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In-House VS Outsourcing

Organizing Real Estate Management

Written by Marcus Lindh, Filip Lindmark

Paper category

Master Thesis

Subject

Architecture & Real Estate

Year

2016

Abstract

Master Thesis 2.2.2 Outsourcing As companies increase their awareness of other competitors and service providers, senior management has improved their ability to evaluate and compare internal capabilities with those offered in the market. This is one of the factors leading to the large-scale organizational changes observed in various industries. The basis of outsourcing is the process of externalizing previous internal activities to external suppliers. In the past few decades, it has been one of the most commonly used tools to try to use external expertise or streamline the organization to save costs and increase strategic flexibility. . Gilley & Rasheed, 2000; Duhamel & Quélin, 2003; Hitt & Holcomb, 2007; Stener Pedersen & Jenster, 2000). Some people believe that outsourcing enables companies to focus their resources on core activities that help improve the company's competitiveness. Since not all capabilities are equally important, the successful outsourcing of non-core activities is now seen as the key to competitiveness. Empirical evidence shows that the combination of a large number of successful outsourcing arrangements in the past few decades with the continued need to reduce costs and increase profitability has brought outsourcing activities closer to those considered core activities. This gradual trend makes companies increasingly dependent on service providers, which in turn will cause companies to lose control, reduce innovation capabilities, and in the long run, insufficient research and development (Gilley & Rasheed, 2000; Stener Pedersen & Jenster, 2000). The organizational decision-making of outsourcing or insourcing specific functions is highly complex, and these two options usually bring different benefits to the company. The general idea is that the insourcing of close core activities requires the company to invest a lot of resources that are difficult to reverse. Although this means that insourcing may limit strategic flexibility, it enhances the company's ability to accept new technological breakthroughs, which may increase productivity and overall competitiveness (Gilley & Rasheed, 2000; Hitt & Holcomb, 2007). Duhamel and Quélin (2003) and Hitt and Holcomb (2007) both emphasized the importance of companies' ability to identify whether activities are suitable for outsourcing and how to evaluate the trade-off between outsourcing and insourcing benefits. Because strategic outsourcing provides activity vitality for outsourcing companies, it creates value beyond cost-effectiveness in the company's supply chain. 2.2.3 Joint Venture Joint venture is the use of joint resources of two or more companies to cooperate in a joint organization to obtain cross-company advantages. 2.3 Real estate management Like many other industries, the trend in the real estate industry is to increase organizational flexibility through progressive outsourcing (Lind, 2015; Kotabe, Mol, and Murray, 2012). In most cases, the outsourcing process only involves non-core activities and functions that do not have much impact on the overall strategy. A tighter organizational structure enables participants to focus on core and closely core activities, such as owning, managing, and trading real estate, activities that are central to business strategy and significantly affect financial results. Although most real estate companies view these activities as an important function to ensure competitive operations, some participants also choose to outsource their real estate management. (Damodaran, John & Liu, 1997; Farncombe & Waller, 2005; Lind, 2015) According to Black and Gibler (2004), there are a number of reasons why companies choose how to structure their real estate management functions. They conducted research on a global scale through interviews and questionnaires with corporate real estate personnel and real estate service providers. Some of the most important reasons for outsourcing are acquiring professional skills, focusing on core competencies, improving customer satisfaction and adapting to job fluctuations. Palm (2013) published a research paper on the commercial real estate industry in Sweden, in which similar factors are part of the survey results: • Customer-centricity-making it possible to focus on customers rather than operations and maintenance. • Local function-support investment in areas where there is no local business. Flexibility-the contract period of outsourcing can match the investment period. Regarding internal management, Black and Gibler (2004) demonstrated the reasons why some companies return to internal management, such as service quality, control, and dissatisfaction with providers. Unlike Black and Gibler, Palm (2013) put forward the reasons why real estate companies choose not to outsource property management functions. Although the article did not investigate the exact same area, there are similar findings here: • Direct contact with customers-to ensure that customer relationships are maintained. • Short decision path-all problems of the tenant can be solved more easily. • Responsible for the problem-the decision is 100% in line with the business model. • Investment basis-to provide information for reliable investment decisions. A highly competitive market promotes efficiency and quality, which may mean organizational change related to the real estate market through proactive trade-offs between internal and outsourced property management (Lam, 2012). Read Less