Cost is Not a Major Factor in Outsourcing Decisions, Report Says

Cost is one of the least important factors in decisions to outsource services, according to a new survey of corporate real estate users.

Cost is one of the least important factors in decisions to outsource services, according to a new survey of corporate real estate users.

The survey from CoreNet Global's Applied Research Center (ARC), shows that real estate end users consider a focus on core competencies, increasing lease flexibility and raising service levels as among nine factors more important than cost in determining whether to partner with a service provider to manage portfolios.

Service providers, on the other hand, cited cost savings as among the most important factors end users should consider in outsourcing real estate functions.

"There's no need for instant replay on this one," says Eric Bowles, Director of Global Research for CoreNet Global. "The contrast between the relatively low importance of cost to end users vs. the service providers is dramatic. And the reason is simple: corporate end users and service providers are not on the same page when it comes to the reason for outsourcing."

While cost ranks last in importance among nine outsourcing factors, it is still a key source of disconnect between end users and service providers.

According to the report, corporate real estate departments typically measure outsourced services using Key Performance Indicators (KPI). But the KPI actually used by corporations revolves largely around efficiency and cost reduction rather than important drivers of outsourcing like flexibility, service quality, and innovation.

The Applied Research Center also found that outsourcing is expected to continue apace through the end of this decade across most major corporate real estate functions such as facilities management, lease administration and workplace design. But survey respondents said end users for the most part will continue to manage customer relationships in-house.

Performance based incentives are becoming an increasingly normal part of outsourcing contracts, according to the new research. Many contracts include combinations of performance incentives to provide a basis for continuing improvement and as a way for end users to evaluate the performance of their providers.

Bowles says the research indicates a communication breakdown between end users and service providers.

"Simply put, corporate end users are not communicating well enough their real objectives and service providers are failing to understand the needs of their clients," Bowles says.

Corporate end users are sending mixed signals by indicating cost is relatively unimportant, and then giving providers incentives based on costs, says Bowles. "No wonder there's a disconnect," he says.

The report, "Trends in Sourcing," was compiled from a survey of 50 leading experts on outsourcing at Fortune 500 firms, their global equivalents, or service providers. Forty-eight percent of survey respondents are end users, 32 percent are service providers and 20 percent are consultants or academics.

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  posted on 11/15/2006   Article Use Policy

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