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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 technologiesare 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 ProcurementNet 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 ManagementNet 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!
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 1992-1999Revisited: 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
