you got to have passion

I was in a client meeting last week , we had a great session on the “BPO Procurement Value Proposition” all was going well until I was asked the following “What differentiates you from your competitors?”  At first I thought I would respond with the usual “Global Delivery, Great on-site teams, Sourcing Insight, Category expertise and so on) then a numb feeling hit me, “So What!” the same as our competitors I am sure. Finally after what seemed like a life time ( 5 seconds) I responded with an emotional word “PASSION” we employee teams that are passionate about what they do, where every they are, India, Poland or China we go after the guys and girls with passion…..passion for Procurement!! thats what drive us…..I like it.

The Facilities Management (FM) services industry is highly competitive with few barriers to entry. Companies from all service tiers often compete against one another, with larger companies emphasizing breadth and sophistication of service offerings, and small, owner-operated companies competing on the basis of price or historical relationship.

There are five key competitive factors and company differentiators in the facility services industry:

• Cost Structure and Service Pricing – Competitive cost structures are pursued through purchasing economies, capital equipment economies of scale, and cost saving from labor productivity technologies and techniques.   Small local competitors compete by minimizing non-production overhead costs.
• Service Breadth – As market expectations evolve, the capability to provide a broad range of fully integrated services is becoming increasingly important.  Further, technical innovation and the capability to perform industry specialized services is becoming a strong differentiator.
• Service Quality – Expectations of timeliness, reliability and quality of service are increasing.  Higher value contracts and longer contracting periods are making the ability to establish and maintain satisfactory long-term customer relationships a key competency.
• Geographic Scale of Operations – Competitors for large contracts must have the capability to serve multiple client locations
• Ability to Make Capital Investments – Large, multi-service contracts often require the disposition of client assets.

Facility Services Outsourcing Patterns:

Food services, landscaping/grounds keeping, custodial/janitorial, security, and HVAC/ mechanical are the five areas with the highest level of complete outsourcing.  45% of companies completely outsource their landscaping/grounds keeping, and nearly one-third completely outsource custodial/janitorial, security, and HVAC/mechanical.

The high growth outsourcing areas as a percent of budget change are HVAC/mechanical, energy management, construction/project management, custodial, and environmental services. Twenty-four percent of companies predict more external spending for HVAC/mechanical, 18% predict more external spending for energy management, 14% for custodial, and 13% for environmental services.

Historically, facility managers have approached outsourcing in a fragmented way, with 76% of companies contracting separately for each service. However, facility managers are increasingly outsourcing will consider bundled services like project/construction management, energy management, and real estate/property management services where value is “locked-up” in internal processes.

Facility Management Service Satisfaction:

External real estate and property management satisfaction ratings are 99%.

Food service, security, and custodial have relatively lower satisfaction scores.   The source of the dissatisfaction with these areas is most often related to service levels and the difficulty many providers are having with staff turnover.

1. BPO Procurement will continue to Tip focus on the US and then elements of Europe
2. Real Time will start to become a key demand for Procurement Providers
3. New Business Models will evolve (Read Free)
4. Technology costs need to reviewed  (Moores Law still rules)
5. Sourcing will become more digitalized,  as platforms become cheaper and more effective,
6. The five forces are Strong in this segment; they are coming and coming from everywhere
7. 2010 will be the Battle of the Sourcing Houses
8. Supply Chain BPO will start to Tip

The Sourcing Garden is an environment designed for todays modern Procurement professional, who needs support and up to the minute insight, into todays Sourcing Strategies . The site has been designed by Procurement Architects to  provide deep Market knowledge across key Sourcing categories.

Like a garden the site has been set up to grow organically, the aim is plant seeds of information and have are gardening teams enrich the content over the lifetime of the garden

We aim to share and partner with the Sourcing world building a self supporting “Eco System” of  Content and rich insight from around the world for the good of all.

The Garden has been built and will be maintained by a team of Procurement specialists from some of the leading consulting houses from around the world, with the vision to share knowledge and provoke discussion.

The Gardener

The Planter

The Mixer

The Rancher

]]> http://thesourcinggarden.com/?feed=rss2&p=142 0 http://thesourcinggarden.com/?p=159 http://thesourcinggarden.com/?p=159#comments Sat, 09 Jan 2010 17:58:49 +0000 The Gardener http://thesourcinggarden.com/?p=159

The Souricng Shift

I was surprised to hear a Sales Manager, tell me that they had refused to bid on a piece of work, because the client wanted to use ”eSourcing” as a method for supplier selection. I asked the person in question “was this not a normal practice?” It turned out that the person in question was “Old School” and could not see the opportunity, using digital skills amd techniques in reality he avoided the conflict of eSourcing because he was a relashionship guy.  I became intrigued by the issue, as a Procurement professional I have been using eSourcing as a tool, methodology and discipline for over eight years. I very much believe that e Sourcing is a “end to end” process and has a dominant role within the sourcing cycle. The issue that is been infuriating me now , for months is this idea that eSourcing is only useful for buying “Products” it does not work for buying services.  This is not the case and anew model is emerging that enables the value to be captured from eSourcing while driving the relationship model to new dimensions.

I started to see the opertunities a few years ago when we  we ran a eSourcing project to Source some 200meuro of service related spend, across a number of European countries. We did our ground work, we formed a empowered Sourcing Committee, we engaged with the engineering departments to develop complex SOW’s ,we worked with legal to agree pre release the Contracts, we managed all of the tasks within the eSourcing platform. This enabled us to keep everyone engaged within the project including the Steering Committee.

Using the eRFI tool we ran a complex review of market conditions, capabilities, financial as well as quality. We developed a evaluation criteria for Supplier Selection. This enables us to get a good view of existing and emerging suppliers across the Field of Operations. We started with some 20 suppliers and recommended to the Steering committee to go forward with 6 pre approve suppliers who met all of the requirements for doing business with our company.

We released a comprehensive eRFP Package to the chosen supply base, this included an overview of the process, detailed log-in instructions, a timetable for a supplier open day, all the SOW documentation. The Supplier Open days were critical to the success, as they enabled each supplier to have a whole day with the engineering teams who had developed the SOW. Once all the communication activities were completed the eRFP was opened. The suppliers had two weeks to complete the process.

What became very clear during the open eRFP process was that this was the opportunity to ensure that the supplier had indeed understood the SOW’s, it was the chance for us to focus on  harmonization, no more open Word documents trying to understand the response and match pricing within excel. We were able to harmonize the eRFP inreal time, as supplier entered responses into the pricing grids, we would realize almost immediately if the SOW had not been understood, we would issue a corrective notice to all suppliers if we detected something out of the ordinary. Once the eRFP was complete we did our analysis understanding that the baseline had been taken down by 29%

On the Monday morning we flipped the eRFP into an eAuction, one supplier later told me it was like being “cockroach and having the lights tuned on for the first time”  the baseline was taken down a further 8%. after 7 hrs of active bidding.

What did we learn during this process….

1. We only provided the Steering Committee with facts, this was great and we made it very clear from that moment on we would be the Fact Base Souricng Department.
2. The role of the Procurement Professional during this process. to being much more of a conductor a Project manager of different disciplines.
3. The Sourcing cycle was compressed into 8 weeks for a complex Service related event, in the old days it would have taken nearly six months, we did allow each supplier to come in and present their strategy and thier pricing.
4. You can do Service Related spend using these techniques and it works very well.
5. The Sales man was correct his role was  reduced to setting up meetings and getting the correct people involved during  the cycle, the relashionship role changed it did not go away. You can not beat Face to face and a firm commitment and a gentleman’s handshake still helps!
6. Letting suppliers fight with supplies to win our scope became key to our ongoing Sourcing waves

Introduction for Sourcing FM Outsourcing Suppliers

Facility management is an interdisciplinary field primarily devoted to the maintenance and care of commercial or institutional buildings,such as hotels, resorts, schools, office complexes, sports arenas or convention centers. Duties may include the care of air conditioning, electric power, plumbing and lighting systems; cleaning; decoration; groundskeeping andsecurity. Some or all of these duties can be assisted by computer programs. These duties can be thought of as non-core or support services because they are not the primary business of the owner organization.

There are three Types/Tiers of service providers in the Facility Services marketplace:

Tier 1:  National Full Service Providers – Characterized by broad geographic coverage and broad service offerings

Tier 2:  Niche Providers – Characterized by specialization in a narrow but complementary portfolio of services or focus on a particular geographic region

Tier 3:  Regional and Local Contractors – Provides point   services or small combinations of services for a defined   geographic area. Each tier is also differentiated by the characteristics of typical deal structures and contracts, and the depth of “value added service management” provided to the customer.

Tier 1 Profile: National Full Service Providers

Breadth of Service: Deep capabilities in both Facility Maintenance Management (FMM) and Asset Planning/Construction Management.

“Value Added” Services:  Integrated service management, asset and facility planning, design and architecture and engineering, project management, inventory control, performance measurement, etc.

Contracting Characteristics: Performance based/gain share contracting common. Service provider often takes ownership of Facility Services assets.

Operating Model: Broad service scope typically provided by combining capabilities of various wholly owned operating divisions and coordinated through a common management infrastructure.

Business Drivers:

1)Economies of Scale – multiple large and lengthy contracts allow for efficient sharing of common assets (i.e. IT and operations equipment), leverage over supply inputs, and broad use of best practices.  2)Service Bundling – Combining higher margin service management and skilled labor services (i.e. design architecture and engineering) with non-skilled labor services (custodial) provides risk diversification against historically low facility maintenance margins.

Example Companies:  Johnson Controls, Aramark, Unicco, Fluor

Tier 2 Profile: Niche Providers

Breadth of Service: Often geographically or industry focused.  Deep capabilities in core service area, with “market parity” service in related auxiliary services.

“Value Added” Services:  Industry focused providers offer comprehensive service choices for the targeted customers (i.e. From custodial to full operations of power generation facilities).  Specialized service providers offer true best-of-breed practices in a particular service area.

Contracting Characteristics: Tendency toward cost-plus contracts with performance parameters.   Limited gain sharing contracts.  Fixed cost contracts for one-time transactional services.

Operating Model: Geographic coverage and service breadth often achieved by service “alliances” with sub-contractors.  Various methods used for integrating sub-contractors into the service management infrastructure and managing sub-contractor performance.

Business Drivers:

1)Specialization – Leverage complex and specialized best of breed practices to a specific scope of service (such as real estate planning and management) .  This strategy often provides for deeper and more strategic relationships with clients.

2)Service complexity  – Often rely on complex service requirements from customer to differentiate from tier 1 and tier 3 competitors.

Example Companies:  Avalotis Corporation (industrial painting and coatings), MPW Industrial Services Group (industrial cleaning).

Tier 3 Profile: Regional & Local Contractors

Breadth of Service: Deep capabilities in a narrowly defined service area.

“Value Added” Services:  Transaction based. Service planning and management provided in large part by the customer. Contracting Characteristics: Fixed cost contracting with performance characteristics common.

Operating Model: Wholly owned capabilities for providing service.  Loose alliance of subcontractors for construction based jobs when required.

Business Drivers:

1)Price – With limited “value added” service offerings, price is often the dominating factor in customer decisions.   Contractors are often one of may providers of a similar service for their customer. Contractors often have limited leverage over supply costs.  May also act as a sub-contractor to larger FMM companies.

Example Companies: Avalotis Corporation (industrial painting and coatings), MPW Industrial Services Group (industrial cleaning).

Trends in the Market Place

The Facility Services industry is experiencing an extended period of growth in both the number of companies outsourcing services and the breadth of facility services being outsourced.

Customer drivers of this trend include an increasing focus on core  competencies, increasing technical complexity of facility and mechanical, electrical, and other systems, and the need for increased  system reliability.

Consolidation is slowly occurring within the industry, as competing against the largest providers requires broad service offerings, economies of scale, and broad geographic coverage.

Demand  for higher margin Facility Services such as replacement and repair are being driven by higher system complexity and aging infrastructures.

Technology is playing an ever-more-important role in the Facility Services outsourcing contracts.  The Internet and other systems have dramatically improved service providers’ ability to communicate with clients, manage projects and portfolios and meet performance expectations.

There is a downward pressure on fees and an increased use of fee structures that reflect shared risk and emphasize achievement of performance targets.   This trend benefits firms with significant scale and the ability to spread fixed costs over a larger revenue base.

Access to capital is becoming a market qualifier for large, multi-service contracts, as they often include the disposition of client assets and broad geographic coverage.

Low margin non-skilled labor services (custodial) are increasingly being bundled with higher margin service management and skilled labor services (i.e. design architecture and engineering).  Non-skilled labor services are often viewed by service providers as loss-leading market qualifiers.

Total cost of labor is a key driver for the industry.  Companies are managing cost of labor in two ways.  First, labor productivity is being addressed by deploying common advanced labor planning and scheduling applications across a broad base of client accounts and services.  Second, there is a renewed focus on professionally managed recruiting, training, and carrier development programs that are helping companies employ, train and retain qualified and motivated service technicians and field personnel, resulting in reduced turnover and higher service quality.

It seems that category management has become the default solution for procurement these days. In discussion I am often asked what tweaks should be made to this model and more essentially how it could be improved. What is interesting is that no one ever seems to question whether category management is actually the optimum model. There is a place for category management in professionalizing procurement during a process of evolution. However, in my opinion, it is not an end state. Take a moment to reflect and the flaws in the model become self evident.

Problem 1: Coverage

A category management model typically appoints category managers to those spend groups representing the lions share of total spend. For the rest there is little attention unless something goes wrong. Whilst a category management model may have resources focused on 70 or 80% of spend, this often only covers 40% of the goods and services an organization purchases. Risk is seldom limited to high spend areas and often most of the niggle comes from these ‘tail’ spend areas.

Problem 2: Differentiation

Category management has a habit of applying a standard approach to focused spend areas. It seldom differentiates between the attributes specific to particular areas of spend. As a result things end up being managed in broadly the same way using similar tools and techniques. Whilst language often focuses on strategic suppliers and spend groups, it is often difficult to see differentiation from category to category in approach, technique or philosophy.

Problem 3: Knowledge Management

Advocates of the category management model often justify its need because of the requirement to drive category insight, knowledge and understanding. All very valid. However, what this ends up creating is a consolidation of knowledge in the individual buyer. In effect an organization’s category knowledge becomes vested in the particular buyer. The problem with this is if the buyer leaves. Not only do you potentially lose a good resource but you also lose the accumulated knowledge and insight for the category. This problem exacerbated by recruitment approaches. Too often the focus concentrates on the depth of an individual’s knowledge in a category rather than on the key skills of a buyer whether that be sourcing, cost modelling or relationship management. In effect the model compounds and perpetuates the knowledge problem without ever addressing it.

Problem 4: The law of diminishing return

Category management tends to rely on appointing dedicated procurement resources to particular spend areas. Whilst sourcing techniques applied properly will see significant commercial improvement over time it is common to see the same levels of resource continuing to focus on particular spend categories long after commercial, quality and service improvements have diminished as a result of earlier activity. Like a maturing tree, category management creates rigidity in the procurement function removing flexibility and the capacity to adapt to circumstance.

Summary

Category management does have a place in evolving procurement. It is the natural stepping stone to bringing discipline to the function as professionalism takes hold. Bringing focus and rigor to spend should never be criticised. Where things go wrong though is the perpetuation of the category management model long after the benefits have been secured and step change delivered from focus on primary spend areas. In effect, organizations persisting with the model fall into the trap of diminishing return. The result is an adverse impact on their ability to adapt to circumstance and drive further innovation and improvement. My suspicion is that part of the reason for the continuing dominance of category management as the prevailing model for procurement is the absence of an alternative.

So, I hear you say, if not category management then what? I will give you my perspective on what I believe to be the natural successor to category management in my next drop to the Sourcing Garden. In the mean time good luck with whatever challenges face you and happy hunting.

The Planter.