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Economic perspective on outsourcing of property management services

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Author 1 Name: Terence Y M Lam

Department: Department of the Built Environment
University/Institution: Anglia Ruskin University
Town/City: Chelmsford
State (US only):
Country: UK

Corresponding author: Terence Y M Lam

Corresponding Authors Email: t.lam@anglia.ac.uk

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Structured Abstract:

Purpose - This study aims to identify the economic forces influencing the outsourcing process of property management services,
and investigates how these forces should be applied in order to maximize the productive efficiency and performance quality, thus
ensuring optimal use of resources.

Design/methodology/approach - Market competition and transaction monitoring were identified to be the fundamental factors.
Single-case study method was used to quantitatively examine the impact of these economic forces on the outsourcing of property
management services of the Hong Kong Housing Authority.

Findings - The property services market was contestable, and through competitive tendering the level of competition had a
significant negative impact on production cost and a significant positive relationship with service quality. Fee level was also found to
have no significant effect on service quality. Professional maintenance services were found to be complex and associated with
significant transaction costs, especially where there was a high degree of contact with tenants.

Research limitations/implications - The outsourcing strategy forms a conceptual baseline on which further research can build to
test its significance in many other settings, thus resulting in a more robust economic theory for outsourcing of property management
services.
Practical implications - Competitive tendering should be adopted for outsourcing to minimize production cost and maximize service
quality. The overall transaction costs should be minimized by focusing the limited resources on monitoring of the complex
professional maintenance services, especially the services for major planned maintenance works where there are many occupiers
involved.

Originality/value - The confirmatory tests indicates that the strategic objectives of cost and quality improvement from outsourcing,
as expected by the stakeholders, can be achieved. Hence the research contributes to the property management practice by
developing an economic strategy which optimizes the use of resources for the benefit of corporate organizations which own a
property portfolio, whilst satisfies the power and needs of the tenants and other stakeholders at the same time.

Keywords: Outsourcing, economic forces, optimal use of resources, stakeholder needs.

Article Classification: Research paper

For internal production use only

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Running Heads:

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 Economic perspective on
outsourcing of property management services
Abstract
Purpose This study aims to identify the economic forces influencing the outsourcing process of
property management services, and investigates how these forces should be applied in order to
maximize the productive efficiency and performance quality, thus ensuring optimal use of resources.
Design/methodology/approach - Market competition and transaction monitoring were identified to
be the fundamental factors. Single-case study method was used to quantitatively examine the
impact of these economic forces on the outsourcing of property management services of the Hong
Kong Housing Authority.
Findings - The property services market was contestable, and through competitive tendering the level
of competition had a significant negative impact on production cost and a significant positive
relationship with service quality. Fee level was also found to have no significant effect on service
quality. Professional maintenance services were found to be complex and associated with
significant transaction costs, especially where there was a high degree of contact with tenants.
Research limitations/implications - The outsourcing strategy forms a conceptual baseline on which
further research can build to test its significance in many other settings, thus resulting in a more
robust economic theory for outsourcing of property management services.
Practical implications - Competitive tendering should be adopted for outsourcing to minimize
production cost and maximize service quality. The overall transaction costs should be minimized by
focusing the limited resources on monitoring of the complex professional maintenance services,
especially the services for major planned maintenance works where there are many occupiers
involved.
Originality/value The confirmatory tests indicates that the strategic objectives of cost and quality
improvement from outsourcing, as expected by the stakeholders, can be achieved. Hence the
research contributes to the property management practice by developing an economic strategy which
optimizes the use of resources for the benefit of corporate organizations which own a property
portfolio, whilst satisfies the power and needs of the tenants and other stakeholders at the same time.
Keywords Outsourcing, Economic forces, Optimal use of resources, Stakeholder needs
Paper type Research paper

Introduction
In new public management, it is argued that outsourcing and market competition are often
adopted to deliver public services, based on the argument that such approach can improve
productive efficiency and service quality (Walsh, 1995). In the private sector, outsourcing
of services has proliferated through various industries and property services are commonly
contracted out (Field Fisher Waterhouse and Remit Consulting, 2004). The International
Facilities Management Association (IFMA, 2006) conducted a questionnaire survey on
outsourcing of facilities and property services to its North America members and confirmed
that the percentage of firms outsourcing one or more services was 77% in 2006. In the UK,
outsourcing of public services has become a significant part of the economy, accounting for
79bn in 2007/08 (nearly 6% of the GDP), and directly employing over 1.2 million people
(DeAnne, 2008). Construction services, property management, and professional services
are part of the key public services outsourced. DeAnne (2008) points out that competitive
tendering can yield 10 to 30% of cost savings with no adverse effect, and sometimes an
improvement, in service quality.

The Hong Kong government involves the private sector extensively to deliver its
services (Efficiency Unit, 2003) Price Waterhouse Coopers (1999) finds that property
management services are commonly outsourced in Hong Kong, and argues that the service
providers can offer quality service at a competitive price. In 1999, the Hong Kong Housing
Authority (HKHA), a major social housing organization providing rental and subsided
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ownership housing for more than three million people, decided to outsource its housing
services in phases for a portfolio of more than 600,000 rental flats in the forthcoming years.
The outsourcing process involves empowerment by which the service production is
transferred to the external property services companies. These companies undertake
property management professional and manual services, including estate asset functions,
budgetary control, communication with tenants, planning and project management, quality
assurance as well as maintenance, security and cleansing.

For public sector management, the theory of public choice argues that market
competition is essential to productive efficiency and quality which can be improved by better
working methods, better organizational structure, better equipment and technology, and
elimination of waste under market pressure, as quoted by Boyne (1998). But according to
the property rights theory (Alchian, 1965; Yarrow, 1986), an organization may be viewed as a
team of factor suppliers with contracts established and monitored by management. Where
management prevents slack in the team, the result is high productivity, low costs and better
quality of service. But to perform this task well, management needs an incentive. The
central argument is that private organizations, in which rights to profits are clearly defined,
will perform better than public sector organizations where rights are diffused and uncertain.
Coase (1960) and Alchian and Demsetz (1973) conducted a flurry of research on property
rights and this early literature was quite optimistic about the evolution of property rights
towards economic efficiency.

Whilst proponents of outsourcing argue that competition is a means to ensure better

service quality, opponents contend that competitive price can result in worsened service
quality (Walsh, 1995). The negative impact of competitive price on service quality is
founded on the assumption that fewer resources would be used so as to reduce the production
cost, and hence the service quality is compromised.

Hackett et al. (2007) point out that economic use of resources should be considered to be
the first priority in the procurement process. The process should ensure that the particular
needs of the client are satisfied and that the price paid to be as low as reasonably possible.
Costs and performance quality of the outsourced services should therefore be considered.
What are the economic forces driving the cost and quality performance in the outsourcing
process?

This research aims to identify the economic forces influencing the performance of
property management services in the outsourcing process for corporate organizations which
own a property portfolio for business operations or letting, and to investigate how these
forces should be applied in order to maximize productive efficiency and performance quality,
and hence optimal use of resources.

Ferris and Graddy (1991) reveals that, based on an empirical analysis of three frequently
contracted health services, minimization of service delivery costs and choice set of available
quality suppliers are important to local governments decision to contractor choice. The
service delivery costs comprise of production and transaction costs. With regard to
performance quality, Harte and Dale (1995) conducted a qualitative review on the quality
dimensions used by clients when selecting professional service providers from accounting,
architectural, engineering, management consulting and general service firms. The review
shows that the service quality required by most clients is multi-dimensional and it covers five
key areas: timeliness (prompt service), empathy (understanding the clients needs), assurance
(technical correctness for the work), tangibles (evidence for the work performed correctly),
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reliability (doing what you say you will do). It is the aim of this study to examine how these
production and transaction costs as well as performance quality are influenced by the
economic forces.

Ownership and Performance

In the case of outsourcing of services in the public sector, the theory of property rights
explains the relationship between ownership and organizational performance by referring to
the difference in profit motive between public and private organizations. In private
organizations, the rights to profit are clearly defined so their management has the financial
incentive to achieve higher productivity and better service quality. For public sector, the
profit motive is absent and government departments tend to pursue goals such as budget
maximization, risk aversion and employment. Although property rights argument may be
initially attractive and favour the choice of private sector over public sector in delivering
public services, it does not go unchallenged. Parker (1985) argues that politicians and
bureaucrats do indeed pursue public interest, and that like their private sector counterparts,
government employees may find satisfaction in a job well done. Given that senior
management in the public and private sectors are drawn from the same social and cultural
backgrounds, it would be surprising if they do not hold similar values.

As it cannot be definitely determined on a priori basis whether private ownership leads

to higher efficiency and better service quality, it is necessary to turn to the empirical evidence
to test the property rights argument. Domberger and Piggostts (1986) review of the
literature on the Australian airlines experience suggest that the private enterprise is
somewhat more efficient than the public enterprise, while Estrin and Perotin (1987), in
making cross-country comparison between Britain and France, concludes that the French
public sector was more cost-efficient than the British public sector, and that there was no
distinguishable difference between the performance of the French public and private firms.
Donahue (1989) concludes from his study of privatization in the U.S. that most of the
benefits from contracting-out have come more from the great scope of rivalry than from
private provision per se. Vickers and Yarrow (1991) show from their comparative studies of
the private and public utilities in the U.K. that the performance findings were mixed.
Private utilities had superior performance in some cases while public utilities in the others.
Such performance difference was due to the regulatory policies and performance monitoring
was utmost important.

It can be argued from the empirical studies of the major countries that it is competition
and monitoring which affect performance, rather than private ownership and profit motive.

Competition and Performance

From strategy management point of view, outsourcing is often adopted by the public sector to
deliver services, based on the theory of public choice and the associated benefits from market
competition. The theory suggests that if public officials monopolize service delivery, then
the result is oversupply and inefficiency. By contrast, if services are contracted out, the
pressure of a competitive market would lead to improved performance on cost and quality
(Flynn, 2002; Boyne, 1998). So (2000) adds, based on a numerical study and observation of
delivery service firms, that in todays competitive markets firms would always aim to
produce efficiently with lower unit operating cost in order to compete with lower price.

The productive efficiency effect of market competition on property management

services can be explained by contestable market theory in respect of threat from the potential
competitors. The theory suggests that, on exit from the industry, firms can fully recover
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undepreciated prior investments in capacity, reputation and marketing. Under these
circumstances, even a monopolist will be unable to earn supernormal profit, since, if price
were above average cost, there would be opportunities for the adoption of profitable hit and
run strategies by potential entrants. If the market is highly contestable, there is little need to
worry about inefficiency due to such market power. For property management firms, the
investment is mainly the professional and manual manpower rather than capital investment.
The level of sunk costs is very minimal and thus would not form an entry barrier to the
market. Williamson (1997) indicates that professional and services firms, including law
firms, accounting firms, investment banking and consulting, involve negligible investment in
firm-specific physical assets. For these reasons, the property service market should have a
high number of suppliers and hence a high degree of contestability. Consequently, market
option should be adopted and competition instead of negotiation should be used to maximize
the productive efficiency. Hoxley (2000) confirms, from a survey of public and private
clients employing construction consultants, that competitive tendering has become the
principle procurement method.

In a review on the engagement of consultants for maintenance projects, the HKHA

found, from the case of Architectural Services Department, that there was an average
production cost savings of 24% when consultant appointments were obtained by competitive
tendering instead of negotiation (HKHA, 1996). Mainly for the reason of production cost
savings, the Authority decided that all professional maintenance services should be engaged
on fee competition basis. Moreover, Lam (2008) points out that competitive tendering could
be used to optimize the consultant performance quality, and argues that the number of bidders
can influence the consultants performance in such a way that the consultant has to propose
competitive quality and quantities of project resources to undertake the contract.

According to SCMP (2001), professionals in the construction and property service fields
in Hong Kong had a serious concern that the highly competitive market and the associated
fee-cutting might lead to a decline of service quality. Their concern was based on the
assumption that for lower fee level, fewer resources would be used by consultants for the
project, thus resulting in lower service quality. This assumption is founded on the economic
theory of firm which states that the objective of the firm is to maximize its profits (Coase,
1937; Machlup, 1946). A corollary of this theory is that given a level of output, firms
minimize costs. Firms that do not come close to maximizing their profit and minimizing
their costs are not likely to survive and grow, simply for financial reasons. To maintain their
turnover and the goal of profit maximization, firms would try to keep price as competitive as
possible. However, consultants who are paid low fees may be demotivated to provide good
service because individuals need to be satisfied with their compensation so that they are
motivated to perform well (Lawler, 1981). The result is that fewer resources would be
injected into the project and service quality is compromised as a result.

In a questionnaire survey of 500 client organizations engaging in construction

professional services to assess the consultant service quality upon the impact of competitive
fee tendering and fee level, Hoxley (2000) found from the 244 replies that the service quality
would not be influenced by fee level in competitive tendering. Construction professionals
had not allowed fee competition to compromise their professionalism. Instead of inputting
fewer resources into the projects, consultants would minimize costs by improving production
structure and methods, as explained by Boyne (1998) for the positive impact of market
competition on performance.

It is therefore argued that the property service market can be contestable. The cost and
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quality performance of property service suppliers can be positively influenced by market
competition which can be operationlized by the number of bidders competing for tenders.
But fee level should bear no significant relationship with performance.

To ensure that outsourcing change can be implemented successfully, the power and
needs of these stakeholders must be satisfied. In a study on development of a framework for
implementation of social change through planning, Flyvbjerg and Richardson (2002) suggest
that planning theorists should understand power, its relations with rationality and the use of
insights precisely to bring about change. Outsourcing is always taken by public and private
organizations as a strategic choice to improve the cost and quality of services. In the
context of outsourcing of property management services, there are a number of key
stakeholders involved in the change process: corporate organizations, tenants, political parties
and the public. All these stakeholders look for improving the productive efficiency and
service quality through outsourcing (Audit Commission, 2005; HKHD, 2001). It can
therefore be further argued that if market competition can bring about cost and quality
improvement and hence optimal use of resources, the corporations business objective and the
needs of tenants and other stakeholders can be fulfilled at the same time.

Based on an analysis of the reforms of public service production process in New

Zealand, Gregory (1995) suggests that with the increasing use of contracting-out, instances of
corruption will probably increase in the years ahead. The outsourcing approach will place
more and more public officials in a critical brokerage position because they will increasingly
become morally hazardous: untrustworthy, self-seeking and opportunistic. Consequently,
their performance needs to be monitored and measured in ethical and not just technical terms.
In a research on development of risk management framework for construction projects in
developing countries, Wang et al. (2005) identified 28 risks and developed mitigation
measures through an international survey with project sponsors, developers, investors and
contractors. Corruption was ranked 7th amongst the top 11 critical risks. To tackle the
corruption risk, one of the mitigation measures is to set aside a budget for unavoidable
spending. This reactive measure, however, would jeopardize the production cost-savings
because contractors would build this extra spending into their tender. The other measure is
to provide cultural and commercial awareness training to management and key personnel
who may have to deal with corrupt officials. To treat the root of problem and hence to
prevent corruption, morality awareness training should be provided to both the contractor
personnel and the government officials involved in the outsourcing process. Without
corruption, the production cost savings resulted from market competition can be sustained.

Transaction Monitoring Costs and Performance

Walsh (1995) states market competition alone is not sufficient to ensure performance quality.
There is always a need for some elements of regulation and supervision in the market
production process, thus resulting in transaction costs.

With regard to the theory of transaction cost economics, Coase (1937; 1990) and
Williamson (1975; 1985) emphasize the need to incorporate transaction costs in assessing the
overall cost and efficiency. Transaction cost economics is built on two assumptions,
bounded rationality and opportunism (Williamson, 1997). Bounded rationality refers to rate
and storage limit on the capacities of individuals to receive, store, retrieve and process
information without error. The absence of unlimited capacity in preparing the contract
would result in incomplete contract terms. Opportunism is an effort to realize individual
gains through a lack of candor or honesty in transactions. During the course of service
contract, it is therefore necessary to monitor the agreement because of impossibility that the
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service provider would follow all contract terms and behave responsibly.

Coase (1990) sums up that in order to carry out a market transaction, it is necessary to
discover who is the one to deal with, to inform people that one wishes to deal and on what
terms, to conduct negotiation leading to a bargain, to draw up the contract, and to undertake
inspection needed to make sure that the terms of the contract are being observed.
Monitoring transaction costs are induced in the whole procurement and production process
and such costs are necessary to ensure service quality. Lesmond et al. (1999) point out that
transaction costs are important for empirical studies from market efficiency to international
market research. But transaction costs are difficult to estimate and not always available, or
where available, are subject to considerable expense and errors.

Walsh and Davies (1993) argue from their empirical studies of outsourcing of public
services in the U.K. and the U.S., that the transaction costs incurred were significant,
especially the cost of preparing documents and monitoring activities. They found that the
costs of preparation for compulsory competitive tendering in local government in the U.K.
were 7.7% of the annual contract value. In the U.S., cities often spend 20% of the value of
the service on performance monitoring. The more complex the services are the higher the
transaction costs.

Performance monitoring is difficult in the case of many professional services (Walsh,

1995). It is difficult to assess the degree to which the services have been delivered on the
basis of judgment because of its intangible and heterogeneous nature, particularly where
clients have no professional or technical background. Building maintenance works is
generally complex. For example, structural repairs and replacement of underground pipes
are technically complicated and have an uncertainty in the scope and extent of works. The
service level agreement in the consultancy contracts is therefore difficult to be precise
because of this uncertainty and bounded rationality. Such problem can be further
compounded in the context of high density developments where there are a large number of
occupiers involved. In these cases, transaction costs for preparing contract, compiling
qualified tenderers and subsequent monitoring of contract terms and opportunistic behaviour
of consultants can be substantial.

It can therefore be argued that professional maintenance services are complex and
require stringent performance monitoring to ensure service quality, thus resulting in high
transaction costs. To reduce the overall transaction costs for the property management
services of an organization, available resources should be focused on monitoring these
complex services.

Hypotheses and Research Methodology

The literature review has addressed the research question and aim: what are the economic
forces driving the cost and quality performance in the outsourcing process and how they
should be applied to optimize performance? It was hypothesized that economic forces could
have significant impact on production cost and service quality. This main hypothesis was
addressed by the following sub-hypotheses.
1. Property services market was contestable so competition could significantly reduce
the production cost.
2. Performance quality was positively correlated to competition but not fee level.
3. For complex professional maintenance services, stringent performance monitoring
was required to ensure service quality, thus resulting in significant transaction costs.
This infers that the limited resources should be focused on monitoring these services,
6
 especially where there is an intense contact with occupiers.

Single-case study method was used to quantitatively examine the impact of these
economic forces on the property management services in a major international housing
organization, namely, the Hong Kong Housing Authority, which has managed more than
600,000 flats in the social housing sector. Fellows and Liu (2008) and Yin (2009) both state
that case study research can be used to investigate phenomenon within real context and can
therefore draw rich conclusions. Yin (2009) further contends that findings from single-case
study are useful to build up a theory. The theory can then become a vehicle for examining
other cases. Consequently, the single-case approach can make significant contribution to
knowledge. As compared with the possible qualitative interview or questionnaire survey
with the HKHA consultant management practitioners to find out their opinions, the
quantitative study can provide an objective analysis on the economic impact of market on
cost and quality. The quantitative approach was therefore chosen for this study.

For sub-hypothesis (1), cost data were collected from the press release of the HKHA in
2001 to examine the mean of the cost-savings per flat resulted from the initial phase of
outsourcing of its property services for 218,000 flats, which constituted about one third of the
total of 680,000 flats.

For sub-hypothesis (2), a quantitative regression analysis was conducted to find out how
performance quality can be influenced by competition and fee level. Regression analysis
provides a powerful tool for developing a forecast of the future based on the past (Schleirfer
and Bell, 1995). 50 maintenance consultancies of the HKHA were used, which constituted
70% of the consultancy contracts executed and completed between 2000 and 2001. Stevens
(1996) stipulates that there should be at least 15 cases per predictor variable. Because there
were two predictor variables in the research model, the minimum number of cases required
was 30, and 50 consultancy cases would be sufficient for conducting the analysis, although
this sample size is rather limited. Nonetheless, this quantitative research method should
achieve a high level of objectivity and generalization.

For sub-hypothesis (3), cost data and performance scores were collected from the 50
maintenance consultancies for two tests: to examine the mean of the transaction costs to
consultancy cost ratios for the various types of consultancy in order to confirm that the
transaction costs were significant for maintenance services; to verify that the more complex
services were associated with higher transaction costs which in turn would result in better
service quality. The sample size needs to be carefully considered to ensure meaningful and
reliable results. Fellows and Liu (2008) state that small samples are less reliable than large
samples. Small numbers in the samples will mean quite large percentage differences and it
is the proportionality of differences which tends to be important. The boundary between
large sample size and small sample size is 32 in statistics sense, although the size adopted in
practice is often 30 (Levin and Rubin, 1991). 50 consultancy cases would therefore be
sufficient for conducting a statistically meaningful analysis.

Findings and Discussion

Sub-hypothesis (1): Production Cost
In 2000, the HKHA launched the first phase of outsourcing its property management services,
including professional and manual services like security and cleaning, for 218,000 flats, by
competitive tendering. A review was conducted in 2001 with regard to the impact of market
force on production cost. HKHA (2001) reported that the property services market was
contestable and firms had been very keen in getting jobs from the outsourcing programme,
7
and confirmed that contracts were let on competitive prices, with a mean cost-savings of
20% per flat per year, equivalent to HK$2,200 (the mean in-house cost was approximately
HK$11,000 per flat per year). This in turn verified that competition in a contestable market
could significantly reduce the production cost. An independent survey was also conducted
on the tenants to seek their experience on the outsourcing. The results demonstrated that
these stakeholders were more satisfied with the service quality provided by the property
service companies than the HKHA in-house teams, and hence were supportive of the
outsourcing strategy.

According to HKHA (2003), the number of property service companies admitted to the
outsourcing list has been increased to 26 as at 31 March 2003, thus further raising the
contestability.

The research findings demonstrated that the property service market was contestable and
that competition could significantly reduce the productive efficiency whilst meeting the
particular needs of the client at the same time, as pointed out by Hackett et al. (2007). The
result is also in line with the empirical findings of DeAnne (2008) that competitive tendering
can yield significant cost-savings and sometimes an improvement of service quality in
outsourcing of public services. This can be explained by the theory of public choice and
market competition (Flynn, 2002; Boyne, 1998).

Sub-hypotheses (2): Performance Quality

Performance quality was regressed against competition and fee level, as shown in the
multiple linear regression equation in Table 1. Regression analysis was run by SPSS
programme and the results are given in Table 2.

As previously explained, performance quality is multi-dimensional, covering timeliness,

empathy, assurance, tangibles, reliability. It was operationalized by the average of the
quarterly performance appraisal scores. Performance quality was appraised under the
service criteria of planning, design, contract administration and relationship with client, each
of which was assessed by the five dimensions aforesaid. The criteria were measured by
quality gap between perception and expectation (Hoxley, 2000), which was represented by
various grades corresponding to different marks. Marks for individual criteria were added
together to give the performance score.

Table 2 analyzed the correlations between performance quality and economic factors of
competition and fee. The results showed an adjusted R2 of 0.583 for the correlation between
output service quality and competition level. This means that 58.3% of the observed
variability in service quality (dependent variable) could be explained by this economic factor
(predictor variable). Norusis (1996) considers that an adjusted R2 of above 50% infers a
significant correlation between dependent and predictor variables. Hence there was a
significant correlation between performance quality and competition level. Part of the
sub-hypothesis (2) related to the positive impact of competition on quality performance was
hence substantiated.

According to Mohr (1990), if a partial regression coefficient has a t-value > +1.98 or
<-1.98 at a significance level (p-value) of smaller 0.05, the relationship between dependent
variable and predictor variable is considered to be significant. Fee level factor was excluded
from the regression model. With a t-value of -1.543 and a p-value of 0.13, this factor itself
was found to be insignificant to output service quality, therefore excluded from the regression
model. This finding, in the context of Hong Kong social housing, coincides with the
8
empirical result of Hoxley (2000) that there was no significant correlation between fee level
and service quality in competitive tendering of construction professional services. Under
market competition, firms would try to improve its productive efficiency. The remaining
part of sub-hypothesis (2) related to the insignificant impact of fee on performance was
validated.

Table 1: Regression Model for Analysis of the Impact of Competition and Fee Level on
Performance Quality of 50 maintenance consultancies at the HKHA

OSQ = + 1 CL + 2FL+ , wherecc

VARIABLES OPERATIONALIZATION
Dependent Variable
OSQ (Output Service Quality) Average of the quarterly performance scores in a
maintenance consultancy
Predictor Variables
CL (Competition Level) Number of bidders in the tendering
FL (Fee Level) Tendered fee percentage in a maintenance
consultancy

= Constant, or the Y-intercept of the regression plane

n = Regression coefficients for the predictor variables
= error constant arising from the prediction values and the actual observed
values, which are subjected to variability and cannot be expressed as exactly a linear relationship.

Table 2: Regression Analysis of the Correlations using SPSS

Stepwise Regression Model Analysis
Model R R2 Adjusted Std. Error Durbin- Testing
R2 of the Watson Procedure
Estimate
1 0.769 0.592 0.583 7.594 1.851 Stepwise

Model 1 was chosen by SPSS and it included the following variables:

a. Predictors: (Constant), Competition Level.
b. Dependent Variable: Output Service Quality
Analysis of the Chosen Regression Model
Significant variable accepted:
Variables B SE B Beta t-value p-value Collinearity/
Tolerance
cl 3.348 0.402 0.769 8.337 0.000 1.000
(Constant) 41.910 3.633 11.537 0.000

Insignificant Variable excluded:

Partial Collinearity/
Beta In t-value p-value
Correlation Tolerance
Fee Level (fl) -0.205 -1.543 0.130 -0.220 0.469

Sub-hypotheses (3): Monitoring Transaction Costs

To find out the significance of the transaction costs required for monitoring the performance
of consultants, transaction costs to consultancy cost ratios from the 50 maintenance
consultancy contracts were analyzed, as shown in Table 3. The results showed that the
9
mean of the ratios was 24.840% across all disciplines, with a standard deviation of 9.434%.
This inferred that the transaction costs for monitoring professional maintenance services
were significant. Stringent performance monitoring was required at the procurement and
implementation stages because of the uncertainty of scope of works and hence the service
level. The former stage covered setting up lists of approved consultants, preparation of
detailed specification and contractual requirements, as well as tendering and evaluation of
tenders. The latter stage included implementing contract, monitoring consultant
performance against specification, and managing contractual issues. This finding is
supported by the arguments of Walsh (1995), which pointed out that transaction costs for
professional services is significantly high because of the need to prepare detailed consultancy
documentation, the difficulties in evaluating the intangible, heterogeneous and credence
services, and the high cost involved in employing professional staff to monitor the
consultants and audit their services.

For professional services involving an intense contact with tenants, the transaction
costs to consultancy cost ratios increased to between 31% and 38%, as indicated in Table 3.
The related works were major planned building maintenance, replacement of estate roads and
underground pipework, and structural repairs. There were 27 consultancies involved in
these more complex works and the mean of the quarterly performance appraisal scores was
78.59, with a standard deviation of 5.65. The remaining 23 consultancies were less
complex because of less contact with tenants, and the mean quarterly performance score
was 61.74, with a standard deviation of 10.49.

These results showed that professional maintenance services required significant

transaction costs. More complex services for major planned maintenance works were
associated with higher transaction costs, which in turn resulted in better performance quality.
These inferred that to reduce the transaction costs, limited resources should be focused on
monitoring of the professional maintenance services, especially the more complex services.

The transaction costs for those consultancy contracts were derived from the
performance monitoring costs incurred by the consultant management office for the
procurement and implementation stages, and for training to improve the monitoring staffs
essential skills, which included evaluation and selection of suitable consultants, as well as
communication and co-ordination with consultants. Fenwick et al. (1994) have a great
concern about the ability of public managers on resources management. With the impact of
compulsory competitive tendering of public services of local authorities in the U.K., the role
of public managers has shifted from traditional supervisory-based management to resources
management. They have much fewer internal staff but more external consultants and
contractors to manage. However, they have learned their skills in the traditional
hierarchical environment of government and may not be an effective manager of resources,
nor an effective communicator. Dale et al. (1997) point out that the control of outsourcing
processes is often dependent on the behaviour and attitudes of monitoring staff, their training,
and commitment to continuous improvement and customer care. It is therefore important
that performance monitoring should be supplemented by outsourcing training in order to
ensure effective procurement and communication, and hence to maximize the consultant
performance.

Table 3: Transaction Costs in 50 Maintenance Consultancies of the HKHA

Types of Nature of Works Contact with Transaction Costs/

Consultancy Stakeholders Consultancy Cost Ratios*
Geotechnical Slopes and retaining walls Some contact with 12%
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 Engineering maintenance tenants

Quantity Surveying Documentation and cost Some contact with 17%

advice for various tenants in site
maintenance projects measurement

Building Services Electrical reinforcement Moderate contact with 19%

Engineering and rewiring projects tenants

Architectural Shopping Centre and Moderate contact with 20%

estate office improvement shoppers

Building Surveying Major planned building Intense contact with 31%

maintenance tenants and politicians

Civil Engineering Replacement of estate Intense contact with 35%

roads and underground tenants and politicians
pipework

Structural Engineering Structural repairs Intense contact with 38%

tenants and politicians

* Note: The mean of transaction costs / consultancy cost ratios for the 50 maintenance consultancies was
24.84%. The transaction costs included performance monitoring and training costs incurred by the
consultant management office, whilst the consultancy cost referred to the total cost of the contract.

Conclusions
Despite high transaction costs, the results demonstrate that outsourcing can yield significant
net cost-savings and an improvement in service quality. Market competition and transaction
monitoring are found to be the fundamental economic forces influencing the production cost
and performance quality.

The research findings indicate that property service market is contestable and that the
associated competition can optimize the economic benefits by significantly reducing the
production cost and improving the performance quality. The findings also demonstrate that
there is no significant relationship between performance quality and fee level. These results
infer that market should be used for delivery of property management services and that
competitive tendering should be adopted to maximize production cost savings and
performance quality.

Outsourcing is always taken by public and private organizations as a strategic choice to

improve the cost and quality of services. For outsourcing of property management services,
the corporate organizations, tenants, and other stakeholders all look for improving the
productive efficiency and service quality through market. This research contributes to the
property management practice by developing an economic strategy which optimizes the use
of resources, thus achieving the business objective of the corporate organizations whilst
satisfying the power and needs of the tenants and other stakeholders at the same time

The results also indicate that professional maintenance services require significant
transaction costs. More complex services for major planned maintenance works are
associated with higher transaction costs, which in turn results in better performance. To
reduce the transaction costs and hence the total cost of service delivery, limited resources
should be focused on maintenance services, particularly the more complex planned
maintenance works.
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 Transaction costs refer to performance monitoring costs incurred for procurement and
implementation of services, and for staff training to improve monitoring skills. It is
important that performance monitoring should be supported by outsourcing training to ensure
effective procurement and communication, and hence to maximize the consultant
performance.

Corruption is now an increasing problem in the outsourcing process, and would affect
the production cost as the contractors transfer the cost of risk to their tender. To prevent
corruption, morality awareness training should therefore be provided to the contractor
personnel and the officials of corporate organizations so that significant cost-savings from
market delivery can be achieved.

Whilst the outsourcing theory is verified in the context of property management services
of the HKHA, it forms a conceptual baseline on which further research can build to test its
significance in many other settings. Consequently, a more robust economic theory for
outsourcing of property management services can be developed.

This study only focuses on the economic forces for outsourcing, which should be
applied along with the quality management measures adopted by individual organizations.

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