This week, we’ll conclude our article series exploring how data center facility management is evolving REIT and data center provider operational models. In this article, we’ll look at some real-world use cases where organizations have shifted the data center facility management paradigm.
To become more competitive, leaders need to understand how they can continue to impact their core competencies and leverage partners for help. Rather than demanding or paying a premium for internalized facility management, investors and analysts should be agnostic and challenge the decision process. Investors and other stakeholders should question whether internal management actually creates value and at what cost. Likewise, REIT and data center provider management should reevaluate the management structure of their properties in each market within the context of their overall strategy.
One way for small and mid-cap REIT and data center providers to gain some operating scale benefits is through external facility management, handled by an organization far more extensive than any individual REIT. While not the answer for every portfolio, it is incumbent on REITs, data center leaders, and their investors to consider alternatives to the old-school internalization orthodoxy. Rather than reflexively assuming that internal always equals better, analysts might consider tearing up their check-the-box lists and instead ask nuanced questions about
how a REIT or data center provider manages its properties and why a strategy adds value. Perhaps a newly enlightened investor constituency will encourage managements to establish best practices rather than reflexively cow-towing to old perceptions.
After the 2008 financial crisis, balance sheets became the dominant REIT investment criteria— good balances sheets won the recession’s liquidity battles, and poor balance sheets evaporated along with their management teams. Balance sheet quality, liquidity, and cost of capital still dominate
the size conversation, with facility operations taking a back seat to portfolio strategy.
The Cost and Revenue Tradeoff Between External and Internal Management Alternatives
Recently, a CBRE study analyzed the typical cost/revenue tradeoff between external and internal facility management alternatives. The analysis shows significant cost savings for a specific “real” facility portfolio converted to external facility management. CBRE selected a “trophy” organization and REIT and analyzed the company’s financial statements, and computed before and after scenarios assuming complete externalization.
The following operating expense savings were collected as a part of the analysis. Still, only some of the categories were applied to the study based on the likelihood that the savings apply to any asset class or market to make the analysis more representative of an actual externalization scenario.
The analysis assumes that 90% of operating expenses savings are passed through to tenants, based on occupancy and industry averages. The example scenario includes only the Energy Savings, Engineering Services, and Elevator Contract categories because they apply to most properties. CBRE excludes more facility-specific savings from Parking, Security, Janitorial, and HVAC Maintenance, but they generally average $0.08 psf annual savings. The G&A savings assumption includes training, procurement, sustainability, executive time, and travel totaling $0.03 psf transferred to the external management contract.
Transitioning Facility Management Services
In looking at partners that can help you with this transition, it’s important to remember that you’re also reducing risk and improving the health of the organization. Management contracts can include performance criteria and penalties for failure to meet those benchmarks. CBRE often provides management clients with warranties to save its management fees in facility-level cost savings or adjust the fees accordingly. CBRE targets to save about two times the gross management fees on the average facility that it manages. CBRE manages this process through KPIs (Key Performance Indicators) and establishes specific facility- level objectives and scores to reach fee hurdles. An example of one facility’s KPI results analysis that we reviewed included the following metrics and objectives for one quarter:
These are concrete, verifiable objectives that are reevaluated every quarter, go to the heart of improved facility management quality, and be tied to fees. How many organizations perform this kind of facility-level self- assessment more often than the annual budget review? How many don’t do it at all?
Those who look at their business and processes introspectively quickly see quite a few benefits in working with a facility management partner. Based on real-world case studies, here are a few examples of improved facility operations resulting from transitioning to their facility management services.
Getting started on this transition doesn’t have to be complicated. However, you’ll need to take a reflective approach to how you’re managing your facilities today and where there are challenges. Remember, evaluating internal versus external facility management alternatives involves qualitative factors that are difficult to measure numerically. However, facility service providers outline a consistent logic, backed up by real- world experience for a compelling case that executives should seriously consider whether it applies to them. While the decision remains a judgment call, and anecdotes support
both approaches, solid data and analytics support many data center external facility management models.
Download the entire paper, “Focusing on Data Center Expertise,” courtesy of CBRE, for exclusive content on how to get started on this new REIT and data center management approach.