From our CRE Service Delivery and Outsourcing Thought Leader Contributor, EY.

Collaboration brings real estate and procurement teams together, creating a synergistic partnership that enhances decision-making.

In brief:

• Mars, Inc. established a new, independent real estate department within its procurement function.
• Integrating the best aspects of culture and practices from both real estate and procurement can lead to enhanced shareholder value.
• When real estate and procurement functions can collaborate effectively, it opens the door to synergistic benefits.

By Douglas Gottschalk, Erik Munck, John Benazzi and Billy Kim

In the realm of organizational operations, procurement and corporate real estate (CRE) functions are more than passing acquaintances. They are allies intertwined together as they shape both operational and capital expenditures. And yet, while these functions operate in tandem, they exhibit distinct characteristics — these can be complimentary, or at times, even create tension.

Procurement activities are often viewed as transactional, centered around immediate operational needs that can vary with the fluctuating requirements of a business. For instance, procurement deals with sourcing raw materials, equipment, parts and services necessary for day-to-day operations. These needs can change rapidly based on business demands, making procurement a dynamic and responsive function. 

On the other hand, CRE decisions involve significant spending and long-term commitments, such as buying property, entering leases or making building upgrades. These choices have enduring impacts on a business and necessitate forward thinking about the company’s trajectory. They’re not easily changed, which requires a strategic approach and unique skills usually provided by a distinct CRE function.

Real estate projects may sometimes seem at odds with a company’s short-term objectives and metrics, requiring patience for ROI that may unfold over several years. This can be a challenge since some of those impacted by the work may not be around to reap those benefits in the future.

In the following article, we explore the nuanced relationship between procurement’s dynamic operations and the CRE function’s strategic planning, highlighting the complexity and potential synergy of these distinct organizational functions.

The path to alignment

Infrastructure decisions have long-term effects on corporate cash flows, but also have bigger capital implications and a significant impact on employee productivity, corporate image and overall business operations. That’s why the CRE function’s view is typically long-term.

The disparity in these views can lead to misalignment in contracts, register systems and even functionality. Thus, it is necessary to foster alignment and collaboration. Ernst & Young LLP recently worked with Mars, Incorporated, a family-owned business specializing in confectionery, pet food, other food items, and animal care services. The company recognized a need to build “end-to-end” real estate capabilities to increase transparency of costs, allow for deployment of advancements in real estate technology and accelerate decision-making across options that take advantage of new real estate dynamics.

Mars’ approach leveraged the expertise of its procurement function in the creation of a new CRE team to serve the enterprise’s best interests. The company balanced the unique needs of real estate with strict procurement standards to create a cohesive new function poised for swift adaptability.

Create a clear sense of purpose

Conventional ways of operation haven’t always favored collaboration between the procurement and CRE functions at Mars. Divergent views related to timelines and budget allocation often led to conflicts. Procurement, focused on expense minimization, would favor shorter-term contracts, while CRE would hold a more long-term, CapEx-focused perspective that prioritized strategic investment. Further, procurement handled most items related to real estate and facilities management at the local levels of the business (where the day-to-day “non-strategic” procurement needs of the company mostly reside). Doing so, however, Mars sometimes missed opportunities for efficiencies between different business segments or to pounce on favorable real estate options.

Mars chose to tackle this discord head-on. Instead of perpetuating individual perspectives, Mars’ procurement and CRE teams developed a hybrid model that allowed their respective strengths to shine while addressing inherent weaknesses. In this model, the procurement team’s focus on expense minimization blended with the CRE team’s long-term orientation, resulting in strategic planning to optimize both immediate and long-term spend.

A business model was proposed in which the CRE team would report into global services alongside the procurement team, but specifically requiring that the CRE team operate according to the same procurement processes and governance applicable to other categories of the company’s spend. The intent was to create an operating model in which the CRE function could focus on the strategic nature and holistic business impact of real estate decisions, while also leaning on the procurement team’s long expertise in delivering efficiency and governance.

Moreover, they’ve managed to meld both a business unit and an enterprise mindset. So while each business unit has specific requirements, the real estate strategy can develop with an enterprise-wide perspective, ensuring efficiency and unity in complex aspects like multi-business unit offices and facilities without losing site of core procurement responsibilities in contracting, category spend and savings reporting, as well as accounts payable best practices.

Find a strong value proposition

Successful collaboration between procurement and CRE can reap significant organizational benefits. Among other things, it can create a mutual understanding of roles, transparency, collaboration from the onset and a shared goal — serving the customer. In the case of Mars, it’s even created opportunities for cross-training — with CRE professionals taking advantage of Mars’ in-house spend analytics training and procurement professionals collaborating on long-term real estate strategies. Being agile enough to reassess if the collaboration is not working and being able to identify projects where both teams can effectively work together creates enduring partnerships that break down silos.

A simple but compelling example is the approach toward leasing. Historically, the procurement team had stewarded real estate transactions, with the business taking a strong lead in requirements-setting and decisions. This approach yielded consistency in process, but with inconsistent results, and an over-reliance on brokers serving in the lead advisory role, who may be disincentivized to drive efficiency. While the procurement team is excellent at driving pricing and scale against commodities, they saw opportunities to bring a more nuanced approach in scanning the real estate markets (for example, subleasing existing furnished space) and negotiating with landlords. A real estate lease negotiation was not the same as buying sugar. With Mars’ new CRE function, the leadership of a transaction shifted toward experts within Mars, while also ensuring the process of the lease adhered to the strict standards of the procurement function. In other words, the new model allowed the best of both worlds of CRE and procurement.

At the heart of this partnership is a distinctive value proposition: understanding business demand against supply and optimizing this understanding to serve the enterprise better, with as much foresight and efficiency as possible. With the right team, centralized planning, and a single source of truth, businesses like Mars can leverage this synergy to increase transparency, speed up decision-making and ultimately deliver better space for the business. Ultimately, the goal is to look beyond merely optimizing operations by building strategic ambition. What growth opportunities await the company if these goals can be met?

In summary, a collaborative pivot toward viewing real estate and procurement as a mutually beneficial partnership can result in a paradigm shift. As demonstrated by Mars, it’s more than just aligning operations — it’s about creating a collegial culture that capitalizes on each function’s strengths and fosters a shared vision. Through this lens, the interplay between real estate and procurement can transform from a frustrating push-and-pull relationship into a harmonious partnership that enhances decision making.

Here’s an overview of some of the practical benefits that become easier to achieve through collaboration between an organization’s CRE and procurement teams:

1. Cost savings: Working together can lead to notable savings. Procurement teams, with their frequent contract negotiations, offer best practices and standardization. When paired with the real estate team’s insights into property costs, they can jointly find ways to cut expenses.
2. Improved forecasting: Working together, these teams can accurately predict and plan for future needs. This can lead to better budgeting and prevent overspending.
3. Streamlined processes: Combining forces can enhance efficiency and effectiveness, reducing duplicate efforts or communication gaps.
4. Better vendor relationships: The procurement team’s skills in building and managing supplier relationships can aid in negotiating with real estate vendors, leading to better terms and conditions.
5. Mitigating risk, strengthening resilience: By planning initiatives like sale leasebacks and flexible workspaces, firms can have more agility and options available to adapt to changing circumstances such as changes in portfolio fit or workplace needs. This resilience not only equips them to better mitigate potential risks, but can also contribute to value creation for the business.
6. Intelligent decision-making: Having data and insights from two vital domains — procurement and real estate — can lead to more informed, strategic decision-making.
7. Enhanced value: When both teams work synergistically, they can add significant value to the organization beyond pure cost savings. This value can be in the form of optimized processes, improved quality of services, innovative solutions or stronger supplier relationships.
8. Sustainability: A key objective of many modern companies is sustainability. Through collaboration, the procurement team’s focus on ethically sourced materials and the real estate team’s focus on sustainable properties can come together to drive a greener agenda.