As companies grow and spread throughout New Zealand, many senior managers and boards of directors are asking the question, “What should we outsource?”
Outsourcing the management of facilities and assets suits property portfolios that are of a certain scale and complexity. For industries like big-box retail, and infrastructure and financial institutions, it can lead to significant savings, sometimes in the millions of dollars, and allow company teams to do what they do best and engage industry experts for the things they don’t do well.
The facilities management industry is, in comparison to other property services, a relative newcomer. Traditionally, companies have relied on in-house staff to manage their property needs, including maintenance. Depending on the size of the real estate holdings, the work has usually been overseen by an office manager or in-house property manager. Larger companies, particularly in the industrial sector or those with campus-style offices, have even employed their own tradespeople.
The facilities management sector is split into two broad categories: companies that largely do the work themselves and those that use established subcontractors. The former tend towards a negotiated price for the work they do and the latter usually work on a management-fee basis, passing costs through to the client. Increasingly, clients require full transparency of costs with agreed margins, and this is creating a better partnership environment. It allows the parties to align their commercial outcomes, with clients getting better value for the services delivered.
Consolidation and increases in the adoption and sophistication of technology have also enabled smaller property portfolios to be outsourced. Efficiency gains are now achievable where service delivery is combined for numerous clients. Additionally, the adoption of cloud computing has ensured that data is retained by clients in the event that a new service provider is engaged – a huge change from previous generations of outsourcing arrangements and a major factor in clients being able to have more flexibility with their supply chain.
For those thinking about making the switch to outsourcing the management of their facilities and assets, here are key things to think about before pressing “go”.
- You have a clear strategic outcome in mind for the initiative, driven by your company’s executives.
- You align the goals of your company and its outsourcing partner.
- There are clear roles and responsibilities for both parties.
- You draft a contract that allocates risk but also rewards the outsourcing partner for performance and is flexible, so both parties remain aligned through economic cycles.
- The contract is a win-win for the parties. A poorly performing contract could be deeply damaging for them both.
- The contract allows for investment by the outsourcing partner; certainty of renewals and extensions are also critical to ensure consistency and the retention of staff.
- You and your partner align your expectations of when the benefits will come to fruition. Poor property and asset information can take two years to correct. Typically, benefits are seen from year three.
So, who should outsource, and why?
When your portfolio is complex: As organisations grow, their property portfolios typically become increasingly complex, in particular their supporting infrastructure or geographical spread. As time progresses, the effort to maintain their holdings becomes a distraction from their core competencies, and risks emerge through uninformed decision making and a lack of specialist knowledge.
When your maintenance necessitates engaging lots of specialists: Companies that outsource their facilities management benefit from working with highly specialised industry experts who bring large-scale property platforms and depth of resources and supply chains that drive efficiency and innovation.
Those wanting to reduce their long- and short-term risk: Outsourcing reduces the risk of non-core-asset failure through underinvestment or lack of expertise. This may include physical assets such as property, or supporting infrastructure or resources that manage and maintain those assets. It also reduces financial risk: good outsourcing involves profiling a project and assessing the outlay, planning for the capital requirements and, in some cases, fixing the cost of maintaining the portfolio.
When your company makes its margin focusing on core operations: The outsourcing of a company’s facilities management function allows the business to focus on its core competency, which in turn benefits its clients. Some companies completely outsource all their non-core functions in order to maintain a high focus on their core operations, and the energy of their workforce. Highly successful outsourcing partnerships enable property assets to be seen as strategic levers, providing flexibility when required in differing economic cycles.
Numbers people who like to make informed decision-making: Well-implemented plans for managing strategic assets allow informed decisions to be made with regard to opex and capex. This, in turn, relates back to managed risk as it allows businesses to make informed decisions with a known risk profile. Mature facilities management companies have sophisticated platforms and skill sets that assist clients to make such informed decisions. Most important is the ability to make them without having to ask questions. This points to the principle that the information presented should be so comprehensive and mature in its analysis that clients can be confident of the decision they ultimately make.
Henry Arundel is the general manager (New Zealand) of Programmed Facilities Management, which recently took on the management of Chorus’ property portfolio across 2600 sites.