Does Fixed Fee Equal Low Cost?
Fixed-fee relocation services have grown in popularity for companies attempting to reduce their exposure to homesale program risks and make their relocation costs more predictable. However, many fixed-fee enthusiasts assume that the lower risks of fixed-fee arrangements must equate to lower relocation costs, which Runnion argues can be a costly miscalculation.
By Timm Runnion, CRP
No doubt it is human nature to trust what is safe and predictable rather than trust the unknown. This is doubly true when it comes to the price we pay for goods or services. Managers with budgetary responsibility want to be sure they are receiving the best value possible, with no last-minute surprises.
Today, most companies that purchase relocation services embark on increasingly involved RFP processes and conduct considerable due diligence before selecting a supplier. To the furthest extent possible, they want to ensure both quality service for relocating employees and value for their corporate relocation spend. To support the latter objective, RFP pricing inquiries typically dissect service and administrative fees, and question how referral fees and any other rebates or credits will be apportioned.
Despite this effort to pin down relocation costs and instill some predictability, most relocation costs largely remain variable. Real estate commissions, household goods transportation, temporary living costs, appraisals, closing costs, and the like can vary substantially from relocation to relocation, adding a large dose of uncertainty for human resources (HR) and relocation professionals who are responsible for corporate mobility budgets.
The Rise of Fixed-fee Programs
In response to these concerns, some clients have asked prospective relocation service providers to present fixed-fee pricing. Relocation companies that offer fixed-fee programs fall into two categories: the minority that lead with the concept to attract risk-averse clients; and a majority that do not actively market the programs but might develop them for clients.
The fixed fee represents a set fee for each homesale transaction (typically a percentage of the departure home’s appraised value), and includes all of the ancillary acquisition and closing costs connected with the homesale. The relocation provider essentially assumes the risk and cost typically borne by the corporation or transferee in the marketing and sale of the employee’s home (Fixed-fee programs normally exclude so-called “special” properties; these are managed as conventional “cost-plus” relocations, with clients assuming the carrying and closing costs.).
Such a fixed-fee approach certainly makes relocation homesale costs more predictable and can simplify client administration and oversight tasks. With many variables removed, clients have a better idea how much each move will cost; they can develop more accurate relocation budgets based on anticipated relocation volume. Fixed-fee programs also offer clients a measure of legal security: the relocation company assumes all of the “risks and liabilities” of owning the home.
These benefits have undeniable appeal to many buyers of relocation services. However, many fixed-fee enthusiasts assume that the lower risks of fixed-fee arrangements must equate to lower relocation costs. That assumption can be a costly miscalculation.
Decreased Risks… Increased Costs?
First of all, it is important to clarify that a fixed-fee homesale service does not equate to a fixed-cost relocation. While the fixed-fee program typically includes a set service charge for providing typical homesale, home marketing, homefinding, and closing services, it does not include many related direct costs that clients usually incur for a relocation. These include temporary living, trips to the new location, household goods transportation, and other eligible employee expenses. These direct costs normally are passed through to clients in both traditional and fixed-fee programs.
Fixed-fee programs also are more complex than they might initially seem. While fixed-fee clients see a simple fixed-rate figure, the many variable costs that influence total relocation costs have not disappeared suddenly; they remain behind the proverbial curtain. The client may not see them, but the relocation company is acutely aware of both anticipated homesale and administration costs and also the less-predictable risks: deal fall-throughs, unexpectedly long inventory times, legal problems, and the like.
Relocation companies that offer fixed-fee programs—and not all do—must develop complex pricing models that account for more obvious costs and also build in sufficient revenue to cover potential real estate and legal snafus. Relocation volume is critical. Similar to insurance companies, the relocation companies depend on a large-enough transferee population to distribute the risk so that a few costly transactions can be offset by many less expensive ones. Under a fixed-fee arrangement, smaller transferee populations equate to increased risk and higher fees. Average home values are important, as well: higher-priced properties take longer to sell and have higher selling and closing costs.
Ultimately, the relocation company must arrive at a fixed-fee arrangement that is competitive but that also allows the company to carry out its contractual responsibilities, invest in HR, training, and technology, and earn a reasonable return on investment. This calculation is every bit as complex as it sounds, and that difficulty, risk, and uncertainty must be reflected in the fixed-fee pricing. The relocation company essentially is assuming all risk in the transaction, including potentially significant carrying costs and losses on sales.
Fixed-fee Programs in the Current Real Estate Environment
Ironically, the current real estate slowdown that makes some companies desire increased predictability and risk indemnification also works to increase the cost of fixed-fee programs.
Here is an illustration: It often is said that all real estate markets are local, and that is more true today than ever. While the East and West Coasts are suffering from widely publicized slowing markets, many Midwest and Southern markets are relatively robust. Fixed fees are developed based on a client’s total relocation profile, but inevitably will rise to ensure the most costly contingencies are covered. For example, a client who moves employees between New York, NY, and Los Angeles, CA, but also to Dayton, OH, and Tulsa, OK, generally will be quoted a single fixed-fee that reflects the most costly and risky scenarios in their relocation profiles.
Relocation providers essentially are factoring in the risk they are taking, on top of the risks their clients are handing off, to arrive at an acceptable risk premium. In essence, the providers might be willing to assume this collective risk, but the fixed-fee pricing will fully reflect the risk they are undertaking. The client has increased predictability, perhaps, but not reduced costs.
Reducing Risk Without Reducing Service
Companies that wish to reduce risk and exposure can achieve many of the benefits of fixed-fee arrangements without paying dearly for complete risk indemnification. The most successful and responsible relocation programs usually include an element of risk-sharing among the client, the relocation service provider, and the employee. Such a shared approach usually allows the homesale process to proceed more smoothly, reflects more realistic costs, and fosters a more collaborative relationship among the client, relocation provider, and relocating employee.
It is important to select a qualified relocation service provider that possesses sound policy development skills and a real understanding of the economics of relocation program options. A company that seeks an optimum balance of price and performance should partner with a relocation service provider to develop carefully-considered performance standards that reflect the company’s budget and culture and that include appropriate rewards and remedies.
Take advantage of your relocation company’s knowledge of relocation best practices and enlist its help in ensuring that your policy is current and reflects today’s market realities. By working with experienced, relocation-oriented real estate agents; setting a mandatory marketing period; establishing reasonable list price limits; and rewarding transferee actions that hasten sales, companies can reduce the risks of extended sale and inventory hold times and control costs.
Bottom Line
The desire to manage risk and exposure can be compelling—especially for companies operating under tight budgets during uncertain times. Companies that are attracted to the predictability and administrative ease of fixed-fee programs, however, should not assume that their relocation costs will be lower than with a well-designed, traditional program. In fact, the substantial risk premium built into the fixed fees usually results in higher relocation costs. A capable relocation service provider can help you to achieve your cost and service objectives without resorting to ultimately costly quick fixes.
Timm Runnion, CRP, is president and chief executive officer for Mobility Services International, Newburyport, MA, and a member of the Mobility Editorial Advisory Committee. He can be reached at +1 978 358 2000 or e-mail timmrunnion@msimobility.com.