A Focus on Corporate Real Estate Outsourcing

         In several of my blog postings over the last two years I made reference to the subject of outsourcing CRE functions. But my references were brief. So over the next several blog entries, I plan to delve deeply into the subject. My plan is to first discuss the general pros and cons of outsourcing while providing the rationale for outsourcing various CRE functions. I will then focus on three service areas: lease transaction services, design services, and property management services. I’ll also touch on other activities such as facility management and physical security.

         Outsourcing has grown in popularity over the years to reduce costs, provide flexibility in meeting variable demand, and provide critical expertise in leasing, market analysis, and various technical knowledge and skill (such as design and engineering disciplines). Outsourcing CRE services is now a major industry on a global scale. Large companies such as Jones Lang LaSalle (JLL), Cushman and Wakefield, and CBRE are equipped with all the necessary disciplines to execute the entire CRE lifecycle from site search, lease negotiation, tenant fit out, and on-going property management. Global in scale, these firms operate worldwide and can bring local knowledge and expertise to bear in most major global markets.

         CRE outsourcing is popular with both large multi-divisional corporations as well as smaller start-up enterprises. Perhaps the greatest reason for outsourcing transaction services is to have detailed market knowledge in the designated target area for the leasing project. The outsourcing firms work daily in the markets and maintain a detailed data base of recent transactions.

          A key issue that the CRE manager needs to address is the scope of the outsourcing services (i.e. limit the scope to market analysis and site selection only, or provide a full service including lease negotiation and contract finalization). One of the concerns with outsourcing is the perceived loss of control. CRE managers worry about whether the outsourcer can be trusted to execute the project in a completely objective and professional manner. And there’s always a concern about fees and whether the real estate broker, who is typically commissioned by the landlord based on the ultimate transaction value, is truly operating in the CRE manager’s interest.

         The key to a successful outsourcing relationship is the question of trust. Trust can be achieved by insuring that the entire transaction process is totally transparent. This would include such things as detailed trip reports, market surveys, meeting minutes, and an audit trail of how the lease negotiation transpired, and how the transaction unfolded, including competitive bids.

         A successful outsourcing relationship requires time. It will take multiple transactions for the outsourcing firm to learn the client culture and processes. Similarly, it will take time for the CRE manager and staff to gain confidence in the outsourcing firm. From my experience, an important tool to build trust is to establish a detailed set of performance criteria to use in measuring the performance of the outsourcing contractor. These criteria would include at a minimum, adherence to schedule, adherence to agreed budget, and efficiency and quality metrics. The CRE team should solicit feedback from end users on such questions as communications, service quality, and meeting expectations.

         Senior management strives to maintain core functions in the enterprise and to focus human resources on customer and profit objectives. CRE for most companies is a non-core function and thus is a likely target for outsourcing. But outsourcing CRE services requires deft management and attention. In the next several blog entries I will explore CRE outsourcing in greater detail and focus on the role of information technology in the outsourcing process.