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Demystifying performance based contracts

Gary_WatkinsThe increasing trend for outsourcing FM services, with the sector predicted to grow by five per cent annually over the next couple of years, has added a new dimension. Failure to manage supplier relationships correctly can have major financial and reputational consequences. Gary Watkins, CEO Service Works Group, explains

Performance management in FM is about monitoring the operation of the facilities against set targets and identifying opportunities for improvement. This is typically focused on the performance of a contract, but can just as easily refer to that of an in-house team.

Managing the performance of an organisation’s facilities is important because of the direct correlation between the standards of facilities management within a company and the morale and productivity of its occupants. Excellent workplaces act as a recruitment and retention tool for both employees and customers.

Good performance management ensures that every part of the FM team is working at optimum level to deliver the expected standards of service. It starts at the procurement stage when the client organisation is looking for an FM supplier, and deciding on the length and scope of the contract.

Clients that tend to take a more partnership approach with their supply base are recognising the benefits of longer-term contracts and are generally opting for longer-term relationships, often with one or two strategic suppliers rather than multiple contractors.

When deciding on the length of any proposed contracts, client organisations need to decide on their key objectives from the FM outsourcing. Are they after a long-term partner who they can incentivise to innovate and create value for money; or do they prefer a more transactional approach with a short-term contract which is more flexible and offers less risk? The contract length speaks volumes.

In order to set those targets, the client organisation needs to understand its business goals, how FM fits within those goals and share that information with their service provider. This is typically done through a contract specification, the blueprint for the contract, which forms the basis for other documents such as service level agreements (SLAs) and key performance indicators (KPIs). Although in-house relationships wouldn’t have a contract, they should typically work to internal service level agreements.

Good specifications are as critical as the legal terms within the contract. For them to work effectively, they should use SMART objectives:

Specific: the specification should define exactly what the contract should deliver with as much detail as necessary. There should be no vagueness in the language used.

Measurable: The objective should be easy to measure – around quantity, quality, timeliness or cost – and the measurement defined.

Achievable: the targets need to be achievable. Does the contractor have the skills and authority to complete the work?

Realistic: the targets must be realistic and relevant, and linked to the organisation’s strategic goals.

Time-bound: the specification should provide a deadline for when each objective needs to be completed; or a frequency. For example, every Friday, every month, three times a year.

Over the past few years, we have seen a move from ‘input’ to ‘output’ specifications. An output approach involves reduced client management input and monitoring, and a service delivery that is results-orientated. In other words, do not tell them how to do it, tell them what you want. This encourages innovation and added value, and allows flexibility; the more control providers have over the inputs, the better they are able to effectively achieve the outputs. Providers can be contracted to self-monitor delivery. Client reporting along with measurable output requirements, user feedback and evidence of conformity help to reduce the fear of loss of control.

The client must explore the merits of an input versus an output specification for their unique circumstances. Input specifications are appropriate when the range of objectives, or outputs, cannot be fully defined. Output specifications are used when service objectives can be clearly defined and demand is relatively predictable.

It is the level of risk transfer which differentiates the two. Owing to the prescriptive nature of input specifications, a large proportion of service risk stays with the client; the problem with service delivery may be due to an incorrect client-defined requirement rather than an issue with the facilities services provider. Output specifications pass this risk on to the FM provider.

SLAs provide the key performance criteria by which success or failure in the relationship will be measured. They essentially give more details than the contract specification. SLAs, which although they are described as agreements are usually written by the client, must be detailed but they should not be so prescriptive about inputs that they prevent a supplier from seeking ways to do a better job and become more innovative. The SLA should:

  • Identify certain service levels or performance standards that the outsourcing contractor must meet or exceed
  • Specify the consequences of failure to achieve one or more service levels
  • Include incentives for performance that exceeds targets
  • Establish the level of importance of key service areas through a weighting system

The SLA can also contain the procedure for incorporating any changes that occur in the targets.

When determining the success criteria for an SLA, the factors that are critical to an organisation’s success must be considered. KPIs define a set of values used to measure against, and each critical success factor will contain KPIs to enable management to understand, measure and control progress.

The aim should be to select as few KPIs as required, focusing on quality not quantity.

Progress reports and discussions, project reviews, and comprehensive updates between appointed parties, and to agreed timescales are vital to the smooth-running of a contract. Performance management is now an integral part of many FM software packages.

As well as benching and scorecards, payment mechanisms manage the financial element of the client-supplier relationship by providing a template of user defined parameters for qualifying and measuring performance and quantifying the pain/gain share aspect. It incentivises the supplier to understand, control and minimise availability and performance risks.

About Sarah OBeirne

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