Behind the magic

Paul Vincent exposes a number of tricks that FM services suppliers use to bump up their bills.

I recently got hooked on a TV programme called Magic’s Biggest Secrets Finally Revealed. I find it fascinating to see how the most famous tricks and illusions are done and in particular I have been amazed at how easy it is to lay a curtain of distraction and deception over an audience – no matter how closely they may be sitting to the action.

For the past five years I have been living a dual business life, helping both purchasers and service providers to operate more effectively. And just like the masked magician in the TV show, I know many of the ‘secrets’ that lurk beneath the surface of the buy-side/sell-side curtain. This insight has helped me become a very knowledgeable buyer, particularly at identifying when suppliers are playing a surface commercial game to get past the procurement gate – often safe in the knowledge that once in contract they can recover and in many cases exceed the value of any concessions they may have been forced to make.

Facilities management is the latest area of spend I have been involved with, in particular, planned and reactive engineering services. During the past 12 months I have seen many examples where procurement professionals believed they had negotiated great deals on behalf of their internal clients but had actually been blindsided as to their true FM service costs and the income/margin that suppliers are able to make from them.

An organisation has three levers to pull if it wants to maximise value for money in FM services: number x quality of service x unit price = value for money.

Despite lots of great market talk it is incredibly difficult to control all these variables simultaneously. Organisations have successfully honed in on these variables individually and have been able to generate cost savings. But these are often only visible on the surface and are in practice very short-lived.

What seems to happen during negotiations is that organisations will insist on receiving the highest quality of service for the lowest unit price and the supply chain will agree to this because they can’t afford not to. So the procurement case looks good. The projected savings look good and, as far as appearances are concerned, the procurement professional has done a great job.

Coping with the accrual budget

But then their invoices arrive and the accrual budget (based on the volume of jobs issued) kicks in. Things start to unravel. The supply chain (and their suppliers) might have added an average of half an hour on to each of their jobs, which no-one can validate. They may have invoiced for the same job three times – because to achieve the quality of service target they can only do a short-term fix (or use underqualified staff) each time a problem is reported.

This can very quickly lead to budget overspend and become a huge bone of contention between FM service providers and their end client. Furthermore this overspend is not usually recognised until well into the contract. In most cases supply chain firms know that their clients cannot track or validate their actual time or performance on site therefore the savings they commit to during contract negotiations are often illusory. Someone told me the other day that the average contract life in the FM industry is now as low as 18 months – if this is true then it is an incredibly poignant indicator of business inefficiency.  

The FM marketplace is hugely competitive. There are many different types of management models and service providers. The absence of real- time activity tracking in many buying organisations means that clients need to trust that their chosen supplier will do what they say they will, or that they have done what they said they would.

Here are some of the things that ‘savvy’ clients will be watching out for:

Reactive call-outs

• The FM or contractor presents low hourly rates to win tenders but because of a lack of adequate control on site they could manipulate the hours on an engineer’s sheet to increase the cost.
• The FM or contractor will send a low-level cover engineer to attend the first reactive call so they can achieve their contractual KPI’s. But they don’t fix the issue therefore guaranteeing a return visit which will invariably encompass a further (and possibly higher) call-out charge.
• Many FMs or contractors do not have the processes or mechanisms in place to track how often they do reactive work on the same piece of equipment or issue, leading to much higher client costs. I have heard of numerous instances where repairs are carried out on the same problem over and over again, thus the cumulative call-out charges end up dwarfing the cost of replacement.
• The FM or contractor attends the first call but the overall job cost will be higher than their predetermined limit – it would therefore need to be competitively quoted for. They will have hit their KPI (and be paid accordingly) but from a client perspective the job is no further forward.

Planned preventative maintenance

• These jobs might not be carried out in full but they are always fully charged for.
• Jobs can often be manually closed on the systems operated by FM companies without concurrence from the client. Once a job is marked as being complete it can be charged for.

Invisible mark-ups and rebates

• Where there are a number of links in a supply chain percentage mark-ups can be added or increased on quotes and materials – these will of course get passed onto the client.
• If you use a management company then they
may be receiving a percentage rebate from the downstream supply chain they are overseeing. Very often this rebate is factored into their upfront pricing. They will still achieve their full margin from the client but just recover it via another route.  

In my experience of this spend area, service providers are not trying to be deliberately deceptive, it is more the case that clients are unwittingly using competitive forces to create an unrealistic and unsustainable contract framework for the level of work required. I hope your organisation is not one of them!

Paul Vincent is managing director of Insight Sourcing Solutions

Source: www.supplymanagement.com

 

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