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Outsourcing Facility Services:Price, the Deciding Factor?

Fixed Cost and Variable Cost

In India, there are some major players who are considered as “one stop shop” for all outsourced activities. “This largely does away with the “multiple contractors” concept and all we do is interact with the Facility Head of the service provider to get the job done,” says M Kalyan Krishnan AGM-FMS, SEZ Coimbatore. Sodexo is offering FM services at the SEZ here at Coimbatore).

“We have “services basket”offered by these MNCs from where we pick and choose services from and at the end of the day, paythem single chequefor all the services provided over the month “– M Kalyan Krishnan

This has multiple advantages in reducing the processing time for multiple invoices from numerous contractors and payment processes against these invoices. “We have “services basket” offered by these MNCs from where we pick and choose services from and at the end of the day, pay them a single cheque for all the services provided over the month. We do get a 30-day credit period and at the same time, do not have to involve in Staff statutory obligations like Provident Fund, Medical Insurance or Professional Tax. Needless to say, these services come with an additional Management Fee of about 10% over and above the salary + admin costs + consumables.”

But, outsourcing some tasks allows the company to scale up the scope and expertise of the workforce as opposed to changing in-house staff. According to Tim Parker, a consultant and expert, “Outsourcing gives the company the advantage of flexibility in changing the level and quantity of talent quickly. One of the down sides of outsourcing is having multiple vendors on site making the company manage each vendor – although that can be overcome with a “resource management” leader (also a possible vendor) who may oversee multiple vendors for the client (sort of like a general contractor who hires sub-contractors). Definitely, outsourcing and just-in-time concepts are effective solutions, as long as the risks are known and the approach is clear in everyone’s mind.”

Needless to say, when contracts are finalised with multiple vendors, besides cost, headcount too plays an important role in the selection process. “Yes, both head count and cost play a major role in selection of service provider,” agrees Madan Kumar. “If I look for a smaller facility (probably below 50,000 sft) I would look for a local service provider at lesser rate with good experience. If I am looking for a bigger facility I will definitely go for a reputed global service provider with good local presence and similar experience. Of course in both the cases, cost would be a factor but not a constraint.”

Lowest bid

“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it cannot be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.” – John Ruskin, 1819-1900, author, architect and economist

Even though cost is a determining factor, service providers complain that it does not match the expenses incurred to deliver standard services. In the bargain, the service provider is unable to meet standards and thereby loses credibility or has to bear the cost himself to retain quality services. In either case the service provider is a loser. Also, issue of late payment by the client is a factor being raised for poor deliverance.

“The points raised by the service provider are very true, but are limited to very few clients. I agree to the points to some extent but that’s not always true. In most cases, the service providers make compromises while sending the proposal to a new client for the first time, but it is not required always to be L1. Service providers can propose what they can deliver additionally and how they can show difference to their competitor in terms of service. Clients of course will look into the financials, but at the same time look for a reputed service provider who can add value to the service delivery in terms of professionalism and bringing new technology in.

“If the service provider is strong in his service delivery and client base and also if he succeeds in the presentation about possible value additions (in terms of service) along with proposal, client also will agree to pay more comparatively. For example, if a client selects a L1 vendor for housekeeping, to cop-up with the take home salary of the janitor/made he may not fallow the statutory requirements like minimum wages, ESI, PF, etc. to his staff. In this case, we can get a service provider at a lesser rate, but being the principal employer we will fail in our internal audit and will lose credibility in the market too,” explains Madan.

Partnership & Deliverables

As both, the client and the service provider are owner/manager and contractor, the best client/contractor relationships always involved a partnering approach. This type of relationship affords give & take, flexibility, unified interest (symbiotic relationship), and ultimately the best bang for the buck.

“Even if the contractor may not be the lowest bidder, he costs me less in the long run because he gets the job done without much care/work on my part. Conversely, the worst relationships that I have seen and/or been a part of are those where both sides are just trying to figure out how they can squeeze money out of each other – facility managers are just as guilty, if not more so than contractors,” says John Rimer, Chapter President at Northern Rockies, IFMA Chapter, Boise, Idaho Area.

“In India, where the costing depends on minimum wages as fixed by the Central Government, the variation in costing generally comes from a few segments, such as the cost of supervisory staff (they do not fall under the preview of Minimum wages of GOI), cost of tools and tackles (HK and M&E) and the facilitation / handling charges. It is here that one can play with,” says Wing Com. Govinda Rrajan, Facilities Manager, AMRI, Hyderabad.

“If the contractor is expensive or charging low, what would matter most is the deliverables and the value adds that one would look for, but again not at the cost of the vendor or the company. In addition, what I generally look for from a vendor is the back office support in the eventuality of any of the staff going on leave. Also the kind of expertise that the vendor brings in from other site (s) to resolve certain complex problems of the facility (let us agree that no two facility are the same and so is the problems therein).

“In India, we also have to guard against one more fact, that is that the vendor claims minimum wages, and if he does not pay the deemed wages, the principal employer (client company) is held liable by the Government. Hence, the payment done on minimum wages and wages given for supervisory staff need to be paid to the individuals, firstly to guard against Government liability, secondly, as regards wages/salary for the supervisory staff, the payment done to the vendor is paid in full, for it is often seen that if the wages claimed is X amount for a certain position, the vendor would supply a staff at X minus the cost given, thus, we get sub-standard staff, while paying for a higher standards that we aim for,” adds Govinda Rrajan.

In conclusion, as Sandra Gomes puts it, “‘You get what you pay for’ aptly describes the fate of many lowest-bid maintenance contracts in today’s commercial buildings industry. Why is the lowest bid process still a way of life? Many service providers provide bid responses without ever visiting or touring the facility. In this case, bid quotes are prepared using the scope of work provided by the facilities team versus preparing a personalized plan designed specifically for maintaining your facility. Price is important however, it shouldn’t be the deciding factor.”


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