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Management

Real Estate Owners and Managers are Failing with Facility Management Procurement Models

I have worked in many areas of energy and infrastructure, and one area that I have always found interesting is Facility Management.

In my opinion, Facility Management (FM) is the service that companies try to get in the door with, almost as a loss leader, though to many a loss is right, in order to grant your company 3-5 years to nurture relationships and increase share of wallet. In more traditional mandates, that is exactly what FM companies have done. They secure low margin work, then lower their resourcing during in-between years, and ultimately show the love again to try and confirm extensions. I can’t say it has worked well, but I would argue that the leadership of those successful sales mandates have moved up or on before the next person wonders why they wanted that particular mandate.

While I don’t think the model is very customer-centric, there are some merits to the concept of become Trusted Advisor and grow your share of wallet from that, but is FM ever going to be a stand alone business model?

I don’t think it is.

Without end-to-end contiguous offering of holistic solutions and services that are win win for both customers (and their customers) and the actual strategic partner, this model is doomed to be the perpetual ground hog day.

I have the luxury of writing this without worrying of offending any FM clients, because I don’t have any. I can write truth.

The model itself is broken.

Vendors will continue to offer this type of solution and service because the asset managers keep procuring it, and for the size of the deals, there is a sense of value in pursuing these wins by the vendors. It makes careers. But does it make value? We know the answer.

Why do asset managers continue to perpuate a failed procurement model?

It’s actually quite easy, and there are several factors:

  • these larger asset owners/management firms have legitimized the race-to-bottom procurement models because, who gets fired for picking the lowest cost, and they look smarter when they award;
  • these firms also break down exec roles by capital and operating, as if the separation of functions leads to true leadership. Leadership to the bottom;
  • the lack of combining capital and operating decisions removes the ability to drive best NPV on investment and budgeting decisions;
  • boiler Bobs (as affectionately referred to) themselves try and maintain control of annual budgetary decisions and of FTEs and budget size;
  • generally, asset managers and their capital and operating leads are not qualified or sophisticated enough to debate the merits of decisions with their day-to-day managers, who don’t like change;
  • they don’t like change at all;
  • with the gap between selecting FM vendors and replacing them far too great to create meaningful analysis to connect the problem with the actual procurement model;
  • the engineering, HVAC and Building Controls services industry are too incestuous with asset managers. Conflict of interests with friends would be a gross understatement;
  • REITs don’t have the depth in their flat exec levels to even think about deviating from the dividend model they’re on.

Ok, these are not simple. But unless the leader at the top of that ladder is choosing to force change and hard, you are not shaking the hands off of this golden trough.

Is there a solutions that works for everyone?

Yes. Every Real Estate Owner and Asset Manager has been incorporating the language of the change that needs to occur. They are aware the value in increased data points and technology to improve operations and ultimately the bottom line, but they are still thinking in the current procurement model.

We need them to walk and chew gum with their hands behind their back and on one leg. That’s effectively what’s needed. Wholesale change.

The customer needs to appreciate that decisions need to be made from two key points, and believe without a shadow of a doubt that being successful in these two areas will mean greater enterprise value. Period.

Your drivers must be the balance of what is best value for your customers, and what is in the best interest of the asset over the long term. Any deviation will mean you are simply playing a low-cost option play and that is not in the best interest in shareholders. I think the Great Recession made that clear.

This means very active leadership with your tenants and end-users and being the most customer-centric you can be. That does not mean the cheapest, but that there is an appreciation of the value proposition.

That means that your investment decisions must include metrics and points for long term investment with the best NPV while meeting those customer-centric targets.

Your board, investment committee, exec functions would place responsibilities in different baskets than traditional, and only the true leadership can make this happen.

For the FM companies, you will stop bidding on low-cost option FM services that deliver no real value to customers or their users. FM companies should be made up of holistic strategic infrastructure partners that are aligned with your new corporate directives. They thrive on being your Trusted Advisors and delivering advanced innovative solutions and services that merry up with your investment criteria.

There are a few companies have the ability to deliver what I’m writing about, but Real Estate Asset Owners/Managers need to lead from within or they will be destined to ground hog day of misaligned outcomes on the Facility Management world.