Pacific Rim Real Estate Society (PRRES)
Conference 2000
Sydney, 23-27 January 2000
THE OUTSOURCING OF CORPORATE REAL ESTATE ASSET
MANAGEMENT IN NEW ZEALAND
PRESENTATION
JOHN MCDONAGH*
TIMOTHY HAYWARD
Property Group, Applied Management and Computing Division
Lincoln University, Canterbury,
New Zealand
*
Contact author for all enquires
Phone: 64-3-3253859, Facsimile: 64-3-3253839, E-mail: mcdonagj@lincoln.ac.nz
Abstract:
The outsourcing of non-core business activities has recently mushroomed throughout the
world as organisations seek reduced cost and strategic business advantage in an
increasingly competitive marketplace. A component of this overall trend has been a
dramatic increase in the extent to which real estate asset management functions of nonproperty investment organisations have been taken over by “external service providers”.
This study is the first in New Zealand to examine current practice, emergent trends, and
identify outsourcing issues and problems in detail. Via a survey of 457 organisations the
reasons behind the trend to outsourcing are identified, as are the types of services
outsourced, the basis of selection of service providers, the skills and attributes required of
real estate professionals and the success or otherwise of outsourcing experiences.
Introduction
Some of you who were at the PRRES conference in KL last year
may have heard my presentation on preliminary results from
research I am carrying out into CREAM in New Zealand.
This paper is a continuation of that research and examines the
outsourcing or contracting out of CREAM functions.
This research was carried out jointly with Tim Hayward, a student
in our Master of Property Studies programme.
Background
For many non-property investment organisations real estate asset
management is seen as a non-core activity and they seek to shift
this responsibility onto some one else.
In response to this increasing demand, corporate real estate service
providers have emerged.
Some have come from the traditional investment property management
sector - others from elsewhere such as accounting firms.
These service providers understandably vigorously promote the
advantages of outsourcing, but there have also been reports of
outsourced services not delivering the claimed benefits or other
more serious problems with the practice.
This paper addresses this situation by presenting presents the
results of a comprehensive mail survey of outsourcing practices
and experiences amongst a wide range of organisations in New
Zealand holding a substantial property portfolio.
A definition of outsourcing and CREAM are in the paper as is a
review of recent literature in this area but I will move straight on to
the methodology and results.
Research Methodology
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A questionnaire investigating various aspects of Corporate Real
Estate Asset Management was developed with an outsourcing
section focussed around 5 issues I will cover shortly.
In December 1998 this was mailed to 457 organisations in New
Zealand owning or occupying substantial real estate resources.
A copy of the survey is attached as appendix A
We received a 43% response rate and apart from an unusually high
response by TLA’s respondents were pretty representative of the
sample.
Data from the survey forms were then entered into the SPSS
software package for analysis.
3
Survey Results
F ig .1 - Or ga nisatio na l S tru c tur e of Resp on de nts
30
20
Percent
10
0
Go v . D ept
SOE
T LA / LA T E
P ublic C o .
P riv at e C o .
N o n P ro f it
Category
4
Fig.2 - Core Business Sector of Respondents
30
20
Percent
10
0
n
No
of
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ry
ng
uri
t
us
nd
ct
uf a
an
yI
ar
gy
er
En
M
im
Pr
Core Business
Fig.3 - Organisational Size of Respondents
In Terms of Employees
40
30
20
Percent
10
0
1-10
11-20
21-50
51-100
101-200
201-500
over 500
Employee Numbers
Apart from the government sectors, the sample was relatively evenly spread across
industry sectors and most of the organisations were large -72% having more than 100
employees.
5
Research Question 1. - Is there a trend of increasing
outsourcing of CREAM in New Zealand?
Outsourcing Strategy
• 60% of respondents said they had an outsourcing strategy
• Only 36% had committed this to writing.
• Chi squared and Mann -Whitney U testing showed no
significant differences between organisational categories or
sectors with respect to having an outsourcing strategy
• The number and value of freehold properties and the
performance of CRE management information system were
significantly related to the existence of an outsourcing strategy.
• The existence of a strategic plan for corporate real estate was
highly significant in respect to having an outsourcing strategy.
Extent of Outsourcing
• For 43% of organisations, outsourcing was now more common
than five years ago
• 7% were outsourcing less
• 50% had an unchanged level.
• Again, higher numbers and values for freehold properties were
highly significant in explaining increasing outsourcing.
• The existence of a strategic plan for corporate real estate and the
existence of a separate CRE unit were also found to be highly
significant in explaining increased outsourcing.
6
Research Question 2. - What corporate real estate
functions are being outsourced, and to what extent?
See Figure 4
• Only minor variations when broken down into sub groups and
analysed using Kruskal-Wallis analysis of variance.
(For example - Government departments were more likely to do their own building design
and Territorial Local Authorities their own site selection, property procurement, space
planning and RMA compliance.)
• Significant positive correlations exist between larger
organisational staff numbers and increased outsourcing of space
layout, building design, Resource Management Act compliance
and property disposal.
• Increase in the number/value of freehold properties was
significantly negatively correlated to the outsourcing of site
selection, space layout and construction/fitout management.
• Those who outsource their property/lease administration were
significantly more likely to use current market value for real
estate assets in preference to historic or depreciated replacement
cost.
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1.0
Mean
Fig. 4 - Comparative Frequency of Outsourcing
4.0
Individual Real Estate Services
3.5
3.0
2.5
2.0
1.5
St
te
ra
c
gi
l
na
g
in
nn
la
A
kt
n
in
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m
ad
ns
n
ig
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ti o
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as
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ea
FM
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ut
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to
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Va
8
Research Question 3. - What are the main reasons/drivers
for the outsourcing of these corporate real estate
functions?
See Figure 5
• Access to skills, technology and best practice not available
within the organisation is the main outsourcing reason
• Contrary to popular belief, cost savings are relatively
unimportant.
• No significant differences due to organisational type, core
business or number of employees.
• Negative correlations above the 5% level were found between
number of properties owned and the reason “to access skills,
technology and best practice not otherwise available”.
• In contrast, positive correlations existed between the number of
properties and the reason “ to provide greater flexibility in staff
resources”
• Those organisations that lease property are more cost conscious
as there was a very strong positive relationship between the
number of properties leased and a primary focus on cost
reduction.
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Fig 5. - Reasons/Drivers for Outsourcing
Real Estate Services
3.8
3.6
3.4
3.2
3.0
2.8
Mean
2.6
2.4
access skills
no t co re bus.
ind. service
better service
flexibility
co st
10
Research Question 4. - How do organisations identify
real estate service providers and what are the main criteria
used in the selection of providers?
Identification
• Networking and personal contact 82%,
• Associate’s recommendation 57%
• Professional affiliations 48%.
(This result was consistent across all sub groups and also reflects the findings in the
Kimbler and Rutherford research.)
Selection
See Figure 6
• Top 4 again reflected the USA situation
• Service cost was of only moderate importance
• Company size, nationwide capability and breadth of service
were least important.
• Some unusual sub group relationships
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2.0
Mean
Fig. 6 - Criteria Used to Select
Real Estate Service Providers
4.5
4.0
3.5
3.0
2.5
Co
Na
.S
ize
e
it
bi l
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ic
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Qu
12
Research Question 5. - How successful is corporate real
estate outsourcing in NZ and what factors affect the
success/failure of this outsourcing?
Success of Outsourcing
• Outsourcing was a qualified success for most organisations.
• However 12% of the total sample and 19% of the larger
portfolios had taken “back in house” functions that had
previously been outsourced.
• These included project management, disposals and acquisitions,
planning and policy development and property administration.
Factors Contributing to Successful Outsourcing
See Figure 7.
• Ratings were somewhat different than in overseas studies
• Fee structures, performance measures and well-developed
service level agreements were less important
• Business understanding, quality personnel and service,
responsiveness, clear objectives and communications were more
important.
• As elsewhere, there was support for retention of an “in house
property expert”.
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(Kruskal-Wallis one way analysis of variance revealed the importance of the quality of
personnel assigned and the quality of the service provided was significantly more
important for non-profit organisations and less important for public companies.)
A significant relationship was also found between existence of a strategic corporate real
estate plan and the importance of both quality personnel and effective performance
measurement tools.
Clarity of objectives and performance measurement factors, plus retention of control were
also significantly related to existence of a separate corporate real estate unit.
Fig.7- Factors Contributing to Successful Outsourcing
5.0
4.5
4.0
3.5
3.0
n
a
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M
2.5
Qu
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14
Conclusion
Outsourcing has increased significantly over the last five years
both in overall frequency and the range of functions covered and
this trend is expected to continue.
The majority of organisations now have at least an informal
outsourcing strategy irrespective of the ownership structure or core
business of the organisation.
Organisations with larger property portfolios are more likely to be
actively pursuing an outsourcing strategy, as are those with good
management information systems, a strategic plan for corporate
real estate and a separate corporate real estate management unit.
Property valuations are clearly the most frequently outsourced
service followed by building design, fit out and Resource
Management Act expertise.
A surprise is the tenth ranking of facilities
management/maintenance as this is frequently outsourced
overseas.
Government departments and TLA’s are more likely to retain some
functions in house.
Reducing corporate real estate costs is relatively unimportant for
most organisations relative to accessing skills, technology and best
practice.
This may indicate that New Zealand organisations have “leapt
ahead” of the initial focus on cost reduction shown in early USA
studies and are instead focussing on the higher level, longer term
advantages of outsourcing.
It may also be reflective of the very low number of qualified
property management staff within New Zealand organisations and
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therefore the need to “go outside” for a wide range of market
related advice rather than being only cost driven.
It appears a scale factor is comes into play with organisations with
large portfolios better able to support the retention of skills,
technology and best practice “in house”.
It was also evident that those organisations with a strong
preference to lease property are most cost conscious.
In common with international research the personal approach is
favoured in selecting service providers.
In terms of final selection the top ranked criteria were similar to
those found in the USA, but national coverage and breadth of
service were less important.
Again there was also a clear distinction between the factors of
importance to those favouring freehold versus leasehold tenure.
Outsourcing has generally been judged a success with those who
have implemented it, but it is not without its problems.
Success factors were dominated by quality service and personnel,
responsiveness, core business understanding, clear objectives and
communication.
Less important than in overseas studies were fee structures,
performance measures and well-developed service level
agreements.
In conclusion, the results of this survey generally reflect overseas
research, but there are some important differences to be accounted
for, and in particular there are significant differences in
outsourcing in respect of those organisations that predominantly
lease property.
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