Real estate costs comprise a significant part of a company’s overall spend, especially for those with a large real estate footprint. Yet, cost optimization strategies have seldom been focused on this area, as they have been toward, say, technology. Corporate real estate teams within companies have not really collaborated with procurement when it comes to acquiring or leasing real estate for a company. Yet, in a fast-changing environment, where companies are closely monitoring real estate costs as well, involving procurement in real estate activities can yield significant benefits for a company. Best-in-class companies have realized this and are focusing on closer involvement between procurement and corporate real estate teams. Let’s look at the value procurement is adding to real estate activities.
Real Estate Benchmark
Real estate benchmarks are majorly utilized by real estate and finance teams for budgeting or estimating the total cost in terms of leasing, renovating, construction, etc. The real estate team typically communicates the requirement regarding the type of office and location to procurement. The procurement team can play a major role in identifying and collecting real estate benchmarks for location evaluation and budgeting. For instance, if an office needs to be established in a particular country, but the location or city has not been finalized, procurement can help with benchmarks such as availability of offices, cost of renting, cost of renovation, commute availability, infrastructure, taxes etc. for location evaluation or opportunity assessment. It can look at both cost parameters (such as maintenance cost, utility cost, lease cost, legal cost, tenant improvement cost), and non-cost parameters (condition of the structure, proximity to suppliers and customers, contamination of soil, labor quality, logistics availability, crime statistics in the area, etc.).
Lease or Buy Decision
The decision on whether a company should lease or buy a property is a crucial one. Procurement can provide market values for parameters used in a cost-benefit analysis and leave the lease vs. buy decision to the real estate team. Once a decision is reached, procurement majorly helps in identifying the real estate firm that can help lease the space and provide ancillary services. Procurement can also review leases and assist in negotiations.
Management of External Brokers
External brokers are firms that have market knowledge and help companies in finalizing the leasing space. For services offered, the brokers charge a management fee of about 5-7 percent as a commission. Procurement engages with the external broker (preferred suppliers) due to various factors, including, a large number of projects in a particular location and lack of experience, market knowledge and internal capability to manage the project. Management of external brokers involves an end-to-end process for supplier management. Procurement is involved at every stage of supplier management. It can play a significant role in the hiring of the brokers, architects/engineers, construction project managers and general contractors/subcontractors, furniture, fixtures and equipment (FF&E), and IT solutions.
Credit Application for Office Projects
Credit application involves the assessment of financial credentials of a company by a supplier or leasing firm to decide on the payment terms. For credit application, procurement acts as a coordinator or facilitator between the finance team and suppliers. For instance, if the client demands a payment period of 90 days, and if the supplier finds the company’s financial capabilities to be unsuitable, then the supplier might reduce the payment period to 30 days or so. In that case, procurement negotiates the payment terms with the supplier to ensure that it suits the client’s interest.
Procurement gets involved in both formation and handling of the contract. During contract formation, procurement decides on the business terms in a contract, such as payment terms, currency exchange, percent increase in pricing, pricing model, etc. Once the legal team adds legal terms in the contract, procurement reviews the contract. Post reviewing, the legal or contracting team shares the contract with the supplier for signing. If the supplier has any business-related issues, the procurement team assesses the document and makes the necessary changes.