FACILITY MANAGEMENT OPPORTUNITIES AND RISKS.

This is a freely translated version of the article published on the ISS Italia Website, Written by Roberto Cigolini & Fabiana Pala.

Original content too recognise correct credit to the authors and ISS Italia webpage:

All credits related to the content go to Roberto Cigolini & Fabiana Pala.

Published on https://www.it.issworld.com

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(English Version)

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Outsourcing, tertiarisation or alternatively outsourcing is an issue debated with contrasts in recent years: it is considered by some as the main tool for achieving efficiency, by others as a pure legalised exploitation.
The reference model encourages companies to focus on their distinctive skills (core competence) and the acquisition of qualified professionals (know-how) from the market and has its own validity and raison d’être. Often, unfortunately, the application of the model is the weak link in the chain.
Clearly, the benefits and criticalities that outsourcing brings are largely linked to the objectives that the companies themselves aim to achieve with this operation.

Opportunities

The benefits achievable can relate to three main dimensions of business management:

• the strategic – organizational one;
• the operational one;
• economic and financial.

Strategic – organisational opportunities

Outsourcing services, in the first place, allows the company to free up resources and focus them on its core business. Outsourcing, in fact, means entrusting to an external entity all the problems related to the management of a service that is not part of the company’s core business. Lightened from the burden of carrying out this task “at home”, the organization will turn all its attention to its basic skills, so as to make the most of them and become more competitive. The most important step, from this point of view, is the precise identification of the boundaries of its core business: once this is done, the company will be able to outsource activities that it considers far from its core business, freeing up the resources previously engaged in the management of those services.
The choice to outsource a service, if done with care, also leads to entrust one of its activities to a specialized company, therefore able to carry it out with a high quality standard: the competitors of the company that has outsourced will therefore find themselves competing in the field of central business and with an external specialist, which makes the activity received in outsourcing its core business. In addition, managing and providing a service internally also brings to the company the heavy burden of following the technological development of that specific sector, with the result that, often, those who do “at home” find themselves using techniques and equipment behind the state of the art available for that service: entrusting the latter to specialists, ensures that this activity is carried out using the most advanced technologies available, bridging in a short time the gap that may have accumulated over the years.
Finally, outsourcing services has the direct consequence of reducing business complexity, giving the organization greater flexibility and speed of response, two decisive characteristics to excel in the most competitive markets. Management will therefore find itself running a leaner, more dynamic and focused company – precisely because it has more resources available for its core activities and, as a result, will be able to respond more efficiently, effectively and quickly to environmental change.

Operational opportunities

Relying on an external entity to carry out certain activities makes it possible to avoid the operational rigidity linked to the functioning of organisational processes: where the outsourcing agreement provides for a strong strategic link between the two players (partnership), with broad sharing of objectives in terms of quality, efficiency and effectiveness, the supplier will tend to be proactive. This means that the supplier will often be able to respond to the company’s needs in a much more timely and flexible manner than the company’s internal structure would have been able to do.
Freed from the constraint of the internal hierarchy, decision-making processes become more fluid. In addition, the use of qualified specialists can create a virtuous circle that invests the quality of the activities carried out by spreading the culture of continuous improvement in the company.

Economic and financial opportunities

The benefits of outsourcing from an economic point of view, are many and varied, although often not all immediately evident.
First of all, some advantages derive from the transformation of what were previously fixed costs into variable costs: this benefit is sometimes difficult to quantify, since the internal cost of an activity is difficult to measure and often the characteristics of the outsourced service are different from those of the service provided internally.
A further economic benefit derives from the better quality of the activity offered by the external supplier: the latter is often able to guarantee lower costs for the provision of the service because not only can it boast a better knowledge of the activity, but it can also distribute its investments in human and technical resources over several customers, thus achieving economies of scale. Some cost reduction opportunities for the company also derive from the sale of activities or processes that appear to be underused internally or that, due to the impossibility of exploiting economies of scale and specialization, imply an excessive commitment in human and technical resources compared to the needs and size of the company.
Always speaking of the possible economic advantages linked to outsourcing, when the company establishes a long-term partnership with external parties that involves the sharing of objectives, there is automatically a tendency to adopt a target costing approach: it is a matter of seeking the optimization of costs by determining them before they are actually incurred, with a view to continuous improvement of products and processes and the search for best performance.
Finally, if the outsourcing process involves the transfer to the external supplier of plants and facilities functional to the outsourced activity, the company will achieve a further reduction in costs, laying the foundations for the total elimination of cash flows attributable to outsourced activities and creating the opportunity to use the resources freed in alternative activities within the company.

The risks

In a dual way with respect to the advantages that an effectively executed outsourcing operation can bring, it is also worth examining the main problems that may arise in the course of outsourcing activity: they also concern the three dimensions: strategic – organisational, operational and economic – financial.

Strategic – organisational risks

In an outsourcing operation one of the greatest risks is related to the possibility of losing control and knowledge of the outsourced area: if the relationship established with the external supplier is not a real partnership, the company may lose sight of the way in which the outsourced activity is managed. For this reason, it is always essential to have a control system, so as to constantly check the quality level of the service, the actual use of resources, the costs incurred and the consistency between the outsourced activity and those left inside: without a system with these characteristics, you lose control of activities whose strategic value has been underestimated.
Similarly, a poorly collaborative relationship between company and supplier, due to information asymmetries between the two parties, can aggravate the loss of operational skills that outsourcing necessarily entails, because it also leads to the loss of the knowledge and information indispensable for the managerial assessment of the outsourced area. This knowledge also includes those necessary for the possible and rapid reconstruction within the organization of outsourced activities.

Operational risks

The most significant operational criticalities are related to the correct identification of the activities to be outsourced, the search for an external supplier, the choice of the contractual form to be used and the management of the relationship with the supplier.
When analysing the timing and methods of outsourcing, it is essential to accurately identify which activities to outsource: this implies a step of fundamental importance, i.e. the correct evaluation of the costs incurred internally for the activities considered, so that they can be compared with the costs proposed by the supplier.
The outsourcing operation may also make it necessary to review the way in which certain activities, internal to the company, that are directly connected with the outsourced service are carried out: it is therefore necessary to review and rethink certain internal organisational mechanisms, to distribute tasks and responsibilities among functions in a different way and to develop new functions that support coordination and interface activities with the supplier.
A further difficulty is linked to the choice of supplier: it is essential to analyse the characteristics of potential candidates with extreme rigour, especially if a strategic partnership relationship is to be established with the external supplier. The selection presupposes a careful study of the suppliers on the market not only from an economic point of view but also with regard to the level of reliability. It should also be verified that the candidates have the technical, human and financial infrastructure to ensure the soundness and stability of the activities carried out, as well as competent management open to change. Candidates must also show a high level of experience, design skills, delivery methods that allow the economic measurability of results, aptitude for partnership with the client and the ability to govern complex processes.

Economic and financial risks

The economic-financial risks are mainly related to the possibility of having underestimated certain costs generated by the supplier’s research, negotiation and – above all – control and regulation of the relationship.
Other avoidable costs may arise from an inaccurate definition of the price of the supply in its variable component.
Finally, if the company delegates a series of activities to the external supplier and succeeds in concluding a very advantageous price negotiation and subsequently finds it useful to delegate other activities but has become dependent on the supplier from an operational and strategic point of view, it may no longer be able to obtain a price that is in line with the market, incurring disproportionate costs compared to the content and importance of the activities subsequently outsourced.

How to establish a partnership with the supplier

After analysing the advantages and risks associated with an outsourcing operation, it is important to focus on the fundamental steps for a correct choice of the company to be entrusted with the service, which, in a nutshell, concern:

• Analysis of the status quo;
• Needs analysis;
• Market analysis;
• Identification of alternatives to the status quo;
• Evaluation of opportunities and risks;
• Decision;
• Search for skills on the market;
• Race;
• Choice of facility management company;
• Definition of control system.

The choice regarding the degree of outsourcing and the way in which the market is used cannot, in fact, disregard the analysis of the status quo and, in particular, the analysis of the facility function (Facility Management Department) in terms of skills, roles and responsibilities. At the basis of the change process there must always be an analytical decision-making phase that starts from the identification of needs and arrives at the choice of the management strategy of the services and the mix of internal and external skills needed to achieve the set objectives. During this phase, possible alternatives to the status quo are analysed and the benefits and risks of each are assessed in order to reach a final decision. This is a step that involves the entire company management and sees the facility manager and purchasing structure involved in the decision-making process. The facility manager’s task is, in particular, to summarize the company’s needs, collect all the necessary information and reconcile the different points of view of the company management in order to achieve the best solution.
Once the policy to be implemented has been defined, we move on to the implementation phase which includes the implementation of the chosen policy and involves the introduction of the skills identified. Depending on the choice made, some skills will be “purchased” directly through the insertion of new resources, or one or more suppliers will be identified on the market. Fundamental, as we have already seen, is the definition of a system of control of the results that allows us to verify the goodness of the choices and to make the appropriate changes.
The last stage of the process is the monitoring phase, which consists of comparing the objectives set with the results achieved and analysing the gap. It is therefore the “moment of truth”, during which the goodness of the chosen policy is evaluated and any corrective measures are planned.

The supplier market in Italy

After highlighting both the opportunities and risks associated with outsourcing services and clarifying the methodological guidelines for establishing an effective partnership with the supplier, it is advisable to complete the picture with a look at the composition of the Facility Management market in Italy.
In this regard, it is useful to adopt the classification operated by IFMA Italia, which divides the operators present on the market into three macro-categories:

• Single and multi-service suppliers
• Specific service providers
• Facility Management Companies

Single and multi-service suppliers

Mono and multi-service suppliers are certainly the most widespread category in our economic scenario: they have matured over time a competence in service delivery, of which they provide exclusively the operational part, developing a relationship with the customer based on a single service. These realities have their specificity both in the provision of services with a high labour content (e.g. cleaning) and in those linked to a high technological content (e.g. maintenance of technological systems).
Most of these suppliers operate at local level for small companies, while others have become privileged interlocutors of larger operators, thus carving out the role of sub-suppliers in a more articulated and complex supply chain.
Many single service suppliers, over the years, have undergone or promoted mergers and acquisitions in order to increase the size and economic weight of their organization, so as to compete on the market with the major players present.

Specific service providers

Specific service providers can be defined as specialists in the management of a specific service. Their offer is characterized by a strong vertical integration: they are able to respond globally to the customer’s needs from the development of the service, through the delivery, to the control phase. They are characterized by being highly competitive companies in a given activity, for which they have developed solid management, technological and operational skills, and are able to guarantee the customer a complete service. These companies have their strength in their ability not only to provide the service, but to manage it in its totality, exploiting internal synergies and qualified resources.
This category of suppliers can be identified directly from the specific services provided: space design and management, document management, car fleet management, corporate travel management, etc..

Facility management companies

Facility management companies are economic entities able to position themselves on the market as managers of several services and to establish a real partnership with the customer, oriented to guarantee the result and to fully share the objectives. Their characteristic note is that they are able to respond effectively to the customer’s needs. They are streamlined and dynamic companies that, through the competence and professionalism of their resources, offer the customer managerial skills, taking care of the purchase, delivery and control of the service.
They are primarily targeted at medium and large companies, have a high spending capacity and are equipped with the most advanced information management technologies. The latter feature, in particular, is useful to provide the facility manager of the client company with the necessary guarantees of transparency, especially with regard to any subcontracting contracts. The supplier is therefore able to carry out the accounting of all activities and interventions, provide an automated system for collecting information and also equip itself, where required, with a call center that functions as an interface between the end user and the supplier, so as to provide an initial response to problems that arise on a daily basis and promptly detect customer satisfaction.

The main facility management companies operating in Italy have different origins, namely:

• Companies that, taking advantage of their position and technical expertise, have expanded the range of services offered and acquired managerial expertise;
• Companies that are born as spin-offs of large industrial groups and make the integrated management of services their main business after a transition from captive to free market;
• Subsidiaries of foreign multinationals that, taking advantage of the know-how acquired, also through acquisitions, seize the opportunities offered by the Italian market.

In order for an operator to qualify as a facility management company, it must have the following characteristics:

• Management skills, i.e. the operator must have managerial skills proven by the composition of the employees (managers, technicians and employees) and the presence of management staff at its customers (site manager, building coordinator, workplace manager, etc.).
• Offer of services, i.e. not so much the ability to provide the service with one’s own personnel, but the possession of the know-how necessary for the design, management and control of all the services belonging to the three macro-areas of application of the discipline.
• Contractual supervision, i.e. the operator must be able to honour contracts that provide for the establishment of a partnership and with which it undertakes to achieve the agreed results. The contract must include and specify:

1. service quality levels (service level agreement – SLA);
2. performance indicators (key performance indicator – KPI);
3. bonuses and/or penalties depending on the results achieved;
4. transparency in management (open book approach);
5. partnership clause.

• Information management, i.e. the operator must know how to manage information and integrate it with the information available to the client: a constant flow of information is a fundamental requirement for the correct execution of services; it is important to provide internal clients with the quickest and widest access to data relating to the services, so that they can assess their quantitative and qualitative levels: these assessments will then be the basis for defining, together with the client, management policies and strategies.
• Monitoring and control, i.e. the company must have developed (and use) a system of pre-qualification of suppliers and have a system of analysis of results; it must also have studied a customer satisfaction survey model to be submitted to internal customers, i.e. direct users of the services.

Original content written by Roberto Cigolini & Fabiana Pala

The authors wish to thank Dr. Mariantonietta Lisena and Dr. Maria Elisa Dalgrì of IFMA Italy for their contribution.