Outsourcing CRE Services: Time to Reset
The Problem: By spending countless hours and wasting millions of dollars in an endless buy-sell tug-of-war, it has commoditized the CRE industry and created a race to the bottom. Effectively, the CRE industry is falling victim to Gresham’s Law. Gresham’s Law is the race to the bottom and it is an economic principle defined as: The centralization and automation of procurement have created an environment where buying organizations consistently attempt to reduce complex CRE services to the level of a commoditized service to drive down the price. As Clients seek commoditization of CRE services and apply muscular contracting practices, CRE providers respond by limiting investment and minimizing services to protect margins and find themselves in an unavoidable race to the bottom to be competitive.
The Myths: A key contributor to this problem stems from the little white lie Clients and CRE providers tell each other called “strategic partnerships.” Simply put, many companies use terms like partner, expert, and trust when referring to their service providers. However, the vast majority of CRE relationships are built on a backbone of highly transactional commodity procurement processes fostered by a win-lose mentality.
The Solution: How can the CRE industry escape being caught up in Gresham’s Law? The answer is by becoming vested in each other’s success. The good news is research shows that those business leaders and CRE providers who become true strategic partners were able to deliver innovation, proactivity, higher levels of service, reduced total costs, a competitive advantage, and higher margins for the CRE providers. Harvard Business Review proclaimed the concept of formal relational contracts as a much-needed paradigm shift. In doing so, the parties would shift from traditional and transactional contracts laden with inherent perverse incentives, to a formal relational contract that establishes the playbook for how the parties will collaboratively work together and become more vested in each other.
The Next Steps: Imagine the next-generation of the CRE industry; what could happen if companies stopped simply saying they were strategic partners and started to act as real strategic partners? What if Clients abandoned the age-old commodity-based procurement practices and CRE providers also quit playing the buy-sell game? What if, Clients and CRE providers set out together to create formal relational contracts as espoused in the HBR article? A true strategic partnership is the “new normal” for companies that want to add value and to reach desired outcomes and not see the workplace and CRE services as commodities.
The Time Is Now: It is well beyond time for the CRE industry to reset and avoid the perils of Gresham’s Law. Why now? The COVID-19 pandemic has not only physically stressed supply chains globally – it has stressed both Clients and their CRE providers in their ability to deliver services in support of the workforce when their workforce is facing challenges. What happens to those contracts and relationships that are faced with Gresham’s Law? Oliver Hart (2016 Nobel Prize winner -Economics) defined a behavior called “shading.” Shading is a retaliatory behavior in which one party stops cooperating, ceases to be proactive, or makes countermoves; it happens when a party isn’t getting the outcome it expected from the deal and feels the other party is to blame or has not acted reasonably to mitigate the losses. When unanticipated events occur and the parties need to evolve, the contract all too often anchors the parties in the past expectations and the status quo.
The Conclusion: The current environment is ripe to capitalize on new strategies to drive enhanced value. Implementing trusting and collaborative relationships will improve the odds of eliminating supply chain disruption both in times of crisis and during the status quo.
Here are Five (5) Rules to a Win/Win Vested business model:
1. Focus on outcomes, not transactions
2. Focus on the what, not the how
3. Agree on clearly defined and measurable outcomes
4. Use pricing-model incentives that optimize the business
5. Provide insight, not oversight, with governance structure
Reach out to learn more about how we can assist your company to be the right CRE provider to collaboratively and effectively strategize to meet your real estate portfolio needs at corporateREadvisoryservices@gmail.com.
Source: CoreNet Global The Leader May 2021
