Outsourcing:
Cut Small Services Co$t$ to Yield Big $aving$

By Michael Redding

By now, most facilities owners have recognized the potential savings in optimizing the cost and delivery of first-tier services—large contracts such as maintenance and janitorial services—and have taken steps to achieve them. However, the opportunities for savings associated with second- and third-tier services—smaller contracts ranging from building automation systems to indoor plant care—are frequently overlooked. Indeed, the greatest potential savings may be found where least expected, and the opportunity for cost reduction in smaller services may be larger overall than in first-tier services that already have been thoroughly scrutinized.

The spending on second- and third-tier services is less visible because the individual costs are small and the total distributed among several vendors. Consequently, these activities often are not visible budget line items even though they may constitute 30 to 50 percent of total facilities costs. This is in contrast to the larger service contracts which are typically managed and controlled at a high level of the organization and constitute clear budget line items.

The many smaller services tend to be inconsistently or minimally managed. Often they are initiated and approved on a case-by-case basis at a lower level of the organization with less senior management oversight. Contracting arrangements may be informal, there may be no clear basis for pricing, and invoicing may not be rigorously reviewed. In some cases, it can be difficult to determine the precise nature of these services, the vendor who provides them, what their costs are and to what accounts they are charged.

As a result of these factors, savings opportunities from optimizing these types of contracts may run as high as 30 percent, as compared with the 5 to 10 percent that might still be saved on first-tier services. It is therefore essential to find an efficient and effective way to evaluate and capture these opportunities.

Data collection and analysis

Traditional methods for assessing first-tier services, such as benchmarking, competitive bidding and using published reference sources, are too time-intensive, and impractical for application to the large number of small contracts involved in second- and third-tier services. Moreover, competitive benchmarking information is usually not readily available. To circumvent these problems, it is suggested that facility managers focus on 10 critical indicators of contracting effectiveness to give priority to opportunities for improvement. These indicators will identify those services which show the greatest likelihood for savings. A systematic three-step process will yield the data required to evaluate the contracts efficiently and identify those in need of revision.

To begin with, gather copies of all service contracts (where they exist), sample invoices for each vendor, and a spending summary—the total of all invoices—of each vendor for the previous year. If this information is not readily available or easily consolidated within the organization, it can be requested directly from the vendors. The request in itself demonstrates to suppliers that the organization is scrutinizing relationships, and this can have the effect of spurring vendors to self-identify efficiency opportunities.

Optimizing services

A two-phase approach can be taken to optimize services. The first step is to repackage the services, eliminating unnecessary scope or reducing excessive service levels in the process. For example, when first purchased, some equipment may require a high level of maintenance to preserve the manufacturer’s warranty. When the warranty period expires, a lower (and less expensive) preventive maintenance regime may be sufficient.

Similarly, when reviewing indoor plant care contracts, removing plants from low impact areas may significantly reduce the cost of care without affecting the overall positive impact on the work environment. Changing technology, regulatory and business requirements often creates other opportunities for scope and service level reduction. Although it is often neglected, cutting services should always be examined first as it creates the greatest savings in the shortest amount of time.

Bundling services is an important strategy when multiple vendors are providing similar or overlapping services. This reduces the complexity of managing numerous service providers and, through increased buyer leverage, can create significant economies of scale when renegotiating services. Often this strategy can change the nature of the service provider relationship from transactional to partnering, and subsequently increase the value of service provided.

The bundling of services can be followed by either a contract renegotiation with a preferred vendor or a competitive bidding process if a favored vendor has not been identified. Competitive bidding should be engaged selectively because contract renegotiation often will result in similar savings in a much shorter period of time. Further, time to execute is a critical factor in maximizing savings when there are several other service contracts under review.

Disaggregating services also can create significant savings opportunities, in particular when dissimilar work is being performed under a single pricing model with a single service provider. This is often the case, for example, with building automation contracts where lower value calibrations are charged at the same rate as system program upgrades. Similarly, maintenance contracts may have a facility paying top mechanic rates for simple filter changes and lubrication work. Disaggregating the scope of work enables differing pricing models for different elements in the existing scope of work, often resulting in significant savings. When pursuing this course, it is important to carefully define the new scopes of work to avoid gaps in service.

The second phase is aimed at optimizing pricing. Solutions can be found in renegotiating contracts, bringing the work in-house, or launching a competitive bidding procedure. When an organization is satisfied with a current provider and that provider is open to a new or restructured contracting relationship—a high degree of trust and sufficient information is available to determine a “good deal”—renegotiation may be the route to take.

Pros and cons

On the positive side, this preserves the relationship with an effective provider, entails less effort than other options and can be implemented relatively quickly. On the negative side, it may mean a missed opportunity to work with an even more effective vendor, and may require an intensive effort to establish new working conditions with an entrenched provider, as well as incurring the risk of eroding some of the benefits. For this reason the upfront evaluation of service provider receptivity to new contracting models is essential.

Furthermore, if a trusted supplier has the competency to perform or manage the services effectively, additional services can be assigned. This minimizes the number of supplier relationships and simplifies management. It also increases the scope and leverage, takes advantage of an existing relationship and expertise, and can be implemented rapidly. Care must be taken not to drive providers to perform non-core work, and the same attention should be given to establishing the scope of work and service level agreements for expanding the scope as for completing new work.

Services also can be brought in-house, under conditions where there is a high degree of satisfaction with the productivity, quality and cost of the in-house workforce; in-house skills are present or obtainable; and the reduction of the in-house workforce is not possible or acceptable. With this approach, the same care should be taken in establishing scope of work and service level agreements as with outsourced service delivery.

This solution will reduce vendor mark-up, can be put in place quickly and may have the added benefit of boosting employee morale. However, where head count stability is uncertain or reductions are expected, this approach may not be politically acceptable even when cost savings can be demonstrated.

Consolidating vendors

Finally, it may be desirable to seek the delivery of a complete package of services from the outside. This strategy can be advantageous if there are multiple providers capable of delivering the services, if it is not essential to preserve current vendor relationships, or the existing relationships are not satisfactory.

An organization will benefit from the competition for services, which drives down costs; the exposure to the marketplace, which furnishes an education on alternative service delivery options; and the opportunity to ensure a relationship with the “best-fit” service provider. It should be recognized, however, that this type of arrangement can require significant time and effort to execute, thus delaying the realization of benefits.

In all cases, there are a number of elements that require attention when establishing new service contracts. The intent of the contract must be clearly stated and the scope of work clearly identified and complete—the “true” scope of work should be evident. Furthermore, service levels and the pricing model must be suitable, and there should be sufficient granularity in the scope and pricing to fully understand the cost drivers of the contract.

Remember that the appropriate pricing model is critical to cost effective contracting. In general, the contract must be internally consistent, the terms and conditions balanced and appropriate and the expectations on both sides clearly defined.

Given the great potential for savings and the multiple approaches that may be taken to achieve them, optimizing second- and third-tier services is a strategy that facilities owners should not wait to pursue.

Michael Redding is Director of UMS Facilities Consulting, a management consulting firm specializing in Performance Management, Best Practices & Outsourcing for Facilities Organizations. UMS is a subsidiary of EMCOR Group, Inc., a Fortune 500® leader in mechanical and electrical construction, energy infrastructure and facilities services for a diverse range of businesses globally. For more information, contact Michael Redding, mredding@umscg.com - www.umscg.com