Facilities management (FM) outsourcers are challenged to fulfill client needs in today’s economic landscape. Many clients are clamoring for even deeper cuts in already reduced costs, which encroach on already thin provider profit margins. But they also see areas of growth, especially in some of their ancillary services.
“Service providers are being asked to develop models that are not in line with their services because clients see them as a commodity,” says Ron Holzschu, Senior Manager at Chicago, Illinois’ Deloitte & Touche. “It’s getting harder to deliver services in the manner the clients want at a price they can accept.”
But according to Sven Pole, senior vice president for Dallas, Texas-based Trammell Crow, a vertical property management and FM outsourcing firm, there are still areas of opportunity. “The winners are providers who can afford to lower costs through redundancy, technology and automation, or can deliver dramatically higher value of service than the competition, often involving ancillary offerings.”
These two factors are leading to a shakeout in the market. Although there is a lot of pressure on corporate budgets — making FM outsourcing more of a viable option, the challenge is the clients’ view of equating commodity-type services with specific FM tasks. Service providers seem to be having a difficult time distinguishing themselves as a value application.
This increases the difficulty in reconciling clients’ objectives (and financial means) with the need for providers to make money. “Clients are asking for the same services but not factoring that they want them for less, which is putting a strain on the providers,” says Deloitte & Touche’s Holzschu. “It’s creating confusion and uncertainty because the line between vendor and enterprise relationships is becoming more diffuse.”
He says the providers have themselves to blame for their quandary in many cases.
“In better times, some providers marketed themselves very aggressively. Others weren’t quite so optimistic and probably aren’t under the same pressure to meet inflated expectations,” he observes. “Had they been a little less accommodating and not oversold themselves, the optimistic providers might have avoided their current predicament.”
More Security in the Post-9/11 World
Since the World Trade Center attacks, security is one of the top issues on clients’ minds. Pole says it’s vital. “There are firms that are reviewing relationships with offshore vendors because of security concerns,” he notes.
And while domestic providers are responding to the need for more accountability, Pole wonders if increase security awareness poses greater impediments to global service level agreements (SLA).”Some just might not think it’s worth the trouble to address overseas markets, especially in areas that are perceived (politically) to be less than secure or stable,” he says.
But it’s also further cementing existing relationships, according to Bob Dickhaus, CEO of Atlanta, Georgia’s FM Solutions, a specialty firm that provides technology and energy-based FM services. “It’s a comfort issue, ‘better the devil you know’ rather than taking a chance on an unknown provider, especially in light of outsourcing relationships that have gone to vendors that are now in trouble,” he says.
Ellen Evans, director of marketing for facility services and management at Milwaukee, Wisconsin’s Johnson Controls’ is seeing greater interest in their security-based offerings. “Since we also are a security consulting firm, we’ve seen greater interest in those services. That should probably continue. Customers are also asking us for contingency plans and investigating risk analysis for our services — what sort of plans do we have if worst case scenarios arise?”
Vertical FM Outsourcers Fight to Retain Market Share
Vertical providers in some cases are also faced with a “back to the future” wish on the part of some clients to balance limited outsourcing with internal task responsibility, which is much like things were at the beginning of the outsourcing wave in the early/mid 80’s.
Verticals must sometimes break up their bundled services and offer a “pick and choose” formula to clients who then can select between bundled or individual FM tasks to be awarded to providers. Those not selected are either managed in-house or by another niche service provider.
“It has more to do with matching what a customer is looking for with the strengths of the vendor,” says Johnson Controls’ Evans. “If customers are looking for input on tasking and technical levels for service, then they might use third parties to assist them in performing those duties themselves.”
FM Solutions’ Dickhaus suggests an opportunity for niche FM outsourcers. “Client needs are becoming more sophisticated. Today I see a trend to more specialization. This makes it more difficult for vertical providers to deliver high quality service in multiple areas at a price that’s fair to both sides,” he says.
He sees a future for the single service outsourcing providers that specialize, such as the growing number of energy or telecom resellers that have arisen from deregulation in their industries. Dickhus projects opportunity for “some interesting alliances” between niche providers and some of the larger, more established vertical FM outsourcers, especially in service areas that the verticals don’t see as large profit centers.
Uncertainty Breeds Restlessness and Optimism
Expect marked change over the coming months for the FM outsourcing industry.
Real estate tends to lag behind the economy in general and that will probably continue into next year,” says Pole. “But the opportunities for the vertical companies are still there so long as they can maintain profit margins in the face of client-inspired cost reductions and find ways to generate a nominal amount of ancillary business from their relationships.”
Holzschu suggests the firms that play to their strengths will be able to weather the uncertain times. He sees longer term SLAs that offer a give and take between the two parties, reflecting “a true business relationship rather than a simply transactional one.” On the other hand, “specific tasks that are singularly outsourced will probably have shorter than normal SLA’s,” he predicts.
The overall trends for FM outsourcing appear to emphasize flexibility in the relationship rather than exclusively price, so long as the provider can help the client understand economies of scale, which can be a challenge for a non-core provider to impress on a core business decision-maker.
Facilities Management Outsourcing Trends for 2003:
- Vertical facility management outsourcing firms are fighting to retain market share in the face of niche firms that sell expert services in areas of specialty, such as utilities, telecommunications and security.
- More imaginative SLAs that focus on solutions rather than services as a commodity are needed to keep vertical providers and clients working together.
- Security issues are much more prevalent. The onus is on providers to assure clients they can trust the employees who provide outsourcing services and that detailed contingency plans for worse case scenarios are in place.