So far, few organisations have been keen to hand property management to a third party. But, now the DSS's PRIME contract is reaping rich rewards, others are beginning to see outsourcing's attractions.

During the recession at the beginning of the 1990's, many businesses got their fingers burned due to a mixture of bad luck, bad debt, and bad management. In the ensuing years, while they were picking up the pieces and re-assessing their strategies, areas that were time consuming and not directly relevant to the business came under serious scrutiny - and so out-sourcing was born.

It made sense to contract out areas such as catering, security, cleaning and hygiene, and, in some cases, staff functions such as reception and post handling. Not only did this allow organisations to buy in expertise and hand over tiresome administration, it also left them to concentrate on their core abilities.

However, nearly a decade later, this culture still has not crept into property management. There are various reasons for this, not least that the British are emotional about owning property, and that this attachment to bricks and mortar has seeped into the boardroom. Logically, any portfolio worth millions should have a dedicated manager - but, with property, it never comes down to logic.

Ian Ellis, Portfolio Group Managing Director of property services company Trillium, says that although property may show a 10% to 11% return, a business should be looking for a return of 20% to 25% against investments in people, IT business initiatives - and its property, too. He sums his argument up bluntly. "It is not a good ideas to hold property", he says. "Companies should take their capital out and re-use it elsewhere."

This is Trillium's area of expertise. The transfer of property ownership as a means of raising money is not the norm. in the public or private sector, but, in 1997, Trillium won the PRIME contract (Private Sector Resource Initiative for Management of the Estate), which means that it now owns, manages and services the property estate of the Department for Social Security. Its raison d'�tre is to save the department money, while allowing the Benefits Agency to concentrate on administering the social security system.

There are various ways of managing property and freeing up the cash held in it. These include outsourcing facilities management and estate management, along the lines of services provided by the likes of Jones Lang LaSalle or Insignia Richard Ellis. Together, they variously provide flexibility, release of capital, and improved quality of service, while freeing up management time to concentrate on the core competencies of the business.

The most popular ways of raising money against property have traditionally been mortgage, sale and leaseback, or leasing the building and acquiring rental liabilities. As purely financial solutions these have their merits. Mortgaging a building allows the owner to retain management control and get back full ownership once the loan has been repaid. As a bonus, it does not tie the company into a long lease commitment. "Arrange the mortgage through a property services company and have asset management and business occupation services in the same package," says Direct of New Business for Amey Business Process Outsourcing, John Pilkington. The down-side is that a mortgage can raise only a percentage of the value of the property involved.

Sale and leaseback involves the sale of premises that will continue to be used by the vendor. The former owner then leases back the premises for between 15 and 25 years. This technique has traditionally been used by blue chip companies, but is also available to smaller operations. It has had the advantage of being an off-balance-sheet transaction, although this is about to change.

WP Carey is a US company which specialises in sale/leaseback deals on commercial property. It opened offices in the UK in 1999 and is pitching at mid-market companies. As Executive Vice President, Anne Coolidge says: "We give 100% of the market value of the property. A mortgage would only raise up to 70%. But with sale and leaseback, clients need to take a long-term view and know they want to stay in that location for a while, because they will be tied into a 15 year lease.

WP Carey charges up to 10% of the purchase price of the property for its service. This is more expensive than borrowing money from a bank, but the deal raises more money than is available by most other means. The rent is either set at a pre-agreed rate or increases are limited to an RPI benchmark. The vendor may retain control of the building, although where this does not happen the tenant loses control of facilities management, and, at the same time, being committed to a long lease means that a company cannot respond to changes in space requirements.

Distributor Gloystarne & Co is one company that has entered into a sale and leaseback arrangement with WP Carey. "This was purely a financial arrangement", says Managing Director, Colin Johnson. "We wanted to strengthen the balance sheet, not give our property management to a third party. We considered other ways of raising cash for investing in systems and this provided the best return on investment." Gloystarne has retained two of its three sites though.

"I am a believe in doing what you know and concentrating on your area of expertise," Johnson continues. "Our major vehicles were acquired on off-balance sheet, full maintenance lease deals, with maintenance, cleaning and mechanical handling managed by one company. We have not looked at property management, but I would consider out-sourcing anything. There is enough to do just looking after the core business."

Apart from emotional issues surrounding property, another obstacle to its efficient management is that most organisations approach a building as though it is in two parts: the outside and the inside. The inside is taken seriously: it is the environment in which you do business, it needs to be clean, light and comfortable. So internal services are either procured internally or facilities management is out-sourced. But the outside seems less important.

Companies such as Trillium provide a solution to this. They sell an all embracing package, acquiring freeholds and leaseholds and looking after rental liabilities. They also provide facilities management and building maintenance as part of the deal and juggle the changing requirements of various company departments and marry them up. In fact, companies such as Trillium can take over all the tasks that are usually the responsibility of the in-house property and facilities management departments that largely have neither the technology nor the business imperative to make the property portfolio work hard.

"We pay capital up front and the company has a share in the future value of the land", says Ellis. "So if we buy land for �1m and we realise development value to the tune of �2m, we share the profits with the client."

This total management approach also brings another big advantage for companies that are able to overcome the perceived hurdle of parting with property assets: namely that risk is transferred to the out-sourcer. And, although Trillium has been the only option for this kind of out-sourcing to-date, Mapeley and, on a smaller scale, Amey, are setting themselves up to compete for contracts.

The problem is that property value is barometric. The FD might allow �100,000 a year for building repair and maintenance, but then finds it costs nothing one year and more than �500,000 the next. But, because property services companies are managing such a vast estate, they can smooth out these ups and downs - and make property costs follow RPI, which help keep them in sync with income. "We take on the risk from the beginning by linking charges to the RPI, making outgoings predictable for the FD", says Ellis.

Property service companies also have the advantage of negotiating long facilities management service contracts, which introduces a greater element of stability in costs. The traditional contract is for up to five years and is set at a fixed price, but this leaves clients open to significant price rises when they then put the business out to re-tender.

"We fix a price on day one, link it to an agreed index such as RPI, and manage the risk of prices going up", says Ellis. But, instead of the normal five year contract, Trillium recently entered into a nine year arrangement with a catering partner. This gives the caterer a degree of certainty that allows it to invest in kitchens and restaurants. But the long-term view has traditionally been counter to the prevailing culture in the UK, where the goal has been short-term price cuts.

One obvious drawback to sourcing all services at one root is benchmarking. If, on the other hand, an organisation puts facilities management services out to tender, it can compare the offerings of several companies and negotiate on the basis of that with the winner. But companies such as Trillium and Amey set up performance measurement systems to ensure that, for example, call centre telephones (Amey has a dedicated number for each client) are answered within a certain number of rings, that light bulbs are replaced within a certain number of days, and that pressing issues are resolved more speedily.

"We measure activity on any day with a view to continuous improvement. And we focus on areas most important to customers", says Amey's Executive Director, Martin Channon. "We operate as an integral part of the client company." And if targets are not met, there is a financial penalty.

Economics of scale feature large in the out-sourcing of property services management. In the DSS PRIME contract, Trillium manages 16 million square feet of office accommodation and has a presence in 350 towns and cities across the UK. "We are the UK's largest producer of carpets", says Ellis. "We can buy it cheaper than anyone else in the country. And every time we lay another square yard of carpet or put in another radiator, our unit costs go down."

PRIME was the first contract of its kind in the UK, in the public or private sector. More recently, the Inland Revenue has awarded a contract to Mapeley (Soros), involving the management of 30 million square feet of offices, which is 5% to 6% of the commercial space in this country. And the BBC is also putting its property management out to tender, allowing it to concentrate on what it knows best - programme production.

If there is any doubt about whether such a massive contracting-out works, the PRIME contract is proof. Trillium paid �250m to the DSS for its freehold and leasehold properties. DSS makes an annual payment of �250m to Trillium for the provision of accommodation and related services. Payments can be reduced in the event of poor performance or buildings being unavailable. In the first year, Trillium saved the DSS �49m and the National Audit Office estimates that PRIME will save the government - and therefore the tax payer - �560m over the 20 year contract.

However, your contract does not have to be the size of the national debt to be viable. The principles work equally well on a smaller scale. For example, two departments of the DSS were occupying offices in two blocks in Leeds. One wanted to move out of a good 1980s building, with six years to go on the lease. Trillium took back the leasehold liability, but it is difficult to off-load short-term leases. The other, a training department, occupied a grotty office block across the road and the lease was due for renewal. But they wanted to stay put.

Trillium suggested that the training department move into the 1980s building, but the DSS said they could not afford to fit it out. "We did it for them, moved them into a new training centre and surrendered the old lease. They were ecstatic", says Ellis. "We would have made a loss on the 1980s building because of the short lease, but this way we saved money and they are paying no more than they would have. They would have stayed in the old building and renewed the lease for another 15 years."

Property management services companies can build these logistics into their economic decisions, where most businesses do not plan that far ahead because property management lies so low on their priority list. At the same time, sophisticated IT enables the out-sourcers to marry up diminishing requirements for space in one department with expansion in another, where, internally, the two departments might not communicate.

Although, to-date, this level of out-sourcing has remained within the public sector, financial services company, JP Morgan, is now looking at just such an exercise. "The DSS type of model is right for us", says Head of Corporate Services, Leigh Jones. "This is more than out-sourcing property management, we are looking for a partner to own the real estate we operate. In a dynamic business, where radical changes happen quickly, it is difficult to match headcount projections with getting a 20 year lease. The market is right to find a partner who will be in a position to respond more rapidly than we can."

JP Morgan's property portfolio comprises 2 million square feet, which is spread across Europe, although this will not all be embraced by the contract. It has put out an open invitation for tenders for the business and these were narrowed down first to six companies and now to "a short short-list".

This move could represent the opening of the floodgates for property out-sourcing in the private sector. If it does, it will create a large number of relieved financial directors who will finally be rid of a hefty administrative millstone (well, the bricks and mortar part at least). At the same time, they could achieve paramount efficiency in their property management and gain time to concentrate on the really important bits of their jobs.

Size is important: economies of scale feature large in out-sourcing property services management. In the DSS PRIME contract, Trillium manages 16 million square feet of office accommodation and has a presence in 350 towns and cities across the UK.

Financial Director 9/2000