Best practices in facilities management: An ADC & JLL roundtable
With the need to streamline the management of its installations while it addresses aging infrastructure, severe budget constraints and evolving weapons systems and missions, the Defense Department has been refining its vision for “the base of the future.” Other trends are prompting DOD to contemplate new ways for supporting its installations as well, including a shift in demand for services due to service members’ changing demographic profile and the emergence of more efficient service providers. Many on-base services the military now provides can be carried out more efficiently by the private sector or local governments. Beyond a greater reliance on public-public and public private partnerships, a move toward a performance-based approach to contracting for facility management has the potential to improve the quality of installations services at a lower cost.
In recent years, the outsourcing of facilities management (FM) has grown rapidly in the private sector, and the global market is expected to grow at an annual rate of 6.4 percent to nearly $100 billion by 2019. If well executed, outsourced FM can drive significant cost savings, uncover efficiencies and support the creation of a partnership between the client and servicer which incentivizes performance.
Generating Cost Savings and Efficiencies through Performance-Based Outsourcing
For both public and private sector entities, the primary driver of FM outsourcing is to generate cost savings through reduced operating expenses and improved processes. Top FM service providers have successfully reduced total operating expenses from 5 to 30 percent through efficiencies in energy management, workflow management, supply chain management and workforce administration. These cost savings translate directly to a more effective use of resources, a better work atmosphere for employees and increased focus on the agencies’ core missions. In an increasingly competitive and resource-constrained environment, FM outsourcing is a very powerful tool.
The primary way the FM industry achieves these efficiencies is through a best practice known as performance-based outsourcing. In this arrangement, contracts and incentives focus on agreed-upon outcomes rather than on prescriptive tasks. For example, a performance-based contract would simply define the standards for facility cleanliness, versus stipulating the frequency of cleaning for each area. The focus on cleanliness standards allows the service provider to design a customized strategy that adjusts service levels for high- and low-traffic areas, allowing for the most efficient use of manpower and resources.
Key Performance Indicators Assess Effectiveness and Provide a Baseline for Performance Incentives
Another critical component of performance-based outsourcing is the use of key performance indicators (KPIs) to judge effectiveness and to provide a mechanism for establishing performance incentives. In performance-based contracts, service fees are typically divided into base and incentive portions, similar to the approach used in many of the contracts between developers of privatized housing on military installations and their facility managers. If performance targets are not met, the FM service provider’s fees are typically reduced in defined increments that correspond to the size of the performance gap. Conversely, if performance targets are exceeded, the service provider has an opportunity to exceed its base or incentive fee, or share in the percentage of the financial benefit created. Additionally, shared savings incentives may be based on the contractor’s ability to reduce actual costs below the contracted amount subject to meeting the KPIs. This best practice requires the military service to clearly understand what they have spent on FM during the preceding years to establish an accurate benchmark for determining savings. Fortunately, each service tracks costs and cost codes very accurately and with a great deal of precision.
Overall, this enhanced model gives service providers the flexibility to develop customized execution strategies. In addition, it provides financial incentives for achieving mutually defined performance targets to align the interests of the client and service provider and create an environment for continued innovation. Many organizations also find this structure helps create a partnership with the service provider rather than the buy/sell dynamic of the traditional supplier-client relationship.