A Next-Gen Operational Model For REITS and Data Center Providers

We continue our article series exploring how data center facility management is evolving REIT and data center provider operational models. This week, we’ll look at what a next-generation operational model looks like for a REIT or data center provider aiming to compete in a digital market.

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Today’s data center providers and REITs are quite different from those just a few years ago. And, those that focus on the datacenter and technology space face growth and evolution faster than those focusing on facilities and buildings alone. Management roles at REITs (and most data center facility portfolios) include four major categories:

• Corporate (executive) management
• Portfolio management
• Asset management
• Facility management

Each management function involves specific activities and responsibilities, but all of these can be performed either by “internal” staff on the REIT’s or providers payroll or contracted out to “external” service providers.

Focusing on facility management, we see three significant differences between legacy management and how REITs and data center providers with a digital mindset lead the industry.

1. Innovation and Entrepreneurship

Today, data center provider, colocation, and REIT facility employees can be financially incentivized to enhance facility value—bonuses and stock awards can align the employee directly with the REIT’s objectives, a goal that is harder to accomplish using salaried and hourly employees working under a facility management company fee cap. With this in mind, how many internal facility management employees are also tasked with focusing on innovation? Or, are they really entrepreneurially minded? If so, wouldn’t they be doing something else? A genuinely entrepreneurial facility manager is likely to find more advancement opportunities inside an international management company than at most REITs or data center providers. Third-party managers provide alternatives to leasing, development, capital markets, and vast geographic locations.

2. Efficiency

Although a single facility manager can efficiently handle multiple small properties from one location, rather than staffing small- format properties individually, it becomes challenging to scale a business as it grows efficiently. Simply put, a third-party facility manager can exceed whatever a REIT accomplishes in scale and purchasing power based on an even larger scale.

3. Profitability and the Data Center Asset Class

Few REITs and non-REIT data center providers, perhaps only a handful, are large enough to have enough scale to build a full facility management infrastructure comparable to a large-scale worldwide external facility manager. Smaller REITs actually lose efficiency and therefore margin due to excess capacity at some level or inability to spread costs across enough square feet. For example, a REIT or data center partner may employ a senior lease administration executive for its total square feet of managed space. In comparison, an external facility manager might spread that same skill and resource cost across more data center facility space. Simply put, CBRE’s models demonstrate that an external manager “is nearly always more efficient.”

Beyond facility management, it’s important to note that today’s organizations need good partners to help them outsource various business functions.

Not just managed services, but a true data center facility management partnership.

A business’s best friend isn’t just a contract and a set-it-and-forget-it services agreement. Regarding facility management, leading data center organizations to forge a business partnership that intimately understands the business’s requirements and aligns its staff and resources with achieving those goals. Instead of a simple contract, it’s critical to work with a data center partner that can help you focus on your business. From there, there are some great benefits.

1. You can save costs

Here’s the reality, with managed services, organizations can reduce operational costs, conserve capital budget and lower IT operating expenses. Customers typically pay for the services they require with a good managed services partnership, rather than for expensive packages with extraneous services they don’t need.

For example, CBRE estimates that its procurements systems save an average of 7.7% on products and 5% to 25% on contract services. One factor promoting cost savings is a policy to re-bid contracts every 36 months or more frequently to meet ownership requirements. This discipline is systematized at CBRE and is a routine matter with concrete results for operations. Still, it is a process that most REITs and data center providers either do not perform or do more sporadically. In some respects, it can help for the third-party manager to be the “tough guy” with vendors and service providers, buffering the facility owner and simplifying transitions.

2. Focus on your core business and strategy while reducing complexity

When an outsourced facilities management partnership is put in place, the business’s strategic initiatives benefit. To allow both technical and non-technical employees to manage their time better and improve work efficiency, a facilities management partnership will enable you to put the responsibility of IT and data center management in the hands of a dedicated team of experts. Outsourcing can help a company stay focused on revenue- generating activities and innovation by providing focus privilege and less distraction.

Another focus area is how a good partner can help you reduce technology complexity and even investments. CBRE believes it can reduce an organization’s technology investment through external management. Like employing external payroll processing, a standard practice for many companies, external facility-level IT deployment allows an organization to focus on its investment and portfolio management business.

In contrast, the external manager maintains the latest in facility management technology and software. CBRE’s annual IT budget includes millions of dollars for technology in the facility management and accounting services division, far more than any REIT or even data center provider can sustain— yet each client gains access to the entire underlying infrastructure.

For example, CBRE has a proprietary web- based building management system called Axis Portal available to all third-party management clients. Some external users, including some of the world’s largest organizations, who sometimes manage their properties, purchase licensed access to this system.

“Investments in data centers and data center and colocation providers are increasingly becoming more attractive for private equity and institutional investors. Choosing the right facilities management partner can help to reduce distractions and contain costs, as well we provide a homogenous and more predictable operating environment, benefitting both customers within the data centers and shareholders, alike.”
Jason Nance  – CBRE Global Workplace Solutions

3. You improve your sourcing and vendor management processes and lower risk

Some organizations spend way too much time trying to iron out small details with their vendors in a digitally complex world. As the business grew, these calls and conversations would keep getting more complicated and take up even more precious time. A data center facilities management partner can interface with vendors on your behalf. This ensures that any issues the business encounters with the facility are troubleshot and resolved promptly.

Another critical factor is risk consideration as it relates to individual facilities. It’s essential to work with partners that employ full-time risk management and insurance procurement experts who specialize in reducing facility liability and related costs. Only the largest organizations REITs hyperscale data center providers can staff this area. CBRE outlined many examples of preempted legal disputes, reduced facility and liability insurance costs, and risk-reduction systems and procedures used throughout the organization. For example, CBRE audits and compensates or penalizes facility staff for ensuring tenant compliance with insurance certificates and environmental reviews, among other objective factors.

4. You create an environment capable of true scale

Being able to scale and stay on top of the market is critical. And, since scalable solutions can accommodate rapid changes, they also help firms stay productive, improve system availability and eliminate detrimental downtime. Your facilities management partner’s goal is always to remain responsive to your needs, both short-term and long- term. This means aligning strategies, keeping up with the business, and even staying ahead of the competition. This gives you the ability to scale both your technology and business needs as the market shifts.

For example, external facility management can improve facility-level performance through the central contract and purchasing controls that do not exist at most REITs and other organizations. Facility management service companies can have enough scale to source services and supplier contracts that are simply unavailable to the average REIT. A large facility manager such as CBRE, which has approximately 800 million square feet under management in the U.S., far more than any REIT and any data center provider, can scope facility and equipment service contracts that allow its comparatively massive facility base to run individual properties at a high-quality level despite the lower cost, contributing to better tenant relations and retention.

Facility management service companies can have enough scale to source services and supplier contracts that are simply unavailable to the average REIT.

5. You stop wasting resources

As your data center requirements and business evolves, you start to lose track of things. Or, you’ll need to have dedicated people to keep track of all of your assets, when they’ve been updated, when their end-of-life would be, all of their maintenance contracts, and so on. Wasting resources isn’t just a bunch of virtual machines sitting on your hardware, even though that’s one example. You’re also talking about people and company resources. Facilities management partnerships help alleviate these pains by helping you control the essential parts of your business so that you can focus on growth and strategic initiatives.

Here’s an example: Over-spending on unnecessary internal technology. Most organizations expend significant resources on internal IT systems. Hardware and software transitions are a continual process, complicated by onsite and home office communications and shared resources across multiple software platforms. Modern large-scale organizations often have Chief Information Officers and sophisticated IT environments that are subjected to annual audits. This is costly and escalates for broad facility geographies.

Facility management companies see IT as their core service tool—almost everything they do revolves around or is documented in central command and control systems focused on tenant service and facility and lease accounting. The largest facility management companies own and maintain a full complement of the latest industry- standard software packages. These can integrate with the facility owner’s accounting systems almost for free because the costs are spread across many multiples of the square feet managed internally by a REIT, data center provider, or other organization.

In a digital world, you need a partner that can handle the requirements of an evolving business. In the past, facility management was always seen as an internal process. However, given the complexities and growth in the digital economy, leaders in the infrastructure and data center space must look at third-party partners to help them scale, grow, control costs, and become more efficient. Outside of the examples above, there are some great real-world use-cases where facility management has helped REIT data center provider leaders shift their value proposition in a digital market.

Download the entire paper, “Focusing on Data Center Expertise,” courtesy of CBRE, to learn more. In our next article, we’ll look at real-world use cases of shifting the data center facility management paradigm. Catch up on the previous articles here and here.