Trading Spaces with Relocation Services

Special Section/Purchasing Services

By Dan Nolan
Dan Nolan is director of purchasing for Rock-Tenn Company, Norcross, Georgia.

August 2003 Inside Supply Management®, Vol. 14, No. 8, page 26.

What are the ins and outs of relocation services? Would these services help your organization?

IN 2001, RELOCATING A HOMEOWNING current employee cost an average of $60,831. In that same year, an average of 308 employees (current and new hires) per organization moved according to a survey by the Employee Relocation Council, a professional association supporting workforce mobility. With average relocation costs reaching millions of dollars, organizations need to find ways to effectively manage the costs associated with relocation while still meeting the needs of employees.

When it comes to relocating employees, organizations vary in their programs. Some have no formal program while others have very structured programs. Some conduct all of their relocation processes in-house while others find value in outsourcing these processes.

What do outsourced relocation service providers offer organizations? A little bit of everything. They can handle home selling, home finding, household goods moving, mortgage assistance, property and expense management, rental assistance, and even family assistance such as locating children's schools and spousal assistance. They are also equipped to handle international moves including tax, visa/immigration, and cross-cultural issues.

However, outsourcing may not be right for every organization. For small businesses or organizations that do not relocate many employees, outsourced services may not be beneficial considering the small volume. Additionally, if the corporate culture is such that an organization has difficulty relinquishing day-to-day management of relocations, service providers may not be able to involve themselves enough to provide an advantage.

Nevertheless, outsourced relocation services are a good option for many organizations because of the provider's expertise in the industry, which should lead to reduced costs and better service for employees. This article will discuss the advantages of outsourcing, considerations when selecting providers, and transition issues associated with outsourcing relocation services.

Advantages of Outsourcing

Relocation is not a core competency for many organizations. As with any outsourced service, an organization can sometimes benefit from a provider that is familiar with the industry and processes and has the time to devote to those processes. Beyond the general benefits of outsourcing, such as time savings and ability to focus on core competencies, there are other advantages of using outsourced relocation services. These include:

  • Assistance when creating or revising the organization's relocation policies.
  • Enforcement of policies — when confronted with unreasonable requests, the outsourced provider can be the gatekeeper and ensure that policies are consistently applied and that the program is equitable for all employees.
  • Better service to employees — the provider serves as a point of contact for relocating employees to get assistance quickly.
  • Better property management — a relocation provider generally can move property faster and at a lower cost than the organization itself can.
Considerations for Outsourcing

If a decision is made to outsource relocation services, several factors must be considered in selecting a provider to ensure that the organization receives the best service possible. When looking for the right service provider, consider the following factors.

Financial risk. Relocation services involve frequent transactions and substantial sums of money. Therefore, it is necessary for an organization considering outsourced providers to carefully assess and mitigate the financial risk. As with any major contract, the supply manager will review potential providers' financial statements (e.g., cash-flow statement, balance sheet, income statement, etc.) and D&B reports to assess financial health. After a provider is chosen, an organization should carefully structure the process for handling the monies associated with buying and selling homes.

Once the provider is in place, the financial statements should be reviewed at least annually to understand the financial position and the organization's exposure to the risk. Supply managers may also encourage discussions with the account managers and executives as to the financial position of the firm. Watching and talking with the provider's other clients can shed light not only on the financial health of the provider but also on how they've been treated and if they are still benefiting from the service.

Agency ties and/or independence. Different types of relocation service providers exist to meet a variety of organizational needs. Some are divisions of or have ties to companies that specialize in real estate or household goods moving. Other firms are independent, and both types have advantages and disadvantages.

For providers that are associated with a real estate firm or a household goods moving firm, a big advantage is their familiarity with and networks within the industry.

However, conflicts of interest are potential disadvantages. For instance, when using an independent firm, it is easy to switch real estate companies or household goods carriers when the service is poor. This is obviously more difficult with a company that has close ties to a real estate firm or a household goods carrier, and in many instances, there are fees associated with changing carriers.

Another advantage of using an independent firm is the attention to billing. Bills should be audited to ensure that the appropriate tariffs are applied and that the objectionable charges are removed from the bill for a household goods move. Because there's no conflict of interest, the independent firm may be more aggressive in auditing the bills and finding unnecessary charges to the organization.

Size of the firm. The size of the firm selected is also important. A significant benefit of working with a larger firm is that the firm will have the staff and resources to manage a large account with numerous relocations. However, a negative consequence of selecting a larger provider may be the inaccessibility of senior management, if an issue escalates to that level, or a potential lack of dedicated attention to a smaller account. An organization should seek to position itself in a provider's so-called "sweet spot." To do this, an organization should look for a firm in which it is represented in the top 15 percent of the provider's client base.

Online reporting. This is a critical consideration in selecting a service provider and later plays an important role in the ongoing management of the outsourced service. When evaluating a service provider, ensure that it can supply the following data measurements for your organization: average and total relocation cost by employee, average direct home sale cost by employee, and average direct home sale cost as a percentage of the price of the property. These timely measurements will help the organization know that the chief costs of the program — managing the real estate when buying the properties — are under control.

Additionally, the people who will actually use the reports internally should review the reporting capabilities during the evaluation process. Users should look at the complexity of the reporting, the ease of use, as well as what kind of information is supplied.

Transition Issues

The transition from in-house management of relocation services to an outsourced program needs to be appropriately addressed and handled to ensure it is smooth. Two issues to consider include handling of current problem properties and timing of the rollout (i.e., which employees fall under the old, in-house or new, outsourced program).

Most programs, at some time, will encounter problem properties or properties that are not selling. Generally, there's a reason why these properties are not selling. During the transition, the outsourced provider should identify these problem properties and then report them back to the organization. Internally, these reports are reviewed and recommendations for action are made regarding disposition. The provider then carries out the actions. It is important that outsourced providers offer these reports for getting the property problems resolved to reduce the long-term cost burden to the organization. It is also critical to work with the relocating employees' managers during this process to ensure that disposition decisions are in line with their business and human resource needs.

Another critical transition issue to an outsourced provider is deciding which employees will fall under the old program or the new program. One effective way to handle this is by setting a cutoff date for the old program, and any new relocations after the cutoff date will fall under the new program. It is particularly important that senior management is cognizant of the transition as they are negotiating with and recruiting new employees or working with existing employees.

Nearly every organization has a need to relocate employees. Outsourcing these relocation services can be a tremendous benefit to organizations if they weigh the advantages, address the considerations, ensure a smooth transition, and structure the programs appropriately.

Additional material exclusive to the online version of this article:

Creating a Relocation Program

Outsourcing connotes an arrangement in which a process is conducted solely outside of an organization, but most outsourcing arrangements are actually a mix of internal handling and outsourcing activities. Therefore, the outsourced provider will usually work with an organization to create processes that are as efficient as possible. In relocation services, organizations may consider tiered policies with varied options for benefits and property management.

The use of multiple tiers generally helps organizations provide the appropriate levels of relocation benefits to the various levels of employees. Avoid relocation program structures that are too expensive for the organization or that represent hardship for employees. One example of a multi-tiered policy is a three-tier policy. Tier A is comprised of a group of employees for whom the organization will purchase the property if the employee is unable to sell it after a certain period of time. A 1 percent incentive is offered for the employee to sell the property himself or herself, but if the employee is unable to sell it after following the rules of the program, the organization will purchase the house based on brokers' opinions of what it is worth and then will sell the house. The Tier A group also receives payment for the movement of household goods. The offer to buy the house if the employee can't sell it is known in the industry as a guaranteed offer (GO). Tier A usually includes closing cost assistance on the destination property.

The Tier B group receives a buyer value option (BVO). The BVO is cost-effective for the organization and puts a lot of pressure on the employee to sell the house quickly since the temporary living expense typically covers the employee for 30 days. After that, the employee is either responsible for living expenses or may request additional living expenses. Most organizations will grant more temporary living funds upon request if it's reasonable in the process of selling the home. But if the organization refuses the request and the employee is having trouble selling the home, then he or she may end up paying both the mortgage and temporary living expense. For this reason, a BVO can be dangerous for the employee, but the organization generally has the capability to step in if the house is not selling and convert the BVO to a GO to buy the house. This is an area where an outsourced provider can be very helpful in keeping up with the employee to find out if the house has sold or if the employee is struggling to sell. The outsourced provider may advise purchasing the house but would not be authorized to facilitate the sale without the approval of the organization. After approval, the outsourced provider manages the purchase of the house.

A third group, Tier C, is nicknamed the "buck and a truck" group. The organization gives an employee a lump sum of money and access to discounts negotiated by the organization for do-it-yourself moving companies.

These are just three examples of tiers that can be used in a relocation program. A member of management is generally responsible for determining which tier an employee shall be assigned to. Typically, the Tier A group is composed of executives and director-level employees or any employee whose move to a new location within the organization is critical. Tier B employees are generally those below vice president, director, or site manager level or for new employees. Tier C is usually for college hires or employees who have requested to relocate or who are voluntarily relocating.

Some organizations have chosen to put all relocations in the "buck and a truck" category — even executives. However, it is important to understand all tax and risk implications. Organizations must choose between taking on home sale timing risk from the employee or letting the employee bear that risk. Employees are generally not protected financially if the house fails to sell quickly in both BVO- or "buck and a truck"-type structures.

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