Second Generation Facilities Management Outsourcing

Gary Noy

Director, Vendor Management EMEA and APAC

Facilities Management and Property Event, Selsdon Park

Hotel, Croydon 29th - 30th April 2014

Content

• Weighing options

• Future drivers

• Risk of change

• Market perception

• Contract types and incentives

• Transition

• Contracting success factors

• Relationship success factors

2

Weighing Options

3

• Options

– Renegotiate

• Keep current vendor

– In source

• Use own staff

– Bid to market

• Same or different

bundles

• May result in a vendor

change

– Mixture

Future Drivers

Cost control/cost reduction

New service lines

New geographies

Scalability

Flexibility

Asset class expansion

Analytics/modelling

Other

4

Value Opportunities

• Evolution of systems, methods and processes

• Supplier capability changes

• Change in market standards

Change in market

• Acquisitions and divestitures

• Structure, services, geography

Change in customer’s business

• Ideas for improvement

• Remediate issues on current account

Customer’s experience

5

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Analyse Current State

6

Commercial Structure

Relationship

Performance

Investment/ innovation

Vendor market position

Futu

re Im

po

rtan

ce

Market Competitive

High

HighLow

Risk Of Change

7

Enablers of risk mitigation

• Early termination rights

• Notice requirements

• Termination assistance services

• Rights to service data and

information

• Termination transfer rights

– People, Assets, Contracts

– IP (systems, policies and

procedures)

• Other contractual protections

Risk of Change

Lack of knowledge

of the outsourced function(s)

Lack of transferable

function

Service disruption

Time flexibility

Termination of existing

relationship

Stakeholder support

Market Perception

8

Ensure no perceived incumbent bias

Demonstrate willingness AND ability to change vendor

• Innovation vs. Price

• Outcome vs. Prescriptive

• Transformation vs. Tactical/Incremental

• Collaborative vs. Directive

Match sourcing process to objectives

• Process

• Decision

• Scope

Capitalise/re-engage based on history of previous market visit

FM Pricing Models

•Vendor passes all direct costs of FM services through to customer without mark-up, with a separate management fee (margin) invoiced to cover overheads and profit.

•Open book accounting of the pass through costs is essential for assurance

•These may include a “Guaranteed Maximum Price” or Cap.

Pass-through plus management fee

•Vendor provides all services at a fixed price

•Fixed price is usually only appropriate where the volume, standard and scope of services is constant or at least predictable

•Main benefit to customer is certainty of charges

•Downside is that the charges are rarely transparent

Fixed price

•Unit pricing of baseline levels of usage/output for specific items of service (e.g. Number of desks or back office transactions)

•Setting a tolerance level over/under baseline levels (e.g. “cap and collar” gives the customer predictability over certain costs

•Mechanisms for reviewing baselines can be in contract, they are effectively re-negotiations which can be time consuming

Unit pricing/Baseline model

•A very flexible service delivery model and allows for comparison of rates

•No incentive for the vendor to innovate and/or reduce delivery costsTime and material

9

Transition

Pre-Transition

Transition

Post-Transition

10

Coordinate transition between existing and new vendors

• Knowledge transfer– To new vendor or customer

– Cooperation between vendors

• IP, software, assets and contracts– Determine if existing IP can be used

• Personnel– Determine if there are rights to hire outgoing vendor staff

• Communications– To vendors, stakeholders and customers

Human Resources

Contracts

Finance

Technology

EHS/Quality

Operations

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Contracting Success Factors

11

Clear Sourcing StrategyAvoid piecemeal process, inconsistency and lack of transparency

Defined Service RequirementsClarity on type and level of services

Address HR Issues UpfrontMake provision for legal and communication activities

Effective Change ManagementEffective processes and controls in contract

Baseline DataDetailed budget, staff models and improvement tracking

Preserved LeverageNon-exclusivity, termination/renewal rights. Effective governance process

Understanding Pricing StructuresOpen book, risk/reward, fixed fee, gain-share etc.

FlexibilityStructure contract to accommodate growth/contraction

Effective Risk TransferAppropriate KPIs, avoiding margin stacking

Understanding Contractual ContentParticularly risk allocations, insurances, indemnities etc.

Successful Sourcing

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Relationship Success Factors

12

Clear UnderstandingAlign at start:Client needs and expectationsVendor capabilities and responsibilities

AlignmentObjectives and financial goals are aligned so that both parties naturally act in an aligned way. Prevents dysfunctional behaviour from self preservation

Positive EngagementAn assumption of trust and belief that the other party is trying to do the right thingCemented on doing what is expected

MotivationCustomer team contribute to contract successVendor and staff compensation based on customer satisfaction

CapabilityVendor must be fully capable of delivering what is promised at a cost both parties expect

Data QualityCustomer and Vendor use accurate, complete, readily available (and the same) information to make decisions

CommunicationCustomer and Vendor communication is effective at all levels for timely decisions

Stakeholder EngagementCustomer has gained full cooperation of all stakeholders who can undermine the success of the relationship

Successful Relationship

Weighing Options

13

• Options– Renegotiate

• keep current vendor

– In source• use own staff

– Bid to market • may result in a vendor change

– Mixture

• Considerations– Change in vendor can be costly

and disruptive

– Balance value with risk of vendor change

– Be clear on the issues that you care about

– Define what you need to achieve

• Requires objectivity and market insight

Questions

14