Managing Risk in Facilities Management Outsourcing

Managing Risk in

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Executive Summary ... 2

Introduction ... 3

Understanding Outsourcing, Understanding Risk ... 5

The IFM Value Proposition ... 5

IFM Outsourcing Risks Explored ... 7

Risk Management Overview ... 10

1. Preparing for Outsourcing ... 11

Understanding Client Operations ... 12

Creating Ownership in the Client Organization ... 13

Service Provider Capability Presentations... 15

Preparation Checklist ... 16

2. Service Provider Selection ... 17

Understanding the Service Provider ... 18

Evaluating the Proposed Service Delivery Solution ... 20

Critical Systems and the Outcome Based Statement of Work ... 23

Modularity ... 24

Enabling the Best Proposal ... 25

3. Structuring the Outsourcing Deal ... 27

Budget Risk ... 27

Pricing Structure... 29

Budget Controls ... 31

Service Provider Employees ... 31

Contract Termination ... 32

4. Deal Negotiation ... 34

Single vs. Parallel Negotiations ... 35

Negotiation Details ... 35

5. Transition and Transformation ... 38

Transition ... 38

Transformation ... 39

6. Service Provider Governance ... 41

Role Definition ... 43

Operational Responsibility Matrix ... 43

Dispute Resolution ... 44

Growth and Change ... 44

Conclusion... 46

About Agile OAK ... 48

About The Author ... 49

Acknowledgements ... 50

T

ABLE OF

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Integrated Facilities Management (IFM) outsourcing can be an appealing, yet complex option for Facility Owners (Clients) seeking efficiency and cost certainty in the delivery of Facility Management

(FM) services. Many Clients are concerned by the potential risks

associated with turning over broad responsibility and accountability for the Facility Operations and Services portion of their business to a third party Service Provider.

However, through understanding risk and then managing it correctly throughout the entire outsourcing process, Clients can leverage the benefits of IFM outsourcing while ensuring that they operate within an acceptable risk environment. Operational efficiency and cost reduction can be delivered by an IFM outsourcing deal that understands, manages and mitigates risk and provides for a well structured relationship with a Service Provider.

This whitepaper discusses, in detail, the process by which a Client can successfully understand and manage the risks associated with IFM outsourcing. A step by step approach is taken through each phase of IFM outsourcing including; preparation, Service Provider selection, deal structure & negotiation, transition, transformation and post deal Service Provider governance. The key elements of risk management associated with each phase are discussed, and checklists provided which summarize the essential risk management activities.

E

XECUTIVE

S

UMMARY

“This white paper

discusses, in detail, the

process by which a

Client can successfully

understand and manage

the risks associated with

IFM outsourcing.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

I

NTRODUCTION

more common strategy for organizations with larger, complex facilities portfolios, regardless of their specific industry. While many facility organizations have described themselves as self-performing FM services, in most cases self-management of service delivery would be a more accurate portrayal. Depending upon the size of operations, it is not unusual for Clients to be heavily “out-tasked”. In this context, “out-tasking” refers to using third party Vendors to deliver, individually, a limited scope of work. Typically out-task vendors have accountability for work execution but limited performance accountability. Outsourcing refers to using one or few Service Providers to accept performance accountability for a broader scope of FM work. The number of Vendors under contract to one Client for facilities services in an out-tasked environment can range from a few dozen to a few hundred. The largest Clients may even see over a thousand out-tasked Vendor agreements put into place.

Prior to full IFM outsourcing, there may be some FM services which are outsourced with performance accountability. These might include cafeteria and other food services, janitorial services, and security. It is also common to out-task specialized maintenance, with the Client retaining the broader responsibility for the overall program. In this environment, the Client may self perform routine preventative maintenance and repair work while out-tasking specific components. Out-tasked work might include mechanical repairs on equipment such as elevators, overhead doors and vehicle fleets, as well supplemental maintenance and the maintenance of critical systems such as high voltage electrical and the uninterruptible power supplies.

Managing multiple Vendor relationships is not an easy task. In terms of administration, the number of staff needed to effectively monitor numerous out-tasking agreements can become unwieldy. This can consume significant management resources that could better be spent elsewhere. Other out-tasking inefficiencies can include:

 Excessively high Vendor labor rates

 Call-out charges for labor

 Minimal vendor accountability for asset performance

 Improper invoicing and billing practices

 High management overhead

 Unfavorable contacting terms

“Typically out-task

vendors have

accountability for work

execution but limited

performance

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

I

NTRODUCTION

are increasingly consolidating the delivery of their facility services under the care of a single or small group of Service Providers. This IFM Solution can create cost-saving efficiencies. It can also transfer broader FM performance accountabilities to the Service Providers in question.

An IFM relationship may introduce a unique risk profile when it comes to operations, service delivery, and finances. However, these risks, while different than self managed service delivery, are not necessarily incremental. Correct management of these risks is not necessarily any more difficult than self management of service delivery. In fact, in some cases, these different risks may be easier to mitigate then in the self managed scenario.

This paper explains how outsourcing risks can be better understood managed and mitigated in order to achieve the balance of service delivery and cost savings that an organization looks for from a strategic outsourcing relationship. Risk management will be examined at every step of the outsourcing process.

“An IFM relationship

may introduce a unique

risk profile when it

comes to operations,

service delivery, and

finances.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

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NDERSTANDING

OUTSOURCING

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The IFM Value Proposition

Integrated Facilities Management Outsourcing is appealing for many reasons, but the key value propositions are as follows:

 Cost reduction and certainty

 Increased strategic focus

 Better access to Facility Management technology and best

practices

 Improved workforce training and management

 Data-driven performance benchmarks

 Increased operational flexibility

 Transfer of some financial and operational risks to Service

Providers.

When applied wisely, an IFM solution can not only reduce costs, but improve cost transparency and bring future cost certainty, even in the face of changing service requirements. Moving beyond costs, the IFM solution may also allow companies to regain their strategic focus. Resources can be moved from FM to the core business, which is helpful even if the internal services being replaced are already operating at a high level of performance.

The ability to manage outcomes in place of the workforce itself also presents important benefits. Moving to an IFM model shifts management from a personnel focus to a focus on process, metrics and contractual discipline. This enables the FM department to operate in a more strategic manner. Greater attention can be paid to long term space and portfolio planning and the support of asset acquisition and disposal activities. Infrastructure and services can also be better matched to business unit requirements. In addition, Service Providers have the potential to offer access to state-of-the-art techniques and personnel training, along with best practices at a lower cost than would be possible if they had to be developed internally.

“Moving to an IFM

model shifts management

from a personnel focus to

a focus on process,

metrics and contractual

discipline.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Outsourcing enables the Client to evaluate performance through data-driven benchmarks. The IFM model’s inclusion of detailed financial and performance reporting often offers companies their first chance to access this type of resource. This can provide a more objective view of operations. Service Providers can also be capable of greater flexibility than internal solutions when it comes to scaling services or dealing with unforeseen future needs. For example, Service Providers have much more flexibility to adjust internal headcount and the use of third party (sub-contracted) vendors in order to achieve cost and performance targets. In contrast, internal organizations are typically headcount constrained, irrespective of whether this is the most cost effective solution. Finally, a good IFM outsourcing deal can transfer a healthy degree of financial and operational risk from the Client to the Service Provider. The question of risk must be addressed when it comes to implementing IFM outsourcing. Organizations often have valid concerns about cost overruns, service underperformance and a loss of organizational knowledge. The perceived loss of direct control that goes along with handing over the reins to a third party can also cause a Client to feel that they are exposed to greater risk than may actually be the case. Clients often perceive that services no longer under their direct control may be performed to a lower standard, as Service Providers do not have the same ‘stake’ in service delivery that the Client does. This extra sensitivity may reduce the objectivity of the Client when evaluating their risk exposure.

Direct control over services does not guarantee that the Client will be free from operational failures or issues, however. Many of the same risks that concern a Client with regards to outsourcing are also faced by internal operations. Consider the possibility of injury due to arc flash, HVAC failures in a vivarium, the impact of a major sewer line break or the loss of power to a data center. This author has personally seen these risk events occur at organizations which described themselves as “self-performers”.

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NDERSTANDING

OUTSOURCING

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ISK

“Many of the same risks

that concern a Client

with regards to

outsourcing are also

faced by internal

operations.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Many self-managed organizations have lost the capacity to train and develop new personnel due to on-going headcount reductions and an aging workforce. A Service Provider has the resources and competencies to attract, develop and retain the technically skilled workers required to focus on a specific area of service. Clients can also negotiate the contractual flexibility to replace under-performing personnel much more quickly than they would be able to in-house. Likewise, a combination of incentives and penalties can be used to ensure that Service Providers perform according to expectations. This is much harder to accomplish internally.

A rational assessment of the pros and cons of both models is an important part of any decision to outsource. This includes understanding risks and how they can be managed both internally and by a third party. Outsourced service delivery is not free from risk, but while the risk profile presented does differ from a self managed service delivery solution, it is not necessarily any greater. IFM Outsourcing Risks Explored

The following risks are typically associated with IFM outsourcing:

 Critical failures

 Service Provider underperformance

 Financial underperformance

 Cultural rejection

 Loss of knowledge

 Labor risk

Those which attract the most Client attention are usually the operational failures labeled as critical failure risks. These include critical asset failures and service interruptions, such as the loss of utilities or power at an important data center or research lab. These can substantially impact an organization’s core business. Poorly maintained equipment may require expensive replacement, which is not only costly but can also create a further risk of service interruption. Other critical failures include considerable safety or regulatory requirements issues.

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OUTSOURCING

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“Outsourced service

delivery is not free from

risk, but while the risk

profile presented does

differ from a self

managed service delivery

solution, it is not

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

U

NDERSTANDING

OUTSOURCING

,

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While these risks are indeed serious, it is Agile OAK’s experience that as Service Providers have become much more technically proficient and sophisticated these types of failures are not the most likely areas where problems arise when outsourcing. Additionally, Clients can manage these risks by ensuring Critical Systems or activities are clearly identified, and by taking a more prescriptive, as opposed to outcome based orientation towards this work. This is discussed on more detail later in the paper.

Consistent underperformance by a Service Provider can have a more pervasive impact on operations, and one that may be more difficult to rectify. Over time, errors in service delivery that may seem minor at first can add up and require costly management time and attention to handle. This can include delays in technology implementation, documentation issues, weak reporting and a lower than expected quality of service provision. Chronic under-performance of Preventative Maintenance activities of critical assets may have minimal impact early in the relationship, but result in premature asset failure and increased life-cycle cost of ownership.

Cost overruns are also a serious area for concern. Contractual protections are not always a guarantee against this type of risk. The absence of effective budget controls can hide accrued expenses and other overspending until well past the point of intervention. Compounding the issue is the fact that Clients often feel obligated to help offset these types of cost overrun. This is done in order to preserve the relationship with the Service Provider.

There are other, more subtle risks involved in FM outsourcing. There is always the chance that workers will reject a transition from the Client to the Service Provider. This can occur due to reduced benefits, pay, or privileges associated with the change. Workers may also not be comfortable with the new culture they encounter at the Service Provider. Job performance can suffer if employees feel as though they have been abandoned or poorly treated as a result of the outsourcing. There is also the risk that labor may respond to proposed outsourcing by organizing against it and disrupting operations. Some Clients may encounter particular resistance due to company seniority and salary policies. This can

“Job performance can

suffer if employees feel

as though they have been

abandoned or poorly

treated as a result of the

outsourcing.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

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NDERSTANDING

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be seen when certain employees are earning well above market

wages for the work they are performing.

In the face of an outsourcing deal where wages and benefits are reduced to market competitive levels, the risk of significant labor dissatisfaction and potential disruption can be greatly increased. In these scenarios it is important that the Client and Service Provider plan for reduced level of Client to Service Provider employee transitioning and provide increased management support and oversight during the early phases of the transition.

Employee transition can also impact the knowledge base of a Client. If the process is not well managed and key employees leave the organization, then it may result in the loss of vital operational knowledge. While Clients still have access to employees once they have been transferred to the Service Provider, there is the risk that they may leave or get moved to a different account. This type of skill loss can be difficult to replace. Appropriate contractual structures help minimize the risk that key employees will unexpectedly by transitioned to a different account.

“Employee transition

can also impact the

knowledge base of a

Client.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

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NDERSTANDING

OUTSOURCING

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Risk Management Overview

While the risks associated with Outsourcing are important to manage, they are often different rather than incremental to the risk associated with the self-performance of services. As a result we need to refine our risk management strategies.

The most effective method of dealing with these risks is for the Client to manage them at every step of the sourcing process. Being aware of the overall risk picture enables Clients to make planned decisions about strategies to mitigate, transfer or accept each potential risk involved on an individual basis. Not only does this lead to the creation of a more customized risk management strategy, but it also introduces flexibility both while negotiating and when later implementing an outsourcing solution.

The risks associated with each of the six (6) major phases of an Outsourcing initiative are now examined:

Prior to initiating the search for a Service Provider, Clients must have a solid understanding of their own outsourcing needs. During selection, Service Providers must be able to demonstrate that they can deliver the promised services. A clear contract must effectively communicate Client needs and Service Provider obligations. Finally, Service Provider governance processes are required to ensure well defined performance oversight and avenues of communication between the Client and Service Provider.

1 Preparing for Outsourcing

2 Service Provider Selection

3 Structuring the Outsourcing Deal

4 Deal Negotiation

5 Transition and Transformation

6 Service Provider Governance

“A clear contract must

effectively communicate

Client needs and Service

Provider obligations.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

RISKS ASSOCIATED WITH PREPARATION FOR OUTSOURCING

Issue Risk Implication Baseline Client cost and

performance not well understood

 Service Provider bids have no internal baseline

for comparison

 Service levels inappropriate or undocumented  Higher than expected costs &

underperformance

Unclear goals & priorities (cost, technical support, operational flexibility etc…)

 Service Provider evaluation criteria not correctly

established

 Performance expectations not correctly defined  “Wrong deal with the wrong service provider”

Lack of alignment on “Scope of Work” to be outsourced

 Multiple changes to the Scope of Work during the

bid process resulting in documentation and bid errors

 Additional costs and delays in outsourcing

process

 Gaps in the final “Scope of Work”, gaps in

service delivery, cost escalation

Lack of stakeholder buy-in (Legal, Finance, IT, Purchasing, HR)

 Additional requirements imposed on process

delaying implementation & increasing costs

Deal signer not identified

 Additional requirements imposed at deal close

resulting in delay and loss of negotiating leverage

Outsourcing initiative not informed by market capabilities

 Outsourcing does not fully leverage market

capabilities.

 Suboptimal cost and operational performance

The preparation phase of FM outsourcing is the period during which the Client’s mandate to outsource services is established, baseline information gathering performed and the business case established. External market capabilities are evaluated but formal Service Provider evaluation is deferred until Vendor Selection.

From the beginning, it is crucial for the Client to establish a clear definition of their outsourcing goals. What are the driving forces behind the desire to seek out this type of solution? What costs can be lowered through outsourcing, and what areas of operation can be made more efficient? What service levels can be improved? The priorities and objectives determined at the beginning serve as a guide to building a solid service contract.

The outsourcing risks associated with the preparation phase may include:

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“The priorities and

objectives determined at

the beginning serve as a

guide to building a solid

service contract.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Understanding Client Operations

The first step towards establishing these goals is to obtain a good picture of current operations. This includes developing and documenting a baseline from the financial, performance and service level perspectives. In many cases, a Client may have an intuitive understanding of the service levels that they would consider appropriate, but have difficulty communicating it to a third party in the form of quantified, documented performance requirements. There may be no specific hard guidelines or expectations concerning service performance. This is compounded by the difficulties in accurately accounting for the cost of in-house service delivery.

Facilities spending is not always carefully aligned with the accounting department’s General Ledger codes. Some costs might also be co-mingled with other areas of spending, or be incurred outside the FM organization. A thorough activity-based view of costs is often required to gain a true financial perspective of the situation. It needs to identify all employees, contractors and vendors delivering FM services and tracking the costs of each. To do this accurately, the Client must recognize that many resources divide their time between FM and non FM activities. This division needs to be accounted for in the baseline cost determination.

Third party Vendors may be delivering fifty percent or more of the services. It is important to identify these vendors, understand the services they deliver, the cost of service delivery and the nature of the business relationship.

Some of the existing vendors will be in purely transactional relationships and it will be a straightforward matter for an Integrated Facilities Service Provider to transition or replace these relationships. Other Vendors may have strategic relationships with the Client’s organization or be providing business critical services. It will be important to not only understand the scope and cost of these services, but to establish a strategy for how these vendor relationships will be managed. For example the contract could be transitioned to the incoming Service Provider or the contractual relationship could be retained in house, with the Vendor’s work managed by the Service Provider.

1. P

REPARING

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“A thorough

activity-based view of costs is

often required to gain a

true financial perspective

of the situation.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Finally existing Vendors often have direct relationships with facility customers. A good vendor communication strategy is required. In the absence of communication, vendors may go directly to FM customers to advocate their concerns about IFM outsourcing. It will also be necessary to establish a customer communication strategy so as to ensure that FM customers are clear on the goals and risk mitigation strategies of the outsourcing initiative.

The Client also needs to establish a clear financial and performance baseline against which they can compare possible gains in efficiency as well as cost savings from outsourcing. This makes it easier to effectively communicate service level and budget expectations to a Service Provider.

Creating Ownership in the Client Organization

Once these outsourcing objectives have been clarified and documented, the Client needs to ensure that they are understood across the entire organization. Supporting business units should be consulted regarding the proposed operational changes, and given the chance to offer their input. This means approaching the legal, purchasing, IT, human resources and finance departments in order to identify contractual personnel and discuss integration with a third party Service Provider. It is important to enroll the support of these key personnel in the venture.

Facility Business Unit Customers should also be consulted regarding the proposed change. It is necessary to identify their concerns so that these can be addressed during the process. In many cases, internal employees or in some cases vendors will approach customers and, in an attempt to derail the initiative, raise concerns regarding possible impacts to service delivery. It is vital for the team leading the outsourcing initiative to preempt this conversation.

Involving these groups from the outset helps lower the chance that unanticipated issues may hinder the deployment of the outsourcing initiative. The input of these groups can also be helpful when it comes to the details of merging operations with the chosen Service Provider. In particular, knowing how to apply IT and HR policies to the proposed contract is an important aspect of preparation.

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“Supporting business

units should be consulted

regarding the proposed

operational changes, and

given the chance to offer

their input.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

A lack of understanding or the wrong information from any of these groups can undermine the expected business case, require restructuring of the proposed service delivery solution and both delay and increase the cost of implementation.

For example, Information Technology’s involvement is required to ensure that any Service Provider technology solutions can be properly integrated with the Client’s systems. IT involvement can also guarantee that appropriate security and data integrity protocols are observed. Failing to understand IT requirements or engage the IT department in the vetting of proposed solutions runs the risk that implementation will be blocked when the Service Provider attempts to deploy their solution. There is also a risk that if IT is not kept apprised of the project, constrained IT support resources will not be available in a timely fashion to resolve issues when they do arise.

The Client must ensure that those serving as contacts in these partnering business units can truly represent their function. It is vital to avoid a situation where incorrect advice has been given. For example, failure of a Service Provider inform a Client of the correct HR policies regarding severance packages and employee transfers from the start can lead to difficult staffing situations later on at the point of service transition. If properly engaged, these departments may be willing to be flexible with their policies. This can help point to creative solutions to problems which seem difficult or insurmountable.

Finally, it is also important that the Client’s senior management maintain ownership of the outsourcing right from the beginning. Knowing who exactly will sign the deal and keeping the senior management team “in the loop” throughout the process is essential. Failure to do so can create the possibility of signing delays or refusals at the last minute. By being aware of the decision maker deal requirements and ensuring on-going discussion with respect to deal progress, costly setbacks can be avoided at signing time.

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“IT involvement can also

guarantee that

appropriate security and

data integrity protocols

are observed.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Service Provider Capability Presentations

In some outsourcing deals, Client’s are developing Request for Proposals (RFP) without being informed about current service provider capabilities. Service Providers have made significant investments in recent years to improve capabilities. These include investments in personnel, technology, training and the acquisition of local vendors. As a result, perceptions of Service Provider’s skills and capabilities can quickly become outdated.

Failing to do this risks the possibility of going to market with a Scope of Work which does not fully leverage Service Provider capabilities. Having a series of Service Provider capability presentations, at the outset of the outsourcing process can have a number of benefits including:

 Allowing the “Scope of Work” to be informed by updated insights

 into Service Provider capabilities

 Reducing the resistance to outsourcing which stems from a lack

of familiarity or relationship with Service Provider

 Enrolls the Service Provider in the sourcing process, increasing

responsiveness and their level of engagement.

Effective capability presentations should be about two hours in length. The focus should be informative (a dialogue about capabilities and possibilities) as opposed to evaluative.

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“Effective capability

presentations should be

about two hours in

length.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Outsourcing Preparation Checklist

Establish a reliable financial and performance baseline for current

performance 

Determine clear financial and performance objectives for

outsourcing 

Establish a complete picture of third party Vendors and their

contracts 

Create alignment with, and understand of, the requirements of internal stakeholders (Finance, IT, Legal, HR, Sourcing / Procurement etc…)



Ensure that the “deal signer” is identified and requirements clearly

understood 

Establish a communication strategy and plan for all involved stakeholders (impacted employees & Vendors, FM customers & the internal stakeholder groups)

 Preparation Checklist

While there is often a desire to fast-track outsourcing initiatives, proper preparation will prevent delays later in the process. It is an important step in mitigating post deal financial risk, late changes in the scope of work and, ultimately, gaps in service delivery performance.

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“While there is often a

desire to fast-track

outsourcing initiatives,

proper preparation will

prevent delays later in

the process.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

RISKS ASSOCIATED SERVICE PROVIDER SELECTION

Issue Risk Implication Service Provider

doesn’t understand Client requirements

 Service provider does not provide their optimum

service delivery solution

 Disruptive post start-up “trial & error” period as

services are reconfigured

 Cost escalation & missed expectations

Client doesn’t understand Service Provider’s

organizational structure

 Client unable to properly evaluate Service Provider  Client checks inappropriate references

Service Provider not capable of fully delivering services

 Service delivery errors

 Excess costs as Client supplements staffing to

ensure service delivery

 Risk to operations

Pricing not realistic or does not meet desired business objectives

 Unexpected cost escalations  Credibility of initiative at risk

Key to outsourcing success is the identification of the best fit Service Provider. The foundation for this is having a good understanding of current state operations and business requirements as discussed in “Preparing for Outsourcing”. During the selection phase efforts are focused in two areas.

 Assessing the Service Provider’s organization and capabilities

 Evaluating the Service Provider’s proposed service delivery

solution

It must be determined if the Service Provider has the capability to effectively deliver services. With this capability established, the Client’s focus should be on ensuring that the proposed Service Delivery solution is optimized to meet Client requirements. This will enable effective mitigation of the inherent risks associated with Service Provider selection:

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“Key to outsourcing

success is the

identification of the best

fit Service Provider.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Understanding the Service Provider

There are a number of Service Provider characteristics which ought to be considered in the evaluation of potential service delivery partner.

 Geographical Footprint: Can the Service Provider effectively

deliver services in the geographical regions requiring support?

 Proven processes: Do their processes reflect the technical competence, knowledge and expertise needed to transform Client operations?

 Personnel: Will the Client be provided with a capable and well-motivated workforce and be given the tools needed to manage that workforce?

 Technology: What are the specific technological capabilities of the Service Provider?

 Partnering and cultural fit: Will the Service Provider be able to

build a successful partnership with the Client and be effective in delivering services in the context of the Client’s business environment?

 Third party vendor relationships: Does the Service Provider offer

leveraged third party Vendor relationships?

 Business stability: Is the Service Provider financially stable? Is there confidence that the Service Provider will be reliably available over the life of the agreement?

 Relevant Experience: Does the Service Provider have industry

experience with accounts of similar size and complexity as the Clients?

Seeking out feedback and references from prior clients will give the Client a track record from which to project future performance. This can help to validate Service Provider capabilities. It is also important to understand any of their specific limitations. These could include geographical presence, the size and flexibility of their company as well as the technologies that they plan to use. It can also be useful to ask for specific examples of their work methods, performance reports and other tangible proofs of their capabilities. These can provide specific insights into how Service Provider work processes are designed and executed.

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“Seeking out feedback

and references from prior

clients will give the Client

a track record from which

to project future

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

The Client should also seek to understand the Service Provider’s internal structure. Service Providers can have a range of different organizational structures. These can be set along geographical boundaries, industry verticals (Life Sciences, Education & Government) or service lines (Construction, Engineering, Facilities, Real Estate). When vetting a Service Provider, the Client must take care to ensure that the business unit they are examining is the same one that will be providing the services. It is essential to make contact with personnel from that specific business unit. It can also be valuable to delve into the Service Provider’s structure to see how each business unit coordinates with the other.

Equally important is the access a Service Provider has to relevant ‘experts’. Experts sourced from the Service Provider business unit providing services may be preferable, as this reduces the possibility that a Service Provider’s internal transfer pricing requirements may create limited access to expert resources.

The Client should inform themselves as to what services the Service Provider will self-perform, and which will be handed off to subcontracted Vendors. A Service Provider with a high level of self-performed services needs to show the ability to hire, train and develop their own personnel. If instead the emphasis is on subcontractors, then good procurement practices and strong relationships should be apparent.

It is essential to understand the relationship that the Service Provider has with their subcontractors. The maturity and scale of these relationships can have an impact on service delivery. Newer relationships may not work out as well as those which have been in place longer, and on the other side of equation, a mature relationship runs the risk that complacency could affect performance. Service Providers who have larger scale relationships with a specific contractor can also exert more leverage when it comes to pricing, performance and responsiveness.

When the reliance of subcontracted Vendors is high, Vendor cost transparency is important, so that the Client can ensure an efficient contractual agreement.

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ERVICE

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S

ELECTION

“A Service Provider

with a high level of

self-performed services

needs to show the ability

to hire, train and

develop their own

personnel.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Evaluating the Proposed Service Delivery Solution

If a Service Provider has shown that they have the ability to deliver the required services effectively and efficiently, the question then becomes whether the proposed service delivery solution itself is the best fit for the Client. Typical criteria when evaluating solutions are:

Service Delivery Solution: Is the described solution suitable to realize delivery of all services and service levels?

Flexibility: Is the proposed solution adaptable and scalable to meet both current and projected future requirements?

Technology: Is the technology appropriate and can it be integrated with existing Client systems? Can it be transitioned to the Client if services are terminated?

Bid Template: Is the service delivery solution proposed accurately reflected in the financial bid template?

Financial Proposal: Does the bid meet the expectations required?

Personnel: Are the proposed personnel well equipped to deliver the proposed solution?

A good RFP needs to incorporate a detailed bid template which itemizes all service delivery resources. Personnel should be individually listed along with their associated salary information; sub-contracted services should also be itemized.

The RFP should also include detailed information about the Client’s site, the assets that are being maintained and the current service delivery solution. This helps to ensure that the Service Provider is able to develop a solution based on a full and complete understanding of the Client’s service delivery expectations. A copy of the Client’s proposed contractual terms and conditions also needs to be provided for detailed markup. While RFP structures can vary, the checklist over the page lists the complete elements of an effective proposal package.

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“The RFP should also

include detailed

information about the

Client’s site, the assets

that are being

maintained and the

current service delivery

solution.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Components of An Effective Request for Proposal (RFP)

RFP Master (Instructions & Service Provider Questions) 

Statement of Work 

Critical Systems List 

Service Level Agreement 

Key Performance Indicators 

Contract Terms & Conditions (Proposed Agreement) 

Bid Template (Becomes part of contract financial schedule) 

Existing Vendor Spend (If Applicable)

Asset & Equipment Lists (Transferred and Retained)  Standard Operating Procedures (If Applicable) 

Work History (If Applicable) 

Site Information 

Payment Terms and Financial Schedule 

Existing Organization Chart and Staffing Model (If Applicable) 

Preferred Supplier List 

Contract Attachments 

This RFP structure assumes a fairly “open” bid process. When using this approach the Client is disclosing as much information as possible in order to be able to ensure that the Service Provider is providing a fully informed solution. This approach enables negotiation of firm pricing and mitigates receiving “offers conditional on post deal due-diligence”. The information package can be considerable in some cases. In order to accelerate the bid process, it is often effective to initiate the solicitation with a “Core Bid Package”, with supplementary information provided later in the processes.

Some Client organizations prefer “blind” bid processes, where baseline information is not disclosed. This approach is used when the organization wishes to ensure “grounds up pricing”. This can be effective, although it can be more difficult to persuade Service Providers to accept the same level of contractual commitment for pricing or “Dragnet” clauses to protect against escalations through

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“Some Client

organizations prefer a

“blind” bid processes...

This approach is used

when the organization

wishes to ensure

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

A structured discussion or ‘Yellow Pad’ session between the Client and the Service Provider after the issuing of the RFP can lead to a more tightly focused response from the Service Provider. This session gives the Service Provider a chance to ask detailed questions about the Client’s site, expectations and the RFP document itself. As a result, the Service Provider can respond to the RFP in a manner which is much more tightly tailored to the Client’s requirements. The RFP must be data driven in order to provide an accurate explanation of the solution which is being sought. For example, when inquiring about a reliability-centered maintenance program, in addition to requiring the Service Provider to describe the proposed processes the Client might also ask what percentage of failure events would be subjected to Root Cause Failure Analysis. Likewise, when asking about sub-contractor management strategies the Client should inquire as to what percentage of sub-contractor invoices are audited for accuracy. The RFP needs to be specific in order to solicit a specific proposal in return.

It must also be clear how the Service Provider intends to implement Service Delivery and transform FM performance. The RFP should require the Service Provider to provide a compelling set of Transition and Transformation plans as well as a description of the resources which will support implementation.

Pricing should be based on Service Provider acceptance of the Client’s contractual terms and conditions. The Service Provider may not necessarily agree to all terms and conditions, but proposed pricing must not be contingent upon Client acceptance of the Service Provider’s contractual red-lines. Failure to ensure these requirements exposes the Client to potential price escalation during the negotiation process.

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“Pricing should be

based on Service

Provider acceptance of

the Client’s contractual

terms and conditions.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Critical Systems and the Outcome Based Statement of Work In general, when working with an IFM solution, the objective is to be focused on achieving outcomes, as opposed to specifying tasks. For example, the Client wants to sustain a comfortable safe work environment at the minimum cost of ownership as opposed to specifying specific preventive maintenance activities on an air-handler or chiller for example. The Client expects the Service Provider to perform and optimize these tasks to achieve the desired result.

The potential risk to the Client is greater when dealing with “Critical Systems”. These are the systems which due to their connection to the core business, their cost, their complexity or attached regulatory requirements would pose significant risk to the Client if maintenance and operations were not performed to the required standard.

Critical systems (and the dimensions of criticality) are uniquely defined for each Client. These may include uninterruptable power supplies supporting data centers or trading floors, heating ventilation and air conditioning systems to pharmaceutical labs or specialty utilities supporting manufacturing processes. Risks of improper maintenance and management of these systems can be safety, environmental, operational, financial or regulatory. To mitigate these risks it is essential to first identify the critical systems. Special care should be taken to evaluate Service Provider’s capabilities and experiences managing these systems. Additionally, many Clients prefer to take a prescriptive, as opposed to outcome based approach to determining how these systems will be operated.

When adopting a prescriptive, as opposed to outcome based approach, the Service Provider is expected to follow Client defined work methods or standard operating procedures. Additionally, Service Providers may be necessarily constrained from changing third party Vendors delivering services to these systems. This ensures continuity of approach and minimizes potential risk events.

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“Critical systems (and

the dimensions of

criticality) are uniquely

defined for each Client.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Over time, as the Service Provider demonstrates an increased understanding of the technical nature of the systems and their impact on operations, the Client may elect to allow the Service Provider more control over strategy for the maintenance and management of these systems. Even when this is the case, changes to critical systems operations and maintenance routines should be reviewed and approved by the Client prior to implementation.

Modularity

From the Client point of view, complete transparency of the proposed service delivery solution is essential. Modularity is also key. A modular proposal requires the Service Provider to describe and cost each element of service delivery independently. For example, this means separating out items such as janitorial services, maintenance, security and pest control and costing each service separately. For bids involving multiple sites, each site must receive its own service specific costing.

In order to receive a modular proposal, the Client must assemble a modular RFP which explains the broadest possible Scope of Work (SOW) being considered. It is far less risky to remove Scope late in the processes than to add additional Scope. In combination, these two characteristics can allow a Client and Service Provider to go line by line through the proposal. If necessary, a specific component of the service delivery solution can be removed (and the cost impact clearly understood) if the Client is not confident in the Service Provider’s service delivery capabilities or satisfied with the associated pricing.

A proposal which addresses each aspect of the SOW on a one-to-one basis helps to ensure that both parties clearly understand the resources associated with each element of the service delivery solution. This level of detail allows the Client to truly understand the proposed solution and assess its suitability with regards to their specific needs. It also enables a more comprehensive, precise, comparison of proposals across Service Providers.

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“In order to receive a

modular proposal, the

Client must assemble a

modular RFP which

explains the broadest

possible Scope of Work

(SOW) being

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

By going to market with a clear description and proposal for the full suite of services being considered for outsourcing, the Client creates a complete and well-defined picture of their needs. For each point in the SOW, the Service Provider’s proposal should outline what they can offer in terms of the service delivery solution, associated resources and costs.

Enabling the Best Proposal

It is important that both parties take ownership of a successful solution. Typically, a second ‘Yellow Pad’ session will take place after the initial proposal drafts have been submitted for Client review. These one-on-one ‘Yellow Pad’ sessions between Clients and Service Providers give both parties an opportunity to review the proposed service delivery solution before it is made final.

Detailed discussion followed by consolidated Client feedback can help ensure that the final proposal represents the best possible solution from each Service Provider. It is important that the Client, when giving feedback, be specific as to issues and concerns but generally avoid proscribing specific solutions. It is also important that the Client respect the confidentiality of Service Providers with regards to their proposed solutions in order to maintain the integrity of the competitive process.

Considerations when evaluating the final proposal include:

 How does the total proposed cost of service delivery compare

with industry benchmarks and the experiences of other clients?

 Does the solution include detailed descriptions of the roles and

responsibilities of its proposed service delivery team (both employees and sub-contracted business partners)?

 Has the Client tested to make certain that all aspects of the

Scope of Work have been understood and considered?

While the Client will contractually obligate the Serviced Provider to keep strong financial and performance commitments, it is far better to have a sound service delivery solution from the outset, rather than to try to contractually rectify any deficiencies post-deal.

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“It is important that the

Client, when giving

feedback, be specific as

to issues and concerns

but generally avoid

proscribing specific

solutions.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Ultimately, no Service Provider is “perfect”. Effective evaluation is as much about fully understanding the Service Provider’s strengths and weaknesses as it is about determination of the “best” Service Provider. With a good understanding of capabilities, the Client can work with a high performing Service Provider to overcome some organizational shortfalls and ensure an effective service delivery solution.

The best business partner may not be the one who “scores highest”, but instead may be the Service Provider who is best able to work with the Client to leverage their mutual strengths and jointly formulate the best possible solution.

Service Provider Evaluation Checklist

Establish clear evaluation criteria which consider both Service Provider capabilities and characteristics as well as the service delivery solution  Check references to verify Service Provider capabilities, and

evidence of Service Provider driven process and innovation  Develop and understand service provider structure 

Ensure the RFP solicits specificity as to proposed solution 

Solicit specific examples of reports, work orders, schedules & other

work products 

The bid template is detailed and itemizes all resources 

The bid responses are data driven as opposed to purely anecdotal

(Get the story, measure the story)  Pricing assumes acceptance of Client's contractual terms and

conditions 

Provide Service Providers feedback to ensure best possible bid

response 

In final selection, consider the ability to collaborate on the best

solution, not just evaluation scores. 

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“Ultimately, no Service

Provider is 'perfect.'”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

A well designed services contract will appropriately assign each party's rights and responsibilities and is the mechanism which can transfer various risks from the Client to the Service Provider. There are a number of key points in a deal which can minimize risk for the Client while achieving a good balance of responsibility on the part of the Service Provider.

Budget Risk

A serious concern for both parties revolves around budget risk, in particular the risk of the Service Provider overrunning the budget. Cost overruns have occurred in several FM deals. It is important for both the Client and the Service Provider to agree on how to deal with possible overruns before they happen. This means defining a process which ensures that the Service Provider retains significant overrun risk. It is important to define who is responsible for absorbing excess costs in a particular situation.

Risks Associated With “Deal Structure” Phase of Outsourcing

Issue Risk Implication Pricing structure does not align

Client Business objectives with account profitability

 Service provider has financial incentives

to over-run the budget

Inadequate budget controls  Lack of visibility into budget performance  Service provider over-runs the budget.

Early termination by Service

Provider  Significant cost and potential for operational disruption as a new Service Provider is sourced and transitioned

Loss of site knowledge  Client loses control of key business

information required to support operations

Inability to change service

delivery solution  Difficult to rectify supplier under-performance

Pricing mechanism not determined for additional (future) services

 Changes to Scope of Work result in price

escalation

Key (transitioned) personnel not

retained on the account  Loss of critical knowledge required to ensure successful service delivery

Loss of ownership of processes

and technologies  Difficult to bring services in-house or transition to alternate services provider

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“It is important for both

the Client and the

Service Provider to

agree on how to deal

with possible overruns

before they happen.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Often, the Service Provider is contractually obligated to absorb some or all cost overruns. The Client may also require the Service Provider to seek permission before incurring any excess costs.

Addressing the budget overrun risk requires effective Service Provider governance practices which will ensure that the contractual requirements are adhered to. In most cases cost overruns have occurred due to a lack of financial transparency and timely financial reporting. From an administrative point of view, requiring the Service Provider to provide strong financial reporting throughout the relationship can help to identify budget issues while there is still time to correct them. Clients need to be able to see data from the Service Provider that benchmarks cost performance against external sources. This can help ensure that the overall cost of service delivery is competitive. There should also be a well-defined payment dispute process outlined in the contract.

When it comes to reigning in specific budget concerns, a complete and thorough Statement of Work as described in the previous section is vital to controlling costs. Adding a ‘Dragnet’ clause to the contract prevents the Service Provider from charging for services intended as part of the SOW, with the argument that they are out of scope items. This clause ensures that the full intention of the SOW is included in the contract.

The provisions of a ‘Dragnet’ clause typically bind the Service Provider to not only perform according to the SOW, but also include any aspect of the services that were the responsibility of the personnel who were displaced by the outsourcing. This is usually retroactive over a twelve (12) month period prior to the contract going into effect. Additionally, any services or functions which are related to or necessary for the services which are being provided, as well as services customarily provided by the industry are also included in the ‘Dragnet’ clause.

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“Often, the Service

Provider is

contractually obligated

to absorb some or all

cost overruns.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Pricing Structure

Related to these budget concerns are the pricing structure which may include shared savings and incentives which can be offered to the Service Provider. Each of these must be clearly outlined in the contract. When used judiciously they can help align the business interests of the Client and the Service Provider.

Most FM deals are structured as “Pass-through” with Guaranteed Maximum Price (GMP) Provisions. These deals pass through all the direct costs of delivering services to the Client at cost. Service Providers profit from a separate management fee that is not linked to the cost of service delivery. This removes the incentive for the Service Provider to increase their revenue by raising service delivery costs.

It has been suggested by some “experts” that this GMP structure does not provide the Service Provider sufficient “flexibility” to manage a larger or more complex account. The purported result is increased relationship stress and more difficulty establishing true business partnerships.

Agile OAK’s experience is that these issues have resulted from inexperienced facilitation resulting in poor deal structures and inadequate post deal management or “governance”. The GMP pricing structure acknowledges that the Client may have absolute restrictions in terms of their ability to absorb price increases. The proposed alternatives often obfuscate the cost of service delivery, dilute Service Provider accountability and hinder comparisons across Service Providers during the outsourcing process.

Well designed pricing models acknowledge the Client’s legitimate business requirements, provide cost transparency and are managed in an open straightforward manner. The GMP structure builds pricing discipline into the deal and then requires both parties to carefully articulate acceptable exceptions.

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“Service Providers

profit from a separate

management fee that is

not linked to the cost of

service delivery.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Within GMP pricing structures, it is common for Service Providers to gain access to shared savings and performance incentives. These can further align the business interests of the Client and the Service Provider. Shared savings are typically awarded only for achieving a direct reduction in the cost of service delivery. This usually excludes project-driven savings (which require Client investment) and cost avoidance activities. The amount saved against the budget is shared with the Service Provider. The amount of savings which is shared with the Service Provider typically varies from ten (10%) to fifty (50%) percent. Agile OAK has seen one hundred (100%) percent year one shared savings when the Service Provider accepted significant risk in other aspects of the contract.

Most shared savings schemes result in a downwards ratchet in the following year’s budget. The shared savings become a budget commitment for the following year. In order to achieve further shared savings, the Service Provider must then reduce costs by an even greater degree.

Shared savings should also be reliant upon achieving a minimum acceptable level of service delivery performance. Increased incentives may be available if the Service Provider meets pre-defined performance standards. These incentives are based on measured Key Performance Indicators (or KPIs) and payment is most often contingent upon delivering services within budget constraints. It is essential that the contract provide the Client with the right to add or remove KPIs in order to adapt to changes, address omissions or to address perceived deficiencies.

For more information about deal pricing and incentive models, please reference Agile OAK whitepaper “Facilities Outsourcing: Negotiating the Business Model”.

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“Within GMP pricing

structures, it is common

for Service Providers to

gain access to shared

savings and

performance

incentives.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Budget Controls

A more extensive scope of work can increase the chances that the Service Provider will be asked to do work which is out of scope. If necessary, the “Concept of New Services” can be written into the contract. This states that only the provision of out of scope services can result in budget increases. It is recommended that the Client chooses to negotiate the price of these out of scope services prior to signing the contract, as there are significant benefits to doing so. The Client should also insist on the right to allow third parties to compete for specific aspects of the services performed. This flexibility allows the Client to target specific areas of underperformance and introduce a ‘surgical’ change if required. Service Provider Employees

In most IFM deals the majority of Client employees are transitioned to the Service Provider. These employees may have years of experience with the Client site. As such, their knowledge and experience may be critical to ensuring the initial success of the outsourcing initiative.

While preserving the existing knowledge base is important, there is also a risk that these employees will not adapt to the Services Providers new organizational structures and work methods.

For these reasons, attention must be paid to the treatment of workers by the contract. For example, the standards for retention, replacement and re-hiring must be defined. With regards to retention, the Client should require the Service Provider to keep certain key individuals involved with their account for a specific period of time. The Service Provider should be restricted from transferring these workers for a period ranging from twelve (12) to twenty four (24) months. These workers may also be restricted from working on accounts associated with competitors. The Client must ensure that they retain the right to vet those personnel hired for positions that they have classified as key. These requirements can help the outsourcing transition occur more smoothly.

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“In most IFM deals the

majority of Client

employees are

transitioned to the

Service Provider.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

The Client should specify whether employees will be re-hired at equivalent salaries or at market norms. The Service Provider must also allow the Client to reprioritize the work of certain employees as well as re-hire them during or after the term of the contract, or after the worker’s termination. The Client should also retain the right to require underperforming personnel removed from the service delivery team.

Contract Termination

Contract termination can represent a significant business continuity risk to Clients. Clients can be protected from the risk through deployment of appropriate structures. In the past, FM contracts typically gave equal termination rights to both the Client and the Service Provider. However, Clients bear the brunt of risk associated with the early termination of a contract, as their business operations could be seriously disrupted. This can consume both direct costs and resources, while the Service Provider’s termination cost is limited to the margin on the account. In some extreme cases, Service Providers have used the threat of termination as leverage to renegotiate unfavorable contract terms. Additionally, it can be an expensive and resource-intensive activity to develop a fresh outsourcing relationship with a new Service Provider.

To mitigate this risk, Service Providers should have limited termination rights and strong post-termination obligations to ensure Client business continuity. In most cases, the only right a Service Provider would have to terminate would be Client non-payment of undisputed fees.

The Client retains broader termination rights, although there may be a financial penalty tied to early termination if it is done for convenience as opposed to cause. Either way, it is important to fully define the termination process, as well as the consequences that result from it.

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“In most cases, the only

right a Service Provider

would have to terminate

would be Client

non-payment of undisputed

fees.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

Published by Agile OAK LLC

Deal Structure Checklist

Pricing structure clearly articulated 

Shared savings and incentives 

Requirement of Service Provider to provide annual budgets 

Limited Service Provider termination rights 

Budget controls in place 

Right to dispute payments 

Benchmarking 

Clients have right to use third parties (no Service Provider

“Exclusivity”) 

Pricing requirements established for new services 

Right for client to in-source or alternatively source services 

Access to Service Provider employees and subcontractors 

The contract should offer the Client several different options once it is terminated. These can include:

 Being able to continue receiving services for a certain length of

time

 Being able to hire Service Provider employees

 Being able to assume the Service Provider’s third party vendor

contracts

The Client may also wish to be able to obtain assistance to transition to an alternate Service Provider or delivery team, or to purchase the Service Provider’s tools, equipment, methods, technology and materials related to service delivery.

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“The contract should

offer the Client several

different options once it

is terminated.”

MANAGING RISK IN FACILITIES MANAGEMENT OUTSOURCING

RISKS ASSOCIATED WITH OUTSOURCING NEGOTIATIONS

Issue Risk Implication Contract takes longer than

expected to negotiate

 Deal teams lose focus

 Inappropriate contract concessions

made to create closure

Late changes introduced (typically scope additions / additional deal terms / financial requirements)

 Loss of market competitive pricing  Renegotiation of key contractual

protections

Service initiated prior to contract signing

 Loss of client leverage

 Significant delay in contract signing  Appropriate Client rights and Service

Provider obligations excluded from final contract

 Operational & financial risks not