Managing the risk of facilities management outsourcing.

Today, many organizations are outsourcing facilities management responsibilities to gain the benefits associated with focusing only on their core business. In doing so, they acquire the needed professional resources and know-how, while reducing costs and increasing operational flexibility. But to achieve this success, a property owner or manager must properly structure the facilities management agreement and institute a strong internal governance process to reduce the risk and ensure that the provider meets their level of service level expectations.

The critical success factor in any outsourcing relationship is the service provider's strong commitment to delivering performance improvements. However, typical facilities management contract structures contain few such guarantees.

Prior to implementing an outsourcing agreement, owners and managers need to be able to quantify their performance expectations and understand how the provider will realize these expectations over the course of a three-to five-year period. Then they need to structure the agreement to mitigate their risks with respect to budget, service, market competitiveness and contract termination. Avoiding Budget Overruns A performance-based, capped budget agreement creates high value for the owner and minimizes the price risk. The agreement should make the supplier responsible for the budget, with all costs assessed on a pass-through basis and a fixed management fee with a cap. Provisions for deduction of budget overruns from the supplier's management fee and shared savings create incentives for the supplier to reduce costs and establish price controls. Owners also need to retain the flexibility to increase or decrease the facilities management budget, if necessary, to be able to successfully manage their core business.

At the same time, owners should structure the agreement to measure and ensure that the supplier's service levels are equal to or better than the owner-defined baseline. Thus, the contract should provide for performance measurements and tie a portion of the supplier's overhead and profit to the service level.

Maintaining Market Competitiveness

The supplier's service level may meet the owner's expectations at the outset.

However, over time, the supplier's productivity levels may begin to lag behind that of the facilities management industry if they are not making the appropriate level of investment in their people and technology. To avoid this, owners need to ensure that their agreement includes an obligation for their supplier to remain market competitive.

Naturally, owners who are dissatisfied with their supplier's service levels and productivity will want to switch to a new supplier. However, suppliers can make it costly and disruptive for owners to exercise this right. To avoid excessive costs and downtime, owners need to build provisions for termination of services into the initial agreement. These provisions should include the return of assets and key personnel who have strong relationships with customers and knowledge of the company's history and culture,

Ensuring Strong Governance

An effective contract structure is essential to reduce the owner's risks, but it's only part of the picture. Owners also need to institute an effective governance process to monitor their supplier's service level.

Governance becomes the role of the owner's retained organization, or "stay-back team." The stayback team cornpares the supplier's performance data against the owner's expectations,monitors industry standards, and benchmarks the supplier's performance against these key indicators.

Finally, owners need to recognize the need to manage change and communicate effectively with all affected parties if they are to realize their outsourcing goal. Outsourcing inevitably creates suspicion and distrust with employees and incumbent suppliers alike.

This is because owner's interests in cost reductions may run contrary to employee interests in continuity and stability. Understanding and managing these issues as well as making sure employee interests are protected will create better outcomes over the long run. If done right, knowledgeable owners can achieve these benefits and effectively manage their risks with a good contract and good oversight.

By Rakesh Kishan, Michael Redding UMS Facilities Consulting