Microsoft’s reputation as a computer industry giant goes back to the 1980s when the corporation dominated the home computer operating system market with MS-DOS. More recently, the company has gained a reputation for the manner in which it handles its real estate and facilities management operations. In fact, the company is in the top five percent of U.S. corporations in terms of lean management for its on-payroll facilities group.

“Microsoft’s passion is to help individuals and organizations realize their full potential,” says Steve Allen, group manager of global workplace strategies. “That is reflected in our corporate real estate organization where we strive to expand the role and the ability of each individual and the responsibilities he/she can manage.”

The company reviewed its facilities management business model in 2002 and decided changes were necessary in order to be able to scale up and meet the demands of its growing real estate portfolio, particularly at its corporate headquarters in Seattle.

At the time, the Puget Sound campus consisted of eight million sf and approximately 30,000 employees. Today, the headquarters, which focuses primarily on research and development, includes more than 90 office buildings with a total of approximately 11 million sf, and 45,000 employees. Although the square footage and the number of employees continue to grow, Microsoft is managing its Puget Sound real estate portfolio with half of the normally expected staff. Being able to manage more people and more real estate with less staff is possible by using a business model based on lean facility management.

Changing the Organizational Model

Growing pains that became evident in 2002 marked a turning point for the way Microsoft addresses facilities management. The company was experiencing a need to hire additional employees at a time when it was also seeing annual increases of more than three percent in the cost per sf to operate its existing facilities.

“We were concerned about whether the structure of our organization was a sustainable model,” notes Allen. “We had an organizational model that required Microsoft employees to have expertise in many areas, including mechanical, electrical, structural, janitorial, and facilities management. Given the number of employees we would have to hire to cover all of the necessary expertise, we were concerned our model was not working well. We also felt that this type of expertise was more of a core competency of the large service providers.”

Microsoft had to decide whether to invest significantly in expanding its model by hiring more employees as the portfolio grew or to make a strategic shift in its organizational model. The company opted for the latter and has realized the rewards of its decision over the past five years.

The organizational shift calls for the vendors to assume more responsibility and to play a strategic role in facilities management. Under the previous management structure, Microsoft employees worked with suppliers to provide technical capabilities. Although facilities operations were outsourced, Microsoft employees still made many tactical decisions related to day-to-day issues and work. The new strategy allows the company to reduce the number of employees assigned to facilities management and to view vendors as partners who can make recommendations and accept additional responsibilities.

Giving vendors the ability to play a more significant role in the company’s facilities management meant Microsoft employees who previously handled facility operations could now devote their attention to other tasks. Vendors are now responsible for answering calls from employees regarding maintenance and repair issues, which were often previously escalated to Microsoft employees. This represents a switch from a direct engagement model of contacting fellow company employees who handled these issues to a representative model where vendors are in charge of responding to calls and complaints. Vendors are expected to respond to calls in a timely fashion and to correct problems in a satisfactory manner.

Ensuring the smooth transition and ultimate success of the strategic shift required Microsoft to improve the tools it used to define its expectations, manage its outcomes, and monitor the satisfaction of employees.

Providing Vendors with Appropriate Tools and Incentives

In 2002, Microsoft began to specify its desired outcomes relative to facilities management by more clearly defining its service-level agreements (SLA) and scope of work (SOW). Being precise about tasks to be performed and the expected outcomes provides vendors with better information about the jobs they must complete. A scorecard helps the company rate the type of work that is being performed by vendors and the satisfaction level of the end users.

“Our contract wasn’t aligned to give us the results we wanted. It was written as basically providing resources rather than defining the services we wanted and having SLAs,” notes Allen. “We wanted the vendors to be responsible for operating the facilities and we wanted them to be both at-risk and at-stake. If they operate the facilities efficiently, it benefits them.”

Microsoft leveraged an RFP process to effect change by aligning vendor compensation methods with company interests. Today, company contracts are specific about the results that are expected. An at-risk fee and incentive fee are linked directly to performance.

The company was careful to ensure that the contract, the scorecard, and the RFPs were aligned in the original proposal to guarantee there were no conflicts of interests with vendors in terms of fees.

“We isolated the fee motive to be a cost per sf so there was no misalignment of the money being spent,” explains Allen. “The vendors put a significant amount of their fee at risk relative to the contract, but we provide incentives for them in terms of opportunities to make things relative to the performance expectations. If we had made an organic shift by simply asking our existing vendors to manage differently, we believe it would have failed.”

Vendors share in savings as an incentive if they reduce a particular operating cost and continue to  meet the requirements of the SLAs. The incentives and the defined objectives are valuable to the success of the vendor management model. The key, according to Allen, is structuring the model so the vendors are motivated without the need for Microsoft employees to provide tactical direction.

Showing Appreciation for Vendors

Investing in vendors as strategic partners, rather than just commodity suppliers, is essential to Microsoft’s lean management model. The outsourcing that began in 2002 was actually the second generation of the company using outside contractors to perform work, such as facilities management, janitorial, maintenance, move management, construction, project management, and transaction management.

“We had to change the way we operated and not everything worked the way we wanted it to, but we didn’t abandon the model,” says Allen. “We believed we had to make the model work so we approached challenges from the standpoint of trying to figure out how we could make it work. For instance, if we had gaps in the SOW, we refined them. We also have a third party periodically review our operations to help ensure that both sides are doing what they are supposed to do.”

Treating vendors as partners means not only showing appreciation for their work, but also keeping them informed of the company’s objectives and progress. Vendor appreciation events, such as annual get-togethers, are held to celebrate the accomplishments of the suppliers.

Quarterly business reviews are held to examine work performance and results. Annual industry and market reviews provide the company and its vendors with third-party insight and information about trends and conditions. The industry reviews give Microsoft an indication of whether vendors are keeping pace with market trends, offering the most innovative technology, and providing the most competitive prices.

Strategic annual business reviews are held to give Microsoft executives an opportunity to talk to vendors about the direction of the company and the objectives it would like to achieve. In addition, vendors are asked to share information about their companies and to offer recommendations during the annual reviews. For example, vendors noted that Microsoft’s growing real estate portfolio continually requires the addition of more vendor employees, which often leads to a lag in performance when the employee initially comes on board. In order to compensate, Microsoft now allows the vendor to hire employees six to nine months ahead of when the properties they will manage come on-line. Although this results in an added expense to the company, it makes the transition smoother for the vendors and avoids disruption to Microsoft’s business.

Vendor account management is handled by a senior manager at Microsoft who is responsible for considering the total book of business for vendors and handling escalations. For each of the company’s key vendors, a senior-level representative on Microsoft’s management team is assigned to manage the account. The representatives look at all areas, not just facilities management, where the supplier does business with Microsoft to determine if any further efficiencies can be achieved.

Training is also important to ensure that employees and vendors understand the codes of conduct, conflicts of interest, controls, and compliance issues. This is especially essential for employees whose responsibility has shifted from facilities management functions to business management capacity since they are now managing a bigger real estate portfolio.

Success Indicators

Microsoft began seeing the results of its lean management in 2006 and continues to realize improvements. The cost per sf, which is a key metric to determine success, is dropping or remaining flat on a year over year basis. The cost per sf in 2000 was $4.93 and the number was projected to climb higher than $6 by 2004, but the implementation of the lean management model held the higher numbers at bay. Today, the cost per sf is $3.49.

The costs included in Microsoft’s per sf calculation are for repairs, maintenance, administrative services, and roads and grounds. It does not include utility costs. Those are isolated separately because as much as 60 percent of those costs are directly driven by business needs in the computer labs.

“Our pure facility operation costs are also down from $1,000 per employee to $866. We anticipated that we could avoid about $60 million over a five-year period after we started implementing the lean management model in 2002, and we have exceeded that number,” says Allen. “We have also kept operations running without negative business delays, even though we’ve rapidly increased our real estate portfolio.”

During the same period that Microsoft’s expenses have dropped, the company’s Puget Sound portfolio has grown to approximately 11 million sf and is expected to climb to 14 million in 2009. Before lean management was implemented, 32 Microsoft employees were assigned to handle facilities management, real estate development, business services, finances, and planning responsibilities for about 30,000 employees. Now, there are 35 Microsoft workers assigned to handle all of these duties, with the exception of the responsibilities addressed by vendors, for about 45,000 employees. The company has seen an increase of about 40 percent in the number of employees it is supporting, but has only added three more employees to handle management duties and has eliminated the facilities services positions that were previously required.

The corporate real estate group has added three new communications specialists and four workplace research specialists to play important roles in helping the group stay closely aware of the changing needs of customers and to keep communications with them relevant and effective, even as the lean management model reduces the amount of daily interaction with end user clients.

The research specialists conduct year over year surveys, hold focus groups, and study benchmark comparisons. Allen says one of the best moves the company has made was hiring professional communications specialists to effectively convey information about products and services and to help manage change. The communications plan includes a Web portal, individual messages sent to employees to announce projects, and presentations made to the community when necessary.

“Looking back, it’s clear that we made the right decision to shift the business because we have a much more scalable model now,” says Allen. “The bigger our portfolio gets and the more leverage we have with our vendors, the easier it will be to continue to grow in a global marketplace.”

By Tracy Carbasho

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