As a result, the pressure on organisations to cut costs will continue.
Cleaning services has, as an area, felt this squeeze over the past few years, with rates pushed to a point where they can go virtually no lower.
“It’s getting tougher and tougher,” says Bob Vincent, executive chairman of LCC Support Services and deputy chairman of the Cleaning and Support Services Association (CSSA). “People have been moaning about margins for years, but it’s really tight now. And customers still expect service delivery to be what they require; that’s down to the contractor to get right. Unless you’re really on the ball it’s hard to make a margin.”
The involvement of corporate procurement teams is making life even more challenging. Ray Rushworth, managing director of Incentive QAS’s cleaning services division, was until recently operations director at Carlisle Support Services. He says contracts arranged by centralised procurement teams often fail to take into account the precise requirements of operators on the ground. “There are often a lot of added-value things that staff do on-site, but when you’re looking at it from a purely centralised purchasing perspective, all those little things are lost and that can then cause friction,” he says.
In this landscape, both customers and suppliers alike are increasingly looking for alternative models to make contracts work. A common theme is for cleaning to be bundled together with other services, either as part of total FM contracts or less formal arrangements, allowing clients to drive economies of scale and contractors to reduce management costs, in particular.
“There’s definitely a consolidation in soft services so people are combining cleaning with catering and security,” says Andrew Sugars, group corporate development director at Servest. “It means we can deliver a more efficient solution, while still delivering the service expectations that they have, because we can take out cost. But it’s horses for courses; even though we can deliver cleaning, catering and security, some will still want to talk to us about one of those.”
This, however, is having an impact on smaller and more specialist cleaning services providers. Vincent says that working for total FM firms, rather than directly for end-clients, has been an emerging route to market for his business over the past three years and he expects this to be more prevalent in the future.
But not everyone is entirely happy with this new model. “It’s pushing a lot of businesses into what is almost a no-win position,” says Andrew Large, chief executive of the CSSA. “They are either forced to accept these sorts of sub-sub-contracting relationships or to accept that they are no longer going to be able to deal with the big banks or the accountancy firms.”
Alongside this trend towards a greater degree of outsourcing can come difficult questions around the role of in-house facilities management teams and providers can sometimes find themselves initiating discussions around just what should be done in-house and what can be handed over to a total FM firm. “Management salaries are going to be lower in a contractor than they are in a bank,” says Peter Goodliffe, business improvement director at OCS and chairman of the CSSA.
“Then you add pension, holidays and benefits on top and it really adds up. The only way you can tackle that is to have a more strategic discussion with the client, generally at board level.”
He also points to a further trend in contracting models, where a fixed price is agreed and the contractor can charge extra on top, depending on performance. “They can be more flexible, but there are pros and cons,” he says. “Some contractors want a fixed price for a given period of time; others want it going down year-on-year and that’s a challenge because in most cases you’re looking at a change in productivity or working practices. Either way, you’re looking to remove some element of the labour because that normally represents between 70 and 80 per cent of the contract.”
At the same time as the downward pressure on rates, clients and contractors alike are having to wrestle with issues such as the London living wage, which currently stands at £8.55 an hour. Sugars says that expecting contractors to absorb this cost is unrealistic, so any decision would need to be taken by clients. In practice, though, this can be a catalyst for a wider review, resulting in more innovative ways of structuring contracts, which can be achieved at little or no cost to clients.
“We can afford to up rates to the London living wage, but we have to go in and do some interrogation around the specifications, methodologies, high occupancy areas and what the footfall looks like, so apply a bit of science to it,” he says. “But when you’re paying that sort of money, you get longer service and more loyal people who will turn up to work and take more accountability.”
The uncertainty over potential changes to TUPE legislation is also causing concern in the industry and the government has recently announced a consultation on the issue.
Sofia Syed, a solicitor at Mundays LLP, says although the changes have not yet been defined, there is talk of repealing the amendments to the legislation that were introduced in 2006, under which any kind of change in the provision of a labour-intensive service such as cleaning would come under TUPE.
Her advice for organisations entering into any kind of outsourcing arrangement is to keep an eye on the government’s proposed dates and negotiate the terms of any contract to ensure any liability in respect of the employees is minimised. Providers already supplying a service in a long-term agreement may need to consider making provisions for redundancy costs if and when the service ends. “Review the terms of the outsourcing agreement and see if there is scope to re-negotiate the employee liability,” she suggests.
Major changes in this area, though, would be unwelcome, says Large. “Prior to 2006, there were arguments every time there was a service outsourcing as to whether or not TUPE applied. That’s being held up as the future of the industry as well as the past,” he says.
Contracts that involve an undertaking under TUPE can also be useful for service providers, he adds, as it guarantees a supply of labour from day one.
Other issues, too, are causing concern. The question of illegal employment is still a challenge for suppliers and customers, says Large, despite their best efforts to stay on top of it. “There are probably 500,000 illegal workers in the UK and it’s highly likely that contractors are all employing them somewhere,” he says. “They’re trying their level best not to, but the infrastructure that’s in place means it’s very unlikely that they won’t be caught out.”
Sugars, meanwhile, points to the ongoing introduction of auto-enrolment of staff into pensions as a potential issue, particularly when pricing tenders. “There’s not enough historic data at the moment to say that, on average, in our industry there’s a 20 per cent or an 80 per cent uptake,” he says. “A lot of our people work part-time and won’t even qualify because there is a minimum earning level. But it’s something we have to watch carefully.”
Labour costs present a further pressure on both suppliers and customers, suggests Large, with the UK unlikely to see another wave of immigration from overseas, such as those that have helped to keep wages low in the past.
Along with growing pressure around social sustainability, Large says, this is likely to lead to either upward pressure on rates, or force contractors to invest in new equipment to boost productivity. “At the moment, because wages are relatively low in the UK, investment in capital equipment is poor,” he says.
Ultimately, the solution to the constant drive for lower costs, while meeting other objectives and maintaining standards ,may require a fundamental overhaul of the industry, suggests Rushworth.
“If people want to offer the London living wage and give staff more salary, perks and pensions without increasing cost, they have to look at new ways, whether that’s bundling services, total FM or just re-engineering the methods that cleaners use,” he says. “We need to totally re-engineer the delivery model.”
