More consolidation, less resource, limited finances. Does this sound familiar? Julian Fris, Director, Neller Davies, discusses whether recent market changes have contributed to smaller margins and, in turn, more pressure on the profitability of outsourcing contracts. In the past 10 years FM margins have roughly halved; many we see are now less than five per cent
So where are companies and organisations turning to in order to squeeze that extra few per cent out of their services? The answer? Procurement, of course.
There are few people who can argue that procurement is the ‘go to’ place when looking at ‘smarter’ operations, and the more efficient purchase of goods and services from suppliers.
Most progressive organisations will see procurement as one of their core strategic functions, however, the process itself wears many hats and the approach varies, particularly when it comes down to the old private vs public debate.
We have extensive experience in both the private and the public sectors and we see a big difference between the two.
Whilst there are variants, the public sector essentially operates four models for FM and catering; restricted, negotiated,dialogue and ‘light-touch’. If we take restricted and dialogue models (light-touch only concentrates on contracts up to the value of €186k and where there are significant levels of income), we can see some real advantages and some significant issues.
The restricted model basically involves a client putting a contract notice on OJEU (Official Journal of the European Union) or some other channels, identifying what type of service it requires. Suppliers see this online, they fill out a supplier questionnaire which includes requests for financial information and some specific details regarding the subject matter, and they can then put themselves forward to be shortlisted.
RESTRICTED – BEST AND FINAL
We then see a minimum of five bidders selected to go through to the next round. Bids are assessed on a ‘price and quality’ basis and the company which scores highest wins the contract.
This sounds pretty straightforward and fair, if you know exactly what you want.
However, what if you don’t? What if, during the tender process, you identify some gaps or changes you’d like to make in the brief? You are not able to change without starting the process again. Furthermore, what if you realise that, during the tender process, the company which scored the highest isn’t the right cultural fit for the organisation it is about to work with?
As we know, engagement and relationship are the backbone of a successful service-based industry.
The dialogue based approach is quite different. A so-called descriptive document is distributed through OJEU, organisations will go through a period of discussion and engagement with all stakeholders. This is likely to result in a brief that all parties are engaged with, however, it could take up to around 18 months to finalise – about double that of restricted.
Restricted is great if you know exactly what you want and have all the back-up data and policies. Dialogue is best for developing strategy but there is a danger that it can be open-ended. The negotiated procedure does give an opportunity for a best and final offer and works quite well with catering subsidies but you have to ensure that the process is fair and transparent.
On many public contracts, smaller businesses are at a disadvantage at the pre-qual stage because they have insufficient collateral. This means the bigger players will win every time.
The benefits, however, are clear – avoidance of fraud or corruption and strict procedures means that everything is transparent.
In the private sector, the major difference here is that organisations can invite companies they already know of and ask them to bid. The first impression is to say that they immediately rule out competition, but the onus is really on suppliers to engage with companies whose cultures match their own.
In a private sector tender process, suppliers or contractors go through a similar pre-qualphase and we will shortlist those who get through to the next round. The difference here is that we can all be flexible.
Whilst we’d follow strict competitive guidelines, we can work with suppliers to tweak and amend their bids along the way. Ultimately, this will serve the interests of the client and result in a better and more tailored end product or contract. This facilitates dialogue and encourages innovation.
This can also mean that SMEs are able to be in with a shout of competing as the client may be less risk averse.
More importantly, the companies shortlisted will also be measured on cultural fit throughout the process.
Any cleaning, reception, catering, grounds maintenance business can offer the right algorithm on paper but, as ambassadors for the end client, they will need to share similar values and blend into their environment. The wrong service provider can alienate customers and do more harm than good to the reputation and perception of the business. This naturally has a real impact on the bottom line.
Whilst ‘cultural fit’ can be open to misinterpretation and manipulation, the advantages, in our experience of adopting this approach when used properly can be fantastic and really reap rewards for clients, customers and contractors alike.
Isn’t any good business partnership based on a strong relationship? Well this needs to be a major contributing factor in the process. The public sector procurement channels, whilst strong on governance, limit the opportunities to test this, meaning there is a strong risk of the partnership failing from the outset if culture isn’t aligned.
The public sector is strong on process, discipline, governance, and compliance – it has to be. The public demands to know how its money is being spent and rightly so.
Many like to buy into the phrase that the ‘private sector is service driven and the public sector is process and cost driven’ – neither are bad and both can improve procurement processes.
There is no hard and fast rule. Public sector procurement processes can sometimes vary with each other just as much as they can with a private sector business.
So if the question is ‘which’ is better? The answer probably lies somewhere in the middle, or, it really depends on the appetite of the client. The private sector can learn a lot from the discipline of the public sector, however, the public sector can do more to ensure that it opens itself up to more opportunity for competition.