Since the outsourcing boom of the 1990s, there's been a queue of companies offering to shoulder the burden of facilities management (FM) with catering, cleaning or security services, and more. The FM sector is now large and complex, comprising a mix of in-house departments, specialist contractors, large multi-service companies, and consortia delivering the full range of design, build, finance and management. Estimates vary, but market research suggests that, in the UK alone, the sector is worth between £40 billion and £95bn per annum.
Many manufacturers have taken them up on that offer and hopefully are now enjoying the benefits. One thing that is crucial to any successful outsourcing undertaking, however, is the contract that underpins it. Get that wrong and the whole structure on which it is founded starts to crumble. Contract length is probably the most thorny issue here, but what is the ideal when it comes to matching the expectations of both parties?
Longer term buy-in could encourage service providers to seek constant improvements, perhaps sharing cost and process efficiencies with their manufacturing customer, whereas shorter term deals are often awarded on the basis of lowest price and may not offer the same payback – or may even collapse entirely, once the initial gloss has worn off.
"The contracts that are most regularly used and that seem to work best are for a three-year period, with an optional two-year roll-on – providing certain targets are hit, operationally and financially," says Jeremy Waud, managing director of outsourcing company Incentive FM. "In the past, some manufacturers were insistent on very short-term engagements – typically one-year contracts – while outsourced service providers sometimes pressed prospective clients for five-year agreements."
Waud is not very complimentary about either of those two extremes. "Really, one year affords an FM provider very little time to prove what can be achieved and provides a poor return on the initial investment that needs to be made when a contract has been agreed. Asking for a five-year contract, on the other hand, is likely to produce nothing but fear in a manufacturer's eyes!"
Two-way trust
The important thing, he says, is to establish a contractual agreement that also incorporates within the relationship a strong degree of trust. "If the manufacturer is asking for one year, it is already clear that they have no great commitment to this and so are unlikely to put in the effort that successful outsourcing requires. Personally, if someone is insisting on such short-term agreements, I don't believe they are worth having in the first place – for either party."
If a manufacturer has qualms about handing over certain facilities to a third party, one means of accommodating such uncertainty is to have a 'no fault' break clause in the contract, so either side can withdraw – although Waud adds that there needs to be a six-month notice period attached to this, exercisable after one year. "However, this is a dangerous path to go down, I believe, as you are already flagging up uncertainties and a lack of belief in the whole process."
What happens if something goes wrong with the relationship, though, and a client feels that what was promised isn't being delivered? "While we do try to encourage people to sign up for a longer term – usually three years – we also want our clients to know that there is an exit route, if something goes wrong. So the flexibility is still there, should that happen. My personal view is that, if things aren't working in the relationship and you simply hit the client over the head with the contract, it's a downward slope from thereon in, with little or no co-operation. And that's no good for anyone. Instead, a contract needs to be established and agreed, based on principles that are clear to everybody – then you just get on with making it happen."
As for manufacturers, Waud acknowledges that, when it comes to winning new outsourcing contracts, they can be "a hard nut to crack". On the plus side, once won over, they are very loyal. But there are also manufacturers who are highly committed and progressive in their approach. One such Incentive FM client, Pall Europe – the largest and most diverse filtration, separations and purifications company in the world – had never outsourced any non-core activities previously, other than canteen cleaning. Now it has agreed a contract with Incentive FM that covers all machine tool maintenance at its manufacturing plant in Portsmouth.
One of the issues that surfaces again and again with short-term contracts is that they discourage the contractor from making the required investment in capital equipment and systems – a view to which Neil Brown, technical director of Hygiene Group, subscribes. "On the other hand, long contracts without regular performance reviews can create complacency in both the contractor and client." So what is the alternative?
"It is better overall to look at some form of 'rolling contract', which is automatically renewed, subject to the contractor delivering against pre-agreed KPIs [key performance indicators] and at agreed costs," he suggests. "This allows the contractor to plan ahead, and gives confidence to allow a higher level of capital investment, and investment in training and monitoring systems, etc. For the contractors, they need to know that a change of local management will not result in an arbitrary change of contractor, on the basis of personal preference or familiarity with a competitor.
"A rolling contract, where the only grounds for changing the contract are consistently poor performance, or a renewal cost that is outside the agreed rate of inflation, is a strong encouragement for the contractor to focus on how to deliver the KPIs consistently and cost effectively over time."
For the client, a well designed contract is a good basis for promoting consistent results, at an agreed cost, which is what it is all about, adds Brown. "However, getting the targets right is fundamental to making this work."
Steve Edgson's many years' experience in outsourcing, primarily as commercial director of Managed Support Services (MSS), have convinced him equally that longevity is the key to any workable outsourcing contract. "These tend to be the most successful ones, perhaps starting out with one individual function within a manufacturing business and then expanding on that, as you build the relationship by delivering continuous improvement and growing the contract into other services."
He is less than impressed with short-term contracts, pointing to how these severely limit the scope of any outsourced service provider. "The problem is that they give you no time, and little motivation, to develop the scale of the service you are contracted to deliver. When they are longer term, though, you can take a view on the investment you are prepared to make, such as upgrading plant and equipment, and in training staff. You can recover the costs involved over the duration of that contract, which allows you to really look to improve service delivery and be more innovative." And he has some top tips for manufacturers as well when it comes to getting the most from outsourcing – see box, left.
That apart, Edgson sees any outsourcing agreement itself merely as the springboard to building a partnership with common goals. "Old school thinking was that you only agreed a one- to two-year contract, but it's becoming much more sophisticated than that now. Clients increasingly recognise the benefits of having an agreement that stretches across three or even five years."
He has witnessed this change in attitude when it comes to manufacturing especially. "The kinds of facilities that are now being outsourced were once mainly regarded as strictly belonging in-house – as key processes that would not be understood properly outside the business. But now we have clients in that sector who are opting for full TFM [total facilities management] contracts, which historically is unusual. It all bodes well for FM outsourcing.
"As manufacturers start to see the benefits that others are getting, more are signing up. It's where the industry is now heading."
Core strengths
Imagine the scene: members of the core manufacturing team coming off the production line to deal with a relatively minor maintenance issue. It's something that is all too familiar to Ian Fielder (left), CEO of the British Institute of Facilities Management (BIFM), from his many years in industry. Most recently with Johnson Controls as strategy marketing director for Europe before taking on his role at BIFM, he was involved in the outsourcing of FM with many manufacturing sites – BAE Systems, British American Tobacco and Perkins Engines, for example – helping to shape their strategies.
"Although manufacturing is still a lagging opportunity in the UK when it comes to outsourcing – compared to IT, pharmaceuticals and finance, for example – recent reports suggest that outsourcing is steadily increasing in this sector as well," he says. And it's the manufacturers who recognise the cost-saving possibilities that are reaping the benefits.
"During my time at Johnson Controls, one manufacturer explained very clearly where he stood on outsourcing when he told me: 'I'm not interested in saving €10,000 on catering. My concern is that FM costs me 15% of every unit that goes out the door. If you can cut this to 14.5%, I'd be very interested'. That's where manufacturers are focusing now."
Dos and don'ts of outsourcing
Do…
- Look for a partner, not a contractor
- Map out your drivers for outsourcing: understand if it's about cost reduction, specialist support or allowing your organisation to focus on core operations
- Give your partner the ability to invest in innovation/improvements by
offering longer contract term and future scope
- Provide data, history and previous issues, so your partner can develop
solutions
- Allow freedom for the bidders to provide alternative specifications to the
prescribed ones
- Provide a platform for interaction with other service providers/business
functions to allow cross-functional optimisation of processes and delivery
Don't…
- Be rigid on tender responses. Allow your partners to provide you with
value-added offerings
- Hold data back from the bidders in the process
- Exclude alternative proposals from the process
- Exclude key stakeholders from the scope definition: their knowledge
is vital
- Restrict access to sites during the bid process: these visits will allow the
bidders insight to operations and find opportunities to optimise
- Rule out non-sector specialist organisations from participating in the
processes – they should be selected on their ability to create value-added
solutions in any sector
- Opt for cheapest year one price. The solutions should add value and
provide continuous improvement over the full contract term.
