real estate and procurement outsourcing: short term ...€¦ · no better time – for outsourcing...
TRANSCRIPT
Pillsbury Winthrop Shaw Pittman LLP
Real Estate and Procurement Outsourcing: Short Term Opportunity withLong Term Results
No Better Time for the Right Outsourcing Series
June 30, 2009
1 | No Better Time for the Right Outsourcing
About Pillsbury Global Sourcing
More than US$450 billion in completed transactions
Over 20 years’ experience in structuring and implementing complex delivery arrangements
Over 500 transactions across a premier customer base
The most experienced firm in the business – architecting the largest service delivery projects and strategic alliances
No Better Time
The only sourcing advisory firm offering integrated professional services (legal, sourcing, domain, financial & change management)
Guiding clients through the full sourcing lifecycle
Using straight-through processing for speed-to-value
Deploying a unique visual sourcing technique using our patented ValueChain method
2 | No Better Time for the Right Outsourcing
John BartonAttorney, Pillsbury Global [email protected](202) 663-8703
Alison TurnbullConsultant, Pillsbury Global [email protected](416) 275-0265
Roger RoyConsultant, Pillsbury Global [email protected](415) 983-1044
Presenting Today
3 | No Better Time for the Right Outsourcing
{ }
No Better Time – For Outsourcing Real Estate and Procurement Functions
The current economic climate may actually be an opportune time to consider further sourcing initiatives
Today’s webinar will discussCurrent opportunities for achieving near-term savings through real estate and procurement outsourcing Lessons learned and issues to consider when evaluating and executing against these opportunities
We are believers in, but not boosters of, the outsourcing industry. If our clients’ needscannot be met by the outsourcing model, we will tell them so. However, we are of the opinion
that the current economic environment could represent an unusual opportunityfor buyers and providers of outsourced services.
4 | No Better Time for the Right Outsourcing
Agenda
Real Estate OutsourcingDefinedSavings Opportunities – Near Term and Longer TermLessons Learned and Keys to Achieving Savings
Procurement Outsourcing Value Proposition and TrendsCurrent Market Conditions and Recent Case StudiesLessons Learned
5 | No Better Time for the Right Outsourcing
Real Estate Services Outsourcing
Facilities MaintenanceBuilding systems monitoring and maintenance
Building engineering
Small moves and project management
Custodial and waste management
Landscaping / snow removal
Physical security
Food Services
Office Services
Energy Management
Project ManagementMajor moves
Large project planning and execution
Occupancy planning
Architectural and interior design
Construction management
Transaction / Lease ManagementLeasing and sale/purchase transactions
Lease administration
Strategic portfolio planning
Property tax appeals
Almost every company has “out-tasked” many Real Estate activities, but far fewer have taken advantage of outsourcing all of a sub-domain or the entire domain.
6 | No Better Time for the Right Outsourcing
Real Estate Savings
While Portfolio and Space Optimization usually offer the largest long-term cost savings, Cost Optimization through Facilities Management Outsourcing (FMO) can produce significant near term savings and align the delivery to support implementation of Portfolio and Space Optimization initiatives.
time
savi
ngs
Delivery
Space
Portfolio
Corporate Real Estate groups are focusing on reducing total occupancy costs through:
Portfolio Optimization (reducing the number of sites)
Space Optimization (increasing the efficient use of workspace)
Delivery Optimization (reducing the cost of operational delivery)
7 | No Better Time for the Right Outsourcing
Real Estate – Sources of Near Term SavingsFacilities Management Outsourcing
Leverage supplier technology to right-size staffingRe-balance dedicated and contractor staffingProcurement leverage on sub-contractors and suppliersImproved expense information and spend managementCross-client and cross-supplier labor sharingSingular focus of supplier (savings goal alignment) and supplier best practices
Project Management OutsourcingFor existing FM/PM deal, consider treating “dedicated PM” like FM resources from a pricing perspectiveAvoid “percent of cost” method of PM pricing
Transaction Management OutsourcingRefunds on transaction commissions
old news, but some still don’t do this at all…do you have the right split for the risk?
Evaluate the balance of commissions paying for resources v. direct labor reimbursement and commission sharing
8 | No Better Time for the Right Outsourcing
Budgets and capital spending decisions are not centrally managed
Services and materials are not centrally (or regionally) procured
Incentives are not aligned between providers and the customer in existing outsourcing contracts
Services are “out-tasked” v. outsourced and disaggregated within regions or businesses
Facilities management functions are blended into other site functions (e.g., administrative services, IT, HR etc.)
Performance management lacks robust quality measures and training on best practices
Labor sourcing decisions limited by local staffing make-up and availability
Management information systems are inadequate, untimely and/or non-existent
Site planning information is not electronically captured
Real Estate – Sources of Near Term Savings
Significant Delivery Optimization savings from FMO can usually be achieved if the current environment has several of the following characteristics:
9 | No Better Time for the Right Outsourcing
Deal Structure is Key to Savings Realization
Ts and Cs that create and maintain alignment of risk with parties operational and financial goals
Clearly defined scope of services (e.g., business, site, building)
Clearly defined, objective performance metrics
Open book pricing
Savings commitments with clear definition and process
Meaningful fees at risk and bonus potential for Supplier
See further discussion of Real Estate Outsourcing contract structure and best practices at: http://www.pillsburylaw.com/index.cfm?pageid=36&itemid=5913
10 | No Better Time for the Right Outsourcing
Open Book Pricing – Lessons Learned
Basic StructureManagement Fee Reimbursement for Supplier direct labor (salary, benefits, bonus)Pass-through of third party costs without mark-up
Common Friction PointsManagement fees calculated as a percentage of cost or mark-up on laborSupplier Overhead – Included in the management fee or reimbursable?Supplier licensing and “click charges” – IT, call center, accountingBenefits upliftsAdditional mark-ups for PM and specialized resourcesReimbursement of supplier affiliate chargesInefficient allocation of dedicated and variable resourcesTravel and long distance commuting by account management teams
11 | No Better Time for the Right Outsourcing
Savings Commitments – Basic Structure
Deal structure allows for real gain sharing Pricing is open book so actual savings can be measured
Cost savings targets established for each year of the termTargets generally measure P&L savingsTargets can be fixed $ amounts or % against operating expense budgetSavings measured on initiative-by-initiative basisCredit for savings in first 12 months of initiative only
Suppliers will place substantial fees at risk20 to 50% of total fee at risk for cost savings and other KPIsGuarantee of 1st year savings in limited circumstances
Supplier gain-share opportunities% of savings achieved above targets% of savings from sourcing for out-of-scope activities
12 | No Better Time for the Right Outsourcing
Savings Commitments - Lessons Learned
Take control of the budget and authority to spendAlign business owners on RE objectivesClear definition of “savings” is key – FM run-rate vs. cost avoidanceMeasure on an initiative-by-initiative basis against annual targetsSpecify how FX and inflation impact savings commitmentsImportance of accurate baseline spending and operational metricsReductions in service requirements or demand do not count as “savings”At-risk amounts and bonus potential must be aligned with company culture and prioritiesAvoid micro-management, but don’t check out either – mutually assured successContract terms should preserve flexibility and leverage
13 | No Better Time for the Right Outsourcing
Our Approach
Data Gathering – balancing speed and accuracy
Suppliers – pre screen suppliers and create supplier demand
Efficient RFP process – what matters, what differentiates
Matching supplier solution to client need…minimize custom delivery
Ensure structure for long term relationship alignment is not compromised
14 | No Better Time for the Right Outsourcing
Positioning for Long-Term Savings Success
Leverage supplier FMO/PMO systems platform to gather information required for effective space and portfolio management
Feet on the street data collectionEyes and ears of supplier resources with narrow focusPlatforms generally far surpass systems clients can afford or will invest in
Leverage supplier expert resources for strategy supportIn the right circumstances, some limited expertise can be “borrowed”If significant help is required, relationship leverage can result is better pricing
Leverage the reality that the biggest client savings opportunity is in space…and biggest supplier revenue opportunity is in space (at least in the US)
Ensure you also share in the revenue opportunity, not just the spending reduction
15 | No Better Time for the Right Outsourcing
Procurement (Source-to-Pay) Outsourcing
Value PropositionPotential savings from S2P outsourcing can be significantly greater than other domains
Savings are typically 2x - 3x greater than the cost of the deal (ROI)
Labor arbitrage component is typically much smaller
Since local, on-shore resources / expertise is required for strategic sourcing
Most companies are “under-invested” in procurement which often makesthe S2P business case more difficult to justify
Need to look at opportunity cost of implementing such a program internally
Current Trends / ConsiderationsExpansion of F&A / transaction processing deals to include sourcing & category management
Significant additional value
Technology is an enabler, but savings can be attained regardless of the platformFinance-led (CFO) procurement initiativesFocus on “realized” savings as opposed to “identified” savings“Gainshare” is more often associated with
sourcing only (consulting-type) arrangements
And even then, is typically limited/capped
16 | No Better Time for the Right Outsourcing
Procurement Outsourcing
Service Providers are Responding to the Economic Challenges
There is a renewed focus on creating commercial structures that are cash flow positive in Y1
Service providers are adjusting their offerings to provide customers with more flexible solutions
“Pilots”, subset of categories and/or geographies
Some service providers guarantee that returns will exceed fees
Other service providers amortizing transition fees into years 2+ of the contract
Positive impact on client cash flow in year 1Accounting treatment varies according to internal / external auditor views
17 | No Better Time for the Right Outsourcing
Procurement OutsourcingCompanies are using procurement outsourcing as a lever to make reductions in external expenditures. Recent procurement outsourcing deals are expected to drive multi-million dollar savings programs…
Case Study 3: Global Technology CompanyExpanded original F&A scope to include not only procurement operations, but full source-to-pay
Global deal – NA, Europe & Asia
Case Study 1: Global Pharmaceutical Company
Finance initiated program to reduce costs and drive efficiencies
Outsourced source-to-pay process in NA
Leveraged service provider’s procurement infrastructure to support continued growth in NA
Case Study 2: Consumer Products CompanyMulti-tower outsourcing deal including Procurement (S2P), F&A and ADM
Expecting significant $ savings over the life of the contract
18 | No Better Time for the Right Outsourcing
BPO Procurement Key Lessons Learned
Spend BaselinesAccurate and detailed spend analysis is key to defining baselines which havea significant impact on service provider pricing and delivery structureRecommendation: Invest time and resources in completing a thorough spend analysis
Savings MeasurementMutual understanding and agreement on savings measurement methodology is key to value proposition and comparison between service providersRecommendation: Request clear definitions of how savings are measured and calculated early in sourcing process
TransformationOutsourcing procurement usually involves significant process transformationBut, client/service provider roles, responsibilities and resource requirements are often not clearly definedRecommendation: Invest time in developing detailed transformation plan and assign appropriate resources pre-contract signing
19 | No Better Time for the Right Outsourcing
Procurement
If your company has significant savings targets and/or lack of key category expertiseConsider evaluating build vs. buy scenarios to manage indirect expenditures
If you have already outsourced parts of Procurement (some categories, operations, etc.)
Consider other Procurement activities which are higher up the value chain These can easily be added to existing contracts
If you have already outsourced other domains (FAO, IT, HR, etc.) and incumbent Service Provider has Procurement capabilities
Consider adding to the existing scopeLeverage existing contract documents (MSA, etc.) and add new SOW & SLA schedule
If you have not yet ventured into the outsourcing spaceConsider potential Procurement scope and develop a business caseExplore a low risk starting point
{ }Pillsbury would be pleased to assist with the evaluation and execution of any of these opportunities
No Better Time Procurement Opportunities For Consideration
21 | No Better Time for the Right Outsourcing
Final Upcoming Session
July 14 M&A – Business Continuity and Cost Effective Operations through Outsourcing