It’s a worrying trend. Companies’ total primary operating expense per full-time employee — a metric that assesses the total cost of services like utilities, maintenance, and security — has been at an all-time high in recent years, according to the most recent results from CEB’s cost and space benchmarking surveys that cover expenses for the 2014 calendar year.
Many real estate teams struggle to contain these kinds of costs — as evidenced by the data. But it is possible for the function to reduce costs – both internally and in work with vendors — while still keeping employees and business partners happy.
Minimizing the Impact on Employees
Most savings opportunities for Real Estate will affect the customer service they provide to their colleagues in some way, which makes real estate teams hesitant to cut these kinds of costs. But they can reduce facilities management costs in a way that will have a negligible impact on end users.
One example comes from a real estate function in CEB’s member-based network that assessed potential cost-cutting initiatives on three factors — savings, impact on the customer, and the function’s ability to mitigate this impact (see chart 1). If Real Estate determined that it would be able to manage the impact on customer service, the function would proceed with the project.
Chart 1: CRE savings initiative decision matrix Illustrative Source: CEB analysis
For instance, the function calculated that it could save $150,000 per year by reducing lighting levels in its offices. Employees would obviously see the effects of this, but Real Estate worked with the company’s internal communications department to explain the project to staff – and the reasoning behind it – using e-mails, group information sessions, and updates posted on the company’s website.
Another option for real estate teams is to link service standards and customer satisfaction metrics. If the two aren’t directly tied together, as they often aren’t, Real Estate’s costs can spiral as it tries to meet employees’ undefined expectations.
One real estate function developed customized service-level agreements (SLAs) with each business unit. The function then created customer satisfaction surveys directly based on each SLA (see chart 2). This can help limit Real Estate’s level of service to what’s necessary rather than what’s nice to have.
Chart 2: SLAs and satisfaction surveys Illustrative Source: CEB analysis
a – The company runs its customer satisfaction surveys through SurveyMonkey
b – Time frames vary based on the individual business unit’s service-level agreement as well as the specific project request
Click chart to expand
Working with Vendors
But real estate teams will only get so far on good cost cutting unless they understand how vendors are performing. Real estate functions rarely have the specifics to hand, however, as they often prefer to take a back seat once the contract has been signed.
This should change if real estate teams want to cut the right costs. They should have a standard method for evaluating performance, and without being able to assess vendor performance on specific areas — like service quality or timeliness — it’s impossible to bring the required details to the negotiating table.
Real estate functions should first work with colleagues who have close relationships with the vendor to create scorecards that evaluate a limited set of key performance indicators (KPIs) per metric.
Once they have insight into how their suppliers are performing, they can use the information they’ve gathered as leverage in negotiations. They’ll also be able to target areas for improvement to make sure they’re getting the most bang for their buck.
Another factor for companies to consider is whether they might be unintentionally driving up costs for their vendors, forcing them to raise prices.
Examples could include:
- Regularly making special requests that suppliers need to spend extra time to complete.
- Making last-minute changes to the original agreement that could disrupt vendors’ schedule.
- Contacting suppliers more often than their other customers, requiring them to devote more time to customer service.
Factors like this can affect a company’s cost-to-serve: the total cost to that company’s vendors of doing business with the company. If a company’s cost-to-serve is too high, its suppliers may find working with it unprofitable and raise prices to make up for eroded margins. Identifying and reducing these cost drivers can help cut costs, as well as build better relationships with vendors.