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Longer tenures promote Capex investments

Angad Rajain, Global CSO & IFM Head, Tenon Group

In a freewheeling chat, Angad Rajain, Global CSO & IFM Head, Tenon Group made the case for how the duration of a manufacturing FM contract determines investment readiness, reduces Opex costs, promotes digital initiatives and more.

Why does the magnitude of Capex investments required to provide FM services at a manufacturing facility necessitate a longer term contract?

The capital expenditure on machinery, which is borne by the service partner, is very substantial. Imported machines, in particular, can be very expensive; their return on useful life can be more than 3-4 years. When a client signs a shorter term contract, it does not allow the service partner to offer the advantage of spreading that cost over a longer period.

By going in for long term contracts, the client can spread these costs across years, and the service partner can maximise the utility of the machine that’s been purchased. The longer the tenure of the contract, the better the value that can be derived from a machine, and more is the investment possible in terms of maintenance training, which ultimately maximises the utility derived from that machine.

Mobilisation costs are also substantial. Neither service partners nor clients would want to, or should have to spend on this every year, or every other year.

What does the geographical location of a manufacturing facility have to do with the service partner’s initial investments?

Manufacturing businesses are typically not set up in the heart of the city; they’re usually at remote locations. This produces challenges and necessitates investments in setting up local infrastructure.

When you win a contract in a metropolitan city, you already have an existing infrastructure in that city. The proximity of one bank ATM to another bank ATM or of one commercial office to another commercial office allows you to take advantage of these synergies. But there will never be one massive steel plant next to another massive steel plant, or ten steel plants in the same vicinity. These are usually hours away from a major city, spread across several acres and may even be divided into smaller facilities.

Setting up local offices to support the team, setting up housing and boarding for the large number of staff that are hired and deployed becomes difficult if the contract is for a short period.

No service provider wants to train personnel to use expensive, complex machines, then see them leave within a few months. We create incentives and infrastructure for them, which makes it conducive for them to stay put. Likewise, we would want the facility management team that’s locally present to be adequately enabled to conduct their business; they cannot keep going back to the head office
or branch office for any requirement. All this requires long term investment.

How can long term partnerships bring down Opex costs and improve the supply chain for clients?

When a client enters into a long term contract with us, we too are enabled to enter into long term contracts with our supply chain partners e.g. cleaning chemical suppliers. We are able to commit to a price for a longer period, which will remain unaffected by external exigencies. This way, we can avoid yearly price increases.

It also emboldens our supply chain partners to make certain investments. For example, they can be involved in the site survey and deployment program. The best possible training to staff in the correct usage of supplies, minimising health risks and safety risks, becomes more plausible.

Delivering to a major city is never a problem; delivering to a remote location requires our partners to invest in their supply chain logistics. The longer our contract with clients, the longer is our contract with supply chain partners, and the more they can invest in augmenting their logistical infrastructure.

Apart from physical infrastructure, investment is also required in digital infrastructure to manage manufacturing facilities. How does this correlate with contract tenure?

Unfortunately, India is still not very advanced in the functionality of CAFM systems. The way things are done is still very manual-intensive, which does not help us maximise the ROI of the product. A CAFM system works only if there is proper investment, and it works only with long-term contracts.

There is no value in an FM business putting together a CAFM system in isolation. It’s the client’s data and the client’s assets; it should be their CAFM system. If they don’t make that investment and change service partners, the former partner will take away the CAFM system; clients lose facility history. With a good system, they have better sight over what is working and what is not working, and can measure KPIs more effectively.

One thing I’ve learned through numerous contracts in India and the UK is that it takes anywhere from six to eight months to deploy a CAFM system properly. Only after this, you can start developing trend lines and benchmarks and base cases.

What is the typical duration of your contracts with UK manufacturing clients?

It can be a 3+2 contract, where at the end of Year 3, they have the option to extend it by two years. Then, there are 5+2 contracts which are more mature. We have also signed 10 year contracts; such customers want to lock in better price rates and be certain about what their expenditure is going to be for the next 10 years.

They’re willing to make more of an investment in the first initial couple of years, but they will also have more significant savings over the cycles. This long tenure also creates incentives for the service partner to perform well; there will be high profits and margins in the first five years, and motive to continue managing the facility properly over the next five years to avoid being in the red.

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