Insourced, Integrated or Panel? The Ideal FM Service Model Conundrum Bret Butler
Overview of presentation A brief history NB: Focus on Victoria Where to now? The Ideal Model? Key considerations in deciding on a LG FM model Pros and cons of integrated, panel and insourced options Contract Structure a crucial balance Alternatives to current models? Summary Feedback
Influencing History - Victoria Local Government Act 1989 1993: 210 Local Government Councils in Victoria Amalgamations, Compulsory Competitive Tendering (CCT): 1993-1999 Subsequent FM provider proliferation 2010 - present CCT disbanded in 1999 Local Government Victoria (LGV) Collaborative Procurement and Shared Services: 2012 Local Government Procurement Strategy (2008) Victorian Local Government Best Practice Procurement Guidelines : 2008-2013 OH&S Harmonisation: 2013 MAV Guidelines for Procurement: 2011-2013 IBAC Operation Continent : 2013-2015 Victorian Auditor General Report Asset Management & Maintenance by Councils 2014 Asset Management Standards (ISO 55000) - 2014 Rate Pegging - 2016
LG FM Services - Some Context Total LG materials & services (Opex & Capex) $2.7B pa FM is second highest spend after roads infrastructure 2008: Victorian LG Facilities Maintenance spend in $125 - $140M (excl. construction and security) (Ernst & Young, 2008) More than 50% of Services are outsourced in some form 2013 survey into LG Vic FM sourcing: (84% respondents) Building Services (excl cleaning): 52% local panel 16% integrated outsourced 12% in-house 20%: mix Grounds & Gardens: 46% outsourced (45% respondents) Graffiti: 80% outsourced (50% respondents) Condition & Compliance: > 90% outsourced (UMS, 2013) Obvious specialisation or economies of scale single outsourcing increases
Where to now? The Ideal LG FM Model No right answer. (But, plenty of questions) Heavily dependant on individual circumstances Costly to budget, relationships and reputation if you get it wrong How long since last reviewed your approach? What are the key emerging impacts? Is my current model working for me and my stakeholders? (Says who? How do you know?) How long into the future will it be able to meet my needs? If not, are there alternative models? "Would you tell me, please which way I ought to go from here?" "That depends a good deal on where you want to get to," said the Cat. "I don't much care where--" said Alice. "Then it doesn't matter which way you go," said the Cat. - Lewis Carroll: Alice in Wonderland
FM Outsourcing Considerations, Internal: Non-negotiable Procurement Governance (MAV / LGV / IBAC) Local Policy Other Regulatory Constraints Local issues Location Age and condition of portfolio Scale and rate of growth Ability to implement change (Politics!) Internal management structure size, reporting Councilors End user satisfaction Revenue & Budget Core functions expertise
FM Outsourcing Considerations, External Access to competitive supplier base Access to required expertise Contract conditions & structure Productivity Redundancy Accountability Flexibility (during contract) Risk & Compliance Administration requirement (systems and processes) Access to latest technology Positive contribution to data and asset knowledge? Contractor management Contractor benefit delivered: Efficiencies vs. profit foregone Culture and values match?
Insourced - The Pros and Cons PROS Stable team Governance Known and understood relationships Detailed local asset knowledge Direct control Retain in-house knowledge and skills Greater community support & stability esp. rural / remote CONS Lower productivity pressure Less access to latest technology / services Difficulty to challenge and / or reduce internal costs No market / competitive price pressure Limited redundancy in peak load or absence times
Panel - The Pros and Cons PROS High level of redundancy Ability to meet variable load capability Competition for services / competitive pricing Local knowledge Local service focus and priority Provides more options for supply without devolving full control Community perception? CONS Inconsistency of service Inconsistency of data and reporting High internal and administrative cost to manage Accountability remains high with asset owner compared to integrated OH&S liability higher Lack of full or additional investment by providers
Integrated - The Pros and Cons PROS Competitive market pricing Access to latest technologies and services Potential to reduce internal costs Devolved accountability Expansion of additional services (minor capex) at low initiation cost HR / IR / OH&S management Increased resource flexibility vs. insourced Increased investment / partnership CONS Staff changes Contract inflexibility? Lack of immediate local knowledge / history Perceived loss of control Different priorities / perspective Loss of knowledge Profit / benefit justification Less suited to rural / regional
Note: Contract Structure A crucial balance Schedule of Rates: Volume critical Cost of call out fees, travel, quotes Verification of costs versus activity Lump sum: Can be based on resources rather than specific activity Who is wearing the risk? Clear contract conditions are essential/ Predictive: Based on criticality of the asset versus use / impact of downtime To be business case justified Programmed: Regular review and adjustment Reactive: Who can authorise work? Sub-contracted vs. Self deliver Need to be clear on the benefit being delivered
What is changing? Increase in generic FM service providers Competition is increasing / Margins are bottoming out Gains from price pressure are reaching diminishing return levels Ability to accept more risk eg: RWLs, is limited Changes to OH&S and employment laws, placing more onus on effective staff, contractor and subcontractor management Greater governance scrutiny over procurement methods Increased Asset Management focus Reduced incomes - rates pegging A service standard or quantity reduction? New mobility, productivity and compliance technologies are available - Process efficiencies need to accompany How to manage / exploit?
Some Alternatives: 1. Collaborative Procurement Of the Victorian LG FM spend in 2008: ($125 - $140M) - Est. $10-$20M collaborative savings potential (Ernst & Young, 2008) Regional clusters rural / regional areas Have operated in Victoria in limited areas Mt Alexander / Central Goldfields Gippsland More attractive to larger FM providers Can the local contractors operate over a larger area? Who takes the benefit of the cost cutting? Can you really cut internal costs with economies of scale? (Politics, politics, politics!)
Model Alternatives: Collaborative Procurement Net Benefits: Ability to either: Retain local panel (esp. rural / remote) Knowledge, community, access, response Economies of scale in service provision OR: Attract larger providers / more competition Wider market participation Economies of scale / lower costs Access to wider technology. services Reduction in Council internal costs & administration Reduction of duplication in management, administration and procurement Basis for co-operation across other services
Alternatives: 2. Outsourced Panel Management Traditional panel management Time & administration heavy Invoice & order management & payment Inspections, audits Confirmation of charges vs. actual activity Technology now allows for automation in: Procurement Job allocation and deployment Help desk response and triage Contractor compliance and suitability On-site activity verification Real time location Photographic and document records Remote quote preparation Job status recording and updating Invoicing Safety checks and audits Customer quality feedback and contractor allocation
Model Alternatives: Outsourced Panel Management Net Benefits: Retain local panel (esp. rural / remote) Knowledge, community, access, response Reduction in internal costs & administration Ability to absorb increases in activity with lower proportional increase in internal resources Cost effective outsource costs: Limited external resources required compared to full service provision Net management cost reduction Evidence based management, payment & quality control Increased end user satisfaction Able to record and update more asset condition data, remotely More relevant data records
Summary Despite CCT, Panels remain the default and most popular form of sourcing FM trade services for LGs in Victoria today While attractive to source local providers there are numerous disadvantages to consider. Access to latest technology and data integration Increasing cost of internal management in meeting governance, procurement and regulatory constrains. Eg: OH&S Monitoring productivity, due diligence and security Lack of consistency Economies of scale Closer governance and scrutiny of procurement activities and cost pressure with rate pegging are restrictive OH&S legislation will put increased demands on Council subcontractor management
Summary cont. To date, competitive integrated service providers have struggled to demonstrate benefit over panels in many Council, especially rural & regional areas Collaborative Procurement offers benefits to: Reduce internal Council costs while maintaining current FM models and suppliers. Attract larger city bound suppliers and increase Market participation Competitive pressure Provide access to new services and technology Outsourcing Panel Management offers benefits to retain current structures but with substantially reduced internal costs net cost benefit!
Thank You Bret Butler M: 0455 020 569 E: reltub.jba@gmail.com.au
References: LGV, Ernst & Young, Local Government Procurement Strategy September 2008, Department of Planning and Community Development www.localgovernment.vic.gov.au, 2008. UMS Pty Ltd Local Government Victoria 2013 IBAC, Local Government: Review of Council Works Depots. May 2015 Connoley, R. Victorian Local Government Reform 1992-1999 Revisited: Implications for Trade Unions. Journal of Economic and Social Policy, Vol. 11, Iss. 2 [2007] Battersby, L. Council rates capped from mid-2016. The Age. www.theage.com.au January 21 2015