Facilities Management Outsourcing in a Post-COVID World

Introduction

The COVID-19 pandemic caused lasting changes to the way businesses approach and manage their physical environments. Companies face pressure to control costs and maximize the utilization and value of existing facilities, while simultaneously adapting to new norms regarding remote work and workplace safety. Faced with these challenges, companies are looking to their facilities management (FM) outsourcing providers to adapt with them and bring to bear their specialized knowledge and tools. This article describes FM outsourcing, how it differs from other outsourcing models, and the implications of these differences in the current global context. Then, it offers practical advice for legal and other business professionals tasked with negotiating and executing these deals today.

Background: Understanding FM Outsourcing

FM outsourcing involves delegating the management and maintenance of a company’s facilities to a specialist provider. Unlike IT, F&A, ADM or HR outsourcing, which often focus on specific functions or processes, FM outsourcing encompasses a broad range of activities related to the company’s physical environment. These activities include building maintenance, cleaning, landscaping, security, space management, and more. The goal is to have the company’s physical infrastructure support the core business activities effectively, efficiently, and with careful regard to employee well-being.

FM outsourcing thus differs from other forms of outsourcing in certain key ways:

• Physical Presence: FM services are inherently physical and involve managing physical spaces. This requires personnel badged and on-site operating with physical tools and equipment, not merely remote or offshore services. 
• Stakeholder Interaction: Because of the on-site nature of the services, FM providers interact with a wide range of the company’s stakeholders, from employees and visitors to suppliers and local authorities.
• Reliance on Subcontractors: The multifaceted nature of FM services means that services are often provided by local subcontractors providing specialized services. As a result, an FM provider is often managing a range of third-party relationships to deliver the FM services in line with performance expectations.
• Pass-Through Pricing: The costs associated with these local subcontractors is, most commonly, “passed through” by the FM provider for the company to pay or reimburse as part of its facilities budget. This budget is managed by the FM provider and, using its expertise and the economies of scale associated with the provider’s network of subcontractor relationships, can be reduced year-over-year to drive savings for the company. In exchange, the FM provider earns a management fee.

Changes to FM Outsourcing Post-COVID

The COVID-19 pandemic fundamentally altered the way that companies think about and approach their physical spaces. That has driven changes in the FM outsourcing landscape, including: 

• Evaluating Space Utilization: The transition from office-based work to home-based work during the pandemic to today’s office-centered hybrid work has prompted a reevaluation of space utilization. Companies are looking for their FM providers to be more flexible and dynamic in order to maximize efficient use of buildings. 
• Technology Expertise: FM providers have always been able to offer specialized knowledge with respect to maintaining and optimizing facilities. Increasingly, FM providers are providing specialized technological expertise as well. They are using maintenance software platforms, internet-of-things (IoT) devices, and “smart” building platforms to improve workplaces and to allow companies to make real-time adjustments to facilities in response to evolving occupancy, cleaning, and maintenance needs.
• Data Integrated Into Decision-Making: FM providers can help companies collect, track, and interpret data about their own facilities, while also providing recommendations based on data collected regarding other facilities managed by the provider. Real-time data about a particular facility can show where space is being used effectively and also where changes are necessary.
• Health and Safety: Post-pandemic, FM providers are expected to be able to implement and manage rigorous hygiene and sanitation protocols as needed to ensure continuity of business and respond to public health emergencies. In addition, ordinary course health and safety standards have risen at many companies.
• Sustainability: With many companies identifying and setting ambitious carbon-reduction targets, it’s becoming increasingly important that they be able to monitor, measure, and optimize the energy usage of their workplaces. FM providers are being asked to assist in putting the infrastructure in place to enable this.

Updated Approach for Post-COVID Changes

These changes require an updated approach to negotiating FM outsourcing contracts. Below are several recommendations that companies should consider in negotiating today’s FM outsourcing deals:

• Contract for Flexibility and Scalability: Address the fluctuating nature of the post-COVID workplace with provisions that allow for flexibility and scalability in service provision. For example, these could involve the ability to adjust service requirements in response to changes in occupancy levels and shifts in workspace utilization. They may also include options for rapid scaling in response to changing needs.
• Institute Process for Budget Adjustment: As space utilization business needs change and the consumption of the FM services becomes more dynamic, it’s important to have a process for handling budget adjustments in a manner that minimizes opportunity for dispute. This may mean taking a more collaborative approach to budget management and reconfiguring older models for guaranteed “glide-path” cost-savings to more flexible shared-savings models that incentivize the FM provider to collaborate in the company’s cost-saving objectives.
• Leverage Technology and Data Analytics: In order to encourage the use of advanced technologies in service delivery, define a process for the introduction of those technologies. Where those technologies are part of the provider’s initial proposal, consider specifying the plan for implementation, including the specific dependencies that must be met to achieve the plan. The contract should be clear about who owns any devices (such as IoT devices) and the contract should include provisions for data security and privacy, especially if sensitive information will be collected and analyzed.
• Clearly Define Data Rights: Historically, FM outsourcing contracts reflected the fact that the majority of intellectual property flowed from the provider to the company (e.g., licenses to the provider’s tools, platforms, and technology) and were designed to guarantee that companies had sufficient post-termination access rights to ensure a smooth transition to bring FM operations in-house or transfer responsibilities to another provider. Today, with significant and valuable data flowing from companies to the provider, it is important to clearly allocate the ownership and use rights as between the parties.
• Emphasize Health and Safety Requirements: Given the nature of the FM services, it has always been important for FM outsourcing contracts to include appropriate health and safety requirements. However, these requirements need to be further aligned with current regulations and best practices, including in response to pandemics. The contract should specify the protocols for cleaning, air-quality management, and emergency response.
• Align with Sustainability Goals: An FM outsourcing contract can advance the company’s sustainability objectives. That may mean defining specific sustainability targets, such as energy-efficiency improvements, waste reduction, and the use of green cleaning products. It should also include mechanisms for tracking and reporting progress towards these goals.

Enduring Principles for Negotiating FM Outsourcing Contracts

In addition to the recommendations above, the following recommendations on FM outsourcing continue to be as important today as they have been in the past:

• Require Transparency in Spend: As part of the hand-over of the budget to the FM outsourcing provider, companies sometimes lose access to the underlying costs for the service delivery. This can make it difficult to in-source or re-source the work after outsourcing. Consider including express provisions requiring reporting and transparency regarding the spend, including any rebates earned from subcontractors in connection with the services.
• Impose Requirements on On-Site Personnel: Given the on-site nature of the FM services, companies should maintain the right to require the provider to reassign or remove its personnel (including subcontractors). Additionally, consider requiring that the service provider’s obligations flow down to any of its subcontractors, as the contracting entity will not always be the entity actually performing the tasks and functions. If on-site personnel will be wearing company badges or company uniforms, consider also seeking appropriate indemnities from the FM provider to foreclose any co-employment claims that may be made by such on-site personnel.
• Define Objectives and Desired Outcomes: Consider defining the outcomes that are to be achieved as part of the FM services instead of specifying how the services are to be performed. Doing so allows the provider to match the services to the objectives and outcomes with more flexibility. Of course, specificity remains important in many areas, such as building-specific health and safety protocols, sustainability targets, and technology integration requirements. There, companies will continue to invest in drafting and negotiating detailed requirements.
• Specify Governance Mechanisms: The governance expectations for an FM relationship may include regular meetings, reporting, and feedback mechanisms to ensure alignment and that issues are addressed promptly. Consider including specific dispute-resolution mechanisms that clearly outline the process for addressing and resolving any disputes that may arise.
• Specify Plans for On-boarding and Off-boarding: If the parties sign a contract before the transition plan is worked out, it can lead to delays, outages, and gaps in performance as the services are handed over to the provider. Similarly, if the parties do not plan for and agree to a plan governing the expiration or termination of the agreement, the company could face gaps in critical and necessary FM functions or face exceptionally high charges for the provision of such services on an interim basis. 

Conclusion

FM outsourcing in a post-COVID world requires a strategic approach that accounts for the heightened importance of technology, health and safety concerns, and the need for flexibility. Companies must craft contracts that are both forward-looking and flexible. By focusing on these key areas, companies can ensure that these arrangements are resilient and aligned with their long-term objectives.