Contract Negotiations: Real Estate and Facilities Management Outsourcing Lessons Learned on a Critical Phase of RE & FM Outsourcing
Doug Burr, Advisor, Real Estate and Facilities Management Practice
I recently participated in negotiations for a $400 million total contract value real estate and facilities management (RE & FM) outsourcing deal. On the plane home I had some time to opine about what I learned from this and other negotiations. Here are a few questions I hear from companies considering outsourcing.
How hard can it be to negotiate a $100 million outsourcing deal? (I negotiated a great deal on my last car.)
An RE & FM outsourcing deal would be like a car purchase if the providers build a car from scratch, offered hundreds of options down to the size of the brake pads, cost $100 million and opened you up to years of potential liability. Other than that, it’s pretty similar to a car purchase.
Digging deeper, your internal customers and the makeup of the portfolio will drive service levels and the liability limits of the deal. If the grass isn’t cut for a week, no one may notice; if a data center, pharmaceutical plant or highly hazardous chemical facility has a failure, the whole world may find out. Costs are driven by services, service levels and competition among service providers. The difference between a bad deal, good deal and great deal starts with your approach.
Who has the upper hand?
Surprisingly, the service providers do. Increased self performance and larger internal databases combine to tilt the negotiating field in favor of providers.
Increased self performance provides more control and the ability to make firm savings and service commitments – good for customers – but this reduces the ability to see the pass through costs of subcontractors, increasing the opacity of these deals, not decreasing it.
There is a tremendous inequality of information with major service providers managing hundreds of millions of square feet, internally benchmarking different types of space, when clients have one to twenty million square feet and only their own costs for comparison. In order to bid, service providers only need to understand the makeup of the portfolio, service levels and any unique policies your company may have, most of which are identified early in an RFP process or negotiations.
How do I level the playing field?
Competition and preparation are the keys to a successful negotiation.
Competition: Stories abound of companies selecting a single service provider, negotiating endlessly and ending up with a deal they’re not happy with. True competition during the RFP (request for proposal) phase and continuing during negotiations drives service providers to offer the most cost savings, accept weaker contract terms and speed contract signing.
Preparation: First understand your BATNah (best alternative to nothing) which is your walk away point. Prepare negotiating positions by listing the important negotiating points with values assigned to each point, identifying your must have’s and nice to have’s. Don’t decide these things on the spot during negotiations.
Assemble a team and define each person’s role. I’ve seen one person show up and think they can handle everything. It ain’t pretty.
Set ground rules understood by all sides and keep the pressure on until you reach an acceptable agreement. Here are a few rules to start with:
- Move forward not backwards, don’t discuss issues already agreed to
- Negotiate in good faith
- Set time limits for overall negotiations and discussing individual subjects
- Focus on the topic at hand and don’t get distracted
- Don’t take it personally, leave your issues in the negotiating room
Whole textbooks have been written on this topic, so there are many more items to list, but these are the key points I see over and over again. When they are used they make for successful negotiations and when ignored allow negotiations to descend into an emotionally painful, “character building” exercise you’d prefer to avoid. Happy negotiating!
To learn more on this topic, visit the Contract Negotiation section of the EquaTerra Library or read my latest paper, “How to Champion Sustainability, Reduce Costs and Consumption and Win Friends in High Places… Without Increasing Your Spend.”
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