Five Steps To Deliver Outsourcing Value During Real Estate Transactions
By Kim Frahm – Executive Director, EY CRE Consulting & Technology, Michael Golichowski – Principal, EY CRE Consulting & Technology, Shilpa Anturkar – Senior Director, EY CRE Consulting & Technology; contribution from Dan Kirschner – VP Global Real Estate, GE HealthCare
Transactions provide an opportunity to think strategically about outsourcing agreements across a company’s corporate real estate footprint.
- Meaningful change begins with an understanding of current state operations, as well as a vision for how to create value going forward.
- Leaders should maintain open lines of communication to keep stakeholders apprised of what’s happening and to allow feedback that can inform decision-making.
Business transactions of scale require executive leadership to reshape their business’s operating model. One critical component is their outsourcing relationships. Whether the organization is pursuing an acquisition to increase market share, a divestiture of assets in response to economic pressures or simply an opportunity that is too good to pass up, change will follow.
Transaction activity often results in significant, rapid shifts to the way a company does business. In some cases, functions, processes and operating models will need to be designed differently to meet the changing needs of the business. There’s also the matter of an evolving real estate portfolio and service delivery requirements that need to be evaluated. How does each organization’s footprint change post-transaction? What becomes of outsourcing agreements in place to operate, manage and maintain the properties and to support the internal team?
During the transaction, the emphasis is speed, day one design, capturing synergies and mitigating dyssynergies. The mantra adopted by leadership is often to get the deal done. In divestitures, this approach results in temporary agreements, known as TSAs (Temporary Service Agreements), for real estate and facilities. These TSAs serve to enable the business to operate independently and, by definition, are a short-term fix. Similarly, in acquisitions, the deal thesis will rely on operational synergies, the scope of which may be narrowly focused on footprint rationalization. In any of these deal constructs – merger, divestiture or acquisition – the business imperative is to stabilize and grow the new stand-alone business or integrated company, as well as deliver long-term value to shareholders in alignment with the long-term strategy of the enterprise.
Change drives opportunity
The complexity and workload of transaction activity might tempt some organizations to cling to existing provider relationships that offer the allure of normalcy during a period of transformation. However, significant opportunities may be missed in avoiding change. The transformed organization has different portfolio characteristics and functional scope needs, different requirements for success, different internal leadership and overall cultural differences that should be reflected in the partnerships and contracts that support it. Transaction activity also provides a chance to refresh the financials, potentially through a competitive procurement event, to integrate best practices in the most cost-effective way possible.
In the case of GE HealthCare (GEHC), evolving needs made it necessary to develop an enhanced approach to real estate and facilities when it was spun off from General Electric in January 2023, said Dan Kirschner, VP, Global Real Estate at GEHC.
“Key in this need is to migrate to more agile business practices more appropriately suited to an independently spun-off company, where the need for cross-business consistency under a broader GE-conglomerated umbrella was a headwind to this level of necessary agility,” Kirschner said. “GEHC went to market to re-balance the cost vs. value equation, drive acceleration of an agile transformation, and integrate industry-leading practices across the real estate and facilities pillars.”
A comprehensive real estate and facilities outsourcing strategy that can support future business needs, address industry and market opportunities, and align to leading practices becomes imperative during transactions. It is a chance for organizations to rethink these services and build a strategy that is responsive and resilient to an evolving business landscape. Here are five best practices that can help organizations leverage the full value of their outsourcing relationships:
- Cultivate a post-transaction vision
Early leadership is required to define the vision based on the needs of the future business. Desired principles and outcomes of the real estate and facilities organization should be established at the offset to shape future partnerships, service delivery and pricing models. A meaningful way to understand improvement opportunities and guide the approach to a future direction and associated sourcing strategy is to question alignment of current state operations to leading practices and benchmarks.
It’s also important to consider the decision-making players and process in shaping the future sourcing strategy. Is it a single driver or decision-maker, such as a global corporate real estate (CRE) leader, or are there multiple, cross-functional business unit leaders? Is the person new to the organization or part of the legacy team? Depending on who is setting the vision and leading the sourcing event, the outcome may change. The ability to reach consensus on desired cost and operational outcomes can impact the timeline to stand up the fit-for-purpose internal and outsourced teams. The goal is to establish a clear vision and a roadmap that shows the way forward. The rapid evolution of real estate and facilities technologies and its resulting efficiencies should be built into the market ask and program. Change should be paced to ensure adoption at both the site and enterprise level.
- Establish site-level baseline
Organizations often lack a site-level understanding of current state real estate and facilities costs, staffing and site-level service levels across their portfolio. As efforts begin to shape the market ask, a detailed site-level baseline should be established from which costs can be compared. To establish this baseline, the organization needs to be clear about how sites operate today, the use of provider and landlord relationships to manage service delivery, and site staffing and costs. This information is needed internally to better understand the post-transaction organization, and also externally to give the market a clear sense of the opportunity available to providers.
Getting the baseline right allows companies to confidently appreciate their current program from both a service delivery standpoint and a price perspective. It allows for better bids from the market, minimizes contract adjustments as due diligence begins and allows for reduced transition time.
- Design the internal business case in parallel
Typically, the financials connected to the post-transaction outsourcing arrangement look different from pre-transaction, not only as it relates to a reshaped portfolio, but also as real estate and facilities solutions that may be implemented in the future look different from historical solutions. There has been significant advancement in areas such as facility management delivery (e.g., predictive maintenance, remote access monitoring, workplace experience) and other digital tools and platforms that allow for greater access to data and insights on the portfolio and asset performance. Therefore, the impact on the service delivery and financials needs to be considered as you think about the internal buy-in that is needed to move the outsourcing deal forward. Develop a narrative that reflects the approach to building this new organization and why certain decisions were made. Anticipate the needs to socialize up, down and across the organization.
Particularly if the financials have incremental cost components, financial modeling can allow for visibility into the “like for like” costs, along with those that are incremental, supporting the story and rationale around the future vision. As you proceed later with review of bids and provider selection, it also provides the framework for scenario modeling of savings commitments and investments to ensure that the deal makes financial sense and pivot accordingly if it does not. Organizations can leverage both the baseline and financial modeling to ground their approach in data.
- Consider a phased rollout
The design and execution of a new real estate and facilities sourcing strategy can take time. A phased rollout, across sites or geographies, can help balance the need to keep moving forward with the patience that is often required during a transition.
While some sites can lift and shift on day one, others take longer. They might have certain parameters and timelines placed around them as part of the transaction, they could be more complex real estate assets, they might utilize union labor on site, they could be managed by multiple providers, or they could be subject to labor laws that require additional considerations for transition. By taking a phased approach, the process can be broken down to ensure successful adoption.
Another benefit of a phased rollout is that it can relieve pressure and enable things to happen on a more manageable timeline. Missing critical transaction dates can be financially costly, can cause stakeholders and investors to lose confidence in executive management, and can also lead to poor employee sentiment. Set a timeline that works and then be diligent about meeting those goals.
- Prioritize change management and stakeholder communications
Evaluating outsourcing changes related to transaction activity requires constant dialogue throughout the organization. The effort will require feedback and alignment from many departments, including real estate, indirect sourcing, finance, legal and HR, and business unit leaders. It also impacts site leadership and the day-to-day operations teams. Engagement with the right people, at the right time, with the right messaging, is required to keep the process both controlled and confidential until decisions are ready for announcement.
Keeping change management and stakeholder communications a focus through the program controls internal confusion, leaked information and poor market perception, which may impact financial offers and service delivery quality from current providers.
Why timing is critical
Transactions require speed, and getting the deal done is often the No. 1 priority; this speed often leads to suboptimal dyssynergies, which can be mitigated during the transaction process to ensure stability of the new enterprise post-deal. Electing to act on outsourcing decisions during transaction activity rather than waiting provides an opportunity to take advantage of CRE’s visibility and prominent seat at the table during a transaction to drive support and alignment around the future real estate and facilities program. Typically, there is also the opportunity to take a one-time accounting charge, which helps resource the initiative to meet the needs of the enterprise, an opportunity which disappears post-transaction. Most importantly, timing this initiative during a transaction allows for an expedited, rightsized and fit-for-purpose operating model to drive leadership’s first 100-day agenda immediately after day one.
By delaying the strategic outsourcing review, an organization is left to leverage “old” contracting terms and culture, ignoring the new baseline of current state portfolio and needs and without taking advantage of the opportunity to refresh the program. Particularly in a merger, there may be confusion or misalignment in the service delivery required, and a lack of consistency across sites may be seen, leading to poor employee/guest sentiment. There may be unrealized financial gains that come with an outsourcing event, translating to negative impact to stakeholders and shareholders. A delay may cause forced acceleration down the road due to Master Service Agreement/TSA expiration. The costs of real estate and facilities are among the top two or three costs to an enterprise; if left unchecked, these costs will burden the business’s ability to progress on strategic growth initiatives.
Mergers, acquisitions and divestitures are reliable strategies in business. They will continue to be a top lever for executive leaders in virtually every sector. These events drive significant change in most organizations. To increase the probability of success, it is imperative that leaders consider the ways in which they must shape the operating model during and after the transaction event concludes. An outsourcing event is a critical available tool, and it should be utilized to deliver optimal value back to shareholders. To achieve a successful real estate and facilities outsourcing program, it is critical to build a business case in parallel, designing for the future while grounding oneself in accurate current state details. Organizations can ensure that they are telling the right story to leadership around what is changing, investments that are being made and funding that will be required.
Those working on the front lines can bring leaders along on the journey and pivot as needed, rather than waiting until the end for their review and approval or rejection. Various stakeholders and influencers can be thoughtfully integrated to ensure that program socialization and alignment happen confidentially and seamlessly. Timing of the strategic outsourcing initiative is critical to achieving the optimal outcomes for the real estate and facilities organization, the employees, the enterprise and the stakeholders/ shareholders. Take advantage of the opportunity to refresh the program, strengthen outsourcing strategy and enable post-transaction stability.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.