Outsourcing

Outsourcing today is an increasingly common way of doing business. There are sound financial reasons for not employing permanent staff – who must be fully paid regardless of work flows – when you can buy in outside expertise which may be able to do the job better, cheaper and more quickly.

Facilities managers’ time is, therefore, increasingly dominated by managing contracts with external suppliers. This has required facilities managers to develop new skills. Whereas before, facilities professionals had to be multiskilled, multifunctional and good managers of people from a variety of backgrounds, now – on top of all that – comes the responsibility for continuing to motivate those over whom they have no immediate line management authority, while managing outcomes through a third party employer with their hands tied by legal contracts.

Successfully working with contractors on a strategic level is another challenge facing the facilities manager. Today’s outsourced contractors are ‘partners’ who ‘add value’ to a company’s operations. Command and control, as a management style, would be as self-defeating here as anywhere else. Partners are looking for long-term relationships, where trust means more than mere on-time delivery. It means sharing cost bases, profit ratios and business objectives. To a degree, it also means sharing information you might prefer to keep in-house.

What to Outsource

When outsourcing first entered the management arena in the 1980s, it was all about saving money on essentially manual tasks; premises cleaning was a typical and early example. The focus is now on access to skills, with outsourcing expanding to include areas closer and closer to the centre of business; companies are now looking to buy in outside expertise so that they can concentrate on their own core activities, and contract with external suppliers to provide many or most of the tactical elements

The shift from those early manual tasks has seen us move through other administrative and infrastructure areas, towards innovation: how can the company move further ahead faster than the competition? Outsourcing today, and the expertise that comes with the specialist contractors, has now embraced research and development (R&D), design, product management, marketing, communications, even personnel supply and management.

That development has not finished. Already into strategic functions, it is not unlikely that outsourcing of core business areas, and even the strategic direction of the company, could follow.

Outsourcing should not be seen as just a money-saving management device or tactic, but considered in terms of the potential value it can bring to a business. It may cost more to outsource, but the job may be better performed, the company image may be enhanced, and it may release expensive management time for core activities. However, 2005 saw the possible critical turn of opinion regarding outsourcing with some high-profile industrial activities. Some companies are reviewing how they define ‘core’ activities, which begs the question, ‘are we seeing a start of the move to bring stuff back in-house?’.

A first assessment in considering whether or not to outsource is defining what you consider to be your core business activities. Current practice dictates that companies retain control of these areas. The thinking behind this is that organisations should be left to concentrate on their core business activities without the distraction of providing and managing non-core activities. These are better provided by an outsourced commercial organisation whose personnel can be better motivated and rewarded in an environment that recognises their special training and skills.

Of course, what is defined as ‘core’ will vary significantly from organisation to organisation. A good example here would be the law firm that outsources its conveyancing work on the basis that its core skill is commercial litigation and it is from the latter that it earns the majority of its income.

Consider next the degree to which any selected function is routine and well defined. If it can be easily defined, then it can be more easily measured, and managed at arm’s length; and remember, you are not devolving responsibility, just functionality. So, if a non-core function can be defined and measured, it may be worth considering for outsourcing.

Why to Outsource

Focus on Core Business: Core business functions are defined as activities and services that customers pay for, or benefit from. Re-directing resources from non-core activities to core business activities is the fundamental revenue and market reason for outsourcing. As an example, if a company is in the software development business, it doesn’t want to dilute resources by also being responsible for delivering cleaning services for its property; it adds no advantage to their competitive software market position. These cleaning activities create the opportunity for outsourcing for non-core facility support services.

Through outsourcing, the company can focus its resources on its customers, values and mission and give itself a competitive advantage in the marketplace.

Acquire Marketable Benefits: Beyond getting a task done through outsourcing, contractor products can provide services that add greater value to the buyer’s core business. And, when the buyer can create a competitive advantage for itself through outsourcing, it has a compelling reason to do so. For example, if a property management company acquired the capability of a world class call center through outsourcing, the knowledge and experience gained from their partner could improve its competitive position by offering greater benefits to its customers. Certainly, these added benefits can be a worthwhile outsourcing goal.

Create Shared Marketability: Sometimes, outsourcing of facility services creates greater synergy between the company and the contractor. This can derive from shared market advantage or shared costs and risks. A facility management company and a mechanical maintenance services company often have common customers. So an opportunity can be created for each company to market jointly, or individually for the benefit of both. The ability to expand each other’s market share is a powerful strategic advantage that can expand opportunities for both parties. The partnering of these two types of companies can lead to the development or expansion of products or services with the costs and risks associated with development shared jointly. Actually, the scale of benefits is limited only by the vision or the egos of the partnering companies. In addition, facility service outsourcing can reduce costs and bring other gains that, while still strategic, are somewhat more tactical than the ones just addressed.

Reduce Operating Costs: Perhaps the most often quoted reason for outsourcing is to reduce costs. Through this effort the company seeks to avoid the direct and indirect costs of performing the service internally, through outsourcing to achieve a lower operating cost. Frequently, this is achieved by simply asking for (or demanding) a lower price or by, mistakenly, reducing the scope of work. Regardless, the goal is to enhance the price-competitiveness of the company and to free any savings for more important, core value projects

Improve Control: There are circumstances when the in-house facility management department seems unable to implement a sufficient amount of change to its internal systems to adequately achieve the competitive advantage needed by the company. Barriers may include lack of management know-how, insufficient resources, union/management impasse or poor information systems. Outsourcing can establish the change structure and controls needed to bring strategic value to company competitiveness.

Acquire Best Practice Systems: Sometimes, in-house facility systems and technical skills are weak in a specific area. Contractors that have invested in developing best practice systems can bring higher levels of performance to the buyer more quickly. The facility management department is able to focus on its goals more quickly, while acquiring the best capability available in the market place. The growing interest in green services and the emerging chemical-free cleaning technologies are recent examples.

So why are companies outsourcing facility services? They are outsourcing to be more benefit- and price-competitive. Companies have pursued a tactical strategy to reduce internal operating costs, staffing and resources by outsourcing facility support services. Strategically, companies are looking for providers that can help them compete in a highly competitive market place. If facility managers are clear about the goals they are trying to achieve, they stand a greater chance to be successful. From a contractor perspective, clear buyer goals enable the service provider to design and deliver the most important resources to achieve the buyer’s goals —often at a bargain price. Yet, even with clear goals, the outsourcing process itself can create a barrier to success.

Issues in Outsourcing

The track record for many facility managers suggests that the traditional facility services outsourcing process is not fully successful in delivering on its promise to serve buyer strategic and tactical business goals. Surveys have reported that one in four outsourced services is brought back in-house within the first two years. Further, nearly 50 percent of those managing the outsourced contract are unhappy with performance, but are unable to correct the situation. In short, many facility managers have come to believe that traditional outsourcing strategies aren’t fully keeping up with their needs.

A number of shortcomings in the traditional facility services outsourcing model are creating this emerging business failure. These shortcomings include issues as

Buyer specifies the work process. In many outsourcing contracts, the facility manager specifies how the work is to be done versus what result the work is to produce. These are “process” specifications that list the variety of tasks to be performed, at a required frequency. This means that the facility manager selects the contractor based on its performance and achievements, then tells them “don’t do any of your best practices; I’ve written it all down for you, so do it my way.” And, if following the facility manager’s tasks/frequencies delivers a dirty facility and customer complaints, which party is at fault, the contractor or the facility manager? After all, it’s the facility manager’s process that the contractor is legally required to follow. Buying time, tasks, processes, labor hours, systems, etc., has little value if they do not produce an advantage for the buyer. An expensive trap can be created when facility managers are specifying the work process around what people do, versus what resulting benefit the company gets.

It’s a What’s In It For Me-Lately relationship. Many facility service outsourcing problems can be traced a situation where the two parties really don’t have common interest. Where everyone is looking out for their own best interest, the more one party is successful, the less the other party is successful. This negotiation is a classic win-lose dilemma. There is no contractual focus on the buyer’s mission and their competitive goals. And there is no mutuality of consequences linking buyer success to contractor success or failure. Remember to pay attention to WIIFM-L (What’s In It For Me-Lately)? What does each party want to achieve? The buyer wants a “quality” product or service, no customer complaints, responsiveness and below-market pricing as a strategy for maintaining or increasing their market share. The contractor wants healthier profit margins, increased revenues and long term relationships as a strategy for maintaining or increasing their market share. Despite all the talk about partnering, the traditional buying strategy is an everyone-for-themselves-relationship, where success is measured by how much compromise is accepted by each party.

Contractor selection is price-driven. In this sort of ever-person-for-themselves environment, the facility manager often says that price is not the main criteria for awarding a service contract. Facility managers talk about partnering, they talk about performance, they talk about alliances, etc. Yet in the end, the three things that drive buyer selection of contractors are price, price and price. Sometimes the facility manager (or the facility manager’s agent) is too motivated by the goal of dramatic cost reduction. When the facility manager participates in a “savings bonus” program, short-term greed can cloud long term outsourcing success. This is most likely to occur when the company is unclear about the balance of value it expects at any savings level. Contractors understand when price is the driver; and they low-bid (usually under-bid) the job in response. Downstream prices increases are a natural consequence of this strategy.

There are no consequences for poor performance. Traditional outsourcing fails to link consequences to performance, except the implied ability to “fire” the contractor or talk them to death as a strategy to improve performance. Since the traditional contract is based on a process “specification,” it creates a contract obligation to adhere to a constant set of tasks and frequencies defined by the facility manager, despite changing environmental, soiling or service demands. This means, by definition, that the facility will be both under- and over-serviced on a regular basis. The contractor gets paid the same whether or not the facility manager is satisfied, delighted or desperate. The facility manager assumes all the risks. The failure to establish performance accountability undermines a healthy buyer-contractor relationship. Thus, getting things done becomes a relationship dance, and each party thinks it is leading. Sometimes it works; sometimes it does not. Either way, performance results tend to be inconsistent, and the contractor has no operational incentive to change their own systems. Facility managers are left to ask themselves: “I can beat them up, I can fire them and I can even be a friend. Why can’t I get my building cleaned?”

Contractors don’t actually bid the “spec.” Often contractors cannot actually bid the “spec”; they bid price. If contractors submit pricing in direct response to the exact task/frequency “specification,” it is unlikely that they will win the contract. Most contractors will acknowledge that if they were to fulfill every task as required by the contract, the labor and other cost would make their bid unacceptably high. Thus, every contractor is forced to “adjust” its bid to balance what is required against what can be delivered at a winning price. It is no surprise that management of these contracts becomes a cat and mouse game, where the contractor can only respond to problems discovered by the facility manager. In short, very few contractors can successfully bid the documented specification and few, if any, facility managers actually manage traditional contract “specifications.”

Measurement of performance is unreliable. Facility managers have little time to measure reliably and they don’t always accept the contractor’s numbers. Unreliable measurement is compounded by a focus on problems and responses, after problems are evident. Traditional facility management outsourcing is measured by price, complaints and service failure. When there are lots of complaints, everyone says the contractor is unresponsive. If there are no complaints, does it really mean that the contractor is doing a good job? Traditional measurement is rarely focused on supporting a prevention strategy for facility service failure or a reward strategy for service success. And it often fails to link contract performance to company strategic goals. Facility managers should realize that measuring to fix problems is a waste of time. Measuring to fix the system to prevent the problem is what works.

Short-term goals are sought. In the short term, operational cost reduction can support organizational transition and meet the cash need for acquisition or expansion. Yet this traditional outsourcing goal often misses the point about what success means. No business is founded on the idea of reducing operating costs as an end in itself. A company could cut 100 percent of its expenses by closing the business. The fundamental purpose of savings must be connected with the company’s mission, its vision, its customers and its plans for the future. “Hurry up and save money” is a battle cry heard too often. And it is a classic error when savings are not clearly linked to the overall company strategic plan and its competitive position in the market place.

People Issues

Before embarking on any outsourcing initiative, there are several potential problems which should be anticipated and evaluated. Many of these are concerned with the people affected by the change in operation, others are to do with changes in the business itself and the manner in which the business is undertaken.

It is unfortunate that outsourcing is rarely welcomed by a workforce, especially that section responsible for the function being outsourced. Often it is perceived as downsizing by other means, and strenuous efforts are made to oppose it, diverting business time and energy from development to firefighting. Most of the problems that can arise can be pre-empted through intensive discussions and planning. Talk continuously with staff; be certain that they understand what is happening, why, how and when, and understand that simply telling them is not the same as being certain they understand.

Before proceeding, ask the following questions:

• Is there a convincing case for outsourcing? People and unions will generally accept an argument in which the logic is unassailable, in which all the numbers, from every source, have been reviewed and checked, and where every aspect has been openly examined. Secrecy is not a good strategy here.
• What are the legal requirements? How much will it cost to be generous, rather than just to stick to the letter of the law? Is the cost worth it?
• How have the levels of knowledge and skill that exist within the organization been established, especially within the area to be outsourced? Is the loss of some of these skills acceptable – most probably as a gift to the contractor – or should some or all of these be kept in-house as a supervisory or management resource?
• Is everything possible being done to involve and inform all staff – not just in the affected areas – of the progress towards outsourcing? Be aware, however, that different circumstances apply when an internal bid is on the table along-side external competitive bids; managing information in these circumstances is especially challenging.

Business change

All businesses change. Before entering into an outsourcing contract, you need to consider the following questions so that you are not hampered by a restrictive contract as you pursue your development goals

• What happens if you are bought out, or buy out another company? They may have a state-of-the-art in-house provision for what you have outsourced; or they may have none, and you need to look at rapid expansion of the service.
• What happens if you have a fundamental shift in business focus: if you decide, for example, to close plant, move headquarters of strategically important offices, or pursue a new but promising business direction which affects the need for the outsourced service?
• What happens in cases of force majeure: in the case, for example, of a significant market downturn which leaves expensive equipment and facilities underused?
• What provision has been made to allow for a ratcheting down of the service, and the associated costs?

Process change

The way business is done changes continuously. Think how long you have been using email as a key communications channel. How many standalone fax machines are still used regularly in your business? Do your younger staff even know what a telex machine looks like? Such technological changes can significantly alter the manner in which an outsourcing contract will work over time. For example, if outsourcing had been a significant factor a generation ago, the typing pool would almost certainly have been a prime candidate for it; now typing pools simply do not exist. It’s not just the technology: working and management styles can alter considerably over the duration of a contract.