Insourcing vs.

Outsourcing in Corporate Facilities Management

What is Outsourcing? Outsourcing is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. Outsourcing is a management strategy by which an organization outsources major, non-core functions to specialized, efficient service providers. Companies have always hired special contractors for particular types of work, or to level-off peaks and valleys in their workload. They have always partnered-formed long-term relationships with firms whose capabilities complement their own; companies have always contracted for shared access to resources that were beyond their individual reach-whether it be buildings, technology or people. But the difference with simply subcontracting and outsourcing is that outsourcing involves the wholesale restructuring of the corporation around core competencies and outside relationships. The following definitions have been furnished by the International Facility Management Association (IFMA): Insourcing: A common approach in which facility management executives look to outside facility management service firms as process experts. Outside service providers are hired as consultants to measure operations against the commercial benchmark and make recommendations for improvement. The internal staff then implements the recommendations. Outsourcing: Refers to a full transfer of the facility management functions to an outside firm. The corporation then manages the outsourcing contract rather than the entire facility management function. Out-Tasking: A word coined to further define the area to be tasked to an outsource provider. A new study, "Outlook on Outsourcing," shows outsourcing is a part of many companies strategic plans, indicated by more than 70 percent of the responses to a survey conducted by the International Facility Management Association (IFMA). According to the survey, the 10 services most often out-tasked are, in order: Architectural design, Trash and waste removal, Housekeeping, Facility systems, Landscape maintenance, Property appraisals, Major moves, Hazardous materials removal, Major redesigns Furniture moves. Out-taskingthe hiring of individual specialized vendorsappears to be used more frequently than outsourcing, which is the hiring of full-service, single-source vendors. The survey revealed all facility managers outsource services requiring specialty skills that are unavailable in-house or not cost-efficient to handle in-house. Furthermore, they outsource services so they can focus on their core competencies. Other reasons to outsource include acquiring access to specialty tools and equipment, adding flexibility for work fluctuations, enhancing quality and improving customer satisfaction. Respondents observed that outsourcing is good for some services, but not all. As a means of lowering overhead (via downsizing) and saving money, outsourcing will continue to be accepted, and is expected to increase in the next five years. The initiative to outsource generally originates in the facility management department. Most respondents said outsourcing has helped conserve their budgets and has been a key to improving performance quality. Thirty-three percent of facility managers who responded said they reserve the right to interview

and approve candidates for managerial, professional, non-managerial and technical positions. In outsourcing, new staff is often hired in lieu of retaining existing staff. However, 25 percent of facility managers say their companies use a combination of existing and new staff to handle outsourced services. Information Technology This is the fastest growing area for outsourcing today. Executives are currently outsourcing: Maintenance/repair Training Applications development Consulting and reengineering Mainframe data centers Client/server Networks Desktop systems End-user support Full I/T outsourcing

Executives are considering outsourcing:

Operations Administration Executives are currently outsourcing: Printing and reprographics Mailroom Consulting and training Records management Administrative information systems Supply/inventory Printing and reprographics

Executives are considering outsourcing:

Customer Service Executives are currently outsourcing: Field service Field service dispatch Telephone customer support Customer service information systems

Executives are considering outsourcing:

Field service dispatch Telephone customer support

Finance Executives are currently outsourcing: Payroll processing Purchasing Transaction processing General accounting Payroll processing Taxes

Executives are considering outsourcing:

Human Resources Executives are currently outsourcing: Relocation Workers' compensation Recruiting/staffing Consulting and training Human resource information systems

Executives are considering outsourcing:

Real Estate & Physical Plants Executives are currently outsourcing: Food and cafeteria services Facilities maintenance Security Facilities management Facilities maintenance Facilities information systems

Executives are considering outsourcing:

Sales and Marketing Executives are currently outsourcing: Direct mail Advertising Telemarketing

Executives are considering outsourcing:

Reservation and sales operations Field sales

Cost Still Primary Outsourcing Factor A survey conducted at the Outsourcing World Summit indicates that cost is still the main factor in outsourcing decisions. PricewaterhouseCoopers sponsored the survey, which was accomplished by polling summit attendees, who used hand-held keypads. Some of the questions and results were as follows: How much did spending on outsourcing change at your firm over the past year (1998)? 5% or less increase 32% 25% or more increase 19% Decrease 3% How satisfied are you with your outsourcing initiatives? Satisfied 49% Neither satisfied nor dissatisfied 21% Dissatisfied 17% Very satisfied 11% What is the single most important factor driving satisfaction? Realized cost benefits 42% Customer/end user satisfaction 24% Process improvement 20% Close working relationship 14% The main reason my company outsources is to Reduce costs 35% Focus on core competencies 30% What is the correlation between business process outsourcing and shareholder value in the mind of executives? Moderate 49% Strong 44% What is the financial analysis technique for making an outsourcing decision? Straight dollar decision 38% Cash flow 28% Efficiency measures (e.g., return on asset) 20% On a percent of contract basis, how much does your company spend managing an outsourcing relationship? Up to 5% 38% Up to 2% 37% Up to 10% 17% Based on a report from The Outsourcing Report Top 10 Reasons Companies Outsource 1. 2. 3. 4. 5. 6. 7. 8. Reduce and control operating costs Improve company focus Gain access to world-class capabilities Free internal resources for other purposes Resources are not available internally Accelerate reengineering benefits Function difficult to manage/out of control Make capital funds available

9. Share risks 10. Cash infusion Source: Survey of Current and Potential Outsourcing End-Users The Outsourcing Institute Membership, 1998 Top 10 Factors in Vendor Selection 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Commitment to quality Price References/reputation Flexible contract terms Scope of resources Additional value-added capability Cultural match Existing relationship Location Other

Top 10 Factors for Successful Outsourcing 1. Understanding company goals and objectives 2. A strategic vision and plan 3. Selecting the right vendor 4. Ongoing management of the relationships 5. A properly structured contract 6. Open communication with affected individual/groups 7. Senior executive support and involvement 8. Careful attention to personnel issues 9. Near term financial justification 10. Use of outside expertise Source: Survey of Current and Potential Outsourcing End-Users The Outsourcing Institute Membership, 1998 Top 10 Drivers Behind Today's Outsourcing Decisions (in alphabetical order) Accelerate reengineering benefits Access to world class capabilities Cash infusion Free resources for other purposes Function difficult to manage or out of control Improve company focus Make capital funds available Reduce operating costs Reduce risk Resources not available internally

Characteristics of a well-structured alliance Strategic synergy. Can the two (or more) organizations together achieve a high level of benefits? Growth opportunity. Can the relationship--and its benefits--be expanded? Less risk. Does the relationship reduce the level of risk for your organization? Excellent chemistry. Is there a good "fit" between your organization and the provider(s) organization? Clarity of purpose. Are the goals and benefits explicit and clear? Win-win. Does each party benefit fairly from the relationship?

Develop and document a preliminary Outsourcing Mission, Strategy and Goals (OMSAG) statement. An Outsourcing Mission, Strategy and Goals (OMSAG) statement is a document that sums up the organization's outsourcing intentions and the strategic rationale for outsourcing. The OMSAG statement should describe the: Processes to be outsourced and the broad objectives for outsourcing. Relationship of outsourcing to the overall corporate strategy. Links between the outsourced process and your company's core competencies. Strategic forces that are driving your organization into a relationship. Expected positioning of the relationship on the Strategic Sourcing Spectrum. Scope of coverage (international, across business lines and so forth). Critical risks involved. Expected duration of the relationship. The value proposition In drawing up a value proposition: Consider how specific target customers (internal or external) are affected - how the relationship's product or service makes the customer more: Successful? Profitable? Competitive? Efficient? Effective? Productive? Satisfied? Seek validation from target customers. Describe explicit, quantified benefits. Fix the date when measurable success is expected. Assess the feasibility of reaching goals. Consider the advantage of an alliance versus other approaches. Strive for simplicity and elegance. For example, a value proposition might state that "by FY2003, the sourcing alliance will reduce the cost of our travel by 35%, increase productivity of our personnel on travel assignments by 15%, and establish a performance-metrics system that allows us to measure both of these goals." The Performance Work Statement The PWS defines what is being requested, the performance standards and measures, and timeframes required. It provides the basis for the technical performance sections of the RFPs. It states the requirements in terms of "what" is to be the required output rather than "how" the work is to be performed. When developing the PWS, take special care to ensure that it does not limit service options, arbitrarily increase risk, reduce competition, unnecessarily violate industry service or service grouping norms, or omit statutory or regulatory requirements without full justification. The PWS should be performanceoriented, specifying what outputs or measures are desired and limiting directions as to how the results are achieved. INDUSTRY: In July, 1996, J.P. Morgan signed a contract with a prime contractor and 3 subcontractors to outsource approximately 30 percent of J. P. Morgans IT functions. The value was estimated at $2.1 billion over 7 years. The scope of the outsource activities included J. P Morgans IT infrastructure (mainframe data centers, midrange computing, client/server, desktops, voice and data networks), plus about 20 percent of their software application base. Approximately 900 employees were transferred from J.P. Morgan.

Benefits achieved: Costs in general have fallen and fixed costs have been reduced, Company managers are beginning to focus on strategy rather than on day-to-day operations, and The company has gained access to IT skills it could never have developed internally.

Keys to success: Teamwork and communication between all parties. Source - Integration Management, "Ten Deals That Shook the Globe," Mark Mehler, (http://www.integrationmanagement.com/sub_sections/ten_deals.html, January 29, 1998) FEDERAL: In August, 1977, the National Air and Space Administration (NASA) outsourced IT operations at its Jet Propulsion Laboratories (JPL) to a Prime contractor. The contract was estimated at over $200 Million over a 5 year time period. The contractor will provide personnel, computer hardware and software as well as equipment and support services for over 7,000 PCs. The fixed-price, performance-based contract covers help-desk services, systems administration, software acquisitions and upgrades, computer hardware maintenance, and hardware replenishment. Key Objective: Focus on core competencies. Source NASA Press Release c97-k, August 26, 1997 STATE & LOCAL: In 1996, the City of Indianapolis awarded a contract to a prime contractor to provide IT services to the City and the surrounding Marion County. The scope of the effort included all IT services not involved with Public Safety. The contract was estimated at $81 Million over 7 years. Key Objectives: Reduced costs Improved quality Access to better talent Enhanced public access to records.

INTERNATIONAL: In May 1994, Britains Inland Revenue (comparable to the Internal Revenue Service in the United States) signed an outsourcing contract with a prime contractor to provide computer services previously provided by Inland Revenues in-house Information Technology Office. The contract was a 10 year "strategic partnership" estimated at over $1.6 billion. Approximately 1,900 employees from Inland Revenue were transferred to the contractor. Key Objectives: Substantial improvements in cost-effectiveness Significantly improved speed of response in the development and enhancement of systems Rapid access to the latest information technology skills and technologies Optimized career opportunities for Information Technology Office staff.

Source National Audit Office, Report by the Comptroller and Auditor General, "Inland Revenue: Market Testing the Information Technology Office", March 8, 1995. Effectively Managing The Outsourcing Relationship Outsourcing is growing at a rapid rate in the United States, Europe and Asia because organizations view outsourcing as a way to achieve strategic goals, reduce costs, improve customer satisfaction and provide other efficiency and effectiveness improvements. Like any organizational decision, outsourcing requires effective management from the outset of the outsourcing evaluation through the life of the contractual relationship. Define the Objectives you Want to Achieve; Outsource for the Right Reasons; Answer Key Questions; Use a Methodical Approach; Planning Phase; Analysis Phase; Design Phase; Implementation Phase; Operations Phase; Termination Phase Consider All Stakeholders; Get the Right People Involved; Understand the Vendors; Realize that Outsourcing is not All or Nothing; Choose the Right Relationship; Negotiate a Sound Contract; Terms of the agreement; Minimum services levels; Ownership and confidentiality of data; Warranty; Exhibits; Incentives; Disclaimers; Bankruptcy; Force Majeure (Acts of God); Performance measures; Anticipating change. Use Performance Incentives and Penalties; Establish a Relationship Management Structure and Processes as Part of the Contract; Use Objective Performance Criteria; Emphasize the Development of the People Responsible for Relationship Management; Manage the People Issues.