Insource or Outsource?

The Real Estate Espresso Podcast

Insource or Outsource?

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Welcome to the Real Estate ~~Esope~~ 📝Espresso podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about the question of maintaining a function in-house versus outsourcing.

But first, there’s two months remaining in the calendar year, and for many that means some last-minute tax planning. This year we ~~introduce~~ 📝introduced bonus depreciation in the US as a hundred-percent write-off.

If you’re looking to take advantage of this lucrative tax strategy, then you might consider one of our industrial or storage investments that would qualify for bonus depreciation this year. We have several projects that could be a potential fit for your investment portfolio.

If you’re interested in learning more, send an email to podcast@victorjm.com and put the word “bonus” in the subject line. That’s podcast@victorjm.com, and we can hop on a quick discovery call to see if there’s alignment between your investment and our projects for which we’re currently raising capital.

An investment would be for accredited investors, by prospectus only and in compliance with US securities regulations.

On today’s show we’re talking about the question of maintaining a function in-house versus outsourcing it. Well, it’s a classic question that every business will deal with at one time or another, and on today’s show I’m going to outline the criteria that I believe should come into play when deciding whether to staff internally versus outsource.

Let’s start with the four different ways that a person might become attached to the organization. Number one, they could be a partner or an executive member of your team. Number two, they could be an employee, either full-time or part-time. Third, there might be a contractor. And then finally, there would be those folks in an advisory capacity.

Which of these you’re going to choose is a function of the role that you’re looking to fill within the organization. And helping to decide which of these is appropriate, you have to ask the question whether the function is core to the business or not.

For example, you might engage a lawyer or a contractor or a realtor on a contract basis. These functions are important, but not necessarily core to the business. It might eventually be large enough that you conduct a big enough volume of business that you can afford to hire that function in-house, in order to get some operational savings. But neither of these functions are core to the business and I would argue should be outsourced.

The capital raising function is something that is core to the business. You would never outsource that function, although you might hire brokers on a contingent basis to help make some introductions. These engagements would need to be compliant with securities regulations, of course. At the core, however, because it’s a core function, it’s too central to the business; you would never fully outsource that function.

Your finance function is critical. You would definitely have the CFO as a member of the executive team, but you might outsource part of the accounting or the bookkeeping functions. You could choose to outsource the property management, or if you have a large enough portfolio, bring that function in-house. That decision is based on the economics of the deal.

So you would never make a bookkeeper a partner in the business. That wouldn’t make any sense. The bookkeeping function is important, but it’s not core ~~of~~ 📝to the business. Every business needs that function, and it’s largely mechanical and follows a well set of established rules.

Now, we do make a distinction between hiring someone who might be geographically located in a remote location from outsourcing. These are not the same thing. We have people in our organization in dedicated roles that are not located in either one of our two head office locations. Part of our core team is based in Salt Lake City, Utah. Some of it’s based in Ottawa, Canada, but we also have employees and partners all over across several locations in the US.

And when it comes to getting work done within a functional area of the company, the ownership of those decisions and the outcomes reside within the company, within the functional leads for those areas. It means the function needs to report into a member of the executive team, or at the very least have ownership with a full-time employee.

It’s impossible to build a sustained capability with rented talent. We see many organizations make liberal use of virtual assistants. The key is to decide whether the type of work being delegated will help the business scale, or whether it’ll actually create more complexity, confusion, and gridlock.

The fastest way to get something done is with a small, high-performance team to work together on a shared goal. Large bureaucracies tend to be among the slowest to get things done. Now, there’s a balance point between adding people where it’ll speed things up, but then there becomes a tipping point where adding people will only slow things down.

This is why companies like Twitter were able to reduce headcounts substantially without killing the business. This is why Amazon was able to eliminate 30,000 jobs and the impact to the business is minimal.

Another reason why some organizations will outsource a function is to accelerate change. Sometimes a functional area within a company becomes so bloated and so slow-moving it’s too difficult to change the culture. The only way to effect change is to wipe the slate clean and start with a new team and rebuild.

But then you can’t just lay people off for economic reasons and then a week later hire new people into those same functions. In that case, it makes sense to outsource the function to an outside company for a period of time, build new processes, and then maybe a year or two later, from there you can decide which portions of that function you want to rebuild within the walls of the company.

So the question whether to insource or outsource is never a simple one. I’ve shared with you some of the considerations that we look at when we’re asking ourselves that question.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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