By Ingrid M. Fenn
From the March/April 2016 Issue
Corporate real estate and facilities management (RE&FM) organizations commonly employ a balance of insourcing and strategic outsourcing solutions, as they weigh the need to minimize costs while avoiding any negative impact on the employee experience or the quality of services provided. There is no “one size fits all” solution. With the broader business strategy driving the outsourcing decision, the RE&FM organization can become a major contributor to the corporation’s success.
Today, many organizations have fully developed outsourced solutions, while others are still in the explorative stages. Our firm has found that outsourcing strategies tend to be incremental, or “generational,” referring to a typical outsourcing contract term of three to five years. As organizations mature in their outsourcing journey, they become more strategic, creating a need to change the outsourcing model, push past the often experienced point of diminishing returns, and strive to generate sustainable long-term savings and benefits in partnership with their outsourcing providers.
First Generation Outsourcing is often viewed as an experiment. The client may outsource a small selection of services and relies minimally on service provider expertise. The benefits at this stage most often include marginal cost savings and increases in efficiency as well as a more centralized flow of information. Trust between the client and service provider needs to be established.
Second Generation Outsourcing typically occurs when the first generation or trial period is successful. There is increased trust and further refinement of the model: a full-service account management platform, an increase in the number of services outsourced, and development of Key Performance Indicators (KPIs) to manage service provider performance, as well as reorganization of the internal team. This stage requires a reasonable level of dependency on the service provider. By leveraging the service provider’s expertise and best practices, the internal RE&FM team shifts to contribute to the organization in a more strategic, broader way.
Third Generation Outsourcing is transformational and requires a high level of trust and dependency on the service provider. Typically the model is structured to include an on-site account management team, and a contract structure that reflects a strategic partnership: fees and success are tied to performance and, as the client sees wins, the service provider is rewarded. Goals of both client and service provider are aligned.
As the RE&FM organization moves through the outsourcing continuum, the contract structure becomes increasingly more critical. While there are many different structures used in the industry, one of the most common is referred to as “performance based contracting.” Under this structure, the service provider is held responsible for, and compensated based on, agreed KPIs and objectives across the client portfolio. The model allows for centralized management of expectations, performance, and finances.
Once RE&FM decisions are aligned with the overall business strategy, facility management executives need to consider pricing. Some important considerations include:
- Risk: How is it allocated between the service provider and the client, who is responsible for contracting, who is legally liable, and who covers downstream subcontracting risk?
- Financial: Who makes the decisions on cost, who is paying the invoices, who is approving the payments, who is actually making the payments, and lastly, whose money is at risk?
- Operations: Who is deciding “what” gets done and “how” the “what” is to be achieved? And, how much administration is the client willing to take on in the maintenance of the contract?
- Transparency: What level of visibility is required into cost, profit margin, volumes, etc.?
Sorting out the above considerations is a complex process that could benefit from outside advisors to tap expertise not available within the RE&FM organization. The resulting decisions will help in deciding what pricing/contract model is most appropriate. There are four prevailing models in the industry:
- Fixed Price: Client pays a set price at an aggregate level for a defined scope of work. Price is inclusive of labor, materials, profit, and overhead. Price changes occur solely when scope changes or negotiated variables are modified (e.g., indexing).
- Time and Material: Client pays for the amount of time providers spend delivering the service, typically priced on a set price per hour. The hourly rate is fully loaded with all salary, benefits, overhead, and profit.
- Unit Pricing: Client pays a fixed fee for a defined unit of service such as per square foot or meter, per hour, per move. The volume of “units” is the only variable, although many times the actual price per unit varies based upon volume.
- Direct Cost: Client pays for the actual cost of delivering the service. The service provider is compensated for overhead and profit, either based on cost-plus negotiated margin or fixed negotiated fee that varies based upon negotiated volume tiers.
No single solution is always right and, oftentimes, a combination of structures is used. In the industry today, the Direct Cost model is used more often than not, as it gives the client full transparency into actual cost and volumes. That being said, unit pricing is common for services such as call centers (a fixed price per call or work order submitted).
There are many factors to consider prior to making the decision to outsource. Will it make us more efficient? Will it reduce the cost of managing our real estate portfolio? Will it create environments that drive performance and add shareholder value? Will it provide a competitive advantage? Is our organization mature enough, and can we manage the change? If these criteria are met, armed with sufficient information on outsourcing models, pricing, and contracts facility management executives should be well positioned to achieve success in the next critical step—execution of the outsourcing plan.
Fenn is president and CEO of SIREAS, LLC, an advisory firm located in Boston, MA providing corporate real estate and facilities management strategy and services designed to reduce costs, enhance performance, and increase shareholder value. Before cofounding SIREAS, she managed the real estate portfolio of health products firm Covidien as head of global real estate.
Click here for a companion piece from this author focused on governance process design in outsourcing. Share your thoughts in the Comments section below, or send an e-mail to the Editor at firstname.lastname@example.org.