No Better Time for the Right Outsourcing Series Real Estate and Procurement Outsourcing: Short Term Opportunity with Long Term Results June 30, 2009 Pillsbury Winthrop Shaw Pittman LLP
No Better Time About Pillsbury Global Sourcing The most experienced firm in the business architecting the largest service delivery projects and strategic alliances Over 500 transactions across a premier customer base Over 20 years experience in structuring and implementing complex delivery arrangements More than US$450 billion in completed transactions 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 1 No Better Time for the Right Outsourcing
Presenting Today Roger Roy Consultant, Pillsbury Global Sourcing roger.roy@pillsburylaw.com (415) 983-1044 John Barton Attorney, Pillsbury Global Sourcing john.barton@pillsburylaw.com (202) 663-8703 Alison Turnbull Consultant, Pillsbury Global Sourcing alison.turnbull@pillsburylaw.com (416) 275-0265 2 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 discuss Current 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 needs cannot 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 opportunity for buyers and providers of outsourced services. 3 No Better Time for the Right Outsourcing
Agenda Real Estate Outsourcing Defined Savings Opportunities Near Term and Longer Term Lessons Learned and Keys to Achieving Savings Procurement Outsourcing Value Proposition and Trends Current Market Conditions and Recent Case Studies Lessons Learned 4 No Better Time for the Right Outsourcing
Real Estate Services Outsourcing Facilities Maintenance Building 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 Management Major moves Large project planning and execution Occupancy planning Architectural and interior design Construction management Transaction / Lease Management Leasing 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. 5 No Better Time for the Right Outsourcing
Real Estate Savings savings 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) time Delivery Optimization (reducing the cost of operational delivery) 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. 6 No Better Time for the Right Outsourcing
Real Estate Sources of Near Term Savings Facilities Management Outsourcing Leverage supplier technology to right-size staffing Re-balance dedicated and contractor staffing Procurement leverage on sub-contractors and suppliers Improved expense information and spend management Cross-client and cross-supplier labor sharing Singular focus of supplier (savings goal alignment) and supplier best practices Project Management Outsourcing For existing FM/PM deal, consider treating dedicated PM like FM resources from a pricing perspective Avoid percent of cost method of PM pricing Transaction Management Outsourcing Refunds 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 7 No Better Time for the Right Outsourcing
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: 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 8 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 9 No Better Time for the Right Outsourcing
Open Book Pricing Lessons Learned Basic Structure Management Fee Reimbursement for Supplier direct labor (salary, benefits, bonus) Pass-through of third party costs without mark-up Common Friction Points Management fees calculated as a percentage of cost or mark-up on labor Supplier Overhead Included in the management fee or reimbursable? Supplier licensing and click charges IT, call center, accounting Benefits uplifts Additional mark-ups for PM and specialized resources Reimbursement of supplier affiliate charges Inefficient allocation of dedicated and variable resources Travel and long distance commuting by account management teams 10 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 term Targets generally measure P&L savings Targets can be fixed $ amounts or % against operating expense budget Savings measured on initiative-by-initiative basis Credit for savings in first 12 months of initiative only Suppliers will place substantial fees at risk 20 to 50% of total fee at risk for cost savings and other KPIs Guarantee of 1 st year savings in limited circumstances Supplier gain-share opportunities % of savings achieved above targets % of savings from sourcing for out-of-scope activities 11 No Better Time for the Right Outsourcing
Savings Commitments - Lessons Learned Take control of the budget and authority to spend Align business owners on RE objectives Clear definition of savings is key FM run-rate vs. cost avoidance Measure on an initiative-by-initiative basis against annual targets Specify how FX and inflation impact savings commitments Importance of accurate baseline spending and operational metrics Reductions in service requirements or demand do not count as savings At-risk amounts and bonus potential must be aligned with company culture and priorities Avoid micro-management, but don t check out either mutually assured success Contract terms should preserve flexibility and leverage 12 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 13 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 collection Eyes and ears of supplier resources with narrow focus Platforms generally far surpass systems clients can afford or will invest in Leverage supplier expert resources for strategy support In 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 14 No Better Time for the Right Outsourcing
Procurement (Source-to-Pay) Outsourcing Value Proposition Potential 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 makes the S2P business case more difficult to justify Need to look at opportunity cost of implementing such a program internally Current Trends / Considerations Expansion 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 platform Finance-led (CFO) procurement initiatives Focus 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 15 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 1 Accounting treatment varies according to internal / external auditor views 16 No Better Time for the Right Outsourcing
Procurement Outsourcing Companies 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 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 Company Multi-tower outsourcing deal including Procurement (S2P), F&A and ADM Expecting significant $ savings over the life of the contract Case Study 3: Global Technology Company Expanded original F&A scope to include not only procurement operations, but full source-to-pay Global deal NA, Europe & Asia 17 No Better Time for the Right Outsourcing
BPO Procurement Key Lessons Learned Spend Baselines Accurate and detailed spend analysis is key to defining baselines which have a significant impact on service provider pricing and delivery structure Recommendation: Invest time and resources in completing a thorough spend analysis Savings Measurement Mutual understanding and agreement on savings measurement methodology is key to value proposition and comparison between service providers Recommendation: Request clear definitions of how savings are measured and calculated early in sourcing process Transformation Outsourcing procurement usually involves significant process transformation But, client/service provider roles, responsibilities and resource requirements are often not clearly defined Recommendation: Invest time in developing detailed transformation plan and assign appropriate resources pre-contract signing 18 No Better Time for the Right Outsourcing
Procurement No Better Time Procurement Opportunities For Consideration If your company has significant savings targets and/or lack of key category expertise Consider 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 scope Leverage existing contract documents (MSA, etc.) and add new SOW & SLA schedule If you have not yet ventured into the outsourcing space Explore a low risk starting point Consider potential Procurement scope and develop a business case { } Pillsbury would be pleased to assist with the evaluation and execution of any of these opportunities 19 No Better Time for the Right Outsourcing
Questions 20 No Better Time for the Right Outsourcing
Final Upcoming Session July 14 M&A Business Continuity and Cost Effective Operations through Outsourcing 21 No Better Time for the Right Outsourcing
No Better Time for the Right Outsourcing Series Real Estate and Procurement Outsourcing: Short Term Opportunity with Long Term Results June 30, 2009 Pillsbury Winthrop Shaw Pittman LLP