Facilities Management - Should I outsource the spend?

Facilities Management – Should I outsource the spend?

Tarun Nagpal and Sunny Agnihotri Blog, FM, Outsourcing

At 4C we often get asked to evaluate whether our clients’ third party spend is being spent in the most optimal manner and to recommend ways of making it better. While undertaking such an analysis, we challenge the spend, using our “Control, Optimise and Transform” model, from multiple perspectives e.g. price benchmarking, inhouse/outsource, process simplification, specification optimization, service mix etc.

This article looks at the thinking we deploy while assessing the inhouse/outsource question in Facilities Management (FM), as this category often represents a significant proportion of third party spend.

In recent years, the range of services covered within the remit of FM has become more complex, as facilities management has moved into the core operational functions of client organisations i.e. from day-to-day housekeeping into strategic real estate management.

Whether it’s from a Total FM perspective or a subset of hard and soft FM categories, there are common themes and approaches to facilities management, regardless of the size and location of the real estate, although these may not necessarily result in common solutions.

In some cases, FM services are outsourced and in others they are provided in house. Some organisations operate what might be described as a mixed economy, where some services, even the same ones, are outsourced as well as provided in house. For example, some of the larger UK retailers employ maintenance engineers to perform first fix activities across a broad range of store equipment. When the work is more complicated they use a service provider to complete the job.

In order to choose the best model suited for a business, one should consider the organisation’s needs and its space/accommodation strategy. A strategy for facilities management should:

  • evaluate business needs, differentiating between core and non-core business activities;
  • establish an effective process for meeting those needs;
  • establish the appropriate resources needed for providing the required services, whether obtained internally or externally;
  • identify the source of finance to deliver the strategy and its practical implications;
  • establish a budget covering short term needs and best value over the long term;
  • recognise that management of information is key to providing a basis for effective control of facilities management.

Naturally, there will be advantages and disadvantages in providing services either in-house or by outsourcing. The organisation must, therefore, decide the route that provides best value for itself in the long term. This is achieved by taking full account of the implications of this decision, especially the true cost of all options.

In-house

PROS CONS
Better ownership and quality of work Poor scopes leading to cost and quality issues
Career prospects leading to reduce employee turnover Difficult to measure performance of inhouse staff
Direction and destiny of function in own hands Not core activity of business so no incentive to operate like a business

Outsource

PROS CONS
Resource flexibility allowing more/better skills/experience to client organisation No direct control over resources delivering service
Tender process allows for competitive benchmarking leading to reduced costs Variances in quality/costs from contract leading to additional client management
Innovation and new technologies learnt from other clients Difficult to move service provider quickly, especially where TUPE applies

The debate on the benefits, or otherwise, of outsourcing has been running for decades. Although it is now generally agreed that outsourcing can stimulate innovation and can present cost savings through the harsh realities of competition, it cannot be assumed to be the best approach in all cases. The merits of outsourcing each service must be considered until the optimal mix of in-house and outsourced provision is attained.

The decision to outsource or provide services in-house must take into account both the capability of service providers and the effort required to manage them. An organisation that takes the decision to outsource can delegate the direct supervision of work and service operatives to the provider. The role for the organisation’s representatives then becomes one of managing the output from the service provider. The representatives should act as an informed client, managing performance against specifications and service level agreements (SLA). Organisations need to consider their approach to this new management role carefully.

In evaluating the comparative cost between inhouse or outsourced service provision, organisations should identify all costs, both direct and indirect. A common mistake is for only the direct costs to be considered. Indirect costs include those incurred in the internal management of external contracts and the ongoing training and development of inhouse personnel. Furthermore, the full administration of the services such as permit-to-work procedures, competent and approved person regimes, together with the technology to operate them, all attract a cost that must be recorded. The cost of TUPE is often underestimated, as the new employer is required to take on all relevant transfer employees and maintain their contracted rates of pay, holiday entitlements and pension costs.

Organisations also need to consider the costs of financial administration. For instance, a reduced number of labour and material contracts means that invoices can be processed more cost-effectively than in situations where invoices are many and frequent. Clearly, the method of procurement has implications for the FM and Accounting functions. It is quite common for an outsource provider to prepare one monthly invoice for a fixed amount and then an additional invoice to reconcile any extra charges as agreed in the contract. This contrasts with multiple suppliers invoicing variable amounts during the month along with the management of salaries and benefits for inhouse employees.

There are also one-off costs to consider, such as dilapidation or remediation costs and the cost of auditing assets for the purpose of maintaining an accurate asset database.

Another point to consider is the impact of the inhouse/outsourcing decision on the structure of the FM function. Any significant change in the number of services that are outsourced will have an impact on the structure of the function; in the case of outsourcing, a small core management team is required to control and co-ordinate the activities of the service provider(s). In this instance, the role of management changes from direct management to the management of the output of others: the performance measurement of deliverables. The main tasks then become the management of the respective contracts and the definition and development of policy and procedures. It is recognised that some personnel will have to be retained even where the organisation has opted for total facilities management by a single contractor since the informed client function must be maintained. This should be a major factor in the drive to have personnel who are trained to act as competent client representatives and, if organisations find such expertise lacking, they should adopt recruitment policies that recognise the specialisation of facilities management and seek individuals who have undergone appropriate education and training

To conclude, there is no universal approach to managing facilities. Each organisation – even within the same sector – will have different needs and capabilities. Understanding both is the key to effective facilities management measured in terms of providing best value.