Across the world, this year has seen levels of inflation and rising costs not seen since the early 1990's. For many businesses just emerging from the seismic shock of the COVID-19 pandemic, increasing costs – particularly energy costs – are exerting a massive amount of pressure to find cost savings wherever they can be found. Reviewing P+L accounts on a line-by-line basis, looking to identify costs that can be eliminated or reduced, is something that nearly all businesses will be doing.
For businesses that outsource the management of their facilities and assets, there may be pressure to review or even end those arrangements. After all, most businesses will believe that they should be able to manage their own facilities and assets so the costs being paid to the third party facilities management service provider to do just that look like costs that can be removed. It all sounds fairly straightforward but is it and is the decision to "insource" FM services likely to be the right one?
One of the advantages of having been a commercial lawyer for over 30 years – there are a few disadvantages too but we'll pass that by – is that I've seen most things and that extends to trends and fashions in outsourcing, both in terms of decisions to outsource and insource. In my experience, these decisions are often cyclical and driven by the wider prevailing economics and orthodoxy at the time. In relatively stable economic times, businesses tend to favour outsourcing – better (and more innovative) service and the recognition that the business itself may not be capable of providing that, tend to be the key drivers together with a recognition that these things may unlock efficiency savings that are otherwise unachievable. Where (as now) cost cutting is the main driver, outsourced services (such as FM) may be seen purely as a cost and, therefore, one that the business may be keen to shed. Organisational memory is often poor so the rationale for outsourcing in the first place may have been long forgotten.
Clearly, a decision to in-source a service that has been outsourced may be the right one but often it isn't. There tend to be five main reasons for that – some or all may be present in any given case.
- Firstly, some decisions to insource are made without complete data or with a skewed view of the data. Often that arises because the decision to insource is taken in principle beforehand and the data to justify the decision is considered only afterwards.
- Secondly, often a comparison of the outsourced model against the in-house one doesn’t really give a true comparison because many of the in-house costs are simply not counted and this is particularly true of indirect or overhead costs which are not seen as part of the cost comparator. In addition, in many cases, the commercial constraints imposed on the FM provider often are not well enough factored into the comparison so a 'like-for-like' comparison isn't made.
- Thirdly, even if operating costs are identified, the administrative and management time costs of operating the insourced business are often underestimated. The cost of attracting, retaining and training a skilled work force to provide specialist services can be substantial as can the cost of implementing and maintaining the required IT systems.
- Fourthly, there is often an expertise gap. Even with an orderly transition and TUPE transfers, organisations underestimate the sheer effort of assimilating an outsourced business and making it work as efficiently as it did when outsourced and often many of the key personnel in the outsourced operation will not be keen on being insourced and may look to leave, thereby exacerbating the problem – particularly where those providing the service are skilled and (as now) there is an extremely tight labour market. Generally, anticipated cost savings will only be capable of being achieved if the work force to deliver services within the insourced operation can be retained. If the operation is forced to sub-contract as a result of lack of suitable resource, this will generally increase costs and reduce savings.
- Lastly, and related to that point above, culturally, the business may be unsuited to managing the insourced business and the need to treat the new workforce as it does its other employees may well over time erode efficiencies and stifle innovation, thereby eroding cost benefits and (ultimately) driving up cost.
As I said previously, this is not to say that outsourcing is always the right option nor that a decision to insource won't be the correct one in any given case but businesses that outsourced their FM operations did so for good reasons. Recognising that, and considering the wider issues identified in this note, should help business come to the right decision as to whether insourcing is truly for them. Without that, any decision to insource simply to remove a cost line from the business is very likely to be a risky enterprise and one that the business may soon come to regret.
