Very few UK property companies have more than 100 staff. FRI leases and a longestablished managing agent population mean that property owners can concentrate on what they do best: making deals and developing property. Property companies thus outsource many of their support services automatically.

Introduction
What is Outsourcing
What to Outsource
Essential: good planning and advice
Types of Outsourcing
Overseas outsourcing
Case Study

Many property companies have taken outsourcing a stage further. Their formal property investment analysis is carried out by specialist research companies and external investment agents make it as easy as possible to make decisions to buy or sell. The majority of time-consuming tasks involved in developing, managing and investing property can therefore be outsourced leaving the property company itself with a very tight functional brief ... or time to play golf.

This type of client/supplier relationship has remained largely unchanged for 50 years and can be traced back to the 19th century. The relationships are often strained and the contracts are often overly simplistic.

However, other industries have embraced the concept of outsourcing and have created new variations in outsourcing contracts which seek to mitigate and otherwise address the most common problems and client complaints.

Furthermore, changes in the property market over the last ten years have exposed many of the old fashioned relationships as being cosy and ineffective. The increasing requirements of the occupier sector, global management contracts and increasing financial requirements, both statutory and client imposed, have put traditional outsourcing agreements under strain. Add to this the implications of Health & Safety legislation and the Disability Discrimination Act and traditional Property Management contracts start looking weak.

There are a lot of reasons to outsource - the business case is an essential part of the success of the outsourcing. However, over time two main categories have emerged: tactical outsourcing and strategic outsourcing.

A business embarks on a tactical (or reactive) outsourcing contract if it has a problem that needs a solution. For example, let us assume that the continued cost (both financially and in terms of resource) of updating IT is proving a strain on a business. What is the best way to solve this problem? By carrying out tactical outsourcing.

On the other hand, a strategic (or proactive) outsourcing contract aligns an organisation's long term aspirations to the services that the provider supplies. For example, Company X wishes to produce a website in the short term, but wishes to be fully e-enabled within ten years. The outsourcing of its technology function is strategic.

  What is outsourcing?

The key difference between a traditional supplier relationship and outsourcing is that in a traditional supplier relationship, new services are being procured. In an outsourcing contract, a customer will (to a lesser or greater extent) already be carrying out the services in-house. The customer will transfer the function to the outsource provider, and with it, more often than not, it will need to transfer assets, employees, software licences and so on.

This differs from a supplier contract where none of these assets transfer.

So, an organisation of three people who started the company a month ago and wish to 'outsource' its IT or property management will, strictly speaking, be entering a supplier contract, not an outsourcing arrangement.

Any company that has invested time in building up a team to run accounting, HR, property management or IT, and now requires a third party to take over those services - will probably be outsourcing when it tenders a contract.

  What to outsource?

As outsourcing has proliferated through different industries, the courage to outsource more and more functions is increasing.

For example, much of the airline industry has outsourced all non-"airline" functions: its technology, catering, baggage handling, engineering, maintenance, networks and so on. The airline concentrates on flying planes.

Typical areas for a property company to outsource would be property and facilities management including the rental and service charge accounting, leaving the property company to decide portfolio strategy and buy and sell the assets. A corporate occupier may outsource all of its property and facilities management services to third parties.

Recently, organisations such as the UK Government, BT and Abbey have transferred ownership of their property assets and other services.

Rarely, even core functions (as opposed to just the non-core functions) of an industry are being outsourced, leaving a skeleton staff to manage the relationship.

It is essential to understand the interplay between the functions in a company and how the processes within those functions interact with other parts of the organisation. The first task will therefore be a functional review to identify both what is core/noncore, and also which processes can be made more efficient through outsourcing.

  Essential: good planning and advice

So far, so good. However, not all outsourcings work! An unwary customer is often hostage to the bargaining strength of an experienced provider who will tell its customers to rely on "the spirit of the relationship" in order to agree any issues which may arise.

With good planning and advice, the chances of failure can be significantly mitigated. The key areas to examine, in the first instance are:

What are the perceived benefits of outsourcing the function?

What are we outsourcing? This question sounds obvious, but the extent to which a function is outsourced is often overlooked.

Why are we outsourcing - for strategic, tactical, or other reasons?

To whom are we outsourcing?

If our in-house function has no agreed service levels, how will we set and introduce appropriate measures?

What are the long-term plans for our business and how will this affect the scope of the services?

What happens to the assets and other property we transfer when we take the contract back? What otherwise happens at the end of the arrangement?

Recently, a new question needs to be added to the list. Where is the organisation to outsource?

Overseas outsourcing or "off-shoring" involves the transfer of a function to a third party in a country that can take advantage of a cheap and skilled workforce and/or significant tax breaks e.g. India and China.

The press regularly reports on spectacular successes and failings in the outsourcing marketplace. The fact remains that in most successful outsourcing, an organisation looking to outsource will have assessed the business case in detail.

The property market has a clear opportunity for sharpening its approach to outsourcing and we can expect to see more effective use of outsourcing in the next few years.

Will you wait too long before reviewing your own business and see your competitors walk away with a greater share of your business?

  Types of outsourcing

There are many different types of outsourcing, and new types being "invented" by the month. We set out a few of the more relevant forms, below.

Transformational Outsourcing
Transformational outsourcing can be defined as the transfer of an existing function to a third party provider, who in turn transforms such function further for the benefit of the client. Commentators have alternatively defined this as "the transfer of a function, plus consultancy".
A cynic might ask, "Surely, one of the benefits of outsourcing is that the outsourcing providers will improve the function to be outsourced?" What is so different about transformational outsourcing?
It is all a question of degree. Most people embarking on an outsourcing are not expecting a radical overhaul of their business process, just improvements to their existing process. This is one of the most exciting areas for the property industry. The contracts awarded to companies like Trillium and Mapeley which allow the supplier to overhaul the provision of property as if it were a service, provide significant opportunities for transformation of the underlying service.

ASP
The term 'ASP' stands for application service provision. ASP can be seen as a subset of technology outsourcing for, predominantly, the SME market. ASP, in theory, allows small and medium-sized businesses access to technology applications that were only previously available to large corporations. The ASP provider "leases" part of its technology infrastructure (including software) to its customers, for a monthly fee.
A few years ago, the markets looked forward to exponential growth in ASP. However, ASP has simply not taken off - for a number of reasons. Top of the list is the acknowledgement by some suppliers of the SME market, and the specific, offthe- shelf solutions tailored to fit such market. However, ASP is something that could be successfully embraced in the property market, and should not be written off.
The majority of the property industry is comprised of small to medium sized companies which would struggle under the weight of a large IT system such as SAP or Oracle. If, as an alternative, large scale software packages can be licensed on an ASP basis and run by a separate company set up to do just that, smaller businesses can benefit from the integration that these systems can bring to a business.

BPO
'BPO' stands for business process outsourcing. Typical business processes to be outsourced include the payroll, accounts and human resources functions. Importantly for the property industry, facilities management also fits this category. In relation to BPO, there has been a marked increase in the extent to which such functions are and can be outsourced.

Supply Chain Outsourcing
Many organisations rely on a large number of logistics and other supply chain providers to provide a number of functions, including manufacturing, sourcing, delivery handling and distribution, payment and warehousing functions. In a supply chain outsourcing a company outsources several or all the supply chain functions to one provider, who either provides all the services itself, or primes the arrangement whilst relying on a number of trusted subcontractors.

  Overseas outsourcing

The national newspapers have been full of stories about UK companies outsourcing all manner of work to India and other countries. On the one hand, the property industry appears to be at a disadvantage in that UK property owners can only lose out if personnel are not being housed in the UK.

However, on the other hand, much of the work to support the property business can be outsourced overseas. For example:

Development of property software is currently being outsourced to Indian companies by a number of leading UK property service providers. They are achieving large cost savings and getting an excellent quality of service.

Likewise, many of the online property service providers already use Indian companies to supply their back office functions.

In the US, lease abstraction is outsourced in bulk to companies in India.

There is no technical reason why property management accounting cannot be carried out abroad as is the case with many other industries.

At present, it is large organisations who are taking advantage of this type of outsourcing. They are better able to manage the risk and have the capacity to change quickly if the arrangements do not work out. However, the success of these initial ventures may lead to these companies benefiting from cost reductions and a better quality of service and many other companies in the property industry will have to investigate how to take advantage of these options - or quickly see their competitive advantage deplete.

  Case study

The property industry woke up to transformational outsourcing in 1997 when the UK Government tendered the PRIME contract. More than just transferring the services to manage the property, PRIME transferred the whole estate, including freehold and leasehold property to Trillium, one of a new breed of property companies set up to take advantage of these deals.

This is genuine transformational outsourcing. The idea of ordering 1500 desk spaces for the next year in, say, Hemel Hempstead and letting the service provider work out how best to provide it removes the occupier's need for property expertise. The service provider is an expert in managing property and can reduce costs throughout a far larger managed estate than the occupier could do on its own.

The PRIME contract was followed by Abbey National, STEPS (Inland Revenue estate) and BT amongst others.

This provides a number of interesting questions for companies providing property management services. If your clients wish to take advantage of this type of outsourcing, what will they require?

As a traditional service provider wanting to develop a wider range of outsourcing options for your clients, how do you determine the level of risk you are willing to take on and the real value you expect to be able to provide for clients? Can you compete with the Trilliums and Mapeleys of the world?

If you expect to take on a contract from the client’s team or another incumbent supplier, how do you prepare a suitable structure, mobilisation plan, assess the legal issues relating to the transfer of employees, IT support and asset records?

Particularly in the corporate sector, the success stories in outsourcing from other industries are driving the agenda. Property service providers have a fantastic opportunity to reinvent their service industry and, by taking advantage of outsourcing options now available to them, service providers can structure their own service to transform their client’s view of them in the market.

By Robert Shooter and Andrew Waller. A version of this article was first published by Estates Gazette on 26 February 2004
Robert Shooter is a senior solicitor at Field Fisher Waterhouse: www.ffw.com
Andrew Waller is director of Remit Consulting:

 
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