Service-level agreements are win-win

Can manpower-based Contracts give way to SLA-based Contracts

Counting heads or counting results? That is the choice that FM heads across various kinds of facilities have to make. Is it worth sticking to a per-head spend on FM, or should they leave manpower/technology-driven requirements to service providers and focus instead on what the latter are supposed
to deliver?

As spends vary, the fundamental nature of FM contracts is changing. What is driving this change? What sets them apart from traditional agreements? Can this be fair to, and benefit both parties who sign the agreement? Saji Sebastian, Vice-President, Corporate Services, Network18 Media & Investments Limited, Vinay Deshmukh, Executive Director & CEO at Forbes Facility Services, Devender Kumar, Assistant General Manager – Facilities, Motherson Auto Limited and Jiji Thomas, Head – Operations, Nucleus Office Park, engage in a debate with Mohana M.

 

Manpower-based contracts vs Service-Level Agreements (SLAs)

Traditionally, only the manpower component of FM was outsourced in India, but over the years, the entire service is being outsourced. No one could put it better than Deshmukh, who said: “When we started this, our first question to customers was: are you outsourcing accountability or cost? If it’s cost, the contract is manpower-based but if it is accountability, they need the expertise we bring in. Since we are selling a combination of man, machine, materials and methods, SLA-based contracts are the only way ahead.”

According to Sebastian, in manpower-based contracts, his team, which is supposed to monitor service delivery, ends up focussing only on counting heads i.e attendance. This is a waste of the team’s capabilities, and is not its mandate. “Customers and service providers need to talk more about why they are partnering rather than who they are partnering with,” he said.

The benchmark of one cleaning employee per 5,000 sq ft is well-established. In recent times, that same person may be pushed to service 11,000-12,000sqft by customers, said Thomas. This is bound to have a deleterious effect on service delivery.

Instead, Kumar suggested an SLA in which the client signs off on services delivered, and monthly payments are made to the service provider based on the SLA score. Since efficiency is integral to making a profit under this system, it controls costs apart from driving service quality.

A nudge from the pandemic

Some MNCs had experimented with SLAs, at least in part. In the past, Sebastian too had drawn up a property management assignment in which the earnings on the management side were actually less than the SLA incentives! And yet, he finds these work very well for both parties.

But the pandemic in general and lockdown in particular have persuaded many customers to embrace SLAs. Why? Under the manpower model, they had to pay wages even when offices and factories were closed i.e. when no work was being done. In SLA terms, no work means no pay. Since FM is still viewed as servicing a cost centre and not a profit centre of the client, many managements have opted to save on unnecessary expenditure during stressful times.

Kumar said, “Generally, we have person-based contracts but due to Covid, we are looking at SLA-based ones. While AMCs were already mostly SLA-based, now we are looking at SLAs for other manpower-reliant functions like housekeeping, security and horticulture.”

From the service provider’s end, Deshmukh remarked: “At least 70% of our contracts are now SLA-based. The customer doesn’t have to monitor anything except for statutory requirements. 20% of these contracts are variants in which some customers are also monitoring headcount, but the contract revenue is tethered to that.”

Teething trouble

According to Thomas, mechanisms to measure service levels are still rudimentary. Monitoring whether an area has been cleaned ‘x’ times a day or if consumables have been replaced in time are poor indicators. Also, what is acceptable for one may not be so for another. For e.g., a carpet may look clean according to most parties but not to a hotelier. “For SLAs to take off, we need to first switch from a qualitative to a quantitative model of service delivery,” Thomas said.

The trust deficit between service providers and clients will also need to be overcome. Sebastian pointed out that there have been times when service providers couldn’t provide the required service levels because they couldn’t understand the nuances of the business. “Even if everyone wants an SLA, we may not be able to factor everything onto a paper, since every industry operates differently,” he said.

Speaking from the FM head’s point of view, he highlighted the practice of how when a new provider is awarded the contract, most of the old staff is retained with new uniforms. Service delivery hardly changes. For this to happen, new contracts will have to come with new people, technology and processes.

 

Longer contracts make more sense

For a contract to be useful, it will need to be longer than 24 months. By the time a new service provider settles in, 3-4 months go by. Five months after that, the FM head has to begin a new search for the next provider, which is a wasteful exercise for both sides. “When service delivery is seen as a long-term proposition, there is synergy,” said Sebastian.

According to Kumar, when you find a new service partner, plan to award at least a five-year contract. Providers too will get time to understand the customers’ pain areas and offer data-driven, precise solutions.

On the service provider’s side, Deshmukh explained: “Let us assume the service provider is investing 14 lakhs in some new equipment for the facility. If the contract is only a year long, he will have to charge 1.2 lakh a month just to recover the cost of the investment from the customer, which the latter certainly wouldn’t be able to justify to their management. A long-term contract is a win-win for both parties.”

New spends, higher costs

Pre-pandemic, indoor air quality was measured only for compliance purposes. Now, apart from monitoring this, companies have had to invest in increasing ventilation and air cleaning solutions like ozonisers and UVGI.

These are Capex investments, which were, in the case of Thomas — who is both landlord and service provider – something to be delayed for as long as possible. Opex spends on increasing the frequency of HVAC cleaning have also increased, from perhaps monthly to at least weekly.

While costs of line products have rationalised, PPE and other purchases have driven material cost up by 1-2%. This is apart from spending on software like a contactless QR-based monitoring system, which, while not heavy on Capex, has driven up operating costs.

For people like Thomas, there is little motive to make Capex investments, since there is no way to recover the same from tenants. He gave an example: “Let us say I install an energy efficient system that gives 30-40% savings; I have to pass this on to the tenant, it does not contribute to my revenue stream. Unless contracting models change, there is no incentive for landlords to invest.”

 

A fine balance

While certain costs have increased, some others have actually compensated for the rise. For example, the advent of single-step cleaning-and-disinfectant chemicals can offset the cost of increased use of chemicals. Food and transport costs have plummeted, as have utility bills, since most people are working from home (albeit temporarily).

Thomas made an important point: “When people come back to work from offices, social distancing norms will still be in place, adding pressure to the configuration of the office. Earlier, companies calculated 80-100 sq ft per employee; this may now rise to as much as 120-130sqft per employee”. But a word of caution: with the hybrid model of work taking off and many employees continuing to work from home, how the total area to be serviced changes, remains to be seen.

It is important to note here that the easiest way to cut costs is to let go of people. But investing in energy efficiency, which can cut utility costs by 10-20%, can subsume the cost of wages. As Thomas said, “Customers/tenants should look at the total cost of occupancy as a benchmark rather than just piecemeal costs.”

As the need for distancing rises and that for hygiene remains as high as ever, the required frequency and intensity of cleaning will go up. To limit costs in this scenario, there is no option but to invest in technology.

Deshmukh concluded: “In a hardcore manpower-based contract, material cost would be limited to 5-9%. In an SLA, manpower costs will be around 65%; the rest is invested in technology”. Such a contract incentivises efficiency; losses due to inefficiency need to be absorbed by the service provider.

Service providers and facility heads who have adopted SLAs are already reaping the benefits.

Clearly, SLAs are not just the future; they are already here.