Total FM
Competitive tendering for fixed-term contracts PDF Print E-mail
Written by Gareth Hollyman, 2007   

Gareth Hollyman argues that regular re-tendering doesn't benefit the customer or the supplier. As the industry matures, there are signs that new strategies will emerge. 

What are the pros and cons of the traditional shorter-term outsourcing contract?

How does an 'evergreen' contract benefit both client and supplier?

Historically the only solution for procuring FM services - initially building services maintenance, cleaning and security services, and then more recently bundled or total FM contracts - was seen as competitive tender. Elaborate pre-qualification procedures, including at one stage payment for documentation and inclusion on long tender lists (particularly in the public sector), were meant to dissuade all but the most committed supplier from participating in a tender process.

Why did such practices come into being? The move to outsource traditionally in-house functions for cost or risk reasons obviously necessitated a means of obtaining competitive bids from external suppliers. These processes have become ever more complex, and lately have also become more robust in terms of visibility. Whether you are an occupier or a landlord, the drivers are similar, with cost and risk reduction together with improved service performance being of prime importance.

The process has been mainly led by finance directors or procurement teams, rarely those staff who receive or manage the services. So cost has been a stronger motivator than service. Thankfully, in recent years facilities managers have become more involved and have gradually improved their ability to influence appointment of suppliers on 'best value' rather than lowest cost. That has even been allowed in the public sector.

Given the particular economic climate prevailing in business at the time, the balance between cost and service can become unbalanced so that contracts become sub-economic for the supplier, service suffers, the supplier is sacked, and the process is commenced again.

This merry-go-round has been damaging for the FM industry as a whole, with the reputation of suppliers (and some clients) called into question on a regular basis, particularly along the lines of 'promise the world, deliver nothing'. There have been faults on both sides (client and supplier) as the process of refining the service specifications and interpreting those requirements has been learned, sometimes through painful experiences. The development of PFI projects, which by their nature have 20-30 year contractual obligations, has resulted in more visionary contract arrangement, not necessarily the full partnerships Sir Michael Latham had wanted, but significantly less combative in the wording and structure.

The industry has now gone through most of those growing pains, has developed more sophisticated briefing documents/specifications and seen improved professionalism of suppliers in responding to those client requirements.

Given the cost of competitive tendering for both client and supplier, even utilisation of output specifications and electronic issue and submission of tenders has not reduced the 'cost of change' by much, so it is only of late that alternative solutions to competitive tendering are being sought.

A better starting point


As outsourced services are becoming ever more complicated and nearer to core business of clients, and with significant and growing legislative requirements within the scope of service, having selected a supplier through competitive tender, a means of developing the relationship with a good supplier is being sought to break the repetitive cycle of three or five year tenders.

As the FM industry has developed, and because of the competitive tendering environment, there is now a wealth of benchmark service level and cost data on most of the traditional FM services. This allows the client and supplier to be able to develop an open and robust cost delivery model for the service(s) without necessarily having recourse to a competitive tender process. It is still a challenge for finance directors to be able to agree that the cost model is market competitive, but in reality if benchmark information is of good quality, the service levels can be met or even exceeded and changes in business conditions handled more readily in an open working relationship (a partnership).

Traditionally the length of contract for outsourced services typically ranged 1-3 years. The shorter term indicated a lack of trust in either the process or supplier (or both) and resulted in less competitive pricing, as the supplier could not recover contract implementation costs over a longer period.

A three-year contract period does provide for such recovery, and allows a supplier to fully demonstrate its capabilities. The problem is that if the contract has been successful, the full benefits are just being realised through the third year - but the client is looking to tender the services probably mid-way through that final year.

This will lead to some uncertainty for the supplier and staff, and so service levels may dip. So, by the very act of invoking a strict three-year contract cycle, not only is there a cost element of anywhere between 5-10 per cent of the annual contract value involved in re-tendering, the service levels potentially suffer as well. That is probably why the three plus two contract period has evolved, so that by the third contract year, if service levels are being achieved, costs controlled, then a two-year negotiated extension to the contract is agreed. This satisfies the requirements of most auditors, whether internal or external, as long as costs and profit margins are clearly visible.

Facilities services by their nature are low margin in terms of profit, typically 4-8 per cent, so if both supplier and client can agree a formula to reward the supplier for above expected performance, to get nearer to an 8 per cent margin, either through shared savings or improved service levels, to some extent the length of contract becomes less material.

Working towards partnership


Some free-thinking clients, in conjunction with the more sophisticated suppliers, have modelled 'evergreen' contracts. In most cases these have been developed from traditionally tendered contracts, which have been deemed so successful and the relationship developed so strongly, that to maintain that relationship a form of contract that allows for an ongoing development of the services, flexibility in costs to reflect client need and a structure that protects the agreed profit element of the contract has been found to retain supplier involvement.

This form of contract is particularly applicable where the initial contract experience has been good, the level of trust is high and the environment into which the services are provided is ever evolving. This style of contract can provide the flexibility the client requires, whilst engaging with the supplier to truly develop a partnership approach where both sides to the agreement mutually benefit.

By their nature, the length of these agreements is extended, and as such, a suitable protection mechanism needs to be put in place (this does not need to be more than a couple of A4 pages) that sets out the aims and objectives of such an agreement together with a dispute resolution process signed by both parties. Annual formal reviews to renegotiate costs and services, plus any element of external benchmarking/audit required to satisfy internal client processes, ensure that the services provided are in some way measured and re-evaluated so that they meet current requirements.

This is important, as if there are significant changes on the client or supplier side (takeovers/mergers/changes in senior personnel) it is clear as to what is provided, how the costs are derived, and what the appropriate services are for the client/location.

In conclusion, the move is towards longer, more complex service and supply contracts, as the FM industry in general has demonstrated that it can take on more and more responsibility. In this context, the cost of change has increased so that a more sophisticated contractual solution has been sought by both parties.

The means of establishing value has been developed to such an extent that competitive tendering could become a thing of the past (in certain sectors), and the possibility of developing partnerships in the true sense of the word is getting closer.

Annual award schemes run by the British Institute of Facilities Management and Premises & Facilities Management magazine require demonstrating a level of partnering that is still very rare in this industry - but an increasing number of quality entrants indicates that the concept is growing in popularity, and the days of the more traditional contract may be numbered.

About the author

Gareth Hollyman is Chairman of the Facilities Management Association. Please visit www.fmassociation.org.uk/
 
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