Mapeley

Is outsourcing the remedy it is portrayed to be? Or are there headaches to what some see as a 'get rich quick' approach? Liz Hamson examines the possible side effects for the companies who are thinking about outsourcing.

What's not to like about outsourcing? You get to offload your property and facilities management to an outsourcing specialist like Mapeley or Land Securities Trillium and release a whole lot of cash in the bargain. Goodbye non?core interests, hello resources for that vital refurbishment, expansion plan or groundbreaking new strategy.

Now, with the big deals, like BT, BBC and Abbey National, finally beginning to trickle through and the economic downturn focusing corporate minds on the bottom line, all eyes are on who will be next.

But will the phenomenon spread beyond quasi?public bodies to financial services and the IT sector? What about the retail sector that has until now stuck with sale?and?leasebacks, albeit big ones like Kingfisher's recent disposal? Or the beleaguered manufacturing industry? And are the prospects for global deals as good as the likes of Mapeley and Land Securities Trillium would have the corporates believe?

Downturn opportunity
The companies that make their livelihoods from outsourcing are confident that a recession would act as a catalyst for more deals. Mapeley MD Robin Priest stresses that his company is still bedding down the massive Inland Revenue and Abbey National deals, but confirms that more companies are approaching him to discuss whether outsourcing could work for them.

"If there is a recession all organisations will be looking to cut costs and at how to use capital more efficiently," he says.

Land Securities' head of corporate real estate, Ian Ellis, predicts: "Autumn should bring more deals They may want to outsource their facilities management or they may come to us [for a full outsourcing solution]."

A host of European telecoms companies are thought to be keen to follow BT's example. DTZ reveals that it is very close to tying up a "BT?style" deal for a European telecoms company. John van Oost, DTZ corporate finance MD, says that the deal will be of a similar scale to the BT deal but with a different structure.

He explains: "A lot of corporates on the Continent are looking at BT as a template, but with different views on the services or terms of the lease. In the UK, you can easily structure a 15 or 20?year deal. But on the Continent that's not an issue at all. EDF, for exampled signed for six years. The legal implications are completely different. You don't need to second guess what the [occupier] wants to do in a short deal."

The Abbey National deal is widely expected to precipitate more deals in the banking and financial services sectors. Analysts tip Halifax, the Royal Bank of Scotland and HSBC as likely candidates. Priest hints that the big US banks, GE Capital, Goldman Sachs and Morgan Stanley could be signing deals before the year is out.

Shops front
On the retail front, Ellis reveals that Land Securities Trillium has had "conversations" with retails, but says: "I don't know whether they are looking as hard at it as office occupiers."

Mapeley is thought to be in exclusive negotiations with a big high street retailer. Priest refuses to elaborate on the identity of the company, denying categorically that it is Boots of WH Smith, but his insistence that the real plays for companies like Mapeley come through buying largely freehold rather than leasehold portfolios narrows the field somewhat. Retail analysts suggest that likely contenders are Bhs or Littlewoods. Other possibles are convenience chain TNS and First Quench, which owns Victoria wins and Threshers.

But generally, say Priest, there is not likely to be the same take?up among retails as in the other sectors. "There has been a lot of chat. Everyone is looking at it, but very few deals come out that aren't sale?and?leasebacks," he says, referring to M&S; and Woolworths. "They're basically straightforward financing deals."

Both Priest and Ellis see the Kingfisher deal is seen as the more likely template for future retail deals - in which highly leveraged investors like the consortium of Goldman Sachs' Whitehall fund and London & Regional buy a portfolio of properties on long leases. David Burke, director of London & Regional which came a close second to Mapeley on the Abbey National deal, declined to comment on the deal or respond to speculation that up to a third of the �614m portfolio, bought on a 7% yield, is already back on the market.

But he hints that there are signs that another sector that has previously shown little interest is also looking hard at outsourcing. He says: "I'd like to see it applied more in manufacturing," but is elusive about whether London & Regional is in talks with any such companies.

Panacea or placebo?
Responding to suggestions that outsourcing has been presented as a solution to companies in trouble, he warns, "It should not be seen as a "Get our of jail free" card for struggling companies."

This sentiment is echoed by Priest, who is wary of the agendas of some of the retailers that have approached the company. "We are probably least interested in people who are only doing it to release capital," he says. "We prefer to talk to people who are doing it for strategic reasons, so that they can focus on their core competencies and increasing efficiencies."

Too many companies, retailers in particular, see it purely as a quick means of raising cash, agrees Martin Meech, managing director of Dixons Property. He points out that even if there is good reason to raise the cash, "there has to be a reason for doing it other than just raising money and putting it in the bank".

Retail analysts, however, point out that for all their protestations, few providers would look a gift horse in the mouth, especially as so few deals are actually being done.

So are more global deals on the cards? Lots of multinationals have been looking. Oil multinational ExxonMobil is one company that has decided against outsourcing, for now at least. As senior vice?president Joe Sabatino explains: "We believe it is better to keep the internal expertise. Some who've gone for [full outsourcing] are finding it difficult to gauge whether they're really getting the service they need - or were promised."

He is dismissive of the hysteria surrounding outsourcing: "Outsourcing is at best a partial solution and it can be a knee?jerk reaction."

Although some of the big US corporations have undertaken global deals many more efforts have been aborted. Mobile phone manufacturer Ericsson's attempt at a pan?European outsourcing deal floundered because it was impossible to find a partner that had the scope to service a portfolio comprising single buildings in each major European city.

Bitter pill
That is not the only problem facing multinationals. Aside from the logistical nightmare, there is the plethora of legal and tax systems to negotiate, as well as widely differing employment laws.

Priest says: "The big issue is that the property market is different in each place. IN most European countries, flexibility is not an issue - they already have it. What is an issue is that corporates own massive chunks of real estate and a number of businesses, like France Telecom, are interested in raising capital by releasing the property."

Most observers believe these problems will be ironed out. In the meantime, Ellis is confident that there will be pan?European deals, but no a flood. "UK corporates - even BT - want to dip their toes in the UK market first before outsourcing the international side."

Others, however, remain less convinced and cast doubt over the viability of the outsourcing concept altogether.

GVA Grimley head of investment Rob Bould points out that as corporate real estate solutions take off in the UK, as they have already in the UK, corporations will demand more flexible terms. They will baulk at the 30?year contracts signed by BT and the BBC, but may not be prepared to pay a premium for, say a 15?year deal.

He says: "There seems to be a disconnection between flexibility and price for occupiers who want to have complete flexibility but are not willing to pay the price, and between those providers who still want to charge a premium."

While spurring on domestic corporations to consider shedding their property assets, slower economic growth could deter European companies from doing so, believes Bould. "If we are going into global recession, then the first thing European companies will do is retrench to their home markets."

There remains a nagging suspicion that the maths does not add up. In the long term, how many companies will really want to pay through the nose to surrender control of their assets to another company - even with the incentive of a quick cash boost or outsourcing the day?to?day management of those assets?

There is also the problem of covenant strength. It is all very well taking on the likes of quasi?public bodies like the BBC on a 30?year contract, but is it as feasible to commit to a deal with a corporate that is longer than an institutional lease? And a potential killer blow for global deals: what about the resources of the providers themselves?

This is the big issues, agrees van Oost: "At the end of the day, a corporation needs to have a buyer. The view is that there are a lot of banks and opportunity funds out there, but few are willing to lose a couple of billion pounds."

Laurence Gergal, partner at law firm Nabarro Nathanson, is more confident that the resources will be found: "There are financiers out there who are willing to commit the resources to an international company."

He predicts an increase in the number of consortia. These, he says, are likely to involve US merchant banks that have joined forces bidding for deals with the global chartered surveying companies like Jones Lang LaSalle.

Is Mapeley worried about the competition, or that the company may not have the resources to match? Priest insists that the way Mapeley is structured means that it does not need the same level of resources as, say Trillium. "Trillium has three times more people than us, but we focus on the way we add value on a strategic level. We add people where we need to." In other words, Mapeley itself outsources aspects of the contract.

The size of it
It is not clear how great the scope for outsourcing is. But perhaps the outsourcers are looking in the wrong direction. Whereas some providers argue that outsourcing anything less than �100m is not viable, others suggest that it will be smaller organisations - the domestic companies - that really benefit and in the public sector, the local authorities.

Gergel comments: "it is a mistake to focus just on the big deals. The smaller deals are considerably easier to put together and you still get economies of scale."

What is certain is that as economic growth slows further over the next few months, all those requests for proposals that have been landing on the desks of the surveying firms and outsourcing specialists over the past few weeks will be scrutinised closely.



A corporate cure-all? 31 August 2001 Is outsourcing the remedy it is portrayed to be? Or are there headaches to what some see as a 'get rich quick' approach? Liz Hamson examines the possible side effects for the companies who are thinking about outsourcing. What's not to like about outsourcing? You get to offload your property and facilities management to an outsourcing specialist like Mapeley or Land Securities Trillium and release a whole lot of cash in the bargain. Goodbye non?core interests, hello resources for that vital refurbishment, expansion plan or groundbreaking new strategy. Now, with the big deals, like BT, BBC and Abbey National, finally beginning to trickle through and the economic downturn focusing corporate minds on the bottom line, all eyes are on who will be next. But will the phenomenon spread beyond quasi?public bodies to financial services and the IT sector? What about the retail sector that has until now stuck with sale?and?leasebacks, albeit big ones like Kingfisher's recent disposal? Or the beleaguered manufacturing industry? And are the prospects for global deals as good as the likes of Mapeley and Land Securities Trillium would have the corporates believe? Downturn opportunity The companies that make their livelihoods from outsourcing are confident that a recession would act as a catalyst for more deals. Mapeley MD Robin Priest stresses that his company is still bedding down the massive Inland Revenue and Abbey National deals, but confirms that more companies are approaching him to discuss whether outsourcing could work for them. "If there is a recession all organisations will be looking to cut costs and at how to use capital more efficiently," he says. Land Securities' head of corporate real estate, Ian Ellis, predicts: "Autumn should bring more deals They may want to outsource their facilities management or they may come to us [for a full outsourcing solution]." A host of European telecoms companies are thought to be keen to follow BT's example. DTZ reveals that it is very close to tying up a "BT?style" deal for a European telecoms company. John van Oost, DTZ corporate finance MD, says that the deal will be of a similar scale to the BT deal but with a different structure. He explains: "A lot of corporates on the Continent are looking at BT as a template, but with different views on the services or terms of the lease. In the UK, you can easily structure a 15 or 20?year deal. But on the Continent that's not an issue at all. EDF, for exampled signed for six years. The legal implications are completely different. You don't need to second guess what the [occupier] wants to do in a short deal." The Abbey National deal is widely expected to precipitate more deals in the banking and financial services sectors. Analysts tip Halifax, the Royal Bank of Scotland and HSBC as likely candidates. Priest hints that the big US banks, GE Capital, Goldman Sachs and Morgan Stanley could be signing deals before the year is out. Shops front On the retail front, Ellis reveals that Land Securities Trillium has had "conversations" with retails, but says: "I don't know whether they are looking as hard at it as office occupiers." Mapeley is thought to be in exclusive negotiations with a big high street retailer. Priest refuses to elaborate on the identity of the company, denying categorically that it is Boots of WH Smith, but his insistence that the real plays for companies like Mapeley come through buying largely freehold rather than leasehold portfolios narrows the field somewhat. Retail analysts suggest that likely contenders are Bhs or Littlewoods. Other possibles are convenience chain TNS and First Quench, which owns Victoria wins and Threshers. But generally, say Priest, there is not likely to be the same take?up among retails as in the other sectors. "There has been a lot of chat. Everyone is looking at it, but very few deals come out that aren't sale?and?leasebacks," he says, referring to M&S; and Woolworths. "They're basically straightforward financing deals." Both Priest and Ellis see the Kingfisher deal is seen as the more likely template for future retail deals - in which highly leveraged investors like the consortium of Goldman Sachs' Whitehall fund and London & Regional buy a portfolio of properties on long leases. David Burke, director of London & Regional which came a close second to Mapeley on the Abbey National deal, declined to comment on the deal or respond to speculation that up to a third of the �614m portfolio, bought on a 7% yield, is already back on the market. But he hints that there are signs that another sector that has previously shown little interest is also looking hard at outsourcing. He says: "I'd like to see it applied more in manufacturing," but is elusive about whether London & Regional is in talks with any such companies. Panacea or placebo? Responding to suggestions that outsourcing has been presented as a solution to companies in trouble, he warns, "It should not be seen as a "Get our of jail free" card for struggling companies." This sentiment is echoed by Priest, who is wary of the agendas of some of the retailers that have approached the company. "We are probably least interested in people who are only doing it to release capital," he says. "We prefer to talk to people who are doing it for strategic reasons, so that they can focus on their core competencies and increasing efficiencies." Too many companies, retailers in particular, see it purely as a quick means of raising cash, agrees Martin Meech, managing director of Dixons Property. He points out that even if there is good reason to raise the cash, "there has to be a reason for doing it other than just raising money and putting it in the bank". Retail analysts, however, point out that for all their protestations, few providers would look a gift horse in the mouth, especially as so few deals are actually being done. So are more global deals on the cards? Lots of multinationals have been looking. Oil multinational ExxonMobil is one company that has decided against outsourcing, for now at least. As senior vice?president Joe Sabatino explains: "We believe it is better to keep the internal expertise. Some who've gone for [full outsourcing] are finding it difficult to gauge whether they're really getting the service they need - or were promised." He is dismissive of the hysteria surrounding outsourcing: "Outsourcing is at best a partial solution and it can be a knee?jerk reaction." Although some of the big US corporations have undertaken global deals many more efforts have been aborted. Mobile phone manufacturer Ericsson's attempt at a pan?European outsourcing deal floundered because it was impossible to find a partner that had the scope to service a portfolio comprising single buildings in each major European city. Bitter pill That is not the only problem facing multinationals. Aside from the logistical nightmare, there is the plethora of legal and tax systems to negotiate, as well as widely differing employment laws. Priest says: "The big issue is that the property market is different in each place. IN most European countries, flexibility is not an issue - they already have it. What is an issue is that corporates own massive chunks of real estate and a number of businesses, like France Telecom, are interested in raising capital by releasing the property." Most observers believe these problems will be ironed out. In the meantime, Ellis is confident that there will be pan?European deals, but no a flood. "UK corporates - even BT - want to dip their toes in the UK market first before outsourcing the international side." Others, however, remain less convinced and cast doubt over the viability of the outsourcing concept altogether. GVA Grimley head of investment Rob Bould points out that as corporate real estate solutions take off in the UK, as they have already in the UK, corporations will demand more flexible terms. They will baulk at the 30?year contracts signed by BT and the BBC, but may not be prepared to pay a premium for, say a 15?year deal. He says: "There seems to be a disconnection between flexibility and price for occupiers who want to have complete flexibility but are not willing to pay the price, and between those providers who still want to charge a premium." While spurring on domestic corporations to consider shedding their property assets, slower economic growth could deter European companies from doing so, believes Bould. "If we are going into global recession, then the first thing European companies will do is retrench to their home markets." There remains a nagging suspicion that the maths does not add up. In the long term, how many companies will really want to pay through the nose to surrender control of their assets to another company - even with the incentive of a quick cash boost or outsourcing the day?to?day management of those assets? There is also the problem of covenant strength. It is all very well taking on the likes of quasi?public bodies like the BBC on a 30?year contract, but is it as feasible to commit to a deal with a corporate that is longer than an institutional lease? And a potential killer blow for global deals: what about the resources of the providers themselves? This is the big issues, agrees van Oost: "At the end of the day, a corporation needs to have a buyer. The view is that there are a lot of banks and opportunity funds out there, but few are willing to lose a couple of billion pounds." Laurence Gergal, partner at law firm Nabarro Nathanson, is more confident that the resources will be found: "There are financiers out there who are willing to commit the resources to an international company." He predicts an increase in the number of consortia. These, he says, are likely to involve US merchant banks that have joined forces bidding for deals with the global chartered surveying companies like Jones Lang LaSalle. Is Mapeley worried about the competition, or that the company may not have the resources to match? Priest insists that the way Mapeley is structured means that it does not need the same level of resources as, say Trillium. "Trillium has three times more people than us, but we focus on the way we add value on a strategic level. We add people where we need to." In other words, Mapeley itself outsources aspects of the contract. The size of it It is not clear how great the scope for outsourcing is. But perhaps the outsourcers are looking in the wrong direction. Whereas some providers argue that outsourcing anything less than �100m is not viable, others suggest that it will be smaller organisations - the domestic companies - that really benefit and in the public sector, the local authorities. Gergel comments: "it is a mistake to focus just on the big deals. The smaller deals are considerably easier to put together and you still get economies of scale." What is certain is that as economic growth slows further over the next few months, all those requests for proposals that have been landing on the desks of the surveying firms and outsourcing specialists over the past few weeks will be scrutinised closely.