flp bpo educational viewpoint 2014

Initial BPO Educational Discussion Document 1 CONFIDENTIAL AND PROPRIETARY

Implications of Business Process Outsourcing (BPO) for Real Estate Industry Participants

Discussion Document Presented by FrontLine Partners (Updated First Quarter, 2014)

This document is confidential and is intended solely for the use and information of the party to whom it is addressed.

2014

www.frontlinepartners.net

http://www.frontlinepartners.net/


FrontLine Partners BPO Educational View Point (2014 Update)

BPO Strategies and Usage – in General 3

BPO Implications at Large for the Real Estate Industry 12

Typical Business Case Elements and Value Proposition 17

Deploying BPO Strategies at the Industry Sector / Company Level (Applied Example of Real Estate Fund Management Sector)

24

Alternative Structure / Control Options Continuum 31

Next Steps 38

Appendix Items 40

General Qualifications of Managing Partner 41

Representative Case Studies 42

Table of Contents

Shared Service Center Organizational Structure & Design 3 CONFIDENTIAL AND PROPRIETARY

BPO Strategies and Usage in General


Introduction FrontLine Partners is engaging with its customers to talk about business processing outsourcing (BPO).

Introduction

Engage in an Information Exchange

that will Promote Education About the BPO Market

Assist You in Determining the Right

Way to Move Your Company Forward in Exploring the BPO

Market

Provide an Overview of the BPO Market and

Share Our Views

Understand Your Thoughts and Views About BPO Services

and Their Place in Real Estate

Our purpose is to share our view of the BPO market, discuss its impact on the real estate market and explore means

to move your company forward in the BPO market


• BPO has a place in real estate businesses and over the next several years there will be a strong focus on the initiative.

» Our clients are expressing a high interest in exploring BPO services.

» If other market segments (e.g. financial services) are an indication, once companies see the benefits and understand the full extent of the capabilities, we will see a high rate of adoption.

• As the real estate market continues to change, our clients will embrace BPO as a way to meet the challenges that dynamic markets present.

» Market pressures are always pushing companies to do more with less.

» BPO allows companies to secure good talent and scale (up or down) when needed.

• FrontLine Partners is responding to the market’s demand for BPO services by leading its customers through an education and examination process to look at BPO services and determine how to integrate them into current business strategies.

» FrontLine Partners is providing its clients with an understanding of what BPO is and what it means for their business.

The BPO Market and FrontLine Partners’ Response BPO is gaining traction in the real estate market. Over the next several years, these services will become an integral part of the way you do business.

http://www.beacon-cs.com/index.html


Key Business Drivers for BPO

Companies are adopting BPO because it enables them to create an organization that is more focused, scalable, and capable of delivering to a higher standard.

Key Market Drivers for BPO

35%

35%

20%

10%

Fortune 500 companies were asked what most

impacted their decision to outsource

Cost Reduction “Spend Less Get More”

Focus on Core Competency “Do What we Do Best”

Scalability “Replicate the process”

Improve Quality “Improve corporate capabilities”

Source: Forester, IDC


Key Trends

» BPO is gaining visibility in U.S. companies over the last five to eight years.

- Many U.S. companies are under pressure to lower costs and improve performance. Many companies see BPO as a way to fix both problems at the same time.

» The BPO market is now experiencing noticeable momentum in terms of wider user acceptance and the emergence of new service offering categories, as well as a proliferation of providers.

- Service providers offer BPO for literally hundreds of business processes that cover most market needs. Some of these service offerings are very stable; some are just emerging and are, therefore, largely untested.

» Historically, BPO market growth has come from corporations off-shoring low value-add functions but today the market is shifting to offer higher value-add BPO capabilities.

- SOX compliance and other niche accounting/financial reporting requirements have lead to off-shoring of higher value functions.

» Real estate companies have started to take advantage of BPO services and have realized capital savings for their organization/shareholders.

- As market pressures gain strengthen in the real estate market companies will begin looking at cost cutting and ways to save money without impacting their organizations, BPO is a solution that should be examined.

U.S. companies are not just off-shoring low-value functions, but are starting to look at ways to off-shore other types of work.

Key Market Trends


Extended Enterprise Model

Vertical Integration Model

Core Competencies

Critical Functions

Outsourced Functions

Key Attributes

Why outsource? Why not outsource?

• Enhance operating and management effectiveness by focusing on core competencies

• Increase flexibility to meet changing business needs

• Reduce cost structure by leveraging providers’ expertise, technologies and scale

Shifting to an Extended Enterprise Model Reinforces Value Add The extended enterprise model / concept promotes primary focus on core competencies and critical functions and a move away from less value added functions


BPO – Can Drive Operating Strategy in Multiple Environments

Outsourcing creates operating strategy leverage in every environment.

Reduce Unit Costs

Reduce Total Costs

Increase Capacity

Variabilize Costs

Arbitrage Direct Cost Structures

Short List of Trusted Suppliers

Large, Innovative Contracts

Large “Package” Deals

• Find options with lower cost fundamentals, e.g. labor rates in India

• Leverage larger suppliers to handle volumes

• Expand outsourcing scope to ensure reductions in indirect and fixed costs

• Comprehensive and highly structured arrangements

• Shift fix cost risk to supplier • Structure and execution critical

• Key is reducing operating risk, e.g. quality

• Build smooth interfaces to reduce interruptions

Possible Outsourcing Strategies

Description

Profitability

Gro

wth

LOW HIGH

HIGH

Potential Operating Goals Under Various Performance Scenarios


Sourcing / Outsourcing Strategy

» Companies need to examine their back-office to build a sourcing strategy that is right for them.

- Businesses choose to use outside vendors everyday as part of a sourcing strategy. Outsourcing does not have to be off-shoring, but rather it could be a different way of doing things inside your business.

» The feasibility for executing a sourcing strategy is different for companies.

- All companies have a sourcing strategy, whether it is an in-house (own employees) or it is hiring contractors/temps it is a sourcing strategy. BPO requires companies to look at additional sourcing dimensions.

» When most companies think of outsourcing, they look to act quickly because business drivers require an adjustment.

- Our approach is to work with our clients before this “crisis” happens to build a process that will enable analysis of work processes, selection of prime outsourced functions, and a strategy (timing, effort) that will set the stage for effective migration and delivery of BPO services.

Company sourcing strategies should have a component of outsourcing (BPO).

Building the Right Outsourcing Strategy


BPO Misconceptions and Typical Barriers to Usage

» Loss of Business Control

- While 100 % outsourcing is not feasible, a blend of in-house and outsourcing capabilities creates a balanced company.

- Processes structured for collaboration creates an outsourcing situation that puts the customer in charge of direction and delivery expectations.

» Degradation of Service

- Each BPO deal brings different value to the customer.

- Dedicated team for each client delivers focused value and the right mix of outsourced capabilities.

» Customer Relationships Adversely Affected

- Companies that outsource enable their organization to focus on what it knows – the customer, while outsourcing activities that require less skill.

- Deploying resources into core business activities enables companies to deliver more value to its customers.

Outsourcing Misconceptions

Considering outsourcing will challenge your preconceived thoughts about BPO, getting the facts will help sharpen your strategic direction.


BPO Implications at Large for the Real Estate Industry


Real Estate Firms and the BPO Market

The Real Estate Industry as a whole is not an early adopter of BPO services, but is quickly learning of its value

Real Estate Firms and the BPO Market Overview

- BPO providers are responsible for managing turn-over and training new people.

- BPO providers find and attract new talent and pay off-shore competitive rates.

- A number of owner

operators, REITs and fund managers are bringing BPO into their businesses.

- A key area of focus of real estate companies for BPO is transactional support, lease administration and increasingly accounting and financial reporting.

BPO is a real possibility for real estate companies

Real estate companies seeking hard to find

talent are looking to BPO as a solution

- Real estate companies that have tried BPO services are looking for ways to expand.

- Select real estate companies are looking at building captive BPO capabilities or shared service centers.

Real Estate companies are looking at BPO, but are not an early adopter


Real Estate Market Segmentation

Six key market segments define the real estate industry

Home Building

Development/ Construction

Owner/ Operators

Property Services

Capital Markets

Corporate Real Estate

Homebuilders

Multi-Family Housing

Senior Housing

Student Housing

Military Housing

Master Plan Communities

Land Development

Commercial Construction

Multi-Family Construction

Specialty

Office

Retail

Industrial

Hospitality

Healthcare

Mixed Use

Property Management

Facility Management

Energy

Telco

Brokerage

Opportunity Funds

Lenders / Banks

Loan Servicers

I-Banks

Insurance

Pension Funds

Retail Users

Large Block

Industrial

Health

Higher Education

Government

Land Owners

Markets

Real Estate Market Segmentation

Re-Devel/ Development Construction Leasing Legal

Tenant Coordination

and Improvement

Lease Admin

Property Mgmt/ Facility Mgmt

Accounting/ Reporting

Risk Mgmt/ Insurance

Investor Relations

Asset Mgmt/

Funding/ Servicing


Real Estate Segment Market Assessment

Real Estate Segment Market Assessment

Each market segment has its own specific approach and challenges; however, we see the biggest opportunity in the owner operator and capital markets segments.

Market Segment

Key Opportunities

Corporate Real Estate

- Leverage Large Service Providers to get Scale

- Focus on sub-components of Third Party Outsourcing

Capital Markets

- Money is Available - Operations and Systems

Not Keeping Pace - Infrastructure and

Resource Challenged

Owner Operator

- Large Scale Potential - Management Focus on

Scalability / Flexibility - Resource Challenges

Key Challenges

- Cost Center Mentality; Indirect Spend / Impact

- Breadth of Market in Size and Scope

- Prioritizing Key Pain Points

- Desire for Customization

- Competitors after same Market

- Slow Adopters

Market Assessment

- Focused Effort on Large CRE providers first

- Secondary Priority for Direct CRE clients

- Big Market Potential - Focus on Investor and

Fund Reporting/Admin - Secondary Expansion of

Financial Analytics

- Big Market Potential - Adoption / Model Shift to

Funds Management


Real Estate Industry Overview of Operations Activity Chain

Investor Relations

Risk Mgmt/ Insurance

Accounting/ Reporting

Prop Mgmt/ Facility Mgmt Legal Leasing Construction Redevelopment

/Development Tenant

Coordination Tenant

Improvement Lease

Administration

• Identify potential projects

• Pro-Forma model potential project

• Secure funds for project

• Monitor project progress

• Monitor project IRR

• Detail project budgeting

• Construction Mgmt

• Gov’t permitting • Subcontractor

Mgmt • Construction

Progress Reporting

• Property ROI and leasing projections

• Prop. Availability Report

• Mrkting/Prospecting

• Tenant Opportunities Identified

• Lease Negotiations

• Reporting • Property

Plan Design (CAD

• Legal Review • Lease

Negotiations • Lease

Approvals • Lease

Abstracts

• Legal Review

• Lease Neg. Lease Approval

• Lease Abstracts

• Site Design • TI Budget • Bid Request • Contract

Award • Const.

Schedule Mgmt

• Acceptance of Premise

• Contractor Eval

• Tenant Space Delivery

• Reporting

• Lease Setup/Mgmt

• Tenant Rec. Billings

• Recoveries (CAM, Tax, Insurance)

• Lease Renewals • Collections • CAM Audits • Reporting

• Monthly physical inspect

• Vendor contracts – scheduled services

• Tenant Move In/Move Outs

• Site repair, Maintenance/ facilities mgmt

• Prop & Portfolio Reporting

• Property Budgeting

• Procurement

• Accts receivable process

• Accts payable process

• Asset mgmt • Periodic journal

entries • Corp budgeting • Bank

reconciliation • Fixed assets

mgmt • JV accounting • Consolidations • Property

accounting • Reporting • -Integrity • -Month End • -Financial

• Section 404 compl.

• Claims mgmt

• Insurance • Coverage

plan

• Create External communications

• Manage external investors

• Create company marketing materials

• Manage Wall St. Analysts

• Create / post press releases

Real Estate Industry Overview of Operations Activity Chain

FrontLine Partners has identified certain primary and secondary opportunities for outsourcing across the entire industry, although individual firms / sectors will vary significantly

Primary areas for outsourcing

Asset Mgmt

Funding

Secondary areas for outsourcing

• Manage the asset

• Position the asset for growth

• Acquisition (buying and selling)

• Service the Debt


Typical Business Case Elements and Value Proposition


Real Estate BPO Providers Value Proposition Market dynamics along with the constant challengers of maintaining a competitive advantage continue to strengthen the “BPO Option”.

» Retention challenges for qualified and motivated workforce (tenured)

» Scalability and flexibility (acquisition growth)

» Cycle times for billing, frequency, data collection

» Compliance / SOX related issues (cost of compliance)

Issues

» Operational relief to focus on value added functions

» Scalability (Acquisition Growth)

» Fixed cost to a variable cost (“Certainty around transaction costs”)

» Risk Mitigation

» Evolve business model with industry leading practices and technology

» Access to global workforce

» Highly educated » Stable » Reliable » Flexible (7 x 24)

» Faster collection of revenue

Benefits

» Operational inefficiency plus slow cycle time creates:

» Lost revenue opportunities » Poor quality » Poor reliability » Reporting delays

» Operational distraction takes focus away from growth generating transaction/activities

Pain Points


Typical Indicators that Outsourcing may be Attractive Option

1. If we could save you 35 to 45% on your internal financial and related processes and improve consistency and quality without increasing your risks, would you be interested?

2. What processes are your current challenges in your operational, or financial environment?

3. What are your paper and labor intensive processes – real estate, HR, financial and accounting processes?

4. What headcount do those processes have?

5. Do you currently partner with any third parties to process those transactions? If so, which processes? Do you have established SLA’s?

6. Would you consider partnering with a firm that has core competencies in those processes?

7. What are your key success criteria (the 5, or 6 measurable results that will demonstrate long term success)? Do you see the opportunity for strategic advantage in improving the process? Are they thinking about whole processes? Are they limiting their thinking to low level activities? Would they benefit from a total solution?

8. What are their decision criteria for choosing the services provider?

9. Who are the key decision influencers? Internal customers for the service? Decision makers?

10. What will be the process for making the decision?

11. Is the customer willing to do a pilot? Do they have the processes designed?

12. How would you characterize your organizations’ risk sensitivity – are you trying to reduce risk?

13. Is your company highly acquisitive? (outsourcing to reduce cost in integrating companies)

We know selected responses to these key questions are critical decision factors / drivers in deciding to engage BPO providers and to estimate the financial and operational impact from BPO strategies


BPO Case for Action Break-even typically occurs after a short ramp-up and transition period.

TIME

CU

MU

LATI

VEC

OST

1 2 3 4 5 6 7 8 9 10 11 12 13

Project breakeven

during Month 6

Reduction in annualized operating expense

typically 39%


Illustrative Business Case Analysis FrontLine Partners can develop a customized business case analysis

Hard Benefits/Savings » Cost savings from lower cost offshore labor » Greater pull through and response rates from

improved cycle time » Improve and monitor quality » Process improvements (Technology & Productivity)

Hard Costs » One time/Non-recurring

• RIF/Severance • Consultants, legal contracting • System and technology connectivity • Facilities/Equipment (if significant RIF)

» Recurring • Supplier management and oversight • Future step-up in labor costs

• 20-30% + labor and infrastructure cost savings • 15-20% process improvements from quality and productivity • Payback typically six to nine months depending on scope / ramp-up

BENEFITS & REVENUES

COSTS & EXPENSES

Soft Benefits » Improved scalability and flexibility of operational model » Variable cost structure (transaction pricing versus imbedded fixed

costs) » Improved risk mitigation » Preserve capital for strategic uses

Soft Costs » Increased management time / attention during initial ramp-up and

monitoring phase

TYPICAL BOTTOM LINE BUSINESS CASE ATTRIBUTES


BPO Business Case Evolution

TIME

VALU

E

COST REDUCTION

20-30%+ reduction in

labor and infrastructure costs

PROCESS IMPROVEMENTS

15-20%+ increase in

productivity and quality improvements

STRATEGIC COMPETITIVE ADVANTAGE

Freedom to focus on

your core competencies and achieve competitive

advantage

• Test pilot • Prove concept • Maintain quality • Initial cost savings through arbitrage

• Process improvement using Six Sigma methodology

• Technology optimization/leverage

• Process re-engineering

DR

IVER

S

BPO Project

Firms typically will see an initial mix of labor cost arbitrage and process improvements which impact short to near term impact. Over time, the firms should experience greater strategic competitive advantages as their employees are focusing on more critical, value-added activities and less “drag”.


Transition Challenges

Implementing BPO solutions cause challenges in four key areas for most customers.

Scope

Processes, systems, and people across the entire organization change simultaneously.

The entire organization is impacted.

Complexity

Many unknowns exist.

Critical details are hard to gather.

People take on new roles and new working relationships.

Risks Risks are inherent. Pressure for results forces compromise. People issues can be overwhelming.

Momentum

BPO transitions and transformation take on a life of their own.

Management may struggle to maintain control.


Deploying BPO Strategies at the Industry Sector / Company Level


Filter Business and Process Baseline Views

Industry Knowledge

Fund Variability & Complexity

Fund / Investment Mgmt. Process

Process & Technology Readiness

Outsourcing Candidate Screens

Overall Staging and Prioritization

To complete an initial business and process baseline view, we would recommend applying a number of filters to consider select processes for migration or delivery by external / BPO providers

Key insights And recommendations

For migration path And degree of internal vs.

External resources

Outcome

Process Consideration for External / BPO Service Delivery


NON-MISSION CRITICAL

Any activity that, if performed poorly, would

not pose an immediate risk to client

MISSION CRITICAL

Any activity that, if performed poorly, would pose an immediate risk to

client

NON-CORE

Any activity that does not contribute to client’s

competitive advantage

CORE

Any activity that contributes to client’s competitive

advantage

IN HOUSE (FOCUS AND GROW)

• Retain complete control • Engage and control • Client personnel • Continue in house • Our way, our standards

OUT-TASK AND TRANSITION

• Maintain outcome control • Disengage and control • Strategic partners • Drive productivity • Your way, our standards

OUT-TASK AND REVIEW

• Maintain process control • Engage and entrust • Specialist partners • Focused investment • Our way, your standards

OUTSOURCE

• Give up control • Disengage and entrust • Vendors • Leverage and contract • Your way, your standards

EARLY VISIBILITY INTO RISKS

Initial segmentation

improves subsequent screening efforts;

identifying required control level helps to

focus additional suitability analysis on

the most important risk criteria.

MORE IN THE CORE

Not all core activities are “off limits” for outsourcing; an initial risk

screen can uncover suitable core activities given an appropriate level

of control.

We typically help clients assess potential processes for outsourcing depending on criticality to the business, core vs. non-core, as well as internal process readiness and resource capacity

Outsourcing Transition Evaluation Framework


Our initial assessment suggests that select parts of portfolio management and finance, investment management and fund administration be considered for back office / BPO solutions

• Purchase of external data

• Size of in-house research team

• Number of clients, funds and structures

• Size of capital investment

Key Cost

Drivers

Fund Management Value Chain

Operational Infrastructure Support

• Number of transactions

• Complexity of investment / type and variety of asset types

• Portfolio turnover

• Number of portfolios

• Number of investors

• Leverage of operating partners

• Number of properties

• Portfolio roll-ups • Degree of

leverage by operating partners

• Number of portfolios

• Complexity and variability of underlying investments

• Tiering of Funds

• Number and complexity of investor requirements

• Fund vs. programmatic vs. separate account

Investment Strategy/

Market Research

» Strategy Formation

» Data collection, storage and integration

» Compilation / interpretation of analysis

» Aggregation / distribution of analytics output

Capital/ Fund

Formation

» Investor/ partner

acquisition » Fund

Formation » Partnership

structures » Relationship

management

Key Processes

Acquisition and

Dispositions

» Deal sourcing » Market analysis » Due diligence » Underwriting » Buy – Sell – Hold

analysis » Disposition

marketing

Property Management

» Tenant services delivery

» Tenant relationship Management

» Lease Administration

» Vendor Management

» Facilities Management

» Billing and Collections

» Invoice Management

Property Accounting

» Budget / forecasting

» A/R billing and collections

» A/P / purchasing

» Financial reporting

» Closing

Portfolio Management and Finance

» Business plan management

» Performance monitoring and reporting

» Debt management

» Fund tracking » Return/cash

flow calculations

Investment Mgmt.; Asset

Servicing

» Investment management

» Investor or joint venture reporting

» Investor communications

» Industry compliance » Maximizing returns » Capital planning and

deployment

Fund Administration

» Fund accounting

» Statement generation

» Fund statutory and regulatory reporting

» Cash inflow/ ouflow record keeping

• Number of portfolios / funds / partnerships

• Variability in capital call and funding needs

Degree of Inclusion

Indicates primary segments for BPO solutions High Probability Low Probability Med.

Probability

Real Estate Fund Management Value Chain – Applied Example


Fund /Portfolio Administration & Reporting

Asset Management Fund Management

Real Estate Fund Management – Functional ‘Environment’

Strategic Research / Fund Setup » Macro Research » Regional Research » Country Research » Product Research » Fund Strategy Dev. » New Fund Approval » New Fund Launch

Sourcing » Market Research » Deal Review » Feasibility Analysis » Underwriting Cash Flow » Sourcing to Fund » LOI / MOU » Deal Package Prep » Investment Approval

(Preliminary)

Post Acquisition » Deal Structuring » Entity Structuring » Asset Mgmt.

Agreement » Engage Svc. Providers » Document Turnover » Asset Takeover » Data Conversion » Asset Mgt. Handoff

Acquisition » Full Due Diligence » Financing » Market Appraisals » Purchase/Sale

Agreement » Investment Approval

Final » Closing

Investment Administration » Investor Relations » Investor Communications » Investor Reporting

Investor Marketing/ Communications » Investor Targeting » Fund Road Show » Investor Recruitment » Investor On-boarding » Event Management » Marketing Mgmt. » Investor Queries » Fund Cross Selling

Asset Management » Business Plan Mgmt. » Performance Monitoring

Property Valuation

» Provider Selection » Data Setup/Validation » Assumption Validation

• Capital Expense • Income • Market • Global

» Property Valuation » Annual Valuation

Finance » Capital Planning » Capital Development » Cash Flow Mgmt. » Cash Forecasting

Debt/Equity Mgmt. » Debt Management » Equity Management » Debt/Equity Reports

What-If Analysis » Assumption Definition &

Refinement » Portfolio/Fund What-If

Analysis Fund Accounting

» Fund Structuring » Fund Accounts Setup » SPV Accounting » Hold Co Accounting » Cash Position Tracking » Capital Call Calc. » NAV Calculations » Fee Calculations » Monthly Closing » Hedge Accounting

Fund Administration » Entity Setup » Capital Call Statement » Capital Acct. Tracking » Tax Compliance » Safe-Keeping » Trustee & Fiduciary

Supervision » Entity Wind Down

Portfolio/Fund Reporting » Monthly Actuals » Asset Mgmt. Report » Quarterly Fund Report » Return/Cash Flow

Analysis » Property Performance

and Metrics Evaluation

Data Movement & Storage » Communications (w/ Data Sources &

Consumers) » Oversight of Inbound & Outbound Data

Fidelity

Investment Selection

Data Refinement » Data Adjustments (within limits)

Data Governance » Data Standard Definition & Maintenance

• Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts

Asset Data Aggregation

KEY: Fund Manager Client Functions

Fund / Portfolio Admin & Reporting

Data Aggregation / Mgmt.

Property Svc. Provider Functions

Property Reporting » Financial Reporting » Ops Reporting » Capital Projects Reporting

Asset Accounting » GAAP Translations » GAAP Adjustments » Ownership/ / Partnership

Entries » Tax Entries

Asset Controlling & Reporting

Dispositions » Hold / Sell Analysis » Bid / Deal Structuring » Disposition Approval » Wind Down

Billing & Collections » Lease Administration » Billing Setup » Monthly Billing » A/R & Collections

Tracking

Leasing » Market/Business Dev » Leases Execution » Lease Renewals » Lease Forecasting

Property / Building Mgmt. » Property Management » Facilities Management

Property Accounting » CAM Reconciliation » Property Accruals » Capital Expenditures » Bank Reconciliations

Accounts Payable » Vendor Setup » Invoice Management » Check Generation

Capital Projects / Development Mgmt. » Design » Bidding & Contracting » Project Management » Construction Accounting & Rptg.

Property Budgeting » Rent Roll Setup » Income & Exp.

Assumptions » Op Expense Budgeting » Cap Expense Budgeting » Budget Approval

Property Operations, Accounting & Budgeting

Fee Establishment » Asset Mgt. Fees » Performance Fees » Development Fees

JV Accounting Oversight / Interface » Financial Reporting

Review » Ops Reporting Review

» Accruals & Allocations » FX Conversions » Other Non-Cash

Adjustments » Month-End Close Potential Additional Real Estate Functions


Sourcing • Market Research • Deal Review • Feasibility Analysis • Underwriting Cash Flow • Sourcing to Fund • LOI / MOU • Deal Package Prep • Investment Approval (Preliminary)

Post Acquisition • Deal Structuring • Entity Structuring • Asset Mgmt. Agreement • Engage Svc. Providers • Document Turnover • Asset Takeover • Data Conversion • Asset Mgt. Handoff

Acquisition • Full Due Diligence, Financing • Market Appraisals • Purchase/Sale Agreement • Investment Approval Final • Closing

Investment Selection

Dispositions • Hold / Sell Analysis • Bid / Deal Structuring • Disposition Approval • Wind Down

REAL ESTATE INVESTMENT MAAGEMENT – FUNCTIONAL ‘ENVIRONMENT’

Asset Management • Business Plan Mgmt. • Performance Monitoring

Finance • Capital Planning • Capital Development • Cash Flow Mgmt. • Cash Forecasting

Property Valuation • Provider Selection • Data Setup/Validation • Assumption Validation • Capital Expense • Income • Market • Global • Property Valuation • Annual Valuation

Asset Management

Debt/Equity Mgmt. • Debt Management • Equity Management • Debt/Equity Reports

What-If Analysis • Assumption Definition &

Refinement • Portfolio/Fund What-If Analysis

Fund Management

Fund Accounting • Fund Structuring • Fund Accounts Setup • SPV Accounting • Hold Co Accounting • Cash Position Tracking • Capital Call Calc. • NAV Calculations • Fee Calculations • Monthly Closing • Hedge Accounting

Fund /Portfolio Administration & Reporting

Investor Marketing/ Communications • Investor Targeting • Fund Road Show • Investor Recruitment • Investor On-boarding • Event Management • Marketing Mgmt. • Investor Queries • Fund Cross Selling

Strategic Research/ Fund Setup • Macro Research • Regional Research • Country Research • Product Research • Fund Strategy Dev. • New Fund Approval • New Fund Launch

Investor Relations • Investor Communications • Investor Reporting

Fee Establishment • Asset Mgt. Fees • Performance Fees • Development Fees

Fund Administration • Entity Setup • Capital Call Statement • Capital Acct. Tracking • Tax Compliance • Safe-Keeping • Trustee & Fiduciary

Supervision • Entity Wind Down

Portfolio/Fund Reporting • Monthly Actuals • Asset Mgmt. Report • Quarterly Fund Report • Return/Cash Flow Analysis • Property Performance and

Metrics Evaluation

Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis


Asset Controlling & Reporting KEY:

Property Operations, Accounting & Budgeting

Fund Manager Functions

Fund / Portfolio Admin & Reporting

Data Aggregation / Mgmt.

Property Svc. Provider Functions

Potential Additional Real Estate Functions

REAL ESTATE INVESTMENT MANAGEMENT – FUNCTIONAL ‘ENVIRONMENT’

• Rent Roll Setup • Income & Exp.

Assumptions • Op Expense

Budgeting • Cap Expense

Budgeting • Budget Approval

Property Budgeting

• CAM Reconciliation

• Property Accruals • Capital

Expenditures • Bank

Reconciliations

Property Accounting

• Lease Administration

• Billing Setup • Monthly Billing • A/R &

Collections Tracking

Billing & Collections

• Vendor Setup • Invoice

Management • Check

Generation

Accounts Payable

• Property Management

• Facilities Management

Property / Building Mgmt.

• Market/ Business Dev

• Leases Execution

• Lease Renewals • Lease

Forecasting

Leasing

• Design • Bidding & Contracting • Project Management • Construction

Accounting & reporting

Capital Projects/ Development Mgmt.

Property Reporting • Financial Reporting • Ops Reporting • Capital Projects Reporting

Asset Accounting • GAAP Translations • GAAP Adjustments • Ownership/ Partnership Entries • Tax Entries

Accruals & Allocations • FX Conversions • Other Non-Cash Adjustments • Month-end Close

JV Accounting Oversight / Interface • Financial Reporting Review • Ops Reporting Review

Data Aggregation / Management

Data Governance • Data Standard Definition & Maintenance • Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts

Data Movement & Storage • Communications (w/ Data Sources & Consumers) • Oversight of Inbound & Outbound Data Fidelity

Data Refinement • Data Adjustments (within limits)

Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis.


Control / Ownership Continuum of Alternative Options


Six representative structures can be used to give control beyond that of a traditional supplier contract

32

• Strategic Alliance or Joint Venture (either with an Indian or US based BPO partner) • Company partners with another entity without structuring any common or shared entity / ownership. Instead, firms

commit resources, management and possibly funding. In some cases, a JV could involve a (majority-minority) equity interest in a separate entity, created to facilitate the partnership (See Minority / Majority interest below). Company would likely commit volumes in exchange for significant influence over processes and/ or pricing.

• Build-Operate-Transfer

• Company contracts with another entity to design, build and operate a BPO center. Company can influence the design / operating specifications to whatever degree desired. Company has the sole discretionary option to purchase the facility (including transfer of associates) at a pre-determined price and under pre-determined conditions. At transfer, ownership / equity similar to Build-Out. Could be considered as part of consortium.

• Equity Minority Investment (i.e. minority investment) • Company provides equity or deeply subordinated financing in exchange for entity guidance and key leverage over

operational decisions/directions, etc. Likely to receive board membership, veto rights, etc. Potential upside.

• Controlling Majority Equity Interest (i.e. at least 50.1% ownership) • Company invests sufficient capital to receive controlling interest in the decisions of the operating platform, but will

need to manage other investor / client-related entity concerns.

• De Novo Build-Out (On and Offshore) • Company commits financial and personnel resources to design, finance, build and operate a new BPO center as

separate entity. Execution options exist including leased or purchased property and the use of sub-contracting various elements of the design, build-out and operations. Leadership may be ex-patriot or local.

• Acquisition (entity preferred over asset purchase)

• Company purchases an Indian or US based BPO. Purchase would likely include all assets, physical and personnel, as well as all liabilities and existing business contracts.

Operating Control

Extent of Equity

Ownership

• Supplier-Based Contract (Typical Vendor or Short Term Contract)

• Strategic Supplier Relationship


Control trade-offs under more complex BPO alternatives These control structures can also be used to evaluate key business and operational considerations

Supplier Stability / Reputation

Supplier Mgmt. / Industry Expertise

Process Expertise / Methodology Operational Reliability

Speed of obtaining capacity

Influence / Control over process Flexibility to exit

Ownership “optionality”

Company culture / process fit Mgmt. / Employees Retention

Control costs Defray Company investments

Acquire BOT De-Novo

Build Ally or JV

Equity Stake

(Minority)

Long-Term Viability of Supplier / Partner

Quality of Service to Company

Scalability & Flexibility

For Company

People & Cultural Fit

for Company

Economics & Investment

For Company

Equity Stake

(Majority) Strategic Supplier

Favorable

Neutral / Not favorable

Depends on Situation


Benefit-risk assessment based on an increasing level of control/ownership

34

Anticipated Benefits

Anticipated Risks

Strategic Alliance or Joint Venture

(with a BPO partner)

• Company able to contribute financing, volumes and process knowledge

• Many players receptive to this type of arrangement

• Lower execution costs and time frames

• Greater control in process design • Nominal funding

• Control marginally higher than cultivating a strong supplier relationship

• Volume “lock-up” may limit flexibility • Lack of successful beacons--JV

relationships appears to be “high maintenance”

Most likely, these choices are the stronger options available to Company for this objective.

Build-Operate-Transfer (BOT)

(various funding and payment options)

• Lower initial execution costs and accelerated time frames

• Deferred capital investment • Significant control on design/process • Limited Company

resources/oversight • Option to own, timing is entirely

Company call and based upon defined criteria

• Possible control on recruitment

• Potential premium paid for entity and management team (take-out)

• Transfer may have challenges similar to an acquisition

• If partnership does not work out, transition agreement may be problematic

• Partner may lose focus/ commitment to Company near transition point

Strategic Supplier

(Enhanced relationship, not a vendor approach)

• Lower execution costs and faster time

to cost reduction • Leverage process migration discipline • Economies of scale/efficiencies from

others platform/experiences • Greater flexibility to scale up/down or

exit • May exchange volume commitments

for partial control features

• Significance of the customer relationship / attention as BPO’s evolve / mature

• Tension over BPO for recurring work vs. special project needs

• Supplier distractions / focus on their own leads / exit options

• Hybrid model effectiveness in question at early stage until enough depth of work or relationship


Benefit-risk assessment based on increasing level of control/ownership (cont.)

35


Anticipated Risks

• Greater operational influence • Relatively low investment from

Company • Ability to spread out capital

contribution risk • Accelerated time to market • Ability to increase ownership, if desired

• Control could be restricted to select operational areas

• May be difficult to unwind investment/ subject to taxes

• Investments may be used to grow future clients and dilute Company operational focus

• May compromise ability to achieve cost pass through to investors (critical threshold % for investors?)

Equity Investment (Minority Interest)

We can find companies willing to play in all of these spaces. However, the strongest players are typically less “flexible” with their deals. Company needs to decide priority of control / effectiveness vs. desire to achieve BPO benefits without entity control.

Equity Investment (Majority Interest)

• Significant capability to leverage operational control

• Ability to manage capacity with respect to other client or institutional partner volumes

• Potential to fully capture enterprise economic value (to extent of ownership interest %)

• Likely erodes any meaningful chance to achieve cost pass through (unless consortium)

• Large capital requirements • Concentration risk of captive business • Issues with management of entity

growth • Exit strategy may have liquidity

constraints


Benefit-risk assessment based on increasing level of control/ownership (cont.)

36

De-novo Build-Out

(on-shore / off-shore)


Anticipated Risks

• Strong design control • Re-badging potential is possible to

start / launch effort • Strong integration/ alignment with

Company from the start in terms of people and processes

• Ability to hire resources in India, controlling for Company-specific business needs

• Possibility of over-design, leading to high-cost structure

• Longest timeframe for execution • High up-front financial exposure • Intense Company resource and

management focus • Lack of deep in-country expertise

Acquisition

• May accelerate timelines and capacity availability

• Existing operating platform • Possibly gain deep business and

management experience

• Limited number of opportunities • Very significant up-front financial

exposure • Will likely pay premium • Integration (cultural, processes,

infrastructure) may be difficult • Cannot control design elements--

what you see is what you get • Intense Company resource and

mgmt. focus, not core business

De-novo build out and acquisitions are less likely options as they would represent a sizeable commitment to the industry BPO opportunity, when priority may simply be at the Company needs level.


First Stage Assessment for BPO Utilization / Control Options

• Not now. Watch market for opportunities as critical mass and confidence heightened.

Ownership/Control Option Rationale

• Strategic Supplier

• Minority Equity Investment

• Strategic Alliance or Joint Venture (either with an Indian or US based BPO partner – but NO EQUITY)

• Expensive, risky, and inflexible. Recommend only if it

makes sense in connection with emerging platform well suited for Company / industry.

• Pass for now. Monitor market and evaluate

opportunities as needed. Company not likely in a position to commit management time and equity to venture.

• Not recommended; time delays; economic capture via BPO management not core focus. Company would have this issue with internal build-out in US.

• Preferred option for managing cost / scalability / flexibility while limiting capital and management attention. Exchange volume for control over pool of dedicated staff. Desire industry / specific areas of BPO experience.

• Attractive option from perspective of third party firm, expense pass through. Ownership optionality to be researched further. Most become B.O. (no transfer).

• Acquisition

• De Novo Build-Out (On and Off-shore)

• Majority Equity Interest

• Build-Operate Transfer (B.O.T.)

• Next best option to strategic supplier, and prior to a

B.O.T. level of commitment (allow provider to prove out capabilities / scale for you).


Next Steps


Next Steps FrontLine Partners recommends Company take steps to retain FrontLine for assistance with its

business process outsourcing strategy and migration.

FrontLine Partners will provide any necessary additional information to help Company arrive at a decision

1

FrontLine Partners and Company will jointly discuss the scope and nature of our role in the business process outsourcing strategy formation and evaluation / migration process

2

FrontLine Partners will work with Company to outline the key deliverables and project milestones

3

FrontLine Partners will present a proposal for your review and discussion

4

FrontLine Partners will assemble / launch the team once engagement terms are agreed to

5

Please contact for additional information:

Jim Vincent Managing Partner FrontLine Partners [email protected] (214) 369-2085

mailto:[email protected]


Appendix Items QUALIFICATIONS / CASE STUDIES

Project Framework and Timeline

Project Methodology and Approach

Key Document Section Description


Managing Partner Bio – BPO and Organizational Improvement Jim Vincent: Jim has over 30 years in significant business leadership positions with some of the industry’s leading

real estate financiers and financial service firms. Throughout his career, Jim has built multi-million dollar growth platforms, repositioned businesses and achieved significant cost savings at Fortune 500 industry leaders including GE Capital, Capital One Financial and Bank of New York. Significant positions include: SVP / Managing Director and founder of GE Capital Real Estate Capital Markets group, and President of BNY Asset Solutions.

Specific highlights in connection with operational reorganizations, process improvement and BPO:

• Supported a top ten real estate fund manager with strategic and business model options / feasibility assessment

to create a shared service center to consolidate back office operations. Additionally conducted outreach and RFI evaluation of proposals from over 15 firms, evaluated and made recommendations on final round participants.

• Sourced and managed a three phase consulting assignment for a medium sized real estate fund manager. Work consisted of conducting a current / future state gap analysis on business operating model (including outsourcing), to arrive at the technology and business operations road map and implementation plan.

• Conducted significant market research on real estate fund manager back office operational issues and challenges for an Indian based (de-novo) outsourcing group looking to enter the market – suggesting high market need for more effective BPO / integrated software solutions in the real estate fund administration arena.

• Assisted top 20 real estate fund manager with core process review across entire span of operations to identify key system and process improvement recommendations.

• Advised top ten retail REIT (NewPlan) on BPO strategies, including supplier through building a captive operational center, for migrating over 100 retail accounting jobs off-shore to a dedicated real estate BPO firm.

• Running the Capital One Contract Finance team (along with two other business groups) as part of Supply Chain Management Group. Team delivered over $200MM in annual savings – principally through supplier evaluation and contracts with outsourcing.

• Running and turning around the Bank of New York Asset Solutions subsidiary, a $16B loan and asset servicing platform, with six lines of business and over 90 institutional accounts.


FrontLine Partners Case Study

For a leading retail REIT, FrontLine Partner Jim Vincent assisted client with BPO strategy formulation, supplier selection, contract structuring and process migration.

Involvement Objective

» Evaluate BPO strategies and options after existing off-shore supplier was acquired by larger company, causing the supplier to steadily lose focus on our client’s account

» Re-evaluate BPO strategy and structural / control options to minimize risk of repeat circumstances

» Address client’s desire to broaden the outsourcing platform beyond existing work on CAM recovery pools to broader retail accounting services (six functional processes)

» Find a supplier (and partner) who could evolve to truly take on the recurring BPO work as part of their operations

» Assisted client in evaluating several different outsourcing options ranging from strategic sourcing, Build-Operate-Transfer, joint venture and building out a captive BPO platform

» Led evaluation of BPO strategy selection across seven forms of ownership and control options, based on five core criteria and 13 decision elements

» Prepared RFI materials for short list of suppliers to capture relevant information to evaluate providers

» Conducted evaluation, due diligence assessment and selection of outsourcing provider to meet client’s objectives in off-shoring selected processes, as well as criteria to serve as a joint venture partner

» Provided transaction structuring, negotiations and closing support on the supplier contract, including key performance measures

» Developed initial process migration planning and transition management efforts until BPO provider had fully scoped work and staffed up team in India


FrontLine Partners Case Study

For a global institutional investment company with over $50B in A.U.M., members of FrontLine Partners designed a portfolio of business improvement initiatives spanning all business units within the company.

Involvement Objective

» Increase EBITDA by 200 basis points

» Improve access to and quality of business information

» Define current sate processes, applications, data flows and data owners

» Identify major business issues and design initiatives to address these issues

» Implement a program office to manage the execution of these initiatives.

» Deploy solutions to the over 900 properties under management.

» Facilitated a group session of over 50 employees to identify and prioritize current state business issues

» Setup a portfolio of 30+ business improvement projects, each with defined objectives, benefits, participants, major activities and duration

» Assisted in the development of a new budgeting and business planning process which reduced the time by 40% and increased consistency across the company (translates into $1mm in annual time savings/year)

» Designed and facilitated a future state design session for the Acquisitions group resulting in a new investment memo process and organizational design

» Outlined the structure for a data governance program within the company

» Defined the approach for a major ERP re-Implementation initiative