Your company s job is to make. Discovering Value in Outsourcing Facilities Management Timothy Maechling and Jeffrey Bredeson INTERNATIONAL

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1 BioPharm Volume 18 Number 5 INTERNATIONAL May 2005 The Science & Business of Biopharmaceuticals Discovering Value in Outsourcing Facilities Management Timothy Maechling and Jeffrey Bredeson Life sciences businesses are turning to outsourcing as a way to drive down costs and support critical process quality. Timothy Maechling is vice president of business development for Johnson Controls, Inc., 3526 Breakwater Court, Hayward, CA 94545, , Timothy.Maechling@jci.com Jeffrey Bredeson is business development director for Johnson Controls Life Sciences Group, 1255 N. Senate Avenue, Indianapolis IN 46202, , fax , Jeffrey.S.Bredeson@jci.com. Your company s job is to make biopharmaceutical products. Managing facilities is a function supporting the main task. General manufacturing companies discovered this long ago, but pharmaceutical producers have been lagging. Once you consider the outsouring of non-core activities like facility management (FM), office services, space planning, and utilities management, you can focus on core business functions that make profits. Historically, life sciences businesses paid more attention to maximizing production than to reducing costs. But with intense competition and relentless pressure on prices, they are seeking ways to become more agile and efficient. Concentrating one s efforts on cutting costs makes sound business sense, and that is where outsourcing becomes a viable strategy. Changes on the vendor side have made this possible. No longer do life sciences companies have to assume that their processes are too specialized, and their regulatory requirements too exacting to BioPharm International 1 October 2004

2 entrust to outside vendors. Service providers have grown and matured, developing specialized life-sciences industry knowledge that qualifies them to undertake mission-critical support functions like metrology and pilot production setup. This article focuses on the benefits and implementation of outsourcing facilities management. When properly planned and implemented, outsourcing leads to business improvements that measurably reduce costs, increase customer satisfaction, and enhance shareholder value. We will show how to write a set of clear objectives and a disciplined, step-by-step approach to choosing a service provider. FM OUTSOURCING CUTS COSTS FM outsourcing lowers costs for a variety of reasons: It brings market discipline to a function historically treated as an internal monopoly. Large companies often let staffing levels and internal wage rates drift above market levels. Service providers with a core competency in FM will rationalize staffing and compensation. Simultaneously, they can attract and retain the best-qualified service personnel in any given market area. Internal staffs, by doing things the way they have always been done, often provide more service than is necessary. Suppose, for example, that a company's practice is to run calibrations with five points to ensure accurate readings of all measurement and control systems. A service provider might be empowered to change the calibration requirement to taking just one data point in non-critical areas without a negative effect on service quality, which represents a cost savings. Service providers can deploy stateof-the-art technologies to control lighting, heating and cooling; streamline maintenance; and diagnose equipment trouble to prevent unscheduled failures and extend service life. In each instance, savings can be substantial. Service providers, by way of national or global arrangements with their vendors, have price leverage in procuring goods and services. CORPORATE-LEVEL FM BENEFITS When you set up an outsourcing relationship, indirect benefits begin to accrue. These show up as overhead reductions and increased productivity, and make the company more efficient. Increasing Focus on the Core Business Current pricing and competitive pressures are forcing life sciences businesses to consider what functions they should own and control. Core functions typically mean those that drive revenue: research and development, production, and marketing. Focus your capital and talent on those functions others become candidates for outsourcing. Companies that outsource FM typically find they get better service at lower cost by turning that function over to a qualified outside supplier. Converting the savings from outsourcing to funding R&D strengthens the product pipeline, pleases investors, and ultimately influences share price. Sharing and Reducing Risk Outsourcing shifts liabilities such as retirement plan funding and healthcare coverage to the service provider. It also mitigates risk in other ways. For example, regulatory compliance depends on accurate calibration of production and laboratory instruments. Some life sciences companies outsource this task to service providers whose personnel have proven competent. Traditional facility maintenance also can limit business risk because utilities and heating, ventilating, and air conditioning (HVAC) systems managed by an expert service provider directly support critical research and production environments. For instance: Reliable electric power ensures high-value scientific experiments proceed without interruption. Tight control over temperature and humidity in storage spaces keeps conditions from drifting out of specification and reduces the risk of regulatory violations and product losses. Increasing Operational Flexibility In-house staffs sometime find it difficult to adjust to changes inherent to any business. Events like facility closings, production realignments, and cost-cutting initiatives can be traumatic, requiring retraining, redeployment or, in the worst case, layoffs, which tend to be perceived negatively by both investors and local communities. An outside service provider, on the other hand, can adjust easily to change. It can mobilize quickly to accommodate growth, reallocate staff for new production or operational alignments and, in the event of staff reductions at a given site, simply reassign people to other client accounts. MAKING OUTSOURCING WORK The benefits of outsourcing are undeniable, but making the process work presents special challenges. Outsourcing is a complex exercise that touches issues ranging from the organization's strategic goals to the loyalties and daily concerns of rankand-file employees. To launch outsourcing successfully, a company must approach it with care and discipline. Here are seven keys to success. Develop Detailed Agreements Both parties must know what work is and is not included in the contract; what level of service is required for BioPharm International 2 October 2004

3 Table 1. Categories of Facility Outsourcing Tasks. The scope of tasks in facility management outsourcing can be broken into three basic categories. Service Category Business site services Business-critical and technical services Workplace infrastructure services Tasks Included each task; and what constitutes acceptable performance. The outsourcing company must spell all this out before seeking proposals. It is necessary to detail each site s scope of work. Because many services can be outsourced (Table 1), defining the scope of work and service levels can be tedious. A three-step process makes the job easier. First, identify the specific activities that will be outsourced. Second, set service levels and reasonable response times for each service. Service levels should be outcome-based, rather than prescriptive (Table 2). Third, set key performance indicators (KPIs) that are specific and easy to measure. For example: For janitorial service: Satisfactory property inspection reports For storage warehouse climate control: Zero time outside specifications If these steps are followed, the outsourcer and service provider know exactly what is expected and whether expectations are being met. Keep the Proposal Process Simple The outsourcing process typically includes Request for Information (RFI) and Request for Proposal (RFP) stages. Well-constructed RFI and RFP Office services, security, document management, roads and grounds maintenance, environmental health and safety, cleaning, catering and vending, transportation, call center, help desk Lighting, fire and life safety, security and access control water treatment, HVAC maintenance and operation, building automation system operation, critical environments and data center support, supply-side energy, general maintenance (mechanical, electrical, plumbing, carpentry) Move management, project management, computer-aided design, construction, retrofitting, performance contracting documents can make it easy for service providers to submit bids that enable meaningful comparison. The purpose of the RFI is to identify a short list of companies qualified to provide the needed services. Ask for information about: Company background and financial information Operational capabilities and service delivery models Customer service approaches Technologies used Performance measurements Ways of achieving cost reduction The RFP typically asks bidders to examine the facilities and quote pricing. It should include enough information to enable providers to prepare realistic bids. This includes information about individual sites, work order histories, existing staffing levels, IT infrastructure to meet reporting needs, and a detailed specific scope of work and specific service levels. The RFP also should ask for references, typically from three companies in the same or similar industries with similar real estate portfolios. Understand Baseline Facility Management Costs Without a baseline, there is no way to assess the benefits of outsourcing. Companies that cannot set an accurate baseline should find a way to benchmark their costs before seeking service proposals. This gives service providers a target for their bids and creates a foundation to ensure apples-to-apples comparisons. One way to set a benchmark is to use cost-per-square-foot average figures for industry sectors from organizations such as Building Owners and Managers Association (BOMA) and the International Facility Management Association (IFMA). Another way is to ask a facility management service provider to create a benchmark based on its experience with companies of similar size, in similar industries, with similar facility portfolios. Facilities management companies operate millions of square feet of space and can produce benchmarks against which to compare service levels for virtually any task, in any facility, and any industry sector. One common mistake in setting a baseline is to overlook the soft costs of in-house facility management, such as: Human resources costs related to facility management employees Information technology and software costs for supporting those employees Costs for issuing purchase orders, paying bills, and managing facility budgets Legal expenses for drafting and administering vendor contracts After outsourcing, these costs disappear, and the support staff time can be directed elsewhere. Pinpoint Opportunities to Reduce Costs Baseline data help identify areas where outsourcing can have the biggest impact. Janitorial service and landscaping often provide major cost reduction opportunities, as service providers are highly efficient in those areas. In addition, suppliers usually can streamline call center operations, identify BioPharm International 3 October 2004

4 Table 2. Prescriptive vs. Outcome-Based Service Levels Activity Prescriptive Service Level (Out-tasking) Outcome-Based Service Level (Outsourcing) energy savings opportunities, and improve overall equipment maintenance, thus driving down the cost of major repairs Cleaning Landscaping Vacuum fifth floor conference room five times weekly. Mow and water front lawn weekly. Keep fifth floor conference room clean to Class A building standards. Keep front lawn trimmed and green in manner comparable to grounds of other local Class A buildings. Total Results Are the True Payoff Outsourcing is a long-term proposition, and to deliver the maximum long-term benefits, a service provider may need to invest resources up front. This is why we warn you that, in the short term, costs may actually rise. It also is one reason why a company should not Smaller Firms, Bigger Benefits F acilities management outsourcing is not just for the big, multinational pharmaceutical companies. In fact, small and mid-size companies, including contract research and manufacturing firms, stand to benefit even more in proportion to revenue. Outsourcing helps smaller companies because they tend to have narrow expertise in facilities management and prefer to invest their limited resources in core functions. In addition, procurement organizations in these companies tend to be smaller and less specialized than those of large firms. While large companies may outsource to gain economies of scale, consolidate the supplier base, and leverage suppliers across global operations, smaller companies focus more on gaining access to world-class technologies and expertise they otherwise could not afford. Here is some basic advice for smaller firms looking to outsource. Focus on Outcomes Rather than Tasks Don't confuse outsourcing with out-tasking, which means dictating, for example, how often a janitorial service empties wastebaskets, or what actions a preventive maintenance provider must perform, and how often (Table 2). Out-tasking presumes that completion of specific tasks leads to a facility that performs as intended. But real success depends on outcomes, such as maintaining a controlled environment in a manufacturing suite to support the production of a drug. In true outsourcing, the owner defines the outcomes and relies on the supplier to deliver results in the best and most cost-effective manner. This approach taps the supplier's expertise, allowing that supplier to implement technology and management practices developed and sharpened by years in the marketplace. It also takes less owner resources to monitor outcomes than to monitor activities. Consider a Broad Outsourced Scope Smaller companies generally do not have the luxury of building internal expertise outside the core business of drug development and manufacturing. The broader the scope of outsourced services, the more the company can focus on the activities that generate revenue and profit. Outsource a broad scope, and hold the supplier accountable for the desired outcomes. Look for a Partner The benefits of facilities management outsourcing are enhanced by long-term relationships. You will get the benefits of a stable supplier work force, lower procurement costs, and supplier commitment. Of course, a long-term relationship depends on the supplier's willingness to adjust service levels and scope to support the client s changing business environment. Treat the service provider not as an outsider but as an integral part of the business, able to add long-term value and provide a competitive advantage. BioPharm International 4 October 2004

5 select an FM partner on the basis of price alone. One key to successful outsourcing is a transition period, which includes a variety of activities that have upfront costs but yield reductions later. A major company with multiple locations may have thousands of vendors under contract. A substantial reduction in the vendor base ultimately yields better service, lower contract administration costs, and greater pricing leverage but the consolidation process takes time and staff commitment In the long run, better equipment maintenance and a more proactive maintenance culture may save millions of dollars in greater maintenance efficiency, lower repair costs, and reduced downtime. But in the near term, technology improvements like computerized maintenance management systems, an FM partner may take a significant investment. Another reason to avoid choosing an FM partner by just price is that service levels for some functions may actually need to be raised from the baseline to deliver the desired results. For example, in mission-critical facilities such as laboratories the primary objective is not to save money but to eliminate downtime and hold environmental conditions within specifications. The solution may include better maintenance of supporting infrastructure. That costs more initially but pays huge dividends in the long run. Ensure Executive-level Sponsorship Without up-front endorsement from top management, outsourcing usually fails. Plans for outsourcing should be led by a steering committee that includes a corporate-level sponsor and representatives from all key functional areas: human resources, finance, accounting, procurement, facilities management, and others as necessary. A lack of direction from the corporate level creates a vacuum in which rivalries and turf battles can grow. For example, procurement personnel are likely to support outsourcing as a way to reduce costs and so enhance their value to the organization, but facility management personnel may perceive that outsourcing threatens loss of control over their side of the business. Left to their devices, the two functions may operate in conflict. Executive buy-in sends a message that outsourcing is strategically important. Foster Mutual Trust and Effective Communication Outsourcing relationships evolve continually from the moment the contract is signed. For this and many more reasons, the outsourcing company and the service provider must be able to trust each other. In particular, their values and objectives must align, and they must communicate openly and frequently. Transparency is key to building and keeping the relationship. While the service provider must appreciate the client's need to reduce costs, the client must understand that the provider needs to earn a fair profit. To increase transparency, outsourcing partners are moving away from fixed-fee contracts toward contracts based on reimbursable expenses plus a management fee. Those issues aside, trust builds through experience in working together and through solid performance. It starts, however, by treating people appropriately. Employees affected by outsourcing confront the fear of losing their jobs or of being transferred to a different company. To the greatest extent possible, don t cut their pay or demote them if they transfer to the service company. As part of the outsourcing relationship, there must be a communication plan that includes an initial meeting to establish expectations, feedback meetings at specified intervals (more often in the initial stages), and scheduled feedback sessions for executives. TOWARD SUCCESSFUL OUTSOURCING Facility management outsourcing can be an excellent way for life sciences companies to drive down operating costs, tighten their focus on the core mission, and improve their competitive position. By producing a sound plan and a disciplined approach, companies can build outsourcing relationships that yield meaningful benefits from the start and for many years to come. We feel that smaller companies may derive similarly valuable benefits, and you can review our recommendations in the sidebar on page 4. Reprinted from BIOPHARM International, May 2005 Printed in U.S.A. Copyright Notice Copyright by Advanstar Communications Inc. Advanstar Communications Inc. retains all rights to this article. This article may only be viewed or printed (1) for personal use. User may not actively save any text or graphics/photos to local hard drives or duplicate this article in whole or in part, in any medium. Advanstar Communications Inc. home page is located at BioPharm International 5 October 2004

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