Has outsourcing had its shelf life?

Julian Fris, Director, Neller Davies argues we may have reached a point where outsourcing in its current form has had its time.

If the golden age has passed, what now needs to change?

When you look at bids being returned, margins are unfeasibly low – lower than 2% in some cases.

That, coupled with the fact that, additional payments are being made to secure business by contractors means that they are increasingly struggling to find viable solutions which return healthy profits in the medium to long term.

Is this fair and reasonable?

In effect outsourcing has just got a lot more difficult. As the market squeezes more out of contractors we are seeing more business failures, near-misses and acquisitions. Many will be familiar with the recent negative press around Carillion, Mitie, Serco, G4S, Capita, Interserve and so on.

We have also witnessed CBRE, JLL, Elior, CH&Co, ISS, Servest and others snap up smaller companies.

The UK market is becoming more oligopolistic and choice is increasingly being limited. New companies entering the market find it difficult to break through the cost, margin and risk barriers particularly with ‘premier league’ contracts with the big PLCs, multinationals and public sector. According to a recent study conducted by FM World magazine, facilities management contributes about 8% of GDP in the UK. Market dominance is clearly an objective for the ‘big boys’ and they are acting predatory.

Since the credit crunch, there has been a feeling that 15–20% can be saved from the building services function, however, this can’t be a recurrent activity. We get corner-cutting, safety is compromised, slower service, disengagement – there’s plenty about that in the press at the moment on “value-engineered” projects.

Initiatives to bring SMEs in to the mainstream have been mixed. Specialist sub-contractors go through rigorous vetting and are tightly controlled but they know their place. But that doesn’t work for all; it’s fine for lifts and air conditioning, but may be less so for a distinctive food offer. According to Small Business.co.uk, 40% of small businesses die within five years – this is staggering. The biggest problem is poor cash flow and, if they work as a sub-contractor to the ‘first-tier’ companies, they become wholly reliant on sometimes poor payment terms (30 days+) which can be catastrophic.

The UK market is becoming more oligopolistic and choice is increasingly being limited. New companies entering the market find it difficult to break through the cost, margin and risk barriers.

We have seen new so-called ‘second tier’ caterers be presented with complex contract documents with significant risk transfer clauses and they are expected to sign up to that even though they are paying a concession. There seems to be a culture of passing risk down to the lowest level.

We know that around 90% of catering is outsourced in the business & industry sector, FM is about half that. In the public sector this is significantly lower. For instance in healthcare, less than 50% of the estate is outsourced.

Is there now an emerging case for greater use of self-delivery? You could argue that there is a lot of talent out there who might relish the chance to in-source for a client, they have the business acumen, the contacts and so on. In some cases, in maintenance, around half of the work has to be outsourced to sub-contractors because of ‘closed protocol’ or specialist systems like access control, air-conditioning, lifts etc. In some catering operations this is the case where pre-prepared food is used – maybe less so for cleaning or security. So if we are in this hybrid world it does not always make sense to double-handle.

But what of ‘in-house’? Detractors will say that it is manifested by poor cost control, protectionism, inefficiency, restrictive practices and a return to the 70’s. So maybe the golden age of outsourcing has passed, particularly in the public sector (look at the service providers throwing back the keys), how many operators has the East Coast Mainline railway had in the last 10 years with the current one struggling? 

So transferring risk to the private sector can be a bit of a boomerang action where we’ll ultimately pick the tab up for failure.

The answer rests in good and prudent management and is less about who the service provider is. Overall, the decision makers need to understand the facts rather than chase down the cheapest price. Customers are happy to pay if they receive quality and perceive value. In some areas modern catering trends prove this – do we want a cup of instant coffee or a barista made artisan americano? 

Is there now an emerging case for greater use of self-delivery? You could argue that there is a lot of talent out there who might relish the chance to in-source for a client

It’s also about customer attitude and expectation. An FM company selling the dream is compelling for a cash-strapped PLC or public sector organisation. If the purchasers realised the pitfalls of short-termism then they might make a different decision especially when the savings are lost on unplanned monitoring and litigation.

Maybe a period of full or partial in-house might reset the balance in the market. Companies get to understand their needs better and can selectively self-deliver and buy-in services as appropriate. In the end, it is about ownership and some service companies do it well, some less so judging by the amount of diagnostic reviews we are increasingly undertaking.

One of the big-ticket items is – where do you get the labour from, how do you train them, how do you ensure they are productive and keep them engaged?

Labour supply issues are an ongoing challenge in the sector, Brexit aside. We have to face up to it.  Automation is not the panacea in an essentially customer facing industry whether self-delivered or outsourced.

Dare I say if an employee had a choice for working directly for an organisation rather than an outsourcer, they would pick the former. There’s always a strong affinity to working for the brand – a sense of ownership, pride and longevity. Work for a contractor you are more likely to be TUPE-transferred from one to another with all that entails. That’s not to say that loyalty is not generated, but I would argue it less applies to the people on the ground and they are the ones who matter in the end.