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FM in Manufacturing: Extending Contract Tenures

A large-scale manufacturing facility, spread across several high-roofed structures, located in the outskirts of city limits or in far off industrial spaces…

So distant is it from the city that a ‘township’ has sprung up only to house those who work at and manage the factory; so intense is its production process that only the most heavy-duty machines & cleaning chemicals are capable of clearing up the detritus of its core business; so productive is its output that hundreds of maintenance employees work in shifts round the clock to keep the facility running smoothly.

Now, when a facility management service provider is awarded the contract for this site…

How many skilled personnel will have to be recruited or transferred to live full-time near the factory; how many expensive cleaning machines will have to be purchased and transported from a great distance away; and how many semi-skilled housekeeping workers will have to be intensively trained – sometimes even certified — to operate these machines safely?

To systematically put together the mammoth resources needed to get the project going, both the service provider and the client need time to understand each other… how they work, their strengths and weaknesses, the expertise they bring from past experience and how to bridge the differences between them. How can a short-term contract of one year justify the efforts and investments put into this contract?

Mrigank Warrier, Assistant Editor, Clean India Journal, speaks to heads of FM companies that extend services to production units across India on why clients in the manufacturing segments persist on signing one-year contracts, what are the pitfalls of such contracts for both clients and service partners, and how long-term contracts can be a win-win for everyone.

Contract tenures

With very few exceptions, most manufacturing clients sign Facility Management (FM) contracts for no more than one year or go for a one-year ‘rolling’ contract, where the contract is renewed at the end of the year along much the same terms, save for any increase in consumables cost.

A few clients may commit to two years; and very rarely to three years. None of the service providers Clean India Journal spoke to has come across a manufacturing FM contract for longer than five years in India, and the one who has, refers to it as an ‘odd case’.

However, multinational companies with manufacturing facilities in India, with their international experiences of longer-term contracts, are willing to push boundaries in India as well. Over such a three to five year period, the client and the service provider are able to gauge each other; the latter is also convinced that the customer is here to stay. With this surety, the service provider gains the confidence to invest in upgrading machinery and introduce new technologies without a constant eye on a particular year’s ROI, since they are convinced that their investments will pay off in the long run.

End of tenure

When the contract period draws to a close, the client’s FM team reviews the year’s experience to decide on whether or not to continue with the same service provider. Under all circumstances, service performance should be the top factor to be analysed, however, that is not the case. Bids are opened again, and if another service provider meets the criteria and offers to provide the same services at a lower cost, many manufacturing clients will readily finalise the lower quote.

Need for NOCs

If such clients switch service partners every year, it becomes very difficult for the latter to manage this constantly churning flux of manufacturing facilities under their management.

Many guilds of professionals like lawyers and accountants follow the practice of obtaining a No-Objection Certificate (NOC) from their colleague and competitor who was previously engaged by a client that has just taken them on. This is a professional courtesy that needs to be replicated in the FM world; if a client wants to switch service providers or if a service provider wants to leave a client – especially if the need to do so arises before the contract expires – the least one can do is obtain an NOC from the party that is likely to be affected.

The organised FM sector has become as professional as any other; its leaders would do well to mutually commit to such a healthy practice.

Adding on services

It is no secret that in India, clients prefer to outsource different FM functions to more than one service provider at the same facility, or the same function to different service providers at different facilities. Pre-Covid, one could see the beginnings of a movement to entrust a single service provider with multiple functions. Post-Covid, this has gained momentum, but we are far from the day when all FM functions will be entrusted to a single FM company.

Contract renewal time is when a client ponders over putting more of their eggs in a single service provider’s basket, thereby increasing their scope of work. Most manufacturing clients, however, are still reluctant to outsource technical services, which they feel are directly related to their business continuity. The fear of production coming to a halt because of a service provider’s insufficiency is too great. Besides, they feel that no vendor or vendors can manage the mammoth utilities of a manufacturing facility better than their own internal team.

Even if the manpower for technical maintenance is outsourced, the analysis of the data gathered is usually done by the client’s FM team. This way, the FM service provider becomes easily replaceable.

Product line & longevity

The likelihood of being awarded a three or five year contract can be discerned from the type of product being manufactured at a facility.

For example, heavy industries like steel or aluminium are almost always situated at remote locations, and are self-sufficient in terms of support infrastructure like employee accommodation and transport. They are more attuned to the importance of retaining employees and understand that opting for long term contracts is a way to maximise their own ROI.

On the other hand, automotive manufacturing facilities, which tend to be on the outskirts of major cities, have not yet matured enough to recognise this trend. It is only now that some of them have started graduating to two-year contracts.

FMCG clients have an entirely different approach. Food processing clients, for instance, are permanently concerned about the level of hygiene in the facilities; consequently, the penetration of mechanised cleaning here is not very high. Since machines form a relatively smaller portion of the Capex cost in these cases and the service partner does not incur as heavy a financial burden, such clients state this as a disincentive to sign on for the long term.

This leads to a chicken-and-egg situation, where a slow uptake of machines promotes short term contracts, and the shorter term contracts preclude any investment in cleaning machines.

Leadership mentality

When a client’s FM team goes through churn, its mindset towards facility management also changes. A team that was perfectly satisfied with the existing service provider suddenly becomes enamoured by a different service provider, simply because the FM leadership changes.

A simple change at the top can terminate a contract. Since this scenario is a perpetual possibility, the FM team prefers to exercise the right to renew FM partnerships at frequent intervals, with the option of opting out arising every year.

Sometimes, even if the FM team is consistently satisfied by a partner’s performance, the client’s board may have mandated that no team should work with a particular vendor for more than a certain number of years. While there may be sound reasons for this diktat, a perfectly symbiotic FM relationship may have to be terminated on the grounds of ‘company policy’.

Shrinking margins

Alongside the challenge of major Capex investment for low or no ROI from short term contracts is the new problem of cost-fixated clients who negotiate already low margins down by another 0.5-1%. Service charges have plummeted from 12% to 3-4% in some places, and some clients wish to whittle it down further, little realising that in a year-long contract, it allows service providers no room to procure the best of machines.

Repercussions of rebadging

It is an industry-wide practice that when one service provider replaces another, a major portion of the ground-level workforce remains the same – in some cases, as much as 70%. Clients are also reassured that FM personnel who are familiar with the facility will stay on.

While this may also help a new service provider to ease into operations, it can also make
clients view them as dispensable after a year. After all, while the vendor may change, most of the ground level staff remains the same.

Lessons from history

Let us say an entire manufacturing facility has been mapped onto a building management software. Every asset has been surveyed, verified and loaded into the system; its specifications and maintenance records are accurate. And now, the service partner changes after a year – the approximate amount of time it takes to complete such a herculean exercise. Both stakeholders lose, but the client loses out on more.

On other hand, when the same service partner stays on for years at a stretch, it can add and subtract assets that have been installed and decommissioned over time, study the performance of each asset, predict breakdowns, create alerts for maintenance, and compare the performance of assets across facilities of the same client.

If the service provider has to exit after a year, using such a software is pointless and using FM data to improve performance is next to impossible.

1) Longer tenures promote Capex investments

2) Costing depends on contract periods

3) Manufacturing, machines, maintenance and multiple minds

4) RFPs: Long in tenure, tough to crack

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