Interview

15 July 2005

Property outsourcing comes in all shapes and sizes now as KEITH SHIELDS, MD of LS Trillium’s FM services business explained to Jane Fenwick

PROPERTY OUTSOURCING, the ‘big bang’ solution born in the 1990’s has had a slower take up than expected. However, property outsourcing pioneers, Land Securities Trillium (LS Trillium), which for the first three years of its seven year history was a one client company – albeit the Department for Work & Pensions – has in the last three it has picked up five more clients - and more recently agreed to part company with one.

Keith Shields, managing director of LS Trillium’s FM services business, says that property outsourcing is a good option for government although he doubts there is another deal on the scale of DWP likely to arise. “If you had asked the question what property outsourcing was seven years ago, the answer would have been only the DWP version. That involved acquiring properties, delivering life cycle maintenance and support services. Seven years ago this was very new and noone knew how it would ultimately work out. However, we have learned that this original model doesn’t suit everyone’s circumstances and the more recent deals with Norwich Union, Barclays and DVLA are quite different.”

Despite signing deals that generally last for 20-30 years, the property outsourcing approach has in practice allowed for considerable flexibility within this timeframe. The original PRIME deal with the Department of Social Security has had to accommodate a merger of the Employment Service into the Department for Work and Pensions (DWP) and consequential merging of their two property estates. As Shields explained, DWP has also introduced a major change in the way it delivers its services with the Job Centre Plus scheme. The last 4-5 years has seen the removal of physical barriers in the Job Centres as an integral part of service improvement.

Despite undergoing significant changes, Shields feels that the DWP contract has worked out as expected at the beginning. “What we anticipated was a long term contract with a level of flexibility in DWP occupation and service delivery. We are delivering those things. We never anticipated that the contract would be the same on day one as on the last day of year 20. This deal allows for changes and is now established over 7 years of operation. We have been flexible enough to deliver their real estate requirements as their business, service delivery or locations change.”

It is a view that has been endorsed by the independent National Audit Office (NAO) in its report earlier this year into the expanded property outsourcing contract agreed with the DWP when the Employment Service estate was absorbed. The NAO found that the deal was £220m cheaper than a credible commercial alternative. “The Department got what it required at a good price,” the NAO said.

As the first of its kind and the first on this scale, Shields says lessons have been learned at DWP. “The first is that you can’t stop working on the partnership relationship with clients and service partners. Secondly, we had to have the right culture and approach in our business. What has made it work is the determination of the clients and LS Trillium staff delivering the services. Finally, with such massive contracts you need a very strong mobilisation phase to establish processes and procedures, but these have to be flexible to enable change.”

In these past seven years the market has caught up with the LS Trillium vision. Shields explained: “There was a level of understanding that people needed to have about property outsourcing and what the opportunities are. It is incumbent on us to realise that property outsourcing is not what it was seven years ago. There is now a level of flexibility to meet clients’ needs around the property outsourcing model. We have started to demonstrate this with our Barclays and Norwich Union deals, and with the DVLA which is also a government client but is different compared to DWP.”

These three deals reveal the change in emphasis. One the one hand, Barclays’ property outsourcing offer involves very little provision of support services. The 20 year property outsourcing deal combines the sale and leaseback of a regional HQ building and the management of 13 short leasehold properties in London and the south east that are surplus following Barclays move to a new HQ in Canary Wharf.

On the other hand, the corporate outsourcing deal struck with Norwich Union a year ago centred on the improvement and management of its core occupational estate in the Norwich area. The 25 year contract includes transfer of 115,000 sq m of office accommodation (about a quarter of Norwich Union’s occupied space) to LS Trillium who is investing £92m into the refurbishment of its 30,000 sq m HQ in the city centre. LS Trillium also delivers planned and reactive maintenance, life cycle replacement of building components and undertakes capital projects work.

Refurbishment is a key element of LS Trillium’s latest transaction with DVLA signed in March this year. It involves a major refurbishment of the DVLA HQ in Morriston, Swansea, with capital expenditure of £30m over three years, life cycle maintenance, estates management and FM across its entire estate of 58 properties for 20 years. There is no transfer of freehold property.

This contract in particular Shields explained, demonstrates how property outsourcing is an option for organisation undergoing change. “The client is looking to achieve change in how it operates its business and its 1960’s built office accommodation in Morriston does not easily lend itself to change. The refurbishment element of the contract enables the business to modernise its current space. The risk transfer sees LS Trillium taking on the life cycle for the period of the contract to guarantee quality of
environment for the next 30 years, with FM delivering support services. It all matches well – refit, life cycle and services delivery.”

However, this was also the core of the ‘flagship’ property outsourcing deal with the BBC that ran aground just two months ago. Also designed to meet the needs of an organisation undergoing major technical and business changes, the original 30 year deal struck in 2001 for a property redevelopment programme, finance for new buildings and management of FM and other property services for the BBC, floundered after just three years.

Having built the new Media Village at White City now occupied by the BBC, and with other capital projects underway, the new BBC management had a rethink of its property strategy. It chose to re-acquire the White City site and reduced its financing costs by £60m, while Land Securities realised a profit of £23m. However, LS Trillium turned its back on the residual FM-only contract reported to be worth £900m. In a statement that might seem surprising from one of the largest FM players in the market, Shields said, “We are genuinely not a standalone FM company.We deliver value to an organisation through accepting and managing risk, real estate, project delivery and FM in combination, but not through FM on its own. Lots of other successful organisations can do this. We do not want to change our property outsourcing strategy.”

Reflecting on what happened, he said, “We clearly would have wished the contract to have continued with all its elements. I am disappointed for the team at the BBC that has been with us for 31/2 years and has done a fantastic job – but we have to move on. Outsourcing has to be flexible as people’s requirements change – the BBC’s have changed and we have to be mindful of this.”

It is a setback, but not one that Shields is likely to dwell on as more opportunities present themselves. It is still government that is the most likely to fill the gap. The Lyons and Gershon reports on central government departments have proposed reductions in numbers and the relocation of government employees with necessary impacts on their property requirements. He is also looking into opportunities in the education sector where government programmes are modernising the secondary education sector. Shields said “Our skill will be to take on long term deals, risk transfer and capital to support refurbishment and rebuilding of schools, and provide facilities and services for effective education and community use.

Undoubtedly, over the seven years of its existence, LS Trillium has developed a set of transferable skills that fit organisations of a particular size and at a particular time. The property outsourcing model is gaining respect outside the UK and Shields does not rule out the prospect of transferring the LS Trillium skillset to mainland Europe.

“You can’t stop working on the partnership relationship with clients and service partners”

“We are genuinely not a standalone FM company but we deliver value to an organisation through real
estate, project delivery and FM in combination, but not through FM on its own”