When a service contract fails it is often down to a fundamental breach of trust. Are both parties still failing to avoid easily applied ways of avoiding divorce? Or are FM service relationships beginning to show signs of a newly emerging maturity? Nick Martindale reports.
13 March 2017 | Nick Martindale
Almost every service provider and client will have tales to tell of contracts that have died long before their expiry date, with any sense of trust and effective working relationship exhausted. It is, unfortunately, one that is all too evident in the FM space.
"At the moment there's a resignation with some suppliers that they will push hard in year one, see how it goes in year two and then get ready to move out in year three, and that that's just how it's going to work," says consultant John Bowen. "They get it to a point where it's in profit and then just see it out."
Clearly this is not a healthy situation, with a significant number of contracts spent in what can be a long and painful period of decline. Kerry Hallard, CEO of the Global Sourcing Association, says the whole renewal process can cause problems as contracts progress.
"Often the service provider doesn't think the relationship is as strong as it could be and is fearful that they're not going to be successful in a re-tender, so they don't do everything they could to keep that client happy, which is grossly unfair," she says. "We do see some very awkward exits or poor performance towards the end because they don't think they'll get the next piece of business."
In some longer-term contracts there can also be a sense on the client side that contractors do not earn their money, even when the initial contract may have required a large upfront investment.
"It can seem like Easy Street towards the end, but they forget that huge outlay was part of the original deal," she says.
A pervasive lack of understanding can be compounded when the people who were involved in setting up contracts initially have moved on, says Wendy Sutherland, managing director of FM catering consultancy Ramsay Todd and chair of the BIFM procurement Special Interest Group, meaning the original vision of the client has been forgotten or lost in translation.
"You can end up with neither party having had any involvement with the setup of the contract and no understanding of what was agreed initially," she says.
"I've seen several cases where the client will say the contractors aren't doing a very good job and the contractors say they're not getting the information they need. They're working to the wrong brief, effectively, and that tends to happen when the contract is quite mature."
This can be a particular issue in FM, she adds, as the pace of change means client requirements often move on.
Contracts failing to evolve with client needs or new developments is another, albeit related, issue. "If you're dealing with an outsourced supplier you'll need to change the specification as your business changes," says Bowen. "Don't be locked into having 50 KPIs, because you won't know whether or not they're performing. You may need to change hours of operation or location, or adapt to new technology which can change the game, particularly in areas such as cleaning."
Suppliers need to be incentivised to come up with ideas about how things could be done differently, he adds, potentially sharing profits from savings.
Graham Davenport, director of Platinum Facilities and Maintenance Services, talks of having both a physical and virtual contract, with the aim of allowing flexibility around the day-to-day delivery of services. "The signed document should be tucked away safely in a drawer, and the only time it should really resurface if is if there's a problem," he says. "But that's not to say that the approach to the contract shouldn't be flexible. We check in regularly with our clients to discuss contract performance, but also to understand what's happening in the business, so we can change our service delivery model to meet their needs."
Effective communication is vital from the outset if both parties are to avoid issues at the end of contracts, he adds. "During the negotiating, there needs to be an open and honest discussion from clients about what they're expecting from their service provider. It's then the provider's turn to manage expectations and to pre-empt possible outcomes based on their experience and expertise to date."
Having an open relationship means both parties know what to expect, and suppliers can be more open about prices instead of underpricing initially to win the contracts, he adds.
But, says Mike Wingrove, head of facilities and real estate at law firm Dentons, it's important that such relationships are built up at the right level. "You might find that at the outset of contracts the negotiations commence with the sales or business development team and the actual operational team are not in front of the client until the agreement is live, so any relationship that has been built up has not necessarily been built up with the right people.
"We only engage in any discussion or presentation with the operational team in attendance to mitigate that potential loss of communication or understanding."
He also believes the middle period of a contract is where things can break down, and uses three-plus-two-year deals to encourage providers to maintain performance - an example of how the industry is responding to past failures.
Clients and suppliers alike should also make provision for when things do go wrong, says Bowen. "Make it clear when it goes out to tender that if they're not successful then this is how the handover will be done," he says. "That should make it clear for the supplier too, and the clearer the specification is the better the price will be, because they tend to take out a bit of insurance against anything that they think is ambiguous."
Wingrove, meanwhile, says he insists on writing contracts himself rather than using standard ones presented by providers, with one aim being to allow for a swift termination if things don't work out.
"Contracts in the past have often contained terms and conditions that have bound them together when the social contract between the two parties has long since passed," he says. Those without sufficient knowledge should seek legal advice, or at least sound out peer group networks, he adds.
It's also vital for clients and service providers to learn lessons when things haven't worked out.
"It's very easy for clients to blame the outgoing contractor for doing a bad job, but they don't often look at what they should have done differently, or thought about how they can protect the contractor going forward," says Sutherland. "I always ask the incumbent when I'm doing a tender what they need from the client that they're not currently getting, and I feed that information back. But do they take that on board? I'm not sure they do."
Often the real lesson is about interpersonal skills, says Hallard. "Our research shows that in 85 per cent of cases where outsourcing fails it does so because of poor relationship management.
"The whole outsourcing industry is all about the client and service provider really understanding each other, and acknowledging that the service provider has to make a profit. There's often a huge lack of understanding or care on the buyer side that the service provider is there for a reason as well. That can cause quite a few problems if you don't have intelligent enough buyers and relationship managers in place."
Yet there are signs that the industry as a whole is learning the lessons of failed contracts over the past decade.
"Certainly over the last few years we've seen the introduction of an intelligent client function, which recognises the importance of that contract management relationship and what the client needs to do to drive value out of it," says Sutherland. "It's usually a mixture of performance measurements and relationship management, and it gives the best line of communication for the contractor. They know who the best person in that organisation is to support them to get to other decision-makers or to help them understand what they're supposed to be delivering."
Wingrove also thinks the sector is making progress. "There's certainly been a learning curve, which has developed into new ways of working with service providers," he says. "We have a lot of poachers who have turned gamekeepers now, so people working in in-house, client-side FM roles have become significantly more knowledgeable. Respect and mutual understanding of differing objectives is certainly better understood, and that leads to a far better working relationship."
Why contracts fail
The reasons why some contracts do not work out are many and diverse. The following are among the most common:
The increasing pace of technological change in particular means organisations must be able to adapt to new customer expectations and ways of reducing costs.
It must be obvious what the outcomes of the arrangement are for the people who are working on it. Without clarity of roles, there is a risk of things not getting done, tasks being duplicated, or blame and disputes that will affect the relationship itself.
Quality of communication is critical and will be enabled and driven by the quality of the governance processes. If you want to avoid poor outcomes in your sourcing arrangements you can do a lot worse than focus in on the quality and effectiveness of your governance mechanisms.
Poor relationship management
Relationships are key to successful arrangements, but these are often poorly managed. The reason will be that the focus is only on the commercials; relationships are much more difficult to define and to manage.
Lack of transparency and trust
If clear objectives are not laid out or the buyer's parameters are constantly changing, the contract will never work. Buyers and suppliers need patience and must be prepared to trust each other.
Source: The Global Sourcing Association