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Why is it that outsourcing becomes popular when the economy is weak? Simple. Businesses seek to improve operational efficiency and corresponding profitability by controlling their expenses, since increasing revenue in tough times is difficult to impossible. During the recession in the early 1980s, with interest rates hovering around 19 percent and runaway deficits depressing the U.S. economy, companies began to shed their ranks and outsource any noncore business activity to service providers that could deliver those services for less cost. The Fortune 500, however, did not move to outsource their real estate portfolios until the next major recession, in the early 1990s. To find more expense cuts, and with little left to outsource in operational expenses after the last recession, larger companies began hiring outside real estate service advisers to replace or significantly reduce their corporate real estate departments. After a decade of outsourcing their real estate functions, today most Fortune 500 firms can’t remember how they ever managed their portfolios without their real estate partners. Fast-forward to 2003. The economy continues to sputter, and many businesses and professional service firms are struggling to maintain profitability. For a law firm, profitability is an extremely important factor in attracting and retaining the best lawyers, which, in turn, helps the firm to attract the best clients. One way that firms can become more profitable is to better manage their largest fixed expense: their real estate portfolio. While many of the other cost centers in a law firm have been outsourced for years, the real estate function is still handled by most firms themselves. Three years ago, only a few major U.S. law firms outsourced their real estate planning and management responsibilities. Today, approximately 20 percent of the AmLaw 100 are outsourcing this function. Within five years, we forecast, 80 to 90 percent of the AmLaw 100 will do so. Why haven’t more law firms decided to outsource their real estate services? First, firms with no more than three or four branch offices may believe they don’t have enough real estate to make outsourcing worthwhile. Second, managing partners can be reluctant to cede this function to an outside service provider that is more aligned with the home office. Third, many firms have established business relationships in the real estate community and fear that selecting one real estate adviser may risk alienating other possible service providers, either as clients or sources of business. FIRM STRATEGY VS. OFFICE STRATEGY While there is certainly something to be said in defense of each of these points, we have found that making business decisions on these grounds can be short-sighted and a drain on profitability for many years. Firms that allow one or more of these factors to drive their real estate decisions generally find themselves with an office strategy. A firmwide portfolio strategy, instead, can serve the firm’s business goals and objectives and provide long-range benefits — up to 15 years. With an office strategy, typically, each local office makes its own decisions about lease terms, design, and space management issues. This approach often ends up costing the firm more money, as it puts decisions with long-term implications in the hands of many different individuals, who usually lack real estate expertise. For growing firms, a firmwide real estate strategy offers many advantages: • First, expert management of leases and construction agreements, to maximize flexibility, can reduce a firm’s occupancy cost by 7 to 15 percent over the entire real estate portfolio. • Second, by partnering with a national real estate service provider that specializes in representing law firms, the firm will be kept informed of trends that other firms are implementing to reduce their expenses. And having a specialist in each local market will ensure that the firm is getting the best value for its real estate budget. • Third, the firm can realize significant savings by introducing new ideas and conceptually changing its perception and use of its real estate. It’s possible, for example, to restructure the firm’s portfolio from the industry average of 725 to 800 feet per attorney, to 625 to 700 feet per attorney, with no loss in office attractiveness or ambiance. • Another benefit to outsourcing to a national real estate provider is to take advantage of benchmarking data to establish new firm standards as to space, lease, and flexibility. These standards can give the firm multiple options for expansion, contraction, and lease termination. It is critical for a firm to develop standardization in these areas in order to control costs and manage unexpected changes. Flexibility enables the firm to be proactive rather than reactive when sudden operational imperatives affect real estate requirements. • A national real estate adviser also serves as a resource when a firm is evaluating a merger or acquisition candidate, to research new expansion locations or to determine the real estate transition costs. And outsourcing to real estate professionals streamlines the transaction process in a way that minimizes the number of billable hours attorneys will spend on real estate matters. • Finally, with one real estate provider and a single point of contact, rather than multiple advisers in separate cities, the firm can expect greater consistency in services and eliminate biases and subjectivity in decision making. Typical services provided by a national adviser are acquisition and disposition of office space, project and construction management oversight, strategic planning, merger evaluation, and lease administration. Fees for real estate advisory services are affordable, even for midsize firms. In fact, the savings realized often exceed the fees incurred. Most, if not all, of these fees are paid on a transactional basis, as part of the rental stream paid to the building owners. Law firms should look for a real estate adviser that has trained professionals with legal industry expertise in each of its geographic markets. A strategic real estate plan that is carefully integrated with your firm’s business plan can deliver cost and time savings, as well as greater efficiencies. Patrick Marr is an executive vice president in the Washington office of CB Richard Ellis, and co-founder of its national law firm practice group. He can reached at [email protected].

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