Why outsourcing property services may cost more
RODNEY TIMM, director of Property Beyond, questions whether cost savings can realistically be expected in outsourcing property services.
The perennial expectations of virtually all organisations that decide to embark on the property services outsourcing journey is cost savings. This motivation – whether expressed explicitly or hidden among other more admirable objectives – also tends to be elevated to high status in tender evaluation criteria and, ultimately, is pivotal in awarding the property service contract. But, can cost savings realistically be expected in outsourcing property services? As with many other aspects of business decision-making in life, the answer is ‘it depends’.
MANAGEMENT COSTS VERSUS COSTS MANAGED
In defining cost savings, it is important to first think about management costs versus costs managed. In portfolio costs of occupancy – both owned and leased premises – the vast majority of the costs relate to costs managed, represented by rental and outgoing payments, services (such as cleaning, waste and security), repairs and maintenance costs, utility costs, concierge and workplace services, and other such costs. The management costs of the team – whether internal or outsourced – are relatively minor; however, management skills can make a significant difference in saving costs managed. This is a distinction that very few organisations consider in their decision-making, as they often tend to focus on savings in management costs. A far better perspective in making the outsourcing decision is to focus on ‘doing it better’ – and if this does happen, overall cost saving will eventuate.
COMMON REASONS GIVEN WHY OUTSOURCING SAVES MONEY
The property services industry, with its ever-present market collateral, is full of reasons why outsourcing will save money. Some of the arguments are compelling and difficult to refute – particularly when the decision-making rationale is centred on moving non-core property service provision to external service providers. Professional property and facility management companies provide these services as their core business and, if they are to be successful in a highly competitive industry, they should be able to perform the functions more efficiently and cost-effectively.
The compelling reasons supporting the proposition that money will be saved by outsourcing include:
- avoiding disruptions and distractions in core business activities with more reliable, professionally managed properties and facilities
- structuring a cost-effective small core team of appropriately skilled property professionals that are focused on growing their careers within the outsourcing industry
- the implementation of ‘state-of-the-art’ integrated data and information management systems, which, if populated and used correctly, provide total portfolio transparencies for strategy planning, lease event management, user transfer pricing and planned life cycle maintenance, among others – this platform provides the ability to align property and business strategies supported by proactive asset and portfolio management
- costs of major infrastructure, such as information and data management systems, can be shared across many contracts via the outsource service provider – this includes the ongoing innovation and upgrades required to ensure the system remains relevant
- standard processes, procedures and guidelines focused on creating efficiencies, cost savings and consistency of performance will be implemented to ensure that ‘whole of organisation’ synergies are realisable
- scalability of purchase power of services, which, if bundled together – particularly with other contracts managed by the service provider – and procured appropriately, lead to recurrent cost savings
- skilled professional negotiating team members understand the property industry and dynamics of market conditions, enabling rent reviews, options, lease renewals and new leases to be secured at optimal price levels and with appropriate lease terms
- with the appropriate professional skills and understanding of life cycle maintenance planning to avoid major and expensive ad hoc reactive maintenance costs, particularly pertaining to major breakdowns, and to migrate to whole-of-life portfolio maintenance, money is saved in the medium- and longer-term, and
- where appropriate, there is the ability to share specialist personnel across other contracts, so that resources are fully engaged and costs are shared across a number of portfolios.
OFFSETTING COST SAVINGS AGAINST TRANSITION-IN COSTS
Anyone that has previously been involved in any form of property services outsourcing knows that potential future cost savings need to be offset against transition-in costs. In most outsourcing arrangements, the service provider will have recoverable costs for mobilising the team and setting the foundations to take over the property services responsibilities as at the ‘go live’ date. Mobilisation activities include implementing information management systems, data capture and verification, customising and implementing processes and procedures, engaging staff members and training the team on the contract specifics, taking over the financial management processes (including doing pilot runs), co-locating as required, implementing and testing help-desk arrangements, and ongoing communications with all impacted stakeholders. In addition, these transition-in costs are likely to include the redundancies and other required changes within the organisation outsourcing, as well as the cost of an independent transition manager.
As can be expected, in most well-articulated business cases supporting the proposition to outsource property services, the net present value of the projected savings and efficiency improvements will significantly outweigh the transition-in costs.
WHY THESE COST SAVINGS ARE OFTEN NOT GAINED
In many cases, after one or two years into an outsourcing contract, it often becomes apparent that, despite the best endeavours and transition arrangements to the service provider, the projected savings have not been realised. So, what goes wrong and why do the cost-saving benefits of an outsourced contract not meet expectations?
Some of the reasons may include the following issues:
- recognition that the service provider is focused on achieving their target profit on the contract and, despite the purchasing power and operating cost efficiencies that may be possible, these savings through the outsourcing arrangements need to be greater than the contractor profit margin
- not all ‘business-as-usual’ property service costs were captured in the original business case – this may relate to services that had previously been provided on an ad hoc basis by personnel with other primary responsibilities and these may include administrative personnel that had been delivering cleaning or workplace services that have now been rolled up into the property service contracts
- the sales pitch by the service provider relating to savings in costs managed, such as cleaning and ad hoc maintenance, was overly optimistic, resulting in the new procurement process that has not delivered the promised savings
- poor contract structuring and ongoing contract management without regular and robust service performance reviews – this is likely to result in poor service delivery, customer dissatisfaction and possibly contract price-gouging
- a lack of understanding of the contract arrangements and a lack of trust by internal staff who continue to micro-manage all tasks, which increases both internal and contractor costs
- the improved and consistent standards that have been implemented across the portfolio for the improved service standards have a higher cost compared to previously poorly administered processes, and
- a lack of understanding of asset life cycle maintenance management principles designed to avoid major unplanned ad hoc reactive maintenance expenditure – the whole-of-life approach may require that additional budget is required in the short-term in order to save maintenance costs in the medium- and long-term.
It is evident from the above reasons that cost savings do not always flow immediately or directly from outsourcing property services and that the outcome depends on the status quo prior to contracting for the services. However, provided that the contract arrangements are appropriately structured and the service provider is selected via a robust and well-designed process, it is expected that the property services will be delivered ‘better’ in terms of industry standards. Experience has shown that ‘better’ usually results in lower costs.