Service Contracts as a Management Tool

15 June 2007

This article is reprinted fro EuroFM Insight Issue 3 - When real estate-related services are procured, competitive tendering and the contract itself can form the basis for operational development. The contract then becomes a management tool instead of being just a list of tasks and prices.

Companies' own real estate management systems are being stretched thin, and sufficient resources may not always be available for competitive procurement and purchasing, let alone operational development. The various types of service contracts and their competitive tendering can be handed over to a manager for him to worry about, but if the property and its performance are central to core operations, it is often preferable to keep the relevant service contracts under one's own control.

One option in this case is to acquire purchasing know-how. At the engineering firm Olof Granlund, work is underway to develop property maintenance contracts so that they can be used as an operations and management tool.

"This is a very different point of view from the one that tries to define everything as broadly as possible so as to secure one's own position in case of conflict", says Granlund's Veikko Martiskainen, facilities management consultant.

The development work began about five years ago, when Granlund and its customers began to consider how maintenance manuals could be applied to support maintenance operations in a more concrete way.

"This has served to broaden the outlook on how maintenance work can support core operations, whatever they may be", Mr. Martiskainen relates.

Bundling gets the management more interested
In order to use contracts to help manage operations, the client first needs to define a series of targets and an operational strategy.

"Then, one can start to implement the actions by which the strategy is realised. The contract is filled out with elements that relate to management and operational development", says Mr. Martiskainen.

He emphasizes that the aim of the Granlund operating model is to avoid purchasing just individual, separate services.

"A big change is that things used to be looked at more specifically for each location, whereas now, real estate portfolios, or at least several properties at a time, are bundled together. That magnifies their significance, attracting the interest of directors and managers on both sides", says manager Bo Söderholm of Granlund.

"There is interest in customership as well: it's preferable to enter into a contract with a property owner for ten locations as opposed to one," Mr. Martiskainen adds.

It's important to be precise when putting out a call for tenders.

"When maintenance services were being purchased five or ten years ago, calls for tender weren't defined precisely enough. The buyer didn't quite know what he was buying, so the seller didn't know what to sell. That's not a good foundation for working together", says Mr. Söderholm.

For smooth cooperation with the service provider, and in order to make sure you actually receive what you are buying, the work doesn't end with drawing up the contract. There has to be monitoring and measurement of service implementation, and reporting of results. This enables both the client and the service provider to continue operational development.

"This is something new. There are clear targets and implementation with monitoring, measurement and development", Mr. Söderholm says.

"It's vital to have proper communication. In order to make operational development happen, the management of both organisations has to be committed, because that's how decisions are made", Mr. Martiskainen adds.

Measure the right things
When aiming for improved operations, indicators are needed to monitor whether targets are being reached.

"They should be incorporated right into the contract. This is a way to demonstrate at the contract stage that the will exists to develop operations", Mr. Martiskainen says.

"It's fair play when matters are brought up during the tender negotiations. The final result is that both parties have understood what is being purchased and what is being tendered. This also affects the perception of quality", he continues.

"The service providers also consider it a good thing. It is binding on the service provider and the client's organisation, even at the upper levels, thus adding a whole new meaning to the activity and improving development opportunities," says Granlund's marketing director, Hannu Tuovinen.

It is also a good idea to refine the type of information collected, because a caretaker and a facilities manager do not need to know the same things. With this in mind, Granlund has developed RYHTI Executive software for the needs of management within its overall RYHTI software program.

"Whereas a maintenance manual is a tool for site-specific caretakers, property directors or building service supervisors, facilities managers need information of a different kind. They want more raw numbers that show trends and the overall situation", Mr. Martiskainen says.

In the future, measurement and results may also affect how money or other incentives change hands. "We will be seeing a benefit-sharing model of sorts, that is, where you get some kind of bonus if you do well," Mr.
Tuovinen explains.

Business operations as the starting Point
Dissatisfaction with quality is often the reason why customers set out to switch maintenance service-related contracts. For Granlund customers, at least, price has not been the key question.

At Stockmann, cost control is one of the three factors considered not only in real estate maintenance, but also more broadly in facilities operations.

"We have three main goals in operating our facilities: the creation of conditions that support business activities, cost effectiveness, and risk management", Stockmann's technical manager, Thomas Lönnberg, relates.

The aim of Stockmann facilities operations is neither more nor less than to be the foremost facilities manager in its own market area.

"For us, this is an extremely important support function from the standpoint of the vitality of the business itself. We want to be the best facilities manager, specialising particularly in commerce. This concerns both project and maintenance activities."

Describing the situation five years ago, when Mr. Lönnberg came to Stockmann, he explains that "rather than being a drag on the company, we started to develop and strengthen it."

In 2001, the prevailing operating model was a decentralised one in which the responsibility for real estate maintenance rested with individual business units: the department store group, automobile group, Seppälä, and Hobby Hall.

"So someone would be taking care of maintenance in a haphazard sort of way as a side job, which is not appropriate from a property maintenance standpoint."

In Mr. Lönnberg's opinion, the decentralised model diminishes quality and cost-effectiveness.

"It may appear to be cost-effective in the short term, but it is certainly not in the longer term, and you can forget about creating sustainable conditions."

A pilot project was launched at Stockmann to start moving from the decentralised operating model towards a more centralised one.

"We consolidated the maintenance operations of five properties under one company. We found that this was the right way to work: systematic review and inventory of facilities, as well as a definition of services and monitoring based on that."

On the basis of the experience gained with the pilot project, the decision was made at Stockmann to expand its operations to 16 properties. Real estate maintenance was concentrated under a single provider. Mr. Lönnberg has been very satisfied with this arrangement.

"Considering Stockmann operations and the resources we have, working on operational development with one provider has been the right way to go.

"The centralisation has now been completed. It wouldn't be possible to control such a large entity with attention to targets if a decentralised operating model were being used", Mr. Lönnberg argues.

In essence, the key factors are chain operation and concentration on the one hand, and, on the other hand, delegating the implementation of the agreed program to a person in charge at each location.

Reliance on a partner
From the very beginning, Stockmann's approach has been to have the service provider's leadership committed to the entire operation, whether it's a matter of technical maintenance or other sectors of facilities services such as cleaning, environmental management, or security services.

"We believe that is how the traditional supplier-customer relationship is transformed into a partnership," says Mr. Lönnberg.

With all of the dozen or so cooperating partners, procedures have been established that involve work groups of various levels, with cooperation development taking place at the steering group level.

"The steering group meets every two to three months. The purpose of the meetings is not so much to consider solutions to everyday problems, but rather to find ways to develop operations.

"We would like to be reliant on our partners: to have them doing such good work for us that we absolutely wouldn't want to switch."

The responsibility for development has been written into the contract itself.

"Instead of trying to invent ways to develop different sectors of our own operations all the time, we require our partners to actively present us with suggestions for development. That has been new for the service providers.

"Our strategic targets and the obligations and responsibilities of the parties are now included in our contracts. They're not just price lists anymore."

A new level of monitoring
Mr. Lönnberg wonders about the inadequacy of service providers' monitoring in various sectors of facilities operations.

"In all of the different sectors, reporting is based on the point of view of the provider's or partner's own productivity and needs, not the needs of the customer.

"So monitoring, reporting and steering, through real-time monitoring of conditions, for example, are still
rather new concepts." Mr. Lönnberg notes that improved consideration of the customer's point of view is not
being done just for the benefit of Stockmann.

"It also makes the partner more competitive, because the same reporting services can be offered to other customers as well."

Three sectors for development
In addition to the main goals - creation of conditions that support business activities, cost effectiveness, and risk management - Stockmann is currently in the process of narrowing down three sectors for development.

"Keeping up basic real estate data is the point of departure for everything, including store planning. There also has to be a uniform project operating plan by which alterations to a property are controlled. The third sector is an operating plan for use and maintenance, that is, day-to-day operations. These sectors are closely interwoven."

Each sector has its own monitoring, reporting, and steering mechanisms.

Veikko Martiskainen of Granlund thinks the exceptional thing about the Stockmann method is the strong role of strategy in steering operations.

"Simple, understandable targets are necessary. Sometimes innovation gets a bit far-flung, so you have to return to earth and square one, that is, the 'strategy paper.' When targets are straightforward, they can blend in with actual practice", he notes.

He also thinks that the reporting principles are unique.

"The chain operation principles are being implemented in reporting through the standardised RYHTI Executive application. This is coming along well, but there is still much work to be done." Executive is used to report on information from four different applications: maintenance manual, facilities automation system, consumption monitoring, and financial management.

From owner to user
Stockmann owned its own facilities for a long time, but now the company is placing all of its property in Finland for sale except for the department store and Kirjatalo (bookstore) buildings in central Helsinki. Most of the properties have already been sold, in fact.

Generally speaking, Mr. Lönnberg thinks that when properties change hands, there should be more in-depth and farreaching discussion about controlling conditions and cost effectiveness already at the rental agreement stage.

"There is a considerable break-in period for the owner, manager, and user."

He says that the most effective model for thoroughly reviewing the interests of each party has not yet been found.

"Are arrangements for technical maintenance and basic repairs truly in the owner's best interests, for example, while also fulfilling the user's needs? And who is the party who ensures that the needs of the owner and user are taken into account?" asks Mr. Lönnberg.

Stockmann makes rental agreements for 10 or even 20 years.

"When you look at the entire length of the lease, it has a significant impact on expenses." SK