Managing risks and opportunities in strategic fm outsourcing 3

MANAGING RISKS & OPPORTUNITIES IN STRATEGIC FM OUTSOURCING

PRESENTED BY

ENGR. FEMI AKINTUNDE

MANAGING DIRECTORALPHA MEAD FACILITIES & MANAGEMENT SERVICES

June, 2014

www.amfacilities.com

Femi Akintunde – Managing Director

Qualifications B. Sc Industrial Engineering (COREN), Masters Eng Management (Petroleum Engrg.), IFMA Nigeria and International, BIFM

Nestle Foods Nigeria PLC - 5 Years(1988 – 1993) Assistant Industrial Engineer, Industrial Engineer Industrial Engineering Manager (Corporate) Head, Corporate Technical; Planning

Shell Petroleum Development, 12 Years (1993 – 2005) Head of Contracts and Planning, General Services Senior Human Resources Adviser, Oil & Gas Process Engineer, Major Projects Engineer & Interface Manager, Head, Office & Industrial Assets Location Services Manager (5 Shell Companies in Lagos including Shell EP

Africa) United Bank For Africa UBA, 1 Year (June 2005 – May 2006)

Deputy General Manager, Corporate Services covering; Facility Management, Real Estates, Office Services, Contracts, Procurement,

Travels and Logistics. Alpha Mead Facilities & Management Services Ltd. (May 2006 - Date)

Managing Director


Objectives of Presentation

1. Shed light on FM outsourcing as a trending model in Facilities Management

2. Highlight various FM outsourcing risks encountered at various stages in the outsourcing process

3. Recommend appropriate measures to manage the risks and simplify the FM services outsourcing process


Presentation Outline

Background and Introduction FM Outsourcing General Risks in FM Outsourcing FM Outsourcing & Management

Process Stages of FM Outsourcing Common Risks encountered at each

Stage/Process Managing FM Outsourcing Risks Case Study

Background and Introduction

Organizations spend over 30% of total expenditure on Real Estate and Facility Management related services yet nearly 40% of enterprises report poor or no visibility into this significant category of spend and the processes that support it.

Best in Class Performance: Aberdeen evaluated 254 enterprises (Global coverage) in June 2007 and distinguished Best in Class enterprises by two key measures: Percentage of REFLM spend under management and Visibility into both spend and process.

Source: Aberdeen Group Research Report on Real Estate and Facilities Lifecycle Management. June 2007

First Words…

FM Outsourcing refers to using one or few Service Providers to accept performance accountability for a broader scope of FM work

Self managed FM service delivery in most organizations tilt more towards out-tasking (at the operational level) rather than outsourcing of management function a tactical level thus greatly limiting efficiency and lost opportunity for cost reduction

FM outsourcing is different from manpower contracting to carry out FM functions

Out-tasked vendors usually have accountability for work execution but limited performance accountability


Cost-Efficiency Impact of FM Outsourcing at different Levels of Management

©Copyright Key Facilities Management Limited 1992-2007 All Rights Reserved

Tactical Level

Strategic Level

Operational Level

Resources(people/ systems)

Performance(costs/ efficiencies)

Management Levels

Facilities Managementrelationship of Resources Applied to Performance Impact

FM Outsourcing Market Maturity Status in Nigeria

Self

Performance

(80%)

Friends & Family (15%)

Cost Emphasis

(4%)

Value For Money(1%)

BUSINESS EFFICIENCY (%)(Cost & Operation) TIME

LEVEL OF OUTSOURCING (%)

VALUE BASED OUTSOURCING

COST BASED OUTSOURCING

Only 5% of FM opportunities are currently outsourced in Nigeria. 95% are either self managed or by F&F

Why FM Outsourcing?

Managing multiple vendor relationships can consume significant management resources

Multiple out-tasking agreements result in inefficiencies due to:

Excessively high vendor labour rates Call-out charges for labour Minimal vendor accountability for asset performance Improper invoicing and billing practices High management overhead Unfavourable contracting terms


Why FM Outsourcing? …/2

This model is commonly referred to as Integrated Facility Management (IFM)

Very thin dividing line between the Total Facility Management (TFM) and the Integrated Facility Management (IFM) outsourcing models. IFM service provider manages the execution contractors assigned by client while TFM involves total responsibility for management and delivery.

The IFM model allows facility organizations to transfer broader FM performance accountabilities to the Service Providers

The objective in this case is to be focused on achieving outcomes, as opposed to specifying tasks

“Facility organizations are increasingly consolidating the delivery of their facility services under the care of a single or small group of Service Providers”


IFM Outsourcing Client Interface Structure


IFM…any value?

Service based rather than manpower hence “Lean and Mean”

Cost reduction and certainty Increased strategic focus Better access to FM 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 to an IFM model shifts management from a personnel focus to a focus on process, metrics, and contractual discipline”


The FM Outsourcing and Management Process

Preparing for Outsourcing

Service Provider Selection

Structuring the Outsourcing

Contract

Contract Negotiation/Aw

ard

Transition and Transformation

Service Provider

Governance

The Six Major Steps in FM Outsourcing Initiatives


The 10 Key Stages of FM Outsourcing and Management Process

1. Planning

2. RFI

3. Site Visit

4. RFP

5. Capability Presentation

6. RFQ

7. Contract Award

8. Mobilization and Transition

9. Steady State Execution

10. Closure & Exit


Preparing for Outsourcing

Planning Bidders Selection


Risk Associated with Preparing for Outsourcing

Issue Risk Implication

1. 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

2. 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”

3. Lack of alignment in “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

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

Additional requirement 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

5. Outsourcing initiative not informed by market capabilities

Outsourcing does not fully leverage market capabilities Suboptimal cost and operational performance


1. Understand your asset scope; Asset Register and Condition Survey

2. Know your cost structure for accurate benchmarking and comparison;

Direct cost of personnel, labour and outsourced services

Direct cost of third party contractors

Indirect cost of supervision by in-house personnel

Support infrastructure and services eg office space, transport and logistics

Executive resource expended on in-house resources

3. Know your customers, culture and environmental factors bearing direct impact on

service delivery and expectation

4. Gather information about existing vendors and other market potential through RFI

5. Review service history


Understand Your Systems & Operations

Outsourcing Preparation - Key Points to Note in Managing the Risks

1. Establish a reliable technical, operational and financial performance baseline for current performance

2. Determine clear financial and performance objectives for outsourcing

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

4. Ensure that the contract signer is identified and requirements clearly understood

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


Service Provider Selection

RFP: Request for Technical Proposal


Risk Associated with Service Provider Selection


1. Service Provider doesn’t understand Client requirements

Service Provider does not provide the optimum service delivery solution

Disruptive post start-up trial and error period as services are reconfigured

Cost escalation & missed opportunities for improvement Customer dissatisfaction

2. Client doesn’t understand service Provider’s organizational structure and delivery process

Client unable to properly evaluate Service Provider Client checks inappropriate references Mis-managed expectations and frursation on both sides

3. Service Provider not capable of fully delivering services

Service delivery errors Excess costs as client supplements staffing to ensure service

delivery Risk to operations

4. Pricing not realistic or does not meet desired business objectives

Unexpected cost escalations Credibility of initiative at risk


Effective RFP – Key Points to Note in Managing the Risks

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 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

Service Provider Evaluation – Key Points to Note in Managing the Risks

1. Establish clear evaluation criteria which consider both Service provider capabilities and characteristics as well as the service delivery solution

2. Check references to verify Service Provider capabilities and the evidence of Service Provider driven process and innovation

3. Develop and understand service provider structure

4. Ensure the RFP solicits specificity as to proposed solution

5. Solicit specific examples of reports, work orders, schedules & other work products

6. Ensure the bid template is detailed and itemizes all resources

7. The bid responses are data driven as opposed to purely anecdotal (Get the story, measure the story)

8. Pricing assumes acceptance of Client’s contractual terms and conditions

9. Provide Service Providers feedback to ensure best possible bid response

10. In final selection, consider the ability to collaborate on the best solution, not just evaluation scores


Structuring the Outsourcing Contract

Technical, Operational and Legal Requirements

Award in Line with Agreed Terms and Conditions


Risks Associated with “Contract Structure” Phase of Outsourcing

Issue Risk Implication1. Inadequate budget provision by client either due to poor historical cost visibility or inadequate planning

Service delivery to expected standard may result in budget overrun

2. Inadequate budget controls Lack of visibility into budget performance

3. Early termination of Service Provider

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

4. Loss of site knowledge Client loses control of key business information required to support operations

5. Misalignment in delivery expectations versus contract provision

Service provider unable to meet up with new expectations without demanding contract variation this may result in service failures if not obliged

6. Pricing mechanism not determined for additional (future) services Changes to Scope of Work result in price escalation

7. Key (transitioned) personnel not retained on the account

Loss of critical knowledge required to entire successful service delivery

8. Short tenure (Less than 2 years) Encourages short term focus that deliver limited benefits in the long terms

Contract Structure – Key Points to Note in Managing the Risks

1. Pricing structure clearly articulated

2. Shared savings and incentives

3. Requirement of Service Provider to provide annual budgets

4. Well articulated exit clause with rights and obligations of both party to terminate well spelt out

5. Budget controls in place

6. Right to dispute payments

7. Benchmarking

8. Clients have right to use third parties (no Service Provider Exclusivity)

9. Pricing requirements established for new services

10. Right for client to in-source or alternatively source services

11. Build partnership with longer term relationship (3-5 years minimum tenure)


Transformation & Transition

Mobilization

Risks Associated with Transition & Transformation


1. Transition not well planned Gaps in implementation Significant resources required to deploy services Transition is disruptive to supporting Client business units (IT,

Finance, HR, etc)

2. Logistical & coordination issues hamper implementation

Transition is delayed, requiring extension of existing contracts Credibility of outsourcing initiative put into question Benefits and savings potentially differed

3. Insufficient dedicated transition support lack of centralized transition accountability

Logistical & implementation issues hamper deployment

4. Transformation not activity managed

Services in-place, but not delivered to the expected longer term standard

Expected cost savings not materialized Dissatisfaction with Service Provider Business relationship not continued after the term of the

original expires

Transition & Transformation – Key Points to Note in Managing the Risks

1. Ensure that there is a well documented transition plan

2. Ensure continuity between deal teams and operating teams

3. Clarify site, regional and global roles and decisions rights

4. Appoint a dedicated transition implementation manager

5. Ensure realistic, complete transition schedule, incentive driven milestones

6. Manage the transformation as assertively as the transition

“The sheer volume of activity

associated with the transition phase can make it easy to overlook the

longer term transformation of

the facility management operations”


Service Provider Governance


Risk Associated with Service Provider Governance


1. Lack of continuity between deal teams and service delivery teams

Management and operational teams “re-interpret deal intention”

2. Unclear roles of client stay-back teams

Client teams reverts of operational roles, Service Provider is disempowered

3. Lack of dispute resolution process

Resolution of issues deviates from contractual intent. Critical issues may remain un-resolved Negativity encroaches on Client-Service Provider business

relationship

4. Lack of clarity on coordination requirements between Client team & Service Provider teams

Gaps in service delivery Critical issues not communicated & resolved

5. Insufficient budget oversight Unexpected cost overruns


Supplier Governance – Key Points to Note in Managing the Risks

Manage to the contract, ensure both parties have contract training

Clearly define the role of the client “stay-back team”, avoid the development of shadow organizations

Sustain scheduled touch points between the organizations

Ensure centralized & data driven review of performance

Leverage dispute resolution process

Document changes in business requirements

Create and use an operational responsibility matrix

Assertively manage budget performance


Case Study

…Real Life Application


About the Client

A multinational IOC operating in Nigeria for several years

Has investments in several oil and gas assets across the world

Embraces international best practices Has Operated in Nigeria for more than 5 decades so

understands the people and the culture Posses vast real estate facilities –residential, offices,

recreational and industrial Focused on value and efficiency and always seeking

continuous improvement


Background to IFM Outsourcing

The past FM Strategy resulted in: Fragmented, small-scale, and very expensive contract

management Increased number of QA/QC service contracts(241nbrs) to

supervise the execution of the works High level of contract administration (enormous staff work) Missed opportunities for cost reduction Limited opportunities for the development of the community

contractors


Scope of IFM

Utilities – power, water, sewage Hospitals Recreational facilities Residential Offices Industrial Warehouse Guest House/Hoteling Airport Catering Facilities(150,000 meals

per month)

Nbr of Contract

s 476

Nbr of Contract

ors466

Nbr of Contract

or Personn

el2,200


6,500 workstations

1,500 buildings

About 50 different site

locations

Change Management Issues at Transition

Initial resistance to change by both internal and external stakeholders

Initial high cost due to increased level of activity and deferred maintenance overtime

Challenges posed by operational budget misalignment Scope re-alignment arising from current reality Client’s initial misunderstanding of concept and interface

responsibility between client’s staff and IFM personnel created intial friction


Key Lessons Learnt

1. Focus should be more on value than awarding contract based on lowest cost. Choice of the right partner is very key to success

2. FM Outsourcing decision is strategic and therefore must be well planned and executed

3. It should be well managed as a change process, expect resistance

4. Early involvement and regular engagement of all stakeholders especially those that will be directly or indirectly impacted.

5. Outcome must consider the potential impact on both the physical facilities as well as the people issues

6. It requires time to settle and get accepted, ideally first contract should not be less than 3 years except where there is strong justification to change service provider


Key Lessons Learnt Contd.

7. Relationship with service provider must be viewed more as a partner rather being a contractor. Must be complimentary rather than being adversary

8. Transition must build in some continuity plan by integrating some of the existing in-house resources and contractors but must be limited to minimize possible resistance to change

9. Reward and penalty clauses in the contract must be balanced to minimise chances of friction and erosion of value

10. Clearly defined Key Performance Indicators with mutually agreed target

11. Link performance to reward and ensure fairness in the review and reward/penalty application process

12. Both parties must be supportive of each other, share information and be open to correction during execution

13. Roles and responsibilities must be well defined with clear delineation at interface points between service provider personnel and client in-house staff

14. Regular review to explore opportunity for continuous improvement


Benefits and Achievements to Date

Increased customer satisfaction (from 67% to 78% within 2years) No recorded Health & Safety standard incident from inception to

date SLA compliance increased from below 60% to 98% Cost reduction - $8m reduction recorded within the first year

representing 10% savings Improved operational efficiency through

Better management of personnel & materials Training of service provider personnel Improved relationship among all stakeholders Improved management reporting and information to support quality

decision making

Critical equipment (Power & Water) availability at 99.8%


Thank you for your audience


Presentations & Public Speaking

Managing risks and opportunities in strategic fm outsourcing 3