The advantages of outsourcing business functions are now widely apparent in the sector. Here’s what you need to know.
Over the past two decades, the benefits of outsourcing have become so evident across many industries that the strategy has evolved from nice-to-have to must-have. Indeed, the absence of outsourcing in an organization can raise questions about transparency and efficiency.
Interest in outsourcing within the real estate industry began roughly 10 years ago but is only recently catching on. You can’t exactly fault fund managers: Technology and services tailored specifically to the industry lagged behind others, leaving the real estate industry with a subpar product. Providers tended to come from outside the industry and the technology offered was often generic or outdated.
Today, thanks primarily to the increasing maturity of real estate technology and dedicated expertise, those issues have largely been resolved. The real estate investment sector now has access to providers that not only drive efficiency and savings but help to alleviate many of the headaches that are “off strategy” for these investment firms, namely, non-investing focused activities.
Those are the kinds of attributes that LP investors like when eyeing prospective funds — and may soon come to expect.
In a survey of more than 200 institutional investors and REITs conducted by Wealth Management Real Estate and Informa Engage on behalf of FTI Consulting, more than half (51 percent) of respondents report outsourcing at least some functions and activities. Among the outsourced areas, tax preparation and filing, investment/fund administration, and property accounting stand out.
An additional 15 percent of those surveyed reported they are considering outsourcing.
The reasons given for outsourcing are many and speak to the challenges and priorities fund managers face in an increasingly complex environment that’s growing more regulated:
- Desire to focus on core competency, i.e., real estate investing, not managing and investing in back-office functions·
- Difficulty in identifying, onboarding, training and retaining top talent (especially when these functions are not aligned with core competency); note: accountants and other back-office professionals in a real estate investment management business have limited career paths·
- Increasing difficulty in managing upward and downward scalability
- Resistance to investing in capital-intensive technology and support resources
- The value LPs place on objective third-party perspectives of service providers who have invested in strong processes, controls, technology and resources
The traditional perception of the relationship between an outsourcing provider and client is one of vendor and customer. But even this is changing to be more of a relationship made up of trusted partners.
Fund managers have much to gain from that change. In addition to having access to top-notch professionals who are part of a partner organization performing functions under their oversight and direction, they can tap into a deep bench of additional resources when they need to scale up or down, or as needed to get insights into other related areas.
That’s reassuring for fund managers who fear they might lose control by turning functions over to a third party. As the survey showed, real estate expertise (45 percent) and technology solutions and capabilities (41 percent) ranked among the top priorities for those who have yet to outsource.