Vested outsourcing in corporate real estate and facilities management

Transcription

1 Corporate Real Estate Journal Volume 6 Number 4 Vested outsourcing in corporate real estate and facilities management Kate Vitasek* and Ingrid Fenn** Received (in revised form): 17th February, 2017 *University of Tennessee, Knoxville, TN, USA kvitasek@utk.edu **SIREAS LLC, th Avenue Suite New York, NY, , USA fenn@sireas.com Kate Vitasek is a faculty member for Graduate and Executive Education at the University of Tennessee s Haslam College of Business Administration. Her award-winning research has been featured in six books including: Vested Outsourcing: Five Rules That Will Transform Outsourcing and Vested: How P&G, McDonald s and Microsoft are Redefining Winning in Business Relationships. Her most recent book, Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement, has been widely endorsed by some of the most progressive procurement leaders across the world. Ingrid Fenn is a highly accomplished corporate real estate and facilities management leader who has developed strategy and global portfolio platforms for a succession of major multinational corporations. Prior to starting up and leading SIREAS, she was Head of Global Real Estate for Covidien, a global health products leader. She is deeply experienced in emerging markets and navigating complex matrices of international laws and real estate practices. She currently works directly with the real estate and executive leadership of SIREAS s corporate clients in designing strategic plans to cost-effectively meet their business goals. She manages SIREAS client engagement teams, and develops the third-party supplier and outsourcing relationships vital to helping manage clients portfolios and facilities. Abstract In 2003 the University of Tennessee began a research project tasked to answer a simple question: Is there a better way to outsource? Researchers studied some of the world s most successful outsourcing relationships, including Procter & Gamble, Microsoft and McDonald s. Researchers immediately saw trends in these successful relationships where organisations were shifting away from transaction-based agreements to collaborative outcome-based outsourcing relationships that the researchers described as a vested mind-set. Researchers codified their learning into a methodology they coined Vested Outsourcing, or Vested for short. Today, Vested is referred to as a mind-set, methodology and business model that enables highly collaborative relationships in which buying organisations and their service providers are committed equally to each other s success. Organisations that have applied the concept often refer to it as a movement because of its power to transform the way organisations outsource. This article addresses the fundamentals of Vested Outsourcing as well as its applicability to corporate real estate and facilities management, including under what circumstances it can be most beneficial. Case studies from within Corporate Real Corporate Real Estate Journal Vol. 6 No. 4, pp Henry Stewart Publications, Page 323

2 Vested outsourcing in corporate real estate and facilities management Estate and Facilities Management (CREFM) are shared, including TD Bank, Vancouver Coastal Health and Novartis. Keywords: collaboration, real estate, facilities management, outsourcing, change management RESEARCH CONTRIBUTING TO THE DEVELOPMENT OF THE VESTED BUSINESS MMODEL University of Tennessee (UT) researchers set out over a decade ago with an assignment from the United States Air Force. The goal? Find a better way to outsource. 1 Their project led the research to some of the most successful outsourcing relationships around the world at companies such as McDonald s, Procter & Gamble (P&G) and Microsoft. What makes them some of the world s most successful deals? First and foremost were the outcomes resulting from strong outsourcing partnerships, recognised through awards and recognition the companies received from leading professional associations. For example, the Microsoft and Procter & Gamble outsourcing relationships that were studied won dozens of awards, including International Association for Outsourcing Professionals GEO awards for innovation (in 2011 and 2014, respectively) a coveted award given to one company per year. 2 JLL was awarded P&G s supplier of the year honour out of 80,000 suppliers three times something no other supplier had every achieved. In addition to awards, the companies studied all had documented and quantifiable results showing extraordinary outcomes across multiple dimensions including impressive cost structure reductions, efficiencies, customer satisfaction levels and multiple innovations. Industry associations endorsed these companies as demonstrating best practices in transformational results. For example, McDonald s win-win vested System with its suppliers consistently ranked as one of the most efficient and effective supply chains in Gartner s annual ranking, which scores company supply chains across multiple factors. 3 And the Marine Stewardship Council cited McDonald s as a leader in fish sustainability, with an unprecedented 100 per cent of all fish sold in its US restaurants certified as sustainable. 4 But what led to these results? What the UT researchers found was that these companies had created a radically different type of business relationship with their service providers. Rather than transactional buying and selling of services, the parties focused on a highly strategic and collaborative win-win relationship where they worked together toward shared goals to drive innovation, create value, and reward success. In short the world s most successful outsourcing relationships created a business model where the partners literally had a vested interest in helping each other succeed. The McDonald s success story is grounded on a foundation of long-term, transparent and collaborative relationships, based upon the belief that everyone in the McDonald s System can and should succeed. The McDonald s System is depicted by a threelegged stool where all the parties in the System are essential for success. 5 Founder Ray Kroc believed that by creating a win-win System that treated restaurant owner/operators and suppliers as partners versus just suppliers and licensees, success would come to all much easier because the parties would work together to grow the McDonald s brand. P&G took a groundbreaking approach to outsourcing in 2003 when it set out to create what was at the time the largest facilities management agreement with Jones Lang LaSalle (JLL). 6 But what makes the P&G/JLL relationship a success is not the size of the deal but rather their approach to outsourcing. The companies created a commercial agreement that flipped Page 324

3 Vitasek and Fenn the conventional outsourcing approach on its head by contracting for transformation instead of simply transactional day-to-day work. Rather than reward JLL for simply showing up to perform transactions such as janitorial and maintenance operations, P&G tied JLL s profitability to the latter s ability to drive success against jointly defined business outcomes. The more successful P&G would be, the greater the success for JLL. The P&G/JLL strategic Vested partnership has delivered results for over a decade with JLL winning P&G s supplier of the year award on multiple occasions out of P&G s 80,000 suppliers. In 2006, Microsoft determined it needed to completely restructure its major global finance processes and operations because its worldwide system was an inefficient and disjointed patchwork. Microsoft turned to Accenture, creating a win-win outsourcing agreement where Accenture would be highly compensated for driving transformation of Microsoft s back office finance operations. The Microsoft/Accenture team has since come away with multiple awards in the outsourcing arena, receiving the industry s top awards from the Outsourcing Center, the Shared Services Outsourcing Network and the International Association of Outsourcing Professionals. UT researchers took the learnings from these companies and other successful outsourcing relationships and began to codify them into a methodology that could be taught to outsourcing professionals. designed to spur collaborative and innovative mind-sets. The Vested business model combines three modern business philosophies, as shown in Figure 1. Vested leverages components of an outcome-based business model with the Nobel Prize-winning concepts of behavioural economics and the principles of shared value. Behavioural economics is the study of the quantified impact of individual behaviour on the decision makers within an organisation. Behavioural economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationship (I win-you win) thinking rather than adversarial relationships (I win-you lose). Shared value principles are concepts to generate economic benefits for all parties by working together with a conscious effort so that the parties gain or share in the rewards. UT researchers call this a what s in it for we mindset. THE EVOLUTION OF THE VESTED SOURCING BUSINESS NODEL What emerged from the research and field work was the Vested sourcing business model, which is based on five transformative rules designed to purposefully help organisations not just call their contractual relationship a strategic partnership, but to truly architect win-win outsourcing deals Figure 1 The Vested business model Source: Kate Vitasek, with Jacqui Crawford, Jeanette Nyden and Katherine Kawamoto, The Vested Outsourcing Manual (New York: Palgrave Macmillan, 2011) Page 325

4 Vested outsourcing in corporate real estate and facilities management Outcome-based approaches, which have roots in the aerospace and defence industries, centre around paying a supplier or service provider for achieving a defined set of business outcomes or business results rather than paying for a transaction, or activity, to be performed. These three philosophies combine to form the Vested sourcing model, which stresses the importance of building highly collaborative, mutually successful relationships with suppliers while emphasising the creation and sharing of value for everyone involved. 7 Implementing a Vested business model requires following Five Rules: 8 Rule 1: Focus on outcomes, not transactions. This shift in mind-set means that instead of buying transactions, companies purchase outcomes, which can include targets for availability, reliability, revenue generation, and employee or customer satisfaction. Rule 2: Focus on the what, not the how. In an outcome-based partnership, the Service Level Agreements (SLAs) will focus on what the buyer wants, not how the supplier achieves the requirements. The outsource provider/supplier has won the contract because it has the expertise that the buyer lacks. Therefore, the buyer must trust the supplier to solve problems. Rule 3: Agree on clearly defined and measurable outcomes. Make sure all the parties are on the same page about their desired outcomes. Ideally, use no more than five high-level metrics. The parties need to collaboratively spend time to establish explicit definitions for how relationship success is measured. Rule 4: Pricing model incentives that optimise the business. The Vested business model does not guarantee higher profits for service providers. Rather service providers take a calculated risk to link their profitability to performance against mutually agreed desired outcomes. A properly structured Vested agreement gives service providers the tools, pricing mechanisms, autonomy and authority to make strategic investments in processes that can generate a greater ROI and value over time with the goal to link profits to the success of the agreement. There are two principles for establishing a pricing model. Figure 2 The Five Rules of Vested Source: Kate Vitasek, Mike Ledyard, and Karl Manrodt, Vested Outsourcing: Five Rules That Will Transform Outsourcing; Second Edition (New York: Palgrave Macmillan, 2013) Page 326

5 Vitasek and Fenn First, it must balance risk and reward for both parties. The agreement should be structured to ensure the service provider assumes risk only for decisions within its control. For example, a transportation service provider should never be penalised (or rewarded) for the changing costs of fuel. Similarly, a property management service provider should never be penalised for an increase in energy prices. Second, the pricing model should link incentives to the desired outcomes. The more effective the service provider is at achieving the desired outcomes, the more incentives (or profits) it will reap. Rule 5: Governance structure that provides insight, not oversight. A flexible and credible governance framework will enable all the rules to work in sync. The structure governing an outsource agreement or business relationship should instill transparency and trust about how operations are developing and improving. A Vested agreement aligns ten essential contractual elements with the Five Rules. Figure 2 provides a conceptual overview of the Vested methodology, showing the links and interaction between the Vested Five Rules and the 10 Elements that are essential to create a Vested Agreement. A key part of the Vested methodology is for a buyer and service provider to work together to craft a contract around each of 10 elements, as outlined in Figure 3. Implementing the Five Rules in conjunction with the 10 Elements leads the parties to a highly collaborative, outcome-based partnership. In short, it enables the buyer and supplier to co-create a true win-win system built to drive innovation with economics designed to benefit both. A key part of the UT research tracked how the results created a win-win for business units/users (eg increase in service and performance), procurement (reduced costs) and the supplier (improved profitability Rule 1: Outcome-based vs transaction-based business model Element 1 Element 2 Business model map Shared vision statement and statement of intent Rule 2: Focus on the what, not the how Element 3 Statement of objectives/workload allocation Rule 3: Clearly defined and measurable desired outcomes Element 4 Element 5 Clearly defined and measurable desired outcomes Performance management Rule 4: Pricing model incentives are optimised for cost/service tradeoffs Element 6 Pricing model and incentives Rule 5: Insight vs oversight governance structure Element 7 Element 8 Element 9 Element 10 Relationship management Transformation management Exit management Special concerns and external requirements Figure 3 10 Elements of a Vested Agreement Source: The Vested Outsourcing Manual (2011) and other tangible benefits). Figure 4 is an example of the results involving facilities management over five years after adopting a Vested model. PUBLIC CASE STUDIES IN CREFM A properly structured Vested agreement establishes a long-term, strategic commercial real estate and facilities management outsourcing agreement; however, not all Corporate Real Estate and Facilities Management (CREFM) organisations have evolved to the point that they are ready for a fully fledged Vested approach. It depends on the scope and nature of their outsourcing needs and both the longevity and depth of their experience with outsourcing suppliers. Outlined below are three public case studies involving CREFM organisations for which Vested clearly has been a game-changing success. Following these studies is an examination of the typical evolution of outsourcing Page 327

6 Vested outsourcing in corporate real estate and facilities management 54 project initiatives; (e.g. meeting scheduler decreases user time by 21 minutes/week) Supplier Diversity spend nearly doubles to over 27% 14% reduction in energy usage; achieved Energy Star rating Zero Critical Sarbanes Oxley issues 17 consecutive quarterly increases in relationship satisfaction. Year over year increase in customer satisfaction I WIN with higher service levels PROCUREMENT Does Vested Really Work? Overall FM budget reduction of 33% Speed to market 2x faster for helping projects Overall get reduced to market GBS Cost (e.g. as opening up new a percentage locations) of sales by 33% I WIN Speed to market 2x faster with lowest possible costs Longer term contract motivating supplier investment in innovation with a fair ROI Flexible and transparent pricing model enables easy addition of scope of services, increasing revenue (e.g. added warehousing moves, integration of newly acquired business unites) Higher profitability with share of cost savings, earned incentives No bid extension at end of contract I WIN with higher margins/profits BUSINESS CUSTOMER SERVICE PROVIDER Figure 4 An example of the results involving facilities management over five years after adopting a Vested model Source: University of Tennessee Vested Outsourcing Executive Education course facilities management case study example in CREFM organisations, which can serve as a useful guide in determining whether, and at what point, they should consider pursuing a Vested-type outsourcing model. TD Bank-BGIS/CBRE TD had been outsourcing its facilities management services to Brookfield Global Integrated Services (BGIS)/CB Richard Ellis (CBRE) since 2009 and had good results. TD described the contract in an FMXcellence award submission as a traditional outsourcing agreement that was rigid, restrictive and highly prescriptive. It allowed little opportunity for further efficiencies or innovation and, for the most part, it did not tell TD Bank where they were going and what was truly important. TD Bank was operating in a traditional owner/supplier model, focusing on transactional outcomes and oversight of the vendor to manage the relationship. 9 TD Bank s head of Enterprise Real Estate (ERE) at the time, Roger Johnson, heard UT faculty member Kate Vitasek give a talk at a CoreNet conference on Vested Outsourcing and was impressed by the P&G case study. He decided to host a day-long off-site learning session at one of TD s Quarterly Business Reviews. As the parties began to ask is there a better way to outsource, they became intrigued with how shifting to a Vested business model could help them achieve Page 328

7 Vitasek and Fenn service, environmental, and cost goals which many considered were not achievable. Rather than go out to bid, TD Bank decided to restructure its existing contract with BGIS/CBRE using the Vested methodology. The contract was not simply renewed; it was entirely restructured to follow the Vested Five Rules by aligning interests through mutually defined desired outcomes and economics. The process began with a formal review of the existing agreement to identify the gaps between their outsourcing approach and the Vested model. The parties established a joint project team responsible for working through each of the Vested Five Rules/10 Elements with the goal to incorporate the concepts into their contract. One of the first things the team did as part of the Vested process was to jointly create a Shared Vision to reflect the companies mutual strategic direction and to enlist others in a shared view of the future. The shared vision breathed new life into the relationship, and gave the combined TD Bank/ BGIS/CBRE a sense of purpose. We are aligned to deliver innovative and sustainable real estate solutions that create unparalleled value for our stakeholders. Our success is mutually dependent. We attract and retain top talent, promoting a culture of loyalty and brand excellence, resulting in legendary Customer and Employee experiences on our journey to be the Better Bank. 10 TD Bank-BGIS/CBRE then incorporated the Five Rules into its outsourcing contract and day-to-day operations. Rule 1: Outcome-based versus transactions In the traditional FM outsourced service delivery model, most organisations dictate tasks they want the service provider to perform, and how often they want them performed. For example, a task may be to clean the windows every month, vacuum carpets every night, pick up the trash every week, etc. It s a very prescriptive set of standards and tasks, and the service provider is measured against delivering them. Under the new Vested FM model, TD only stipulates that it wants clean stores/offices and happy customers. Does it really matter how often we prescribe when the windows should be cleaned or carpet is vacuumed? In reality, every location has unique needs given its vintage, location, exposure to the elements and traffic pattern. Instead of applying one set of standards across the board, TD trusts that BGIS/CBRE would best know what is needed at each location. 11 The vendor is empowered to make appropriate decisions to meet desired outcomes. Rule 2: Focus on the what, not the how TD s Facilities Management department focuses on the what not the how. Does it really matter to TD which company is being used to vacuum carpets, fix repairs, service HVAC or how it s done? No. As a financial institution, our focus is on servicing customers. We leave the how up to BGIS/CBRE, our trusted experts. So whether they want to self-perform, hire specific service vendors, use building landlords or any other hybrid solutions becomes less important to TD than ensuring our desired outcomes are being met. 12 This approach allows for innovation and flexibility and for BGIS/CBRE to make decisions on their own, or to consult with their TD peer as needed. Rule 3: Clearly defined and measurable desired outcomes The parties identified four desired outcomes that would become the focal point of how they would measure success. The desired outcomes were jointly formulated to reflect Page 329

8 Vested outsourcing in corporate real estate and facilities management their aspirational goals and the spirit of the relationship as a guide to ensure alignment and measure progress. The desired outcomes include: Drive economic value to the organisation through fair and transparent financials. Provide holistic world-class real estate services. Be an environmental leader. Be an innovative organisation. The companies used the Vested Requirements Roadmap 13 process to clearly define performance and operationalise success measures for each desired outcome. Rule 4: Pricing model with incentives that optimises the business In a Vested agreement, the pricing model is fully transparent in both organisations and is designed to optimise the business. Transparency of profit did not come easily for BGIS/CBRE, while paying incentives was a new concept for TD Bank. The companies explained their approach to the pricing model in their award submission: If the BGIS/CBRE teams can deliver services that require fewer hand-offs or total cost of ownership to deliver that function, they can receive an incentive that is mutually shared. So while the service provider may increase their expenses to deliver this function, if the total cost of ownership comes in less, both TD and BGIS/CBRE benefit in this win-win example. In a traditional FM outsourcing relationship, the only way a service provider would want to change staff is to reduce expenses and increase its net profit margins, typically at the expense of service delivery. In our case, as long as the service remains the same, BGIS/CBRE may receive a bonus. Since all costs are flow-through as part of a Vested agreement, the service provider does not try to squeeze profit while impacting service. Rule 5: Insight vs oversight governance structure TD FM Relationship Managers provide insight versus the traditional approach of provider oversight from a governance perspective. The focus is on the solutions needed to achieve the desired outcomes and the vision of being a market leader, rather than oversight in managing BGIS/CBRE as another vendor. TD doesn t waste time supervising the supplier as in the traditional model. The companies signed their deal in the autumn of After just one year, the Vested process had already generated results far beyond anyone s expectations. Kristi Ferguson, TD Bank Group s VP Business Management, Enterprise Real Estate, and Anthony Cho, North American Account Director, Brookfield Global Integrated Solutions, reported great success across each of the desired outcomes at a CoreNet Global conference. In the quest to be the better bank, BGIS/CBRE helped TD cinch a JD Power award by bringing in the top score in the facility category in both Canada and the United States. But true to the spirit of a Vested relationship, TD Bank is able to get value for its money: the savings before the end of the first year was already at $16m delivering five times more savings than any previous year. TD/BGIS/CBRE received an FMXcellence award from Building Operations Management as well as winning a 2016 Global CoreNet Innovation award. They summed it up at their CoreNet presentation by stating they believe the Vested model will revolutionise the industry. 14 Vancouver Coastal Health The quest for both innovation and controlled cost is especially vital in the healthcare industry. Vancouver Coastal Health (VCH), one of the six health authorities in lower British Columbia, dealt with those seemingly Page 330

9 Vitasek and Fenn opposing concepts by applying a new, innovative and highly collaborative bidding process for an environment services contract. The challenge for VCH s BISS (Business Initiatives and Support Services) group came in how it would approach applying the Vested methodology to its outsourcing efforts. As a government institution, by law VCH could not just restructure an existing supplier relationship like TD Bank had done. David Handley, VCH s VP of Business Partnerships, reached out to the University of Tennessee to learn how to apply the Vested methodology in a competitive bid situation. The result? A collaborative effort with UT to create a collaborative bidding methodology that incorporated the Vested methodology. Handley noted: In the past we viewed procurement as a technical exercise. Conventional wisdom is a buyer sets the specifications of what they want; you give potential vendors information, and then let them bid. You don t communicate with them. You don t give feedback or modify anything. VCH knew if we wanted a true partner to be collaborative and transparent, we would have to start on our end to show that we intended to change the way we worked as well. And that meant starting by creating a collaborative and transparent bidding process. 15 VCH called this a Mutual Value Solution Request for Proposal (MVS) process, inspired by combining the government s approved Joint Solution Request for Proposal (JSRFP) process and Vested thinking. This meant creating a bidding environment designed to encourage dialogue with suppliers. Vendors could ask questions and request feedback throughout the process. This is the essence of collaboration and relational contracting under the Vested methodology. A key focus would be to shift from a transaction-based outsourcing agreement to an outcome-based agreement (see Vested Rule 1). The MVS incorporated a four-part process, described in the bidding documents as follows: Phase 1 MVS RFP, Discovery & Concept: information was gathered by the prospective service providers and a high-level concept was formulated, with preferred proponents selected on the basis of the concept. Phase 2 MVS Definition: solution development jointly by prospective service providers and the health organisations occurred, and a successful service provider was selected on the basis of the solution developed. Phase 3 Due Diligence & Validation: the solution is confirmed and validated by the successful service provider and the health organisations. Phase 4 Contract Negotiation: the contract is framed, finalised and executed by the successful service provider and the health organisations; an implementation plan is developed. The four-part approach offered an important advantage to VCH. The MVS clearly stated the intent of each of the four phases, but provided only the detail necessary for each phase as it occurred. This meant that the evaluation criteria did not have to be revealed at the beginning of the process, but rather at the beginning of each phase. The bid process could accommodate new ideas brought forward by potential suppliers as well as VCH s continued efforts to discover the optimum way to move forward. The contracting team also used a flexible framework approach so that VCH had the option to choose one or more solutions to achieve its objectives (Rules 2 and 3). This ensured it was working with suppliers for the best fit solution that would meet its needs. At the end of Phase 2, VCH accepted the Compass proposal and then committed Page 331

10 Vested outsourcing in corporate real estate and facilities management to create a fully Vested contract. It would become Canada s first Vested Agreement between a public and private entity. For VCH, creating mutual value under Vested s collaborative approach does not mean relinquishing the safeguards and legalities required by the contract to protect VCH. Standard governance clauses (Vested Rule 5) for such things as labour disputes, default, termination, suspension, force majeure, confidentiality, and intellectual property remain intact and were addressed in the main body of the contract, which is only 23 pages. The parties adhered to the Vested process and shifted the business components to flow under more flexible contract schedules that follow Vested s 10 Elements. The governance framework has four elements that are designed with the intent that VCH does not manage Compass, but rather manages the environmental services needs with Compass over the life of the contract with the goal to drive innovation. The four elements are: relationship management, innovation/ change management, exit management, and compliance to regulatory and VCH specific business requirements such as privacy concerns. Novartis-Jones Lang LaSalle The Novartis-Jones Lang LaSalle (JLL) journey to a Vested FM agreement began in June 2013, when the two parties decided to pursue the Vested business model by restructuring their existing performance-based agreement as part of a contract renewal process. 16 Novartis International AG is a Swiss multinational pharmaceutical company based in Basel, Switzerland. The Novartis-JLL relationship dates back to 2010 when Novartis outsourced its real estate and FM operations across 24 Novartis sites in North America. Novartis was seeking to shift to an Integrated Facilities Management (IFM) agreement in order to integrate maintenance & repair, site operations, and workplace services under a single service provider contract. This was a significant strategic shift in the way Novartis had managed its real estate and FM functions. Under the IFM model, services would be standardised throughout sites and the chosen suppliers would be held accountable to Service Level Agreements (SLAs). When Novartis started its outsourcing initiative, FM operations were decentralised across each of the seven business divisions within Novartis. Each division had its own objectives, budgets, and needs. There were over 5,000 suppliers managing their facilities, which were ultimately reduced to four strategic suppliers. JLL was selected as the supplier to manage Novartis s facilities. A key objective of the IFM initiative was to reduce cost structures. Leveraging Novartis s purchasing power across significantly fewer suppliers gave it significant negotiating power during the bid process. As such, it made sense that Novartis procurement organisation play the lead role in developing the contract. Michael Thompson, Managing Director, Life Sciences Business for JLL, explained that during the procurement process JLL worked hard to develop a relationship with Novartis s procurement organisation. It was great to have such a good relationship with the procurement folks. But the downside was procurement handed the contract over to operations, who were responsible for facilities. Because Novartis s FM operations was not engaged in the process from the beginning, most of Novartis s divisions were not on board with outsourcing. 17 During the timeframe, Novartis began a companywide restructuring. It was also during this time that Novartis and JLL were moving to the Vested framework to renew their original agreement. In 2015, Novartis had completed a major portfolio restructuring; it also decided to form a new Page 332

11 Vitasek and Fenn division, Novartis Business Services (NBS). NBS was created to manage Novartis s shared service resources more effectively. Novartis thus began the process to shift from decentralised to centralised control of many functions, including real estate and FM. The NBS initiative would ultimately have a major influence and impact on the move to a Vested business model, which was completed in a couple of steps over two years because of the scope and complexity of the business, the Novartis restructuring, and the impact of NBS. Moving to a Vested agreement would allow Novartis and JLL to shift to an outcomes-based framework and incentivise JLL to invest in innovation essential if Novartis was going to sustain year over year cost savings and continued value-add services. The parties began their Vested process with a formal deal review 18 conducted by a Vested Certified Deal Architect. The review identified gaps in the existing contract that would need to be addressed. A key part of the deal review was a Compatibility and Trust Assessment (CaT), including an anonymous survey of both organisations team members designed to help identify issues and build trust levels between Novartis and JLL. With a roadmap in hand from the deal review, Novartis-JLL worked through the Five Rules to align the 10 contractual elements that would become the foundation of their contract. The parties signed their agreement on 1st January, As part of the Vested journey, they wanted to benchmark how well they had followed the Vested Five Rules. As such, they conducted a second deal review to see how well they had closed the gaps. The parties found that their first attempt at a Vested agreement was not quite fully Vested due to low marks on shared vision, pricing model and contract structure. Between August 2015 and December 2015 Novartis and JLL doubled-down on their commitment to create a fully Vested agreement. The team went back to the drawing board to refresh their agreement with tweaks that would complete the restructuring to a fully Vested agreement. The result? The parties signed a fully Vested agreement on 1st January, 2016 that covers about 35 facilities spanning North America and South America. The agreement is structured as a flexible framework and allows Novartis an option to add other regions as the business requires. THE EVOLUTION TOWARD VESTED FOR CREFM OUTSOURCING Corporate real estate and facilities management (CREFM) organisations commonly employ a balance of insourcing and outsourcing solutions, as they weigh the need to minimise costs while avoiding any negative impact on the employee experience or the quality of services provided. There is no one size fits all solution. Today, many organisations have fully developed outsourced solutions, while others are still in the explorative stages. Outsourcing strategies tend to be incremental, or generational, referring to a typical outsourcing contract term of three to five years. As organisations mature in their outsourcing journey, they become more strategic, creating a need to change the outsourcing model, push past the often-experienced point of diminishing returns, and strive to generate sustainable long-term savings and benefits in partnership with their outsourcing provider. First generation outsourcing is often viewed as an experiment. The client may outsource a small selection of services and relies minimally on service provider expertise. The benefits at this stage most often include marginal cost savings and increases in efficiency, as well as a more centralised flow of information. Trust between the client and service provider needs to be established. Page 333

12 Vested outsourcing in corporate real estate and facilities management Second generation outsourcing typically occurs when the first generation or trial period is successful. There is increased trust and further refinement of the model: a full-service account management platform, an increase in the number of services outsourced, and development of Key Performance Indicators (KPIs) to manage service provider performance, as well as reorganisation of the internal team. This stage requires a reasonable level of dependency on the service provider. By leveraging the service provider s expertise and best practices, the internal CREFM team shifts to contribute to the organisation in a more strategic, broader way. Third generation outsourcing is transformational and requires a high level of trust and dependency on the service provider. Typically the model is structured to include an on-site account management team, and a contract structure that reflects a strategic partnership: fees and success are tied to performance and, as the client sees wins, the service provider is rewarded. Goals of both client and service provider are aligned. Outsourcing models like Vested work most effectively in second or third generation outsourcing where trust has been developed, however, both parties are starting to see a breakdown in the traditional contracting model. The future of successful strategic outsourcing at this point is dependent upon more extensive collaboration as in the Vested model to align not only expectations, but also interests. The relationship between service providers and the CREFM organisations will need to be far more of a true partnership as opposed to the traditional client/provider relationships prevalent over the past decade. Vested is one example of what the future of CREFM outsourcing relationships will look like, as shown by the case studies above. Sometimes, however, the journey to a Vested agreement is not a straight path. This is especially true when it comes to large organisations with worldwide facilities. First generation outsourcing is still most commonly transaction-based. In a transactional model, a supplier is paid based upon the number of transactions executed on behalf of the client. Transaction-based outsourcing works most effectively when an organisation has standardised processes, repeatable transactions, clearly defined inputs and outputs, as well as a definitive beginning and end. Transactional relationships are mostly tactical and focus on out-task work. Additionally, these types of contracts are commonly taken out to bid every three to five years and selection of a provider is largely based upon the cost on the front end with little consideration towards innovation or long-term benefits. Transaction-based models do not foster an environment that promotes innovation or collaboration and, as the relationship matures and the need for innovation becomes more critical, this model often falls short of meeting business needs. Frequently, there is a misalignment of expectations. Clients claim to want innovation, strategy and vision, yet deals are structured to focus solely on cost containment and tactical performance. Providers sell strategy, innovation and leverage, but often are hampered by the very real challenge of attracting and retaining talent and the need to invest significantly in technology and global delivery platforms over an extended period. They also are handicapped by relatively short-contract terms that do not promote investment and very rigid service level agreements that limit the ability for creativity and innovation. As services and resources become more integrated and relationships become more complex, the transactional approach starts to break down. This is when organisations seek new solutions such as Vested. The appetite Page 334

13 Vitasek and Fenn for making the shift to a Vested model is increasing in demand. It is important to understand, however, that a Vested model requires a commitment to creating a highly collaborative partnership and consciously building a trusting relationship. As such, a Vested model typically is most beneficial when there is a desire to develop a long-term relationship between provider and client. As a result, organisations (both providers and clients) need to be mindful in their selection of a partner and incorporate more value-add elements in the relationships. To conclude, a CREFM should explore the Vested outsourcing model in order to more effectively accomplish a corporate value-building mission when: It has built some experience, knowledge and success in its early outsourcing efforts, but has begun to bump up against the limitations and misaligned expectations in its purely transactional outsourcing relationships, and The organization is ready internally to expand the scope of its outsourcing and build a more strategic, collaborative and innovation-focused relationship with a trusted supplier on a long-term basis. References (1) Vitasek, K., with Ledyard, M. and Manrodt, K. (2010, 2013), Vested Outsourcing: Five Rules That Will Transform Outsourcing, Palgrave Macmillan, New York. (2) See the IAOP website for details on the Microsoft and P&G innovation awards. Microsoft: Content/19/165/3131; P&G: (accessed 9th February, 2017). (3) Gartner Announces Rankings of the 2016 Supply Chain Top 25, 19th May, 2016, Available at com/newsroom/id/ (accessed 9th February, 2017). (4) McDonald s USA first national restaurant chain to serve MSC certified sustainable fish at all U.S. locations, Marine Stewardship Council, 24th January, 2013, available at newsroom/news/mcdonalds-usa-firstrestaurant-chain-to-serve-msc-certifiedsustainable-fish-nationwide (accessed 9th February, 2017). (5) Vitasek, K. and Manrodt, K., with Kling, J. (2012), Vested: How P&G, McDonald s, and Microsoft are Redefining Winning in Business Relationships, Palgrave Macmillan, New York. (6) Ibid. (7) Described in more detail in The Vested Outsourcing Manual (2011) and Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement (2016). (8) Vitasek (2010, 2013) Vested Outsourcing. (9) TD Bank Group Facilities Management Vested Outsourcing Partnership, FMXcellence Awards Submission, 2nd October, (10) Ibid. (11) Ibid. (12) Ibid. (13) Vested Outsourcing Manual (2011). (14) TD Bank (2015) (15) This section based on the case study, Vested For Success: How Vancouver Coastal Health Harnessed the Potential of Supplier Collaboration (2016), available at (accessed 9th February, 2017). (16) Novartis and JLL From Performancebased to a Vested Agreement (2016): A Vested for Success case study. Material in this section is derived from the case study. (17) Ibid. (18) Vested Outsourcing Manual (2011). Page 335