Watch the pennies
Outsourcing your facilities services can save you money, but keeping a tight rein on costs is another matter entirely. Ian West, commercial director at Vinci Facilities, explains some of the different financial arrangements available in the FM market and how to get the best value.
By Ian West
Outsourcing can help you realise significant savings and release efficiencies, if managed correctly. By bringing together a number of different functions under one management, eliminating duplication of tasks and bringing innovation, suppliers can help you achieve the best value from outsourcing your non-core functions.
Be clear in your requirements
Unfortunately, outsourcing has its detractors and this happens when clients have not fully understood their own role in setting out clearly the full scope of services they expect to be included in the outsourced deal and set reasonable SLAs which they and the supplier can jointly agree will meet the needs of the business. Likewise, suppliers can misunderstand client needs, leading to inaccurate bids, or worse disputes over costs. Once you’ve outsourced part or all of your facilities services, keeping a tight control on suppliers costs and budgets is the next big challenge. One of the many areas in which relationships with suppliers can fail, is when requirements are not clearly defined, leading to unexpected costs and tension with your suppliers.
Clients need to work with their suppliers to ensure that the contract allows for variations. This is a particular consideration for clients in the highly competitive FMCG and retail category.
The best deal
- Ensure your supplier has the right calibre of commercial employees who can demonstrate some of the savings they have generated for other clients
- Work collaboratively with your suppliers to jointly identify savings and understand their cost structure
- Be clear in your requirements and work jointly with your supplier to define specifications
- Keep your client informed of any changes in your business requirements
During contract negotiations, it is important that you understand the different commercial arrangements available, which would help you get the most value from your suppliers.
In the past, clients tended to enter into contracts expecting a fixed price, which had some element of costs reimbursable works. These arrangements led to escalating costs with suppliers having little to no incentive to keep costs down because the balance of risk was too far weighted in favour of the supplier. Over the years, the market has shifted, and rightly so, towards collaborative procurement with various commercial models available. Understanding these financial models should determine the level of savings that can be realistically achieved.
Guaranteed maximum price
This is a form of contract in which the supplier guarantees you a fixed price for the service being procured within a given scope. Guaranteed Maximum Price guarantees the delivery of a budget by engaging with supplier to control spend on fixed and variable elements with penalties for unforeseen, unforecasted overspend on budget.
In principle, the supplier absorbs the risks of increases in material costs, staffing fluctuations, sub contractor service failures or at worst insolvency and legislative changes. This type of financial arrangement can be attractive for companies who can predict with a degree of certainty that their business requirements are unlikely to change too significantly during the contract period, but be sure to check carefully the terminology being used to define costs.
Comprehensive price
Suppliers should be able to provide you with a fixed price for planned and reactive maintenance up to a given value. Here, it is critical that the description of the services included within the planned and reactive works is fully defined as clients will face additional unplanned costs for works that have fallen outside the scope of the written specifications.
Most suppliers should be able to provide you with an average order value based on benchmarked costs with the supplier taking most of the risks around variability in costs. There is a degree of fixed price on planned maintenance and work orders up to a certain financial limit.
Incentive model
This is an increasingly popular form of contract, which can be linked to any given commercial model and involves contractors being incentivised to use their expertise and experience to find efficiency savings which are then shared with the client organisation. Such arrangements can result in significant savings for both parties. This is also similar to the Profit at Risk mechanisms where the suppliers profit earning ability is linked to a KPI scoring mechanism, which has a direct correlation to the delivery of specified services.
Transparency
To ensure you get the best from your arrangements, it is important to ensure that you work in an open and collaborative manner with your supplier to achieve true visibility of your spend.
Open book accounting
Most suppliers these days will agree to Open Book Accounting measures which is primarily designed to facilitate trust between two parties. To achieve the best value from your commercial arrangements, you need to be sure that your supplier is being candid with you about their cost structure and the methodology they used to arrive at the proposed budget. This is an opportunity to really work in the spirit of partnership with your supplier to encourage transparency in the way in which they price the services; help you to understand their cost base; and help you benchmark their service cost. The main form of achieving this is through Open Book Accounting.
Along side Open-Book arrangements, additional cost control measures include ensuring that you have a well thought-out variation mechanism that can be used to ensure that budgets can be reset in a fair manner that is acceptable to the client as and when the business requires flexibility. Typically, this ranges from a more rigid process of charging by cost per square metre, right through to the provision of business cases with bespoke estimates for changes required.
Technology
As with all service delivery, having the right technology, such as a web-enabled Cafm system, can allow you as a client to view your supplier’s performance in real time giving you the ability to view how your budget is being managed. Good suppliers will ensure that you are able to draw out management information which is relevant, concise and accurate. Suppliers should be able to record the value that they have delivered into your business, some of it tangible, some of it intangible, but ultimately, it should provide you with the data to help you make important strategic decisions about your estate.
The right people
Finally, we all know that facilities is about people and with the right calibre of commercial employees with the skills, vision and creativity, suppliers can really help you unlock savings. During the tendering stage, you should ensure that your suppliers’ commercial staff not only have the relevant qualifications and auditing skills, but can also spot opportunities to implement sustainable cost savings and help you reduce your exposure to price escalations.
Ian West is commercial director at Vinci Facilities
