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Understanding the risk and rewards of outsourced FM contracts: The questions you should be asking

The recent advice from the independent Reform think tank included a range of recommendations to improve outsourcing outcomes. This includes “Statements of responsibility” – i.e. measures to make sure that civil servants are aware of their responsibilities. When negotiating private or public sector outsourced FM contracts what sort of questions should clients ask their contractors to help ensure that both parties understand the risk and rewards?

PUBLIC SECTOR CLIENT’S VIEW
CHARLES SIDDONS, 
HEAD OF OPERATIONS (SOUTH) NHS PROPERTY SERVICES LTD

The March 2019 ‘Please Procure Responsibly’ report from the Reform think tank identifies several common areas of failure and weakness in public sector procurement together with a series of recommendations to rectify these. These include improved central government support for contracting bodies, improved training and better transparency of contracts awarded. In addition, the report recommends the mandatory implementation of ‘statements of responsibilities’ and ‘responsibilities maps’ which should be modelled on the Financial Conduct Authority’s example, with the aim of ensuring all managers and directors along the supply chain are aware of their responsibilities and accountabilities in the event of failure.

Risk Management is a theme running throughout the report and, as the report makes clear, risk should be considered well before any procurement itself starts and should link to the fundamental question of why outsourcing is being considered in the first place and what is hoped to be achieved by the process.

Considerations of outsourcing should link to how this will support the organisation’s delivery of its purpose, goals and objectives. This should include an appropriate risk based assessment of delivery options including a ‘make or buy’ review.

In recognising the potential benefits of outsourcing, procuring bodies have to recognise the potential risks and rewards of doing so; risks to service delivery, cost or quality for example do not disappear by passing the responsibility to someone else. Engagement with potential suppliers and other client agencies at this early stage will help to determine the potential market appetite and how similar arrangements have performed elsewhere which can help prevent significant issues manifesting themselves later and ensure appropriate reward mechanisms are put in place.

The approach to risk management should be undertaken thoroughly, ideally with dedicated risk identification sessions to confirm potential risks, measure their potential significance, agree how each can be assessed, monitored and controlled. A risk profile should be created to pull into one place all of the risk information and to enable consideration to be given to the ‘total’ risk portfolio. At the pre-procurement stage this will help confirm important items such as which risks can reasonably transferred to a supplier, the level of contact variability and incentive mechanisms.

A structured best practice approach should be taken to any procurement itself (such as the RICS Procurement of Facilities Management professional statement and guidance note, or the Government Procurement Playbook) and suitably trained and skilled people have to be involved throughout the procurement and contract management life cycle.

All outsoucing arrangements should have effective governance in place, including measurement, reporting and meeting structures.

Questions in relation to contingency planning should be common as well those relating to any changes within the supplier organisation that could affect the contract in the short and longer term. This includes questions on the supplier business strategy, financial performance, key personnel changes, internal change programmes and lessons learned from any material events.

This is only a short response to a very large topic, however my final point is that whilst risk management is there to mimimise loss the same structured approach should be taken to manage the opposite – gain. 

FM CONSULTANT’S VIEW
MARK WHITTAKER, 
FM SOLUTIONS CONSULTANT AT THOMSON FM AND IWFM, REGIONAL CHAIR

From my experience, two major failings in facilities management contracting have been a clear disconnect between the parties involved and a disjointed approach to the procurement exercise, which has meant the contract has “got off on the wrong foot” right from the start and invariably has failed to recover thereafter.

From the contractors side, there may have been a lack of continuity between those who have ‘sold the dream’ to those who have to deliver it. Business development professionals sometimes can receive a bit of bad press for this, but the cause may not be as simple as that. Indeed, post award, some are actively discouraged not to be involved in the operational delivery of the mobilisation and early stages of the contract and to work on the next possible ‘sale’ project instead.

From a client perspective, have the procurement team involved the necessary operational people and consultancy support in preparing the groundwork prior to coming to market? This is precisely the point I made in my recent FMJ Magazine article (“Procurement Passage”, March 2019), where I encouraged organisations not to rush to market and ensure that all the necessary information is obtained in advance of procuring the service contract and to have a clearly defined destination/objectives in mind throughout the journey. So how can asking the right questions smooth the process?

If a public sector organisation is under severe financial pressures, for example, and cost savings need to be achieved, there is no harm is stating this clearly within the tender documentation and setting clear savings targets, as opposed to simply asking for “more for less.” It is also important to be consistent in the message; I recently read a public sector tender document containing three conflicting targets and timescales, within the one tender document.

The Reform think tank also specifically looked at the subject of ‘Social Value’ within public sector service contracts. The Public Services (Social Value) Act 2012 calls for all public sector commissioning to incorporate the “economic, social and environmental well-being” to become part of the service delivery measurables. An increasing number of public sector organisations are coming to the realisation that the delivery of social value is much more than simply a tick box exercise and needs to play a crucial role in the contract deliverables.

I believe that the ‘social value’ requirements must be clearly defined within the tender documents and the organisation needs to obtain firm commitments from their suppliers on what it will take the form of. The ‘Social Value Portal’, for example, is an excellent source of information on helping to define social value, the type of information/commitments they should be asking for from the suppliers and provide recommendations on the weightings the questions should receive within the tender process.

The final question I think they should be asking is regarding ‘cultural alignment’. It may not be easy to define, but must form part of any evaluation and on-going successful relationship management. Through carefully worded written and interview questions, they should be asking the supplier to demonstrate that they understand the culture and values of the organisation and how they can complement it. 

About Sarah OBeirne

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