The Future of Due Diligence: From Paper Management to Data Management

By Michael Cipriano, President and Co-Founder of Millennia Group, LLC. Even the best investment strategies are entirely dependent on the quality of the execution…of the due diligence…of the process.  The challenge has been and always will be how to track all the information of a transaction; Did we receive it? Where is it? Who has it? Did anybody look at it? and Is this the latest version?  The devil is truly in the details. In some ways, the details have become somewhat more challenging to track, as the critical information such as the top 5 or 10 leases, the most recent appraisal, the Phase I report, the rent roll, the Argus file, etc have moved from paper to electronic format while our processes for managing that information are still somewhat mired in paper-oriented thinking   For example,  the standard approach to collecting information is to create a folder structure on the shared drive (analogous to an old-world file cabinet) and to start copying the files into the folders.  While this method is relatively simple at first, issues develop quickly. For example:
  • Files may or may not be copied into the folders in a timely fashion because they sit in someone‚Äôs email for days or weeks.
  • Once the files are in the folder, who knows about it unless someone emails all interested parties that the file has been received.
  • The method of keeping track of versions of the same document are rarely understood or followed.
  • The folders do not let you know when and from whom the file was received
  • Despite the use of templates for naming the primary folders, there can be an endless level of sub folders and sub sub sub sub folders created by the person collecting the files ‚Äì that may not be easy to search or navigate.
  • There is no way to tell if some critical piece of information is missing.
  • There is no way to know if the information was reviewed.
  • Half of the information is in the online war room but the other information is in a box or on the shared drive complicating efforts to find what you are looking for.
  • The receiving and sending of files clogs up the email system.
  • There is no way to tell how far along a transaction is, what percentage of the documentation has been collected.
  • There is no overall view of the current transactions and the progress being made
  • Transitioning and migrating the information into a document management system or an asset management system is a manual process accomplished one file at a time.
  • Sharing the files with outside partners is via email only which may or may not be able to handle the file sizes.
  • There is no way to keep a log of notes on the information collected or to make comments on the documents.
  • The storage of the hardcopy documents is haphazard and unorganized and someone has to scan them and add them to the folders on the shared drive.
Individually, each of these problems seem small, perhaps inconsequential, but in aggregate and over the due diligence period for any investment, the potential for error only grows, and each error or delay can be expensive.  Even the most brilliant investment strategy can be brought down by the seemingly small challenges of document management. The solution to this is not simply to work the existing process harder, put more people on the problem, or even yell at your staff for inconsistent filing of documents – but rather to embrace a digital process – based not on the limitations and capabilities of paper filing, but on the unique qualities of a digital system for information storage and retrieval. Real estate investment managers need to take a good look at digital management systems designed specifically for the real estate acquisition and due diligence process.  Key to such systems should be a secure, online document collection tool that allows you to request, store and track critical due diligence documents and data files.  The system should be designed to track what documents are in the system and which are missing, it should tell you which is the latest version of a document, who last reviewed or commented on the file, and it should automatically remind the responsible party that the document is still missing. Your on-line “war room” needs to be more than a digital replica of your filing cabinet – it has to help you and your extended team manage the details of your acquisition process.  Those investors who understand the power of document management are far more likely to be able to execute their strategy successfully. About Michael Cipriano and the Millennia Group, LLC: Millennia Group has been providing document imaging services and document hosting applications to the commercial real estate industry since 1996.  They have participated in the collection, digitization and normalization of documentation for single asset acquisitions to the acquisition of entire commercial real estate companies with hundreds of properties.  Michael is a frequent speaker at real estate and technology events and is a member of the Association of Records Management (ARMA) and the Association of Information and Image Management (AIIM). www.mgdocs.com, mcipriano@mgdocs.com, 630-279-0577 x122
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