Upstream - The Newsletter of Incentive FM Group

Margin Dive - Is Intellectual Property the only Saviour?

Jeremy Waud, Incentive FM Group Managing DirectorFor years people in the wider facilities services industry have complained about the commoditisation of contract services. By this I mean client organisations and buyers procuring contract cleaning and contract security in particular as if it were bags of flour or sugar from the supermarket shelf.

I really wish I could say that this is no longer the case and that we have all woken up from a nasty nightmare, but the bad news is it’s actually getting worse. The new competition appears to be the race to the bottom of the pond (or is it puddle?) of available margins in order to secure the business out there in the private and public sector. Regrettably far too many buyers believe this is the way to deliver value for their organisations and that while an acceptable gross margin in cleaning or security was 12-16% a year or two ago, it should now be 7-10% fairly irrespective of volume. Outsourced integrated facilities management has moved very little in terms of margin and continues to hold at around 8 -10% gross margin and it seems that the other services have been driven into the same catchment area.

Is Intellect our Saviour?

The more enlightened buyers and commercial executives in business are willing to engage either with advisors such as Incentive FM Consultancy or FM service providers in an open and strategic manner. Here we can hopefully see what are arguably the pivotal and sensible differentiators in the market;

• Intellectual Approach
• Strategic Solutions
• Quality People
• Commercial Reality and Effectiveness

It will not have escaped your attention that all of the above characteristics are evident with high quality managers and teams. These people are only available if they are provided with the stimulation of a business challenge and strong financial rewards. Without these prerequisites the talented people will not be there for their clients in the first place and it will be a case of paying peanuts and getting monkeys sadly.

In short if UK Commerce wants the best solutions at the best possible price, it should head towards organisations and teams with a proven track record of delivering best practice across the board and be prepared to be challenged about the best way of achieving their goals. This is more than likely to involve the removal of some sacred cows as a more logical solution is put in place that achieves the client’s service and cost objectives whilst still allowing the service provider to earn a living.

This more enlightened and grown up approach to outsourcing and facilities management or service delivery will ultimately be the right answer as too much of what I see has short termism and disaster written all over the tin. Buying on margin as the principle driver really is just encouraging the dive to the bottom of the puddle, and what you pay for will sadly, of course almost always be reflected in what you get.

Conclusion

Come on buyers let’s roll up our sleeves, engage our brains and work it out together. Let’s not lower ourselves to old-fashioned margin kidology when we have all the tools of technology, open costing, profit share, risk and reward and contract life extensions at our mutual disposal?

By Jeremy Waud, Incentive FM Group Managing Director