The procurement process for FM contracts relies heavily on maintaining low margins, which often requires striking a fine balance between keeping costs as low as possible while ensuring that a high standard of service is offered. Is it really possible to achieve both aims without short changing providers, clients and end users and what can be done to challenge the commoditisation of FM?
Does the process drive the low margins, is it the competition, or is there another reason? Looking back to where FM procurement has come from it can be true that the process has a lot to do with it, as it is commonly based on construction tendering methodologies from construction trained professionals. The openness and transparency of the tenders is very similar to the bills of quantities for construction, and with that transparency comes a lot of scrutiny, something that often does not bare close examination when it comes to service delivery. Add competition; need to win work and commercial volume to the mix and this opens a Pandora’s box that for years has been difficult for the FM Supply Market
With FM procurement professionals also come the procurement generalists, who have moved FM more away from service to a category, and with it closer to commoditisation.
So, with low margins and detailed service expectations from clients it is not uncommon for suppliers to seek to avoid costs without clients necessarily noticing, as a small way to either bolster the margin, or to create some tolerance in their commercial models that allows them to cope with service demands or scope creep. Or both.
If competition has historically driven low margins, why hasn’t the market responded by lowering service standards to match, or at least clearly articulating to clients what can be delivered for the price? This is difficult to unpick however one problem has been that FM has for a long time been an industry that lacks differentiation; for example how can you truly provide differentiation in maintenance and cleaning for example? So as a service provider, if you are struggling to differentiate what else can you do? The risk here is to oversell performance against a challenging commercial model, and this often only leads one way; client frustration.
There is some generalisation here granted, and there are a lot of very good companies and FM professionals who are looking to do things differently and provide their clients with excellent service, but there is definitely a gap between the sales pitch and reality at all levels, and pressure on differentiation and competition only exacerbates this.
So, if this describes the problem statement, is there a solution? Yes of course, but three protagonists need to work together.
First the clients, really challenging themselves to what they really need and require, and if those pages and pages of specifications and service expectations are really all realistic. It’s strange that many clients think they have moved to output based specifications, but still detail a whole load of inputs and requirements, many of which they are unlikely to notice if they have or have not been delivered.
Second are the procurement experts, often over complicating purchasing processes and services descriptions to a point where the procurement exercises become a huge burden on the supply chain, and in some cases with performance formulae move FM into the realms of a science rather than a service.
And lastly the service provider. The ones who have to make it all work. Be open, honest and not oversell. Focus on getting a good service in place for a prolonged period before offering the world through innovation. ‘Business as Usual’ is not to be frowned upon; it’s an essential step and the bedrock from where great service can emerge.
In the last few years the improvements in product performance and technology, combined with clients focusing on The Future of Work, Sustainability and Wellbeing provides FM with the opportunity to move away from commoditisation to true value add, something that it has be trying to do for many years, it just needs everyone to work together; and it doesn’t have to cost the earth.
The market for FM services continues to develop and the expectations on FM service providers to satisfy all stakeholders becomes increasingly demanding. In an environment under pressure to reduce cost whilst maintaining service levels across complex integrated services collaboration and innovation is key.
FMs have a good understanding of their clients’ needs and the necessity to find the best value package possible. This means the best service and price proposition not the lowest price which often comes at a cost to service.
Low margins are economically acceptable if supported by high volumes of work. FM contracts are no different; the difficulty is maintaining high standards and reputation. There are industry trends for outsourcing and self-delivery. The latter, also referred to as ‘bundling’, is often seen as a way of recouping margin erosion but takes investment to offer a long-term solution. Self-delivering multiple services or bundling, whilst in theory seems a realistic solution, can create its own problems. Recruitment, training and technology for instance can be expensive and involves long-term commitment and the requirement for secure contracts. As a result, self-delivery often reverts to an outsourcing arrangement.
Outsourcing is becoming a more common feature amongst FMs that involves transferring risk to service providers while commoditisation of core services threatens margins.
FM service providers need to rebuild confidence that outsourcing is the best option in delivering a service and price proposition that can benefit all stakeholders – starting with over-arching relationships between the client, FM and service provider that are based on the same value-driven ideas.
Through market segmentation specialist providers are at the leading edge; applying best practice in product/service development and distribution. Investing in their specific service through technology and people to differentiate the service from those seeking to use technology to provide low margin, low quality services. Few integrated companies can provide these capabilities in-house at the same level.
Aimed at building long-term relationships and working towards committed values, specialist providers can differentiate themselves, reduce cost and increase efficiency and effectiveness that can out-perform a company, whether FM or not, that is trying to deliver multiple services. Investment concentrated on single services brings benefit to the services offered. Through experienced, well-trained specialist (and loyal) engineers, and investment in technology designed to meet customer expectations, greater saving can be offered to the end client whilst still maintaining service levels.
FMs should be asking service providers at the PQQ and tender stages to demonstrate how their core values mirror those of the FM and what added-value they can bring. A service provider differentiates itself through quality and delivery of its service, combined with its ability to share the client’s responsibilities. Contracts that are awarded mainly on price are at risk of failing due to lack of understanding or expertise. Sustainable long-term contracts are based on partnership, creative problem-solving and excellence of technical delivery. FMs who value technical expertise above low-cost service provision will be offering their clients a proposition that is service-driven and sustainable.