Getting What You Pay For with Outsourced Providers

June 28, 2006

Working with service providers should be a partnership - discover why

Not enough time, not enough manpower, not enough expertise: There are many reasons to outsource services. When hiring companies to perform services such as pest control, security, lawn care, window cleaning, and janitorial, it’s important to get the most out of the money spent and manage the contractual agreement as if it’s a partnership as much as it is a business decision.

Who should you hire?
If outsourcing isn’t something you have had experience with before or you’re outsourcing a service previously performed by in-house professionals, gather as much information as possible before you put the job out for bid. When passing the work from internal to outsourced professionals, collect accounting records and carefully assess the history of expenses related to the service as it has traditionally been performed. This will provide a baseline and help you realistically evaluate the competitive pricing of service-providers’ bids. Keep in mind that, while you attempt to drive price down, labor wages are increasing. “There is always pressure to drive the price down or hold the price. The problem is that a unit of labor is never going to decrease in cost,” says Dick Dotts, president, Diversified Maintenance Services Inc., South Pasadena, CA.

Evaluate why your organization is outsourcing, and use these reasons to create goals and objectives. For example, if your skills and know-how are lacking when it comes to perimeter security, make sure you include “experience and longevity in management and execution of security-guard services” as one of the mandates for your new outsourcing partner. Prepare a list of these goals and requirements, and then weigh the criteria. For example, how important is cost compared to level of experience and insurance coverage? What about the providers’ corporate mission, vision, and ethics - not to mention financial stability and emergency-response capability?

Be as specific as possible when describing the work to be completed and the level of quality and performance you expect. As you send out a request for information (RFI) or request for proposal (RFP), these criteria will help prospective providers understand your expectations and help your organization evaluate providers. As a precursor to issuing the RFP, consider using an RFI as a means to limit the number of potential providers solicited for a bid. The data collected from an RFI can signal whether providers are capable and qualified to perform the work, and can save you precious time reviewing RFPs submitted by providers who are ineligible.

Invite providers to share their expertise and experience, make suggestions on how the work can best be completed, and recommend a mutually advantageous contract format (i.e. a fixed-price or cost-plus contract). “An RFI is a great opportunity to really try [to] tap some of that knowledge that service providers have and are often willing to share,” says Roger Peterson, vice president of operations at Philadelphia-based ARAMARK Business & Industry - Facility Services.

To define expectations further, conduct a site tour or building walkthrough with providers. An ideal time is before proposals are submitted. “When you’re in the bid stage of an agreement and people are walking through the facilities, service providers ought to ask (and owners ought to tell) whether or not the standards that people are seeing are, in fact, the standards they expect and want,” Peterson explains. Conversely, before awarding the work to a particular provider, ask to visit a site similar to yours in size and function where the same services are being performed by the provider being considered.

While it’s important that the proposals include information on how the provider plans to complete the work to specified standards, and at what cost, it’s often the value-added offerings that can help distinguish one provider from another. “Ask suppliers to bid on a set piece of work and then give them a very distinct opportunity to offer other options and variables that maybe you hadn’t seen or thought of,” says Peterson. This will help you distinguish which company can deliver the maximum benefit to your organization.

What should be in the contract?
The duration of most contracts is 3 to 5 years, with many containing 1- or 2-year extension clauses. Experts agree - anything shorter than 3 years can be a headache. Scott Salmirs, executive vice president at New York City-based American Business Maintenance (ABM), believes that lengthier contracts are popular because of the cost and time associated with the bid process.

Fixed-Price Contract
A fixed-price contract is an agreement between a customer and contractor on a firm price that will not change, regardless of the actual cost of the job.

It’s not unusual for larger owner organizations to draw up the contract and even use the same contract for multiple services. “The contracts may be the same, but it’s the scope that’s always changing,” explains Dotts. “That’s typically included in an exhibit or an addendum.”

The addendum or exhibit describing the scope of work should be as detailed as possible, specifying tasks and their frequency as well as the desired end result. Avoid making blanket statements about the minimum standards for performance. On any corporate campus, or even in a single building, requirements and expectations will change depending on the image and function of various spaces. This is especially true in multi-tenant and mixed-use facilities. For example, should a call center on the third floor be cleaned to the same standards as the law firm two stories above?

Remember that the provider you eventually hire cannot be expected to meet standards if they are never communicated. “That’s hard to do because, in some regards, it’s subjective,” acknowledges Peterson. For example, a contract might state that the headquarters building should be cleaned to Class-A standards. If additional details are not communicated, don’t be surprised to learn that the service provider has a very different definition of “Class A” than you do. Descriptions of how this “Class-A standard” can be achieved will help the service provider understand and meet your expectations.

Insurance requirements, a 30-day cancellation provision, extension options, pricing structure, and the assignment of material- or equipment-purchasing responsibilities are just a few of the items that should be noted in the contract. An explanation of how equipment, tools, material, inventory, etc. will be handled at the end of the contract term is also beneficial.

Include information on how problems and changes should be addressed. “It’s extremely important to include some mechanism to deal with changes in scope, services, quantity of work to be done, or quality levels expected,” Peterson explains. Companies downsize, merge, vacate, and relocate every day; the language in your contract should forecast how the resultant changes will be addressed. Don’t forget to prescribe actions for smaller changes in scope (e.g. cleaning coffee cups left in the conference room) as well. “Oftentimes, the most effective way to [manage change] is not necessarily with a contract amendment each time,” says Peterson. However, it’s important to stipulate in the contract the preferred means for requesting, recording, and administering changes to the scope of work.

How should you manage the relationship with a service provider?
After the ink on the contract has dried, it’s important that communication between parties continues. Building a rapport with either on-site staff or a project-management representative facilitates a comfortable exchange of questions and requests that is neither awkward nor accusatory. “There’s no doubt that the personal relationships and ability to communicate have a tremendous amount to do with the success or, unfortunately, the failure of some of these relationships,” comments Peterson.

Cost-Plus Contract
A cost-plus contract states that the customer will pay the contractor the cost of all labor and materials in addition to an agreed-upon percentage of profit.

When there is a concern, work together to resolve performance-related problems. Communicate early and, when possible, verbally. “You don’t become dissatisfied in a day,” Salmirs says. “What causes you to be dissatisfied is constant problems.” If you are assessing a provider’s performance based on a wastebasket that is continually neglected and you fail to express your dissatisfaction, you are as much to blame as they are. Don’t make assumptions: The janitorial staff may have a logical explanation for the oversight; without asking, you’ll never know.

Encourage your provider to record and communicate changes in their day-to-day routine in a service log. “In larger properties, we may use a service log to make notations of what we observed the evening before. Then, when the property manager comes in and looks at it, they have a heads-up on [situations such as] not cleaning a room because a meeting was going on,” explains Dotts.

Evaluating the performance and delivery of services by an outsourced provider should be constant. “There are no set points in time to evaluate the contract. It’s really every single day while life goes on in the building,” explains Salmirs. As the contract’s term progresses, you and the new provider will find a means of communicating that is mutually beneficial and adequate in both frequency and delivery (i.e. face-to-face meetings vs. e-mail).

Regularly scheduled walkthroughs of the facility and/or grounds can provide the ideal opportunity to share concerns, discuss quality and performance-related issues, and request that the scope of work be expanded. These site tours are often part of a quality-assurance program instituted by the outsourcing company. Ask your provider how often these inspections occur (either monthly, bimonthly, or quarterly) and tag along or request a copy of the written report that results. In multi-tenant buildings where the property manager and outsourcer are in frequent communication, custom services are often requested by tenants during walkthroughs. While the property manager may be eager to keep costs low, some tenants view these requests as worthy investments and are willing to pay for the additional services.

It’s important to meet periodically to discuss quality, performance, and satisfaction. This is especially important when the scope changes or new professionals become involved in managing or conducting services.

What about renewing, renegotiating, or re-bidding?
About midway through a typical 3-year contract, begin thinking about whether renewing or renegotiating is advantageous. “At least 18 months before the end of the term is a good time to at least make an initial assessment,” explains Peterson. This assessment may result in a preliminary decision to renew or extend the existing contract, which is becoming more and more prevalent. If the relationship is healthy, communication is strong, the service is satisfactory, and the cost is fair, continuing the relationship is in everyone’s best interest. Additionally, the cost and time involved in re-bidding the job can be substantial.

Review existing agreements and evaluate whether the scope of services you are currently outsourcing should be expanded or reduced. If you’ve decided to re-bid the work, assess the length of time your organization’s sourcing process takes and determine when an RFP should be issued. Once you’ve asked companies to bid, the process will take, on average, 3 or 4 months. Give yourself enough time to evaluate which provider has the most to offer at a cost that is within your budget. The number of companies bidding, the services included, and scope of work will impact the timeline. Likewise, if your organization’s sourcing committee is a large group and the RFP is extensive, expect and plan for the decision-making process to take longer.

Jana J. Madsen ([email protected]) is managing editor at Buildings magazine.

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