Journal of Corporate Real Estate Volume 7 Number 4
Corporate real estate outsourcing
Journal of Corporate Real Estate
Vol. 7 No. 4, 2005, pp. 306325.
Emerald Group Publishing
Limited,
1463001X
Page 306
contracts and their embedded flexibility
Fernando de Zuniga
Received (in revised form): 31st March, 2005
Property development manager, NECSO Poland, 11A Konstruktorska Str.,
02-673 Warsaw;
Tel: 48 22 54 85 073; Fax: 48 22 54 85 038; e-mail: fzuniga@necso.es
NECSO Inmobiliaria, avenida de Europa 20, Parque empresarial La Moraleja,
28108 Madrid;
Tel: 34 91 663 29 50; Mobile: 48 600 95 76 28
Fernando de Zuniga is the manager of the
property developments of Necso Inmobiliaria in
Poland, a branch of Acciona, a Spanish leader
construction and service company. Actually he is
undertaking an office park development in the
center of Warsaw and some other residential
projects. Before moving to Poland he has been
Necso real estate investment analyst in Madrid
and has acquired experience in land adquisitions
for commercial properties in Spain. He has an
MSc in Corporate Real Estate Finance and
Strategy from Cass Business School (formely
City University Business School) and he is a
fully qualified arquitect from the University of
Navarre, with experience in design and project
management in UK.
ABSTRACT
Purpose This paper intends to respond the
question that comes up to CRE managers
when they consider the outsourcing technique
for their CRE management and portfolio.
The question, if it is possible to capture in
the outsourcing contract sufficient flexibility
to meet the changing needs of the business
and add value, addresses the existing debate
on flexibility arguing the suitability of the
outsourcing structures for corporates portfolio.
Design/methodology/approach The paper
undertakes a methodological analysis, consider-
ing the main outsourcing deals in the UK and
continental Europe and discussing the main
theories on management outsourcing. Theories
of flexibility of CRE portfolios are considered
and the main characteristics of the new REPs
discussed. Findings The paper finds that it
is possible to capture in the outsourcing contract
sufficient flexibility to meet the changing needs
of the business and add value because a contract
can capture all the flexibility desired and iit
would add value as the properties would be
used efficiently. Two outsourcing contracts in the
UK are explained in two case studies, which
support this. Originality/value The paper
suggests methods to outsource CRE portfolios
and obtain adequate flexibility to add value to
shareholders.
Keywords: portfolio investment,
outsourcing, corporate strategy
INTRODUCTION
Surprisingly phrases like If you can
outsource, outsource or outsourcing is
always the best solution have become
common in the day-to-day conversations.
In the property market we can find two
words on fashion, outsourcing and flexi-
bility, normally as synonymous. And this
is the natural reflect of last years huge
activity of corporate outsourcing deals and
transactions.

In the public sector we can find many
examples of the new Private Finance
Initiatives or Private Public Partnerships
(PFI/PPP), which brings the private
sectors finance, management skills and
expertise into projects which would
normally be undertaken by the public
sector1 (Dick & Akintola, 1996); basically
there is a transfer of finance and manage-
ment where the government becomes the
buyer of services. Usually a PFI contract
will be signed after a tendering process
where the service provider will commit to
design, build and manage a hospital,
school or something similar for a long
period. A big PFI deal took place within
the Department of Social Securities,
with a 20-year contract transferring 700-
property portfolio for which the govern-
ment received an upfront payment of
250 million in April 1998 (Case Study
1). The Inland Revenue and Customs and
Excise did another big outsourcing deal in
April 2001, also with a 20-year contract
covering the combined estates comprising
some 600 properties to provide serviced
accommodation.
In the private sector there is much
more variety in contracts and products.
For example there are Corporate PFIs,
which have the same structure and scope
than the PFI/PPPs but for the private
and commercial sector. Another out-
sourcing method, which has moved to
the forefront, is the sale-and-leaseback
transaction, well known in the mid-
1990s and which in the last years has
become a torrent, and not only in UK,
also in continental Europe and in US.
Basically it is an alternative source of
finance, where the privately negotiated
one-by-one sales have been replaced
by public auctions of portfolios with
values in the millions or billions
of euros2 (Barris, 2002). Shell com-
pany in UK is an example of these
large-scale transactions, where 18-year
de Zuniga
sale-and-leaseback based contract cover-
ing 180 UK filling stations for a
reported total value of 300 million was
signed in January 2000. Another ex-
ample is Abbey National PLC, with
a 20-year structured sale-and-leaseback
contract covering 1,307 freehold and
leasehold properties, for approximately
457 million with a profit on sale (after
disposal cost) of 70 million pre-tax
(Case Study 2).
In continental Europe we also find
large-scale transactions. Although the
telecom sector has predominated, transac-
tions have also been seen coming from
the retail, military contracting, energy,
airline, chemicals, insurance and financial
services sector.3 For example in Sweden
Ericsson transaction covered SEK 5.3
billion in 2000, in Italy Telecom Italia
disclosed a transaction of 2.9 billion euros,
the Deutsche Telekom 550 million euros
and the France Telecom 3.0 billion euros
in 2001. And other examples that are not
telecom are Carrefours estate, which was
bought by a public company for 1.5
billion euros in 2000, or Banca di Roma
for 560 million euros in 2001.
However, the really increase has taken
place in the property management
and service outsourcings, including the
facilities management. This has become
very common for companies across
Europe and many new property service
providers continue flowing up. We can
find from corporate real estate (CRE)
consultancies managing some property
portfolios to complex property service
providers managing everything, from
leaseholds to maintenance work and
security. Large corporates like BBC, BP,
CocaCola, Emap, Deutsche Bank,
France Telecom and Suez have already
outsourced their property services.
But still something else can be
outsourced and provided by these new
property service companies: the properties
Page 307
Corporate real estate outsourcing contracts
themselves. This goes beyond the
sale-and-leaseback because besides the
property ownership, leaseholds and
property service & management are
outsourced. In order to be able to frame
these complex-outsourcing deals a new
structure has come up in UK, commonly
know as Real Estate Partnerships (REPs).
The REPs usually has been used to
outsource property ownership on a local
basis, but also some large contracts have
been undertaken with a complete
corporate property portfolio. For example
the BBC in November 2001 signed a
30-year contract covering the BBC
White City freehold and property
management services for estates in
London and Scotland, valued at around
2 billion with an upfront fee of 35
million. In December 2001 British
Telecommunications PLC also signed
a 30-year contract covering 6,700
properties comprising offices, telephone
exchanges and call centres with Telereal
responsible for providing accommodation
and estate management services, valued at
2.38 billion.
However this complex situation brings
out many questions and particularly one
question has now a prominent position
for property managers, maybe because of
the scepticism created by the uncertainty
of the future.
THE QUESTION: IS IT POSIBLE TO
CAPTURE IN THE OUTSOURCING
CONTRACT SUFFICIENT FLEXIBILITY
TO MEET THE CHANGING NEEDS OF
THE BUSINESS AND ADD VALUE?
The Enhancing Corporate Value through
Property Re-engineering research4
brought out some interesting data
regarding corporate real estate in UK.
The study focussed on the property data
of almost 4,500 UK quoted and unquoted
companies over the period 1990 and
Page 308
2000, involving 28,500 individual
observations. The main findings were the
following:
Over the last decade the companies
expanded their exposure to leaseholds
(from 32 per cent to 40 per cent in
1999).
The top two factors viewed as key
drivers of their property strategy are
business flexibility and the cost control
of accommodation.
The types of property considered most
suitable to outsource were HQ
and admin offices (research facilities,
laboratories and manufacturing property
were considered the least suitable).
The advantages of an outsourcing op-
tion are perceived to be the ability to
focus on core business and the expecta-
tion of reducing operating cost. The
need to reduce operating risk was also
highlighted.
The two major concerns to outsource
were namely achieving value for money
and the markets ability to deliver.
These findings reflect the current situation
in the UK market. Firstly the tendency of
the companies to increase their leasehold
against their freeholds is necessary to
remain competitive and grow. Companies
using finance leases significantly out-
perform freehold companies, with higher
returns and are more efficient in managing
their assets. Therefore the companies
with a large freehold base will look
at rationalising their portfolio whether
through restructured leasing, sale-and-
leaseback or outsourcing.
In the other hand, most of the com-
panies have also traditional leases or long
leases (25 year leases), which provoke
an impact of total inflexibility to the
current needs of the businesses. This is
clear because any business plan cannot be
based on more than 23 years due to

the current business uncertainty. There-
fore the companies are now seeking more
flexible lease terms where accommodate
easily their businesses and also flexible
space solutions. (This has been named
The evolution of flexible occupation,
which will be explained in the fourth
chapter).
To sum up, we can say that the existing
situation of the accommodation structures
has led corporates to find new solutions
that respond to changes and uncertainty in
their markets, which have been dramati-
cally changed by the twin forces of tech-
nology and globalisation. The outsourcing
seems to be the key.
There are many types, ways, systems
and strategies of outsourcing but basi-
cally the really value is achieved when a
rigid property portfolio is restructured
efficiently for the needs of the business.
This can be achieved outsourcing the
freeholds and leaseholds of the company
and renegotiating a beneficial occupation
in harmony with the business. This is
the outsourcing cornerstone, the intrinsic
value, which will be measured by the
reduction of the operational cost, and
by the up-front cash payment, that will
be used to focus on the core business
(this is also the motivation for sale-and-
leaseback, as an outsourcing method). Be-
sides this, the outsourcing can provide
other advantages like reducing operating
risk, maximising asset value, performance
related payment and portfolio rationalisa-
tion. Then there are several ways of
outsourcing which can add value like for
example when the property management,
services and facilities management are in-
cluded in the same outsource contract,
because a single contract reduces the cost
of having many different contracts.
However the main reason why
the companies are outsourcing their
properties is to improve the business
flexibility as the study demonstrates,
de Zu n iga
because restructuring their portfolio to the
needs of the business will create value in
the future due to they are using efficiently
their properties, which will be in
harmony with the business goals. But now
is when the outstanding question comes
up: it is clear that outsourcing provides
many advantages at the beginning but can
capture sufficient flexibility to meet the
future changing needs of the businesses?
The study also revealed that the
property executives two major concerns,
namely achieving value for money and
the markets ability to deliver. These
concerns are not surprising because this
form of provision is an emerging market
and there are only a limited number of
players in this market. These are some
limitations to outsource and can partially
explain the current situation. Although
there have been some large operations,
outsourcing property ownership is not
widespread. This lack of enthusiasm
reflects concern over the cost of outsourc-
ing, the lack of full outsourcing providers
that can service property internationally,
and unease over entering into a financial
transaction little understood by investors.
This is all the more so given todays
scandal-scarred market, which is wary of
anything that takes assets off a companys
balance sheet . . .. Where they choose also
to outsource property ownership, they are
likely to do so on a local basis,
with individual contracts for individual
properties.5
In order to be able to answer the
question we have to consider some other
issues. Firstly how much flexibility does a
corporate require now and in the future?
The flexibility require now could be
figured out by seeking to align real estate
flexibility with the flexibility in the com-
pany as a whole.6 Questions like how
flexible customer contracts are or how
flexible is the workforce should be con-
sidered. However the future is uncertain
Page 309
Corporate real estate outsourcing contracts
and to foresee the future required flexi-
bility is unlikely when the outsourcing
contracts are 25 or 30 years long.
Moreover, broadly speaking, the more
flexible the contract the more expensive
it will be. And besides, flexibility is a bit
like a theatre ticket, if you do not use it
on the day it becomes valueless. There-
fore some corporates acquire flexibility for
a large amount of money and then this
flexibility becomes valueless or does not
meet the changing needs and then the
outsourcing contract becomes a burden
because long-term payments have to be
done without any real benefit (except the
benefit achieved at the beginning of the
contract).
The question covers different subjects
that become connected and influence each
other when we try to respond it. Therefore
in the next chapters we will discuss the
theories behind and analyse two case studies
to see how they respond.
CORPORATE REAL ESTATE
PORTFOLIO MANAGEMENT
OUTSOURCING THEORIES
In US there is 20 years experience out-
sourcing CRE management within the
traditional service areas.
Manning, Rodriguez & Roulac7 util-
ized concepts from the neoclassical theory
of the firm, supported by the literature on
corporate real estate outsourcing, to shed
some light on how much and which
corporate real estate management func-
tions should be outsourced. They started
formulating the principle that Outsourc-
ing can benefit stockholders if outside
contractors can carry out functions more
effectively and efficiently than internal
personnel. Then they listed the possible
benefits from CRE outsourcing:
Efficiency gains from economies-of-
scale;
Page 310
Efficiency gains and effectiveness from
economies-of-scope;
Lower transaction cost for routine
tasks;
Timely updates of market values on real
estate holdings;
Other real estate reporting improve-
ments
And they also listed the possible negative
consequences of outsourcings:
Higher costs, as premium transaction
fees are paid in excess of a companys
internal cost.
Loss of power-of-scale when negotiat-
ing contracts;
Loss of control of key elements that
influence business function operation
and success
Inefficiencies in attempting to con-
trol outsource provider performance of
complex, uncertain, or long-term tasks
and responsibilities;
Loss of company learning that builds
valuable CRE management organisa-
tion capital;
Loss of internal relationships that result
from networking with other segment of
business;
Losses of CRE participation in overall
corporate strategy due to the external as
opposed to internal orientation of CRE
outsource providers.
However these outsourcing benefits and
drawbacks do not really mean a lot by
their own in a list. Some of them can be
more important than others and therefore
in order to withdraw some theories they
have to be evidenced with the ex-
perience, as these authors did. They
stated, Outside CRE service providers
are expected to contribute more innova-
tive and comprehensive strategic thinking
as well as to become more able to make
key contributions to the process manage-

ment of a firms corporate real estate
portfolio and firms that are lager, more
diverse, growing rapidly may benefit from
greater decentralisation of their CRE
management expertise. However, the
need for some internal CRE management
for the overall corporation, will most
likely never to be eliminated through
outsourcing. Internal corporate real estate
management will be needed indefinitely
to create and monitor cost-effective,
quality long-term relationships between
the companys business units and the CRE
outsource service providers. And in fact
overall responsibility for the two higher-
level CRE management functions of
Intrepreneur (provide real estate services
as a competitive service provider) and
Business Strategist (integrate workforce,
workplace and technology trends into
overall business strategy) may be better
done by internal CRE staff than by
outside service providers. Besides, deci-
sions about whether, how and which
CRE functions should be outsourced, can
oftentimes be meaningfully enhanced by
using a knowledgeable third-party con-
sultant.
The previous theory is quite important
because it starts to analyse the outsourcing
process in parts, locating which functions
should be outsourced. This is a key idea
that will also be used to respond the
formulated problem.
Kimbler & Rutherford8 studied the
problems that outsourcing industry was
experiencing between the Corporate
Managers of real estate and the Service
Providers. They undertook a survey
consisted of a questionnaire sent to real
estate managers of ninety-two corporate
real estate departments and executives of
seventy-two real estate service com-
panies. We find their recommendations
very interesting because they address
an existing problem that influences
the hypothesis of this paper, the
de Zu n iga
share problems between the Corporate
Managers of real estate and the Service
Providers. In terms of strategy, Managers
should delegate-outsource day-to-day
tasks and should proactively address
corporate strategic real estate issues, and
Providers should support Managers in the
identification/implementation of strategic
activities. And the key to resolving
User/Provider problems is found in the
development of long-term relationships
built on mutual trust, professional
integrity and sustained performance.
Glagola9 offers concrete suggestions for
managing the entire outsourcing process
more effectively, because outsourc-
ing requires a cohesive, end-to-end
methodology for identifying opportunities
and managing their implementation.
Therefore he identifies some points to be
considered in the outsourcing process,
the first step in undertaking any
outsourcing initiative is to conduct a
strategic analysis of how outsourcing can
be used to gain competitive advantage,
which will require an analysis of current
operating cost, the strengths and
weaknesses of both the client and the
provider and anticipated changes in the
business environment.
Another quality of the outsourcing is
that it represents a long-term relationship
with another firm. This is fundamental in
order to predict the consequences of an
outsourcing contract. Glagola offers the
following suggestions in the outsourcing
process:
Defining requirements in clear, com-
plete and measurable terms to serve the
needs of the client and to assist the
provider.
Once the requirements have been ar-
ticulated, a provider must be selected
on the basis of total capabilities and
cultural fit.
Once the provider is selected, a final
Page 311
Corporate real estate outsourcing contracts
agreement must be crafted in detail to
define the nature and scope of services,
to provide performance guarantees and
to describe how the relationship will be
managed over time in an ever-changing
business and economic context.
In addition, the contract should
incorporate a change-implementation
structure (flexibility), which should
include performance-related incentives
and penalties and should delineate
clearly all-organisational hierarchies.
However Glagola points out the lack of
success for organisational change efforts,
when about 80 per cent of total quality
management initiatives fail to achieve tan-
gible results. This evidence is important
for this research because the corporates are
seeking flexibility basically to respond to
changes. Nevertheless this author gives
some suggestions to face these changes,
which are easier to incorporate than to
gain flexibility:
Develop a practical understanding of
how people and organisations respond
to change.
Develop a structured plan for achieving
the desired goals.
Align the organisations current and
planned changes with the resources
available for implementing the initia-
tives.
Put in place a mechanism for absorbing
disruptive change and discouraging at-
titudes and behaviours that detract from
quality and productivity.
Glagola finalises pointing another chal-
lenge, how to maintain and monitor the
effectiveness of the partnership over time.
He offers again some sharp suggestions:
The most important factor is successfully
implementing an outsource agreement
is fostering good working relationships
among the people involved. He added
Page 312
that It must be understood that the
change process takes two or three years to
be completed and therefore The original
deal between the client and the out-
source provider will have to be revised
and corrected in response to ongoing
dynamics and It will be important to
keep in place a set of benchmarks and
metrics for measuring the performance of
partners although the direct impact
on core competency cannot always be
measured precisely.
McBlaine & Moritz10 addressed the
same problem than Kimbler & Ruther-
ford, but nine years later: In many cases,
what has promoted as a strategic partner-
ship has turned out to look far more like
a traditional customer/vendor relationship
. . . too often, outsourcing has not helped
the corporate real estate function emerge
as a strategic business force. And as this
problem has been present in the last years
deals, it is very probable to be an intrinsic
characteristic of outsourcing. Nevertheless
the authors expose their opinion to solve
this limitation: The challenge lies in
creating and maintaining a real partnership
between the corporate real estate team
and the service provider. The key is to
determine what needs to be done on both
sides of the relationship to make it work
effectively.
This new outsourcing model proposed
by the authors, the partnership, is what
currently is taking place in UK, Real
Estate Partnerships (REPs) sharing risk.
McBlaine & Moritz defined the contribu-
tions the service partner should be
expected to make to the relationship:
Real estate solutions that work, broad
and evolving service offerings, financial
expertise, technological innovation and
implementation and transition expertise.
In the other hand the client should expect
the following from a legitimate outsourc-
ing partnership: Strategic perspective,
portfolio-wide service and consistency,

transition to new opportunities and col-
laborative environment/robust account
management. However the problems
arise when it comes time to put those
concepts into practice.
In theory learning from past experience,
both service provider and client can avoid
disappointment and recognise the real
benefits of transformational outsourcing.
However the question is if this lesson will
be learned in UK, because actually it does
not seem so.
FLEXIBLE OCCUPATION THEORIES
WITHIN CORPORATE REAL ESTATE
PORTFOLIO
Dr Robert Harris11 in his From fiefdom
to service: The evolution of flexible
occupation discusses the changes that
have occurred in the UK property market
related to the flexibility: In the early
1990s the corporate community fell
precipitously into recession, and suddenly
large corporations were being caricatured
as oversized, slow moving and inefficient
. . .. The focus of corporate manage-
ment shifted to outsourcing, downsizing,
re-engineering: methods for becoming
leaner, more efficient and more competi-
tive. At the same time organisations
sought flexibility to allow them to
respond to changes by the twin forces of
technology and globalisation. The tradi-
tional role of outsourcing was simply the
provision of services, although the system
yielded to a more packaged approach,
which presaged the broader approach to
service, or flexible occupation in the
property sector. It was argued that the
traditional lease was unsuited to this
dynamic business environment, and that
the answer lay in a more customer-
focused approach based on flexible leas-
ing and enhanced service provision . . ..
Within a short span of time in
property terms the industry whose
de Zu n iga
only product was the FRI lease became a
multi-product industry.
Harris demonstrates how construction
companies effectively reinvented them-
selves, many as service providers during
1990s. All this shuffling in the procure-
ment process was necessary to allow the
property supply chain as a whole to move
towards the provision of flexible occupa-
tion. The traditionally separate interests of
development, professional advice and
downstream delivery began to coalesce
in mergers, alliances and partnerships
to allow for an integrated process,
which focused on service. Therefore new
products providing flexible occupation
emerged:
Pay-as-you-go, the retail front end of
serviced offices
Serviced offices or business centres
Offices with services
In the pay-as-you-go the contractual is
minimal and the service operates rather
like a hotel. The market is typically
individuals and small and medium-sized
enterprises, but includes larger corporates
requiring space temporarily for projects
teams, overflow and so on.12 Business
centres are about providing space, or
work environments, rather than real
estate. Service contracts and licenses
replaced leases, with short-term arrange-
ments typically involving the provision of
staffed facilities; shared meeting or con-
ference space; fully-equipped work en-
vironments; and IT and communications
infrastructure. The office with services
product is basically the traditional assets
but with the provision of more intensive
management, and the supply of the kinds
of service support.
All this process of the evolution of the
office product to service can be linked to
Gibson & Lizieri13 idea of the office
product-service continuum. The premise
Page 313
Corporate real estate outsourcing contracts
is that, at the core all organisations require
space. What differentiates one offering
from another is the amount of addi-
tional service the purchaser requires. At
the far left of the diagram is freehold
property where the occupier takes full
responsibility for maintenance, insurance
and facilities management services. At the
other end of the spectrum, space is avail-
able on a fully serviced basis where the
occupier takes no responsibility for the
property and expects a totally managed
environment. The argument is that these
different offerings are appropriate for very
different business activities and that an
effective corporate portfolio would have a
balance of these different types of offer-
ings as appropriate.
This evolution of the flexible occupa-
tion frames the theories of the CRE
portfolio flexibility, which will be ap-
plied to the existing flexible occupation
products and services. However, the first
thing we wonder is why the flexibility
is now so much required. Virginia
Gibson14 identifies four reasons why
flexibility has become so important,
which are consequence of the way of
corporates operate. First, organisations
are faced with an environment which
is changing rapidly and which is in-
creasingly difficult to predict. This has
led to shorter and shorter planning
horizons within business . . . less than three
years. Secondly, the way in which
senior mangers are increasingly dealing
with uncertainty is by experimenting
and setting up pilot projects. Thirdly,
organisations are constantly reinventing
themselves . . . redesigning the way a
business operates and its core activities.
Finally, even at the most mundane
level, corporate real estate managers must
find way to facilitate the less strategic
changes.
However the next question is how
CRE managers can achieve the elusive
Page 314
goal of a truly flexible real estate
portfolio. Gibson15 brings also light to
this key challenge and establishes a model
that provides a framework for examining
the organisations property portfolio on
flexibility basis. And this examination can
also be applied to an outsourcing property
portfolio deal to check the flexibility.
This is a key challenge because cer-
tainly real estate has a number of charac-
teristics which make it difficult to achieve
greater agility. It is a static, physical,
unique and immovable asset which can
only be purchased in predefined lumps.
The real estate market is inefficient and
therefore it cannot trade like other com-
modity product, or even like other invest-
ment classes. Flexibility within corporate
real estate is multifarious and therefore
needs to be considered from the various
perspectives. From the point of view of a
corporate real estate manager, the physi-
cal, functional and financial aspects of a
property are those over which they have
control or influence, and therefore any
framework will need to consider these as
sources of flexibility Gibson.16 Physi-
cal flexibility is considered the evalua-
tion of buildings, functional flexibility
the activities the buildings can support
and financial flexibility the risk and ex-
posure of any real estate decision (type
of tenure and the terms of any agree-
ment). However what brings financial
flexibility? Brenna ORoarty17 undertook
a survey considering the level of flexibility
provided by different lease lengths and
tenure arrangements. The results indi-
cate, The respondents consider a five-
year lease to offer the greatest level of
flexibility, although freehold still achieves
second preference. While a 15-year lease
with a break at years five and ten is
considered less flexible than freehold, its
index score and rank suggest it is con-
sidered a reasonable alternative, offering
much greater flexibility than leases of ten

years or more. This data is very interest-
ing, particularly the freeholds degree of
flexibility, and although it will be dis-
cussed in a later chapter, it implies that the
freeholds provide more flexibility than
a long-term lease with break options
(which is the typology of the outsourcing
contracts).
Continuing with Gibsons theory, her
viewpoint focuses on how the corporate
real estate manager might assess the flexi-
bility within the portfolio as a whole and
identify in which properties flexibility is
required and in which properties it may
not be required. And this is also the key
of an outsourcing contract, in which the
CRE manager has to identify first which
properties flexibility is required and then
negotiate it, because some flexibility can
be achieved without extra cost. And this
is the challenge the CRE managers have
to face.
Gibson and Lizieri responded theoreti-
cally to the previous question developing
a three-tiered approach to examining a
corporate office portfolio in terms of what
might be seen as core and periphery real
estate requirements. At the centre of the
organisations requirements would be the
core portfolio, buildings considered to be
needed by the long term and therefore
likely to be owned on a freehold or long
leasehold basis. They will need a high
degree of control to adapt them as the
organisation changes and therefore the
key flexibility issue will be the functional
flexibility, the ability to change the use of
the building. The first level of periphery
property is that where numerical flexi-
bility is required. This is what the or-
ganisation will want to be able to service
that demand in times of boom but reduce
the cost in time of recession. Therefore it
would need some functional flexibility
but mainly the ability to exit and the short
lease structure with break clause would be
the ideal. Finally, the second level of
de Zu n iga
periphery portfolio relates to the require-
ment organisations have for very short-
term space, often training facilities and
activities entry to new markets. The serv-
iced office providers who facilitate total
flexibility both in terms of space and
services will meet this demand.
As it has been mentioned, this model
could be very useful to organisations
to examine their portfolio and their
flexibility needs. However, Gibson in-
corporates another dimension to this
framework, which is linked with the
previous chapter, the management serv-
ices. She demonstrates that the two
periphery layers within the portfolio will
need services as well as space and that this
will have to be also provided by the
building provider or to be outsourced to
another partner, because the occupiers
need a greater provision of service
bundled with the physical. This is
interesting because it links the outsourc-
ing of services to a type of space with
certain need of flexibility within a
property portfolio.
Nevertheless ORoarty18 demonstrates
that the granting of flexible lease terms
does not necessarily increase risk and
decrease the returns generated from com-
mercial real estate investments. Rather, it
reallocates risk and reward between inves-
tor and occupier enabling both parties
to attain their objectives. This proofs
the theory that landlords can provide
some flexibility for very little cost which
could be of huge benefit to a tenant
and inversely. This fundamental theory is
broadly known as the intelligent flexi-
bility.
REAL ESTATE PARTNERSHIPS:
FLEXIBILITY IN A SINGLE
CONTRACT
Harris19 in his theory of the evolution of
the flexible occupation mentions the crea-
Page 315
Corporate real estate outsourcing contracts
tion of the latest product, the private
sector PFI or PPFI, which is basically the
transfer of the principle of PFI into the
commercial sector. This was a logical
extension of the evolution of flexible
occupation that began with outsourc-
ing. The essence of PPFI is that cor-
porate occupiers pass the responsibility for
the ownership and management of their
property to a third party. The govern-
ment set out the model for corporate
PPFI when it released the portfolio of
the Department of Social Securities (Case
Study 1).
ORoarty defines the Corporate PFI
as a modernised sale-and-leaseback in a
lager scale (e.g. investor buys corporates
holding, lease back say 80 per cent to
occupier, 20 per cent to market; occupier
may vacate say 25 per cent of undefined
space in say 2 years) Greater flexibility in
terms and/or service provision. However
this deals are subject to individual contract
and risk apportionment, the greater the
level of flexibility achieved, the higher the
rental payment. The flexibility is achieved
for long-term commitments but it loses
the control of property and, where service
provision is a factor, it loses the control of
quality.
Nevertheless, as ORoarty mentions,
the CRE outsourcing deals (or corporate
PFIs) are not just the consequence of the
flexible occupation. They have another
main root and can be introduced as the
successors of the sale-and-leaseback. Tim
Asson20 discusses this phenomenon bril-
liantly. The traditional form of sale-and-
leaseback came to prominence in the
1980s and is currently enjoying a new
wave of popularity among some corporate
occupiers. The sale-and-leaseback was
seen as a relatively straightforward means
of releasing capital that was locked up
in real estate, particularly during times
of high rates of interest on borrow-
ing. However in the current economic
Page 316
climate with the cost of borrowing
relatively low, it is hard why a company
would choose to go down the sale-and-
leaseback route simply to raise cash when
it is a complicated and expensive method
of raising money. And as some companies
have found over time, the short-term
benefits of receiving an immediate cash
lump sum can be outweighed in the long
run by being tied to ongoing liabilities
and facilities which may no longer be
appropriate to operational needs. There-
fore as the shortcomings of sale-and-
leaseback have become more apparent,
the search for a more effective solution
has resulted in the creation of what are
becoming known generically in the UK
as real estate partnerships, REPs (techni-
cally corporate PFIs). They have involved
major corporate occupiers working in
partnership with service-focused real es-
tate providers to realise mutual aims.
The REP, which is the currently main
real estate outsourcing structure, takes the
idea of the sale-and-leaseback and then
takes it to a more refined and sophisti-
cated level. It is a solution driven not by
the real estate market but by a corporates
present and future business needs There-
fore if flexibility is the key for any
business going forward, then a company
looking to embark on a outsourcing of
their real estate must start by determining
what their occupancy strategy is. Essen-
tially, this means identifying what space is
needed and for how long.21 Basically
deciding which facilities need to be dis-
posed of and those those need to be
retained. And then the occupier can price
in the flexibility it will require in the
future, creating a relatively static model
for core properties and factoring in exit
strategies for particular buildings, all in-
cluded in the contract cost. At the heart
of this process is the building-by-building
approach, which enables accurate financial
forecasting of what it will cost for a

corporate occupier to retain, expand or
dispose of individual properties. Clearly,
any degree of flexibility will be paid for in
some way, but the fact that there can be,
and has been, built into these partnerships
an element of no extra cost and/or using
a cost formula at predetermined cost,
shows that various model exist that can be
developed to give corporates some, if not
all, the flexibility they may need.22
REPs also differ from traditional sale-
and-leaseback because associated property
services and certain leasehold liabilities
can also be outsourced. And all this,
included the freehold, will be outsourced
through a single contract, avoiding the
hundreds of contracts that before the
corporates had to manage regarding
property services and facilities manage-
ments. The service contract, covering the
outsourcing aspects of the transaction,
dealt with, inter alia, contract duration,
services to be provided, payment for those
services (including an element of periodic
market testing to ascertain appropriate
revisions to payments), employment mat-
ters, insurance matters, default and ter-
mination, compensation events and force
majeure an, also, provisions to enhance
flexibility and cater for change.23 The
groundbreaking REP deal in the UK was
struck between one of the UKs largest
bank, Abbey National, and Mapeley
Columbus, which will be analysed in the
Case Study 2.
However Barris24 identifies the problem
of non-generic properties, which is worth
to consider. These assets referred to as
non-generic assets because their un-
suitability for the general market are
the toughest part of any portfolio
outsourced: tough to value, tough to
structure leases and tough to finance.
Here the risk of congestion is
considerably higher, particularly in the
countries with highly centralised property
markets. People have reacted to this
de Zu n iga
problem in different ways but there is no
perfect solution. This is an impediment of
dealing with big portfolios, and the
bidders will have to evaluate it in the
tender process of outsourcing.
CASE STUDY 1: DEPARTMENT OF
SOCIAL SECURITIES PRIME
CONTRACT
Based on Michael Evans (2000) The
PRIME contract: The Department of Social
Security and Trillium paper and personal
communication.25
As we mentioned in the previous chap-
ter, in 1998 the Government set out the
model for corporate PPFI when it released
a portfolio of 650 properties of the Depart-
ment of Social Securities (DSS), comprising
1.5 million square metres, to Trillium, with
backing from Goldman Sachs. The deal,
the largest of the governments property-
based Private Finance Initiatives, involved
the consortium paying an initial cash sum,
taking over all freeholds and leaseholds, and
contracting to provide the DSS with serv-
iced accommodation for a term of 20
years.
The DSS was facing all the
problems besetting major occupiers:
surplus property, costing too much;
property market risk from upward only
rent reviews; lack of flexibility, par-
ticularly to downsize; costly, poor quality
facilities management; and hundreds of
separate service provision contracts. And
the pressure to change were great because
the existing property portfolio was rapidly
becoming unsuitable, and to implement
all the necessary changes using the
existing management structure would
have meant increasing resources in a part
of the operation which was not part of the
core business. Therefore the decision
was made to shift the property, together
with its management and the burden risk,
outside the department.
Page 317
Corporate real estate outsourcing contracts
The departments chosen partner is
Trillium, one of several bidders for the
contract. The created contract structures
components are:
The department transferred all freeholds
to Trillium and the leaseholds obliga-
tions were transferred under commer-
cial contracts, or virtual leases.
After twenty year the properties can
revert to the department on payment of
open market value (either freehold or
rental value).
Trillium has undertaken to provide the
square metres of space the Department
needs in the Departments chosen loca-
tions.
The Department makes a monthly pay-
ment, called a unitary charge, to Tril-
lium for the services received. The
unitary charge is made up of property
cost, debt service, facilities management
and profit. There is a price per square
metre for every building and the cost
are indexed upwards over time, except
for the debt service.
Trillium agreed to pay the Depart-
ment 300 million corresponding to
the book value of the estate, with 250
million paid up front and the remaining
50 million repaid via lower unitary
charge costs over the period of the
contract, secured by a first charge on
certain properties.
Trillium actively manages the properties
and the facilities for the Department
under a 20-year contract (unless ter-
minated earlier if performance consis-
tently fails).
The DSS transferred property risk to
Trillium, including lifecycle capital ex-
penditure, maintenance, property and
facilities management risk; and the risk
of requiring occupational flexibility.
Trillium is able to do what it wants with
the estate, providing it meets the ac-
commodation needs of DSS.
Page 318
The surplus space was transferred to
Trillium for disposal. Each year a further
2 per cent of the initial estate can be
vacated without penalty. Any such space
not vacated becomes flexible space that
the Department can vacate at any time
in the future.
Further flexibility is provided by the
Departments ability to swap up to 10
per cent of core buildings with flexible
buildings.
Additionally the Department can exit
from 10 per cent of the core property
portfolio on payment of a predeter-
mined exit cost that was fixed at the
beginning of the contract.
The Department does not have the
ability to dispose of any surplus space in
the open market via assignment or sub-
letting. These rights are exchanged for
the flexibility provided within the con-
tract.
A methodology and formula exist for
Trillium to price for expansion the
Department has to go to Trillium first
for new space but there is no ex-
clusively; the Department is allowed to
use other parties, thereby creating com-
petition.
If Trillium does fail the contract the
properties will in the main revert to the
Department. The freeholds over which
the Department has a first charge would
come back to the Department and the
existing leases would stand.
Michael Evans analysed the financial ef-
fects, exposing the following conclusions:
The departments total occupancy cost
for all services covered by the PRIME
contract were estimated at approximately
2.56bn over the life of the contract
versus the cost of the agreed deal with
Trillium of just over 2bn, a saving in the
region of 2223 per cent. And the
equivalent year one occupancy cost un-
der the PRIME contract is estimated at

272m, including an estimate for rates,
which is 12.5 per cent of the Depart-
ments running cost. This represents a
14 per cent saving in occupancy costs,
including rates, which is approximately
43m.
A concern that arose with the up-front
250 million paid in the contract was if the
assets were sold off too cheaply. Because
the estate was valued at between 316m
and 361m by the Departments advisers
and the agreed payment was the book
value of 300m, of which 50m will be
repaid via lower unitary charge cost over
the 20-year contract.
The whole bidding exercise was time-
consuming and costly, not just for the
Department but for all the bidders con-
cerned. The Departments advisers fees
over the 18-month procurement period
came to 9.4m, the bidders cost being of
the same magnitude.
Trillium is also providing the facilities
management service, in the day-to-day
basis. The existing performance measure-
ment system relies more on quantitative
than on qualitative measures and both
parties feel it can be improved upon.
As a result an alternative system which
is based more on core standards and
customer satisfaction is currently being
developed.
CASE STUDY 2: ABBEY NATIONAL
FOUR STAGES OF OUTSOURCING
DEALS
Provided by Covista (responsible of Abbey
Nationals property management) and by Larry
Hannam (2003) personal communication.
As we mentioned previously, in UK,
the groundbreaking REP deal was struck
between one of the UKs largest bank,
Abbey National, and Mapeley Columbus:
a specialist service-focused real estate and
facilities provider.
In Tim Assons26 opinion, the deal
de Zu n iga
marked a sea of change in attitudes to
corporate property. For the first time, a
blue chip plc had the courage and vi-
sion to take a radical approach to the
way in which it integrates its property
holdings with its business planning. Pre-
viously, PFI-inspired contracts had seen
large chunks of public sector property
service provider, but this was the first deal
of its kind to be concluded by a major
private sector corporate.
Abbey Nationals Group Property &
Survey (GP&S) team in 1998 changed
its philosophy from one of managing
overhead to one of unlocking value.
Over the past five years, the team that
now forms Covista was the driving force
within GP&S. It was this team that en-
sured Abbey National was undertaking a
series of four scoped stages with innova-
tive approach partners. In the stage one,
in 1998, the process was started by the
re-structuring of the supply chain:
The estates management function was
outsourced and a IT interface put in
place for internal clients to access data
directly.
The project management role was
outsourced and a management team
retained to provide an improved in-
ternal interface.
An FM contract was let with a plan to
develop the scope and the relationship.
A number of additional services were
individually outsourced.
This combination of activities in the stage
one resulted in a range of the following
benefits for Abbey National:
Reduced occupancy cost
Lower vacancy rate (1.7 per cent)
Headcount reduction over 500
The stage two started in January 2000 and
was completed in October 2002. Abbey
Page 319
Corporate real estate outsourcing contracts
National signed an innovative deal to
outsource the ownership and management
of its 1,300 properties (6.5M sq.ft.) to
Mapeley Columbus (funded by G. Soros).
The outline deal is as follows:
Abbey National sold all properties
(freeholds and leaseholds) to Mapeley
for 457m (an immediate release of
capital).
Abbey National took a leaseback for 20
years. At expiry Abbey National has a
buy back option at market price.
Abbey National has categorised each
property with a hold date (there are
from one year to 20 years). At the end
of the hold period Abbey National can
exit.
During the twenty year agreement Ab-
bey National has the ability to exit
properties or to extend the lease at not
extra cost at any time. This flexibility is
paid by an increase in the rent of each
property calculated by an agreed for-
mula based on property type, location,
etc.
Rents are indexed at 3 per cent per
annum.
Mapeley provide all landlord services.
Abbey National has one rent and rate
demanded quarterly.
There is agreement to facilitate swap-
ping properties (new for old).
Abbey National is able to resort to
traditional under lettings if the
flexibility price is too high or if the
percentage of the cash flow (rent)
guaranteed by Abbey National to
Mapeley is threatened.
There are a range of performance
measures and escalation procedure to
ensure the fulfilling of the contract.
However GP&S firmly excluded facilities
management service delivery from the
deal in order to ensure focus and keep
future options open.
Page 320
In Covistas opinion, this deal delivered
an unprecedented range of benefits:
Guaranteed operational flexibility so
changes required over the next 20 years
can be accommodated.
Immediate release of capital
Transferred risk by converting variable,
uncertain property costs into fixed and
forecast able payments.
Reduced all-in cost of accommodation
and shared value gains resulting from
surplus property.
In the third stage Abbey National flexed
the retail chained. 750-strong branch
network was where traditional lease
structures had restricted change the most.
Armed with the newfound flexibility,
GP&S supported the development and
rollout of an industry leading franchising
scheme to revitalise the network (a
first in European banking). Under the
Entrepreneur scheme, franchise com-
panies are set-up and branch managers can
make decisions on location, use ofspace
and product offerings based on their
knowledge of local demand. Instead of
the traditional one size fits all (or not at
all) refurbishment programme, a menu of
options was developed, all of which
achieved the fundamental branding and
service objectives, but each of which
catered for a different budget and local
expectations. This new flexibility has
achieved the following results:
Rises in sales productivity of up to 25
per cent
Up to 30m p.a. in additional revenue
and lower costs
Helping to sustain the Retail Bank-s
cost: income ratio at 37 per cent
After having outsourced both the facilities
management and the Abbey National
property portfolio, GP&S decided to

complete Abbey Nationals outsourcing
by converting itself into a corporate asset
(stage four). In April 2001 the team set
about constructing a joint venture to
unlock the value of their complementary
skill sets. Nine months later, a 400m
company was created, a joint-venture
agreement with a Supply Contract that
details areas of responsibility. Appropriate
management structures and a relationship
management matrix support this partner-
ship. The other partner is Stiell, a
forward-thinking facilities management
company. This new company is Covista,
which is now responsible for the manage-
ment of Abbey Nationals property and
facilities services under a ten-year con-
tract.
Asson,27 responsible for completing the
Abbey National structured outsource deal
in 2001, states the deal generated around
500m of revenue for the bank and
guaranteed it a degree of leasehold flexi-
bility, such that any change of lease com-
mitments required by the bank during the
next 20 years can be met.
EVIDENCES ANALYSIS:
OUTSOURCING AND FLEXIBILITY
Evans28 in his report about the Case
Study 1 included a chapter with the title
Changing world. And as we have seen
this was the belief three years ago, as DSS
had shown the way to increase benefits
and gain flexibility. In the other hand
the example of Abbey National, the first
private sector corporate outsourcing its
entire property portfolio, encouraged to
support this belief. In Assons29 words,
Abbey National is a massive step forward
for corporate occupiers who can now
really believe that there is a marketplace
that will give them what they want.
However, although some few major
deals have occurred, the reality is far
away from these prognostics. And al-
de Zu n iga
though many outsource deals and sale-
and-leasebacks are taking place, they are
in small scale. The fact is that the cor-
porates are not outsourcing their entire
property portfolio. And this is because a
series of facts have to convert at the
same time. Firstly there has to be a real
reason behind. In the first case study the
government has a policy focus on stability,
on the minimum risk and has a big
problem of surplus space, which they
could not dispose. While the outsourcing
of their property portfolio brought other
benefits like the reduction of the oc-
cupancy cost, they main aims were to
transfer the risk and gain the necessary
flexibility to dispose properties automati-
cally. In the second case study, the main
driver was the raise of capital to focus
on the core business, as the manage-
ment teams slogan reveals: unlocking
value. Indeed this is the main driver
of all the sale-and-leaseback transactions.
As explained, the REPs can be un-
derstood as an evolution of the sale-
and-leaseback, and therefore, once it is
decided to outsource the ownerships of
the properties, the second step is to out-
source the management and negotiate a
flexible lease structure for the benefit of
the companys business. And this is just
the second stage of Abbey National case.
However the second necessary require-
ment is the people responsible of the
management of the CRE portfolio. They
have to be innovative and brave and
believe that a total outsourcing is the
solution; otherwise it will not happen as
it is a very consuming and long process
and requires a lot of effort. In the case
study 1 the two persons, heads of the
management team of DSS who organised
and made the outsourcing deal, were
after the contract hired by Trillium due
to their strong management skills. In
the case study 2 it is even clearer: Ab-
bey Nationals Group Property & Survey
Page 321
Corporate real estate outsourcing contracts
team, which managed the CRE portfolio
and was responsible of the outsourcing
deals, constructed a joint venture with a
facilities management provider, creating a
400m company with a 10-year contract
for the management of Abbey Nationals
property and facilities services.
But the REPs or outsourcing structures
main goal is that it provides a flexi-
bility that the sale-and-leaseback cannot
provide. And this is due to the partnership
structure that takes all the leaseholds of
the portfolio and negotiates the adequate
flexibility for the corporate. At the mo-
ment in UK the REP is the only structure
that can provide a general flexibility to a
CRE portfolio. But how is this flexibility?
Currently we can find two main types of
flexibility, which will vary for different
cases. These two types best examples are
precisely the two case studies, basically
because they were the pioneers. In the
first case the flexibility is only provided
for surplus space, which can be exit 2 per
cent p.a. of the already defined flexible
space without cost. And during the 20-
year contract you are able to dispose 10
per cent of the core properties but with
an agreed formula cost. If you want
to extend the leases there is also an
agreed formula cost. So this first type can
be defined as general flexibility, be-
cause you agree a single monthly payment
during the length of the contract and
you have the general flexibility of va-
cate free any property within a defined
group. Although it could be called speci-
fic general flexibility because it is specific
in the sense that it is only flexible for
surplus space due to this was the main
concern of the DSS.
In the case study 2, the concept of
flexibility is different. Here they had no
initial requirements and therefore they
acquired flexibility for each property, in
both directions because they can exit or
extend the lease of any property at any
Page 322
time without cost during the contract
length. And any of these properties with
this perfect flexibility has the possibility of
turning to traditional leases. This type
is what we call specific flexibility be-
cause the flexibility is in each property of
the portfolio. However this maximum
flexibility has to have some limitations
otherwise it will extremely expensive.
Therefore Abbey National guarantees a
general percentage of the rents during the
contracts and this constrain is what makes
it a general specific flexibility.
Another possible type of flexibility, al-
though it has not occurred yet in major
deals, is the option of paying a premium
when you exit leasehold, known as the
break option premium. This is common
in single leasehold contracts but when you
have a portfolio of hundreds of properties,
these premiums, which are very high, will
occur quite frequently making the deal
expensive. Therefore, to sum up, although
any flexibility can be achieved, it will
have a price that many times would be
unsustainable. And if we apply this to a
big portfolio of properties, although in
theory the bigger the portfolio is the
cheaper you can get the flexibility, in
practice due to the long term of these
outsourcing deals, it will not be very
probable that all the expensively acquired
flexibility will be use efficiently, because
nowadays the probability of occurring
changes in the businesses is very high.
So returning to the initial question if it
was possible to capture in the outsourcing
contract sufficient flexibility to meet the
changing needs of the business and add
value, the answer theoretically is yes,
because a contract can capture all the
flexibility desired and in the future it
would add value as the properties would
be used efficiently. However the respond
in some cases can be negative for a long
term big property portfolio outsourcing in
two ways. One because the flexibility

required is so expensive that you do not
obtain the necessary flexibility to meet the
changing needs of the business and two
because you acquire the flexibility but the
payment burden is so high compared to
the future savings, that you do not add
value. This is clear in the case study
1, where a change in the governments
policy made DSS not to need the surplus
flexibility. And therefore now the DSS
outsource deal is becoming too expensive
because they are paying for something
that they are not using and that they will
not use in the near future. But the major
evidence of this hypothesis can be found
in the current situation of the property
market, where there is a strong scepticism
to outsource entire portfolios.
CONCLUSIONS AND
RECOMMENDATIONS
This research has intended to respond a
specific dilemma that currently is in the
heads of the CRE managers when they
approach the outsourcing process. And
although the proposed ideas may not be
in accordance with other authors, they are
based on evidences of the current situa-
tion, existing theories and case studies.
Although some evidences may seem
discouraging, the truth is that outsourcing
is a very creative solution that can bring
many benefits as demonstrated by the
theory and the case studies. The outsourc-
ing goal is to add value to shareholders,
raising capital and reducing occupation
cost now and in the future with flexible
structures. And this is the target, to be
able to elaborate an outsourcing deal
which would add value, and this would
be achieved if an adequate flexibility is
obtained.
Current experts recommend outsourc-
ing but partially, with different providers
and the assistant of third parties, in
partnerships. Thus you can get the
de Zu n iga
maximum benefit of the outsourcing
with the minimum exposure to defaults
or changing needs of the businesses.
And this is the current situation, with
several local outsourcing deals. However
some partnerships problems can raise that
should be solved on mutual trust, profes-
sional integrity and sustained performance.
Another detected problem is the ex-
plained non-generic properties in a CRE
portfolio, which are difficult to price and
will have to be managed carefully.
The US theories suggest that although
the entire portfolio and its management
are outsourced, the strategic management
should remain in-house. This is because
the CRE provision should be align with
the business decision and this is more
efficient within the organisation and be-
sides, in any outsourcing contract an in-
house management will be necessary to
control the contracted service, as in the
case studies. The other management func-
tions can be more efficient done if they
are outsourced.
However when we introduce into the
flexibility debate everything becomes less
clear. At the moment we know that the
occupiers are prepared to pay more for
flexibility because it is fundamental for
the business dynamic. A survey revealed
that in 5 years the 53 per cent of the
corporates will have surplus space and 37
per cent will require more space. In this
sense it looks that outsourcing could be
a method to gain some capital, restruc-
ture the portfolio and arrange some
flexible leaseholds for the future. How-
ever another survey revealed that after
the short lease (5-year lease) the freehold
is considered by managers the most
flexible structure for the occupiers as it
does not tie you up as the long term
leases. However freeholds reduce the
returns to shareholder as the capital is tie
up and not used in the core busi-
ness. The key answer is to remem-
Page 323
Corporate real estate outsourcing contracts
ber Gibson theory about flexibility: the
CRE managers should analyse their CRE
portfolio and find which type of flexi-
bility is needed for each property. This
should lead them to discover that the
flexibility needed by the core properties
can be perfectly provided owning the
property and therefore it is not necessary
to outsource it and its services. However
the periphery properties require much
more flexibility and this can be provided
by serviced offices. But if these types of
properties are in traditional leaseholds, it
would be very recommendable to out-
source them to arrange more adequate
flexible leaseholds and in this case the
property and facilities services could be
also outsourced beneficially. Therefore
the core properties should not be out-
sourced to obtain flexibility but to raise
capital as the sale-and-leasebacks.
Moreover, we have to remember
another rule that helps to find how much
flexibility a corporate needs. The ap-
proach is to seek to align real estate
flexibility with the flexibility in the
company as a whole. Because for example
if a firm has major fixed contract to supply
a service to a client for say 5 years the
company might seek to align its employ-
ment, IT and CRE contracts to same time
frame. Because some companies have paid
a fortune for property flexibility yet could
never enjoy what they have bought
because the rest of their business is so
inflexible.
However one of the keys to obtain
flexibility in an outsourcing deal is to
negotiate it intelligently. Because whereas
increased flexibility transfers potential
benefit to the tenant and potential cost to
the landlord this is not a 1:1 relationship.
Therefore a clever tenant strategy would
be to take the flexibility he wants for free
and then bargain for any more that he
needs, but only paying if/when he uses
it.
Page 324
However it would be interesting to
continue researching on the flexibility
needs of the occupiers, analysing the types
of business and the different flexibility
needs. Besides, it would be very useful to
undertake a deep analysis of the changing
needs of the businesses because it would
bring light to the flexibility needed to
meet them. But of course, the most
interesting point would be to know how
the outsourcing markets would develop in
the next years but here we only can
wait.
REFERENCES
(1) Dick, W. and Akintola, A. (1996)
Private Finance Initiative Procurement
Method. RICS research, Glasgow
Caledonian University.
(2) Barris, R. (2002) Sale-leasebacks move
to the forefront: What is motivating
buyers and seller and what are their
preferred methods? Briefings in Real
Estate Finance, Vol. 2, No. 2,
pp. 103113.
(3) Ibid.
(4) City University Business School (2000)
Enhancing Corporate Value through Property
Re-engineering: Summary of Main
Findings.
(5) Ratner, J. (2003) Outsourcing struggles
to win over the sceptics, Financial
Times, London 20th May.
(6) Linehan, G. (2003) Personal
communication.
(7) Manning, C., Rodriguez, M. and
Roulac, S. (1997) Which Corporate
Real Estate Management Functions
Should Be Outsourced? Journal of Real
Estate Research, Vol. 14, No. 3,
pp. 259274.
(8) Kimbler, L. and Rutherford, R. (1993)
Corporate real estate outsourcing: a
survey of the Issues, Journal of Real
Estate Research, Vol. 8, No. 4,
pp. 525540.
(9) Glagola, J. R. (2001) Outsourcing:
opportunities and challenges for
 de Zu n iga

corporate competitiveness Part 2, solutions: an opportunity for occupiers

Journal of Corporate Real Estate, Vol. 3, and investors, Journal of Corporate Real
No. 3, pp. 260269. Estate, Vol. 3, No. 1, pp. 6981.
(10) McBlaine, R. and Mortiz, D. (2002) (18) Ibid.
Transformational outsourcing: (19) See 11 above.
delivering on the promise, Journal of (20) Asson, T. (2002) Real estate
Corporate Real Estate, Vol. 5, No. 1, partnerships: a new approach to
pp. 5765. corporate real estate outsourcing,
(11) Harris, R. (2001) From fiefdom to Journal of Corporate Real Estate, Vol. 4,
service: The evolution of flexible No. 4, pp. 327333.
occupation, Journal of Corporate Real (21) Ibid.
Estate, Vol. 3, No. 1, pp. 717. (22) Ashurst M. C. (2002) Unlocking value:
(12) Ibid. real estate outsourcing, Investment
(13) Gibson, V. and Lizieri, C. (2000) Banking Briefing, June.
Change and flexibility: the role of (23) Ibid.
serviced office space in corporate (24) See 2 above.
property portfolios and office markets, (25) Evans, M. (2000) The PRIME
RICS Research Papers, Vol, 3. contract: The Department of Social
(14) Gibson, V. (2001) In search of Security and Trillium, Journal of
flexibility in corporate real estate Corporate Real Estate, Vol. 2, No. 3,
portfolios, Journal of Corporate Real pp. 208220.
Estate, Vol. 3, No. 1, pp. 3845. (26) See 20 above.
(15) Ibid. (27) Ibid.
(16) Ibid. (28) See 25 above.
(17) ORoarty, B. (2001) Flexible space (29) See 20 above.

Page 325