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Would you save money if you integrate real estate and facilities management?

While corporate real estate and facilities management share similar goals, combining the two poses challenges. We’ve found the benefits far outweigh the costs.

Overview

Organizations that find ways to integrate their corporate real estate (CRE) and facilities management (FM) functions can experience cost reductions beyond 25 percent, due to economies of scale and “economies of capability.” Realizing such savings, however, can require patience, because recouping change costs may take up to seven years, if not managed well.

Although CRE and FM share the ultimate goal of providing space in which an organization conducts its business, the two functions traditionally have significantly different focuses. Integration can be challenging, in part because it means different things to different organizations within the CRE and FM industries.

The way an organization approaches the relationship and level of integration between the CRE and FM functions impacts the organization in two significant ways: How it manages the real estate function internally, and how it engages with real estate and facilities services providers (i.e. suppliers’ scope of services). An organization can manage all CRE and FM functions in-house, completely outsource them, or use a hybrid approach to optimize total costs, capabilities, and risk management.

Vertical Horizontal Integration

When discussing the value of integration, it’s helpful to organize the various components of CRE and FM within functional towers such as facilities, projects, office services, workplace management, and real estate management.

Likewise, organizations can group components within each tower as strategic, tactical, or operational. The chart below provides an example.

An organization can integrate these components vertically (e.g., all facilities services) and/or horizontally (e.g. all strategic services). We would refer to any supplier that consolidates either an entire vertical or horizontal set of CRE and FM business components as an “integrator.”

Vertical integration can reduce the number of suppliers by leveraging “economies of scale,” such as creating a total facilities management (TFM) contract. Most integrated procurement activities use this vertical integration model.

Horizontal integration, on the other hand, can bring facilities services, real estate, workplace management, projects and fit-out, and office services together under a management model that facilitates organizations to procure those services from one or more integrated service providers. This can create not only economies of scale, but also economies of capability within CRE and FM budgets.

Contracting Models

To illustrate the variety of contracting models, the level of capability, and the trade-offs and risks, consider the following diagram:

As the diagram above depicts, outsourcing more CRE and FM functions can result in higher total cost savings and risk transfer to the supplier, but it can also increase dependency on key suppliers. Although client organizations can expect (and should closely evaluate) more service bundling and greater cultural alignment, they might have to pay for that enhanced scope of service through longer contract commitments.

Key Actions

Significant savings can happen in CRE and FM through a tighter collaborative relationship. The more integrated the contract becomes, the more the client procures systems, management infrastructure, and information from its suppliers, potentially increasing exposure to and dependence on the suppliers’ data and information.

During the early stages of new engagements, organizations should attempt to mitigate these risks. Ensure pre-engagement data regarding costs, service frequency, end-user satisfaction, etc. are sufficiently detailed to align with similar data that will be available after a contract begins. This facilitates true evaluation of costs savings and service level changes, as well as auditability.

The more integrated the operating model becomes, the more a procurement staff would be free to focus on more strategic versus transactional tasks. This raises the profile of procurement, which would become responsible for purchases of much higher value.


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