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Can International outsourcing really deliver?

It seems that everyone’s expectation is that I am a cheerleader for the globalization of FM contracts.

If there’s any basis for that supposition, it can only be founded on the sort of projects I’ve worked on in recent years and my involvement with ISO standards and with IFMA, rather than anything I’ve actually said or written, which tends to be (I hope) rather more nuanced.

It is certainly true that there is a trend towards internationalization and consolidation both geographically and in terms of service packaging. I think this is driven by different issues on the part of each of the buyer and vendor sides of the outsourcing market. As i-FM reported last year, the vast majority of contracts by volume continue to be for single service supply, and are either site specific or national. Unsurprisingly, the majority of suppliers are in the same market. However, the major vendors cover the whole spectrum of options, from single service through to various bundled service options, and from local contracts through regional multi-national packages to contacts which are, nominally at least, global. The pressures which create the demand for this are relatively simple to understand: if an organization which uses facilities services is seeking continuing efficiency savings – and of course they almost all are – then once savings have been delivered through initial local single service outsourcing then the next logical step is to bundled services; and from there to national contracts; and from there to international contracts.

As the marginal gain from each repetition of an outsourcing procurement is likely to be smaller than before, it is only logical that organizations believe that they can obtain better net results by expanding the portfolio of property or services included, and by consolidating the supply chain. In my experience, the problem with this is that buyer organizations lose sight of how those savings can be generated and implicitly rely on the assumption that “bigger is better”. But since we know that the majority of cost within supply contracts is labour, this creates a problem in that – in the medium term at least – substantial savings cannot be achieved without impacting on labour resources, with all the risk that creates.

For the supply side, market and revenue growth are a pre-requisite of any corporation, as a precondition for profit growth. It is therefore entirely logical that the supply chain will go through a pattern of growth in terms of expanding service capabilities and geographical presence which conforms with supply side demands, albeit for quite different reasons. The primary effect is to create a situation in which the most prominent market players on both sides of the contractual relationship appear to be driving towards a common goal. That in turn creates an expectation among smaller players in the market that this goal is in some senses desirable, which is to say, likely to be beneficial to them. I don’t intend to suggest there is no truth in these positions, since I believe that properly managed and controlled large scale outsourcing can create real opportunities to raise service quality and reduce costs in the medium term. But the critical issue here is management and control, which is where so far both suppliers and buyers have struggled.

Since this is an industry, like many others, obsessed with use of the military terminology of strategy and tactics, let’s consider this use of the concept of “command and control”, because any geographically diverse operation meets these challenges immediately, and they are at the heart of the success or failure of larger scale contracts. Essentially, vendors hold the key to success here, because the buyers have outsourced operational management and supervision to them. Those vendors have adopted an interesting variety of solutions to the question of how to create, maintain and improve services in diverse cultures across large geographical regions. In some cases, over time the vendors have tried more than one of these options – sometimes simultaneously. Those solutions can be summarized as:

• Retention of a central Buyer management team to supervise and direct one or more contractors

• Management only outsourcing – where all routine service management and delivery is sub-contracted to local or national suppliers

• Centralised client-account control – with management structured around clients (and sometimes sectors) rather than geographies

• Dispersed or delegated management at site level (for example for remote sites or very large sites)

• In-country management delegated by the global entity to operate international contracts under ‘framework’ deals

Each of these designs is intended to resolve a crucial problem of balance, because there are three client expectations which have to be addressed if contracts are to be successfully operated and retained: achieving cost saving; delivering consistency and reliability; and creating innovation in operations. And as we all ought to understand by now, a general rule of management is that if there are three drivers (usually these are: cheapness; speed; and quality) one has to be sacrificed – you cannot successfully deliver them all. Since cost savings are almost considered sacred (despite the fact that international contracts tend to add costs in the form of corporate overheads and supervision) that leaves a fairly straight choice between consistency and innovation. Sadly, this choice is not one which vendor sales teams are ever keen to highlight, let alone resolve (in fact, rather the reverse, as they tend to promise everything in order to win), nor is the idea of sacrificing something one which buyers find attractive. And, of course, its not mere pedantry to consider that consistency and innovation might actually be contradictory requirements.

So one of the problems contract management teams face is that both sides have agreed to the impossible. It might help if we could simplify the issue by removing or downscaling one of the parameters, and of these three factors it seems to me that consistency is the least valuable. When presenting on this issue, I usually quote Ralph Waldo Emerson: “A foolish consistency is the hobgoblin of little minds” – not because I like insulting my audience, but rather because it was put to me by an MBA lecturer that there was no good reason “why consistency is more important than creativity”, which does challenge us all to really review what we need.. That for me was a light bulb moment, and if you put that alongside the idea that we ought to be focussing on what our customers need, then in many contracts we might think that consistency in needs analysis, service planning processes and reporting does not require consistency of service delivery: in fact it might enable a more subtle, legally and culturally appropriate service solution than simply (and metaphorically) applying the same coat of beige paint across the world.

There is another underlying set of issues, though, because I do not accept that the idea that bundling services and geographies creates synergies in cost is wholly proven at this stage. We can see how that could happen in theory – removal of duplication in management and corporate overheads, economies of scale in the purchasing of goods, consolidation of back-office functions, and so on – but whether this really happens is often obscured by the fact that much “first-time” outsourcing makes savings simply because the previous situation was appallingly managed and often financially misreported.

In my view, as I have argued previously, until we get genuine openness in benchmarking then there will be no objective proof of the financial claims about bundling. But if we don’t know this for sure, then it is equally difficult to assess the comparative success of the various structural options set out above. And, most critically, it is also impossible to know whether in-house management solutions are as functionally inappropriate as has been generally assumed to date. To conclude where I began: because the challenges to effective global contracting run from the conceptual to the practical, and because no two buyer organizations are alike, then defining and applying the best solution to facilities service provision is not an exact science. Because there are lots of exciting options out in the market, and because those options continue to evolve through learning from both success and failure, the marketplace as a whole is complex. That makes it exceptionally interesting to work in, and especially exciting for the supply side I think, but it also means that anyone who espouses the idea that there is only one solution to the challenge of making support services delivery better and cheaper might want to think again.

Copyright Effective Facilities Limited. 2014