In or out?

More than eight manufacturers in 10 either already outsource some or all or their non-production services – security, catering and cleaning, or repairs and maintenance services for machine tools and production equipment – or think they should, a recent Works Management/Incentive FM survey discovered. They do it to save costs or allow them to focus money and people on core activities. The bigger they are, the more likely they are to keep it in the family. Air conditioning company Eaton-Williams has a factory in Edenbridge, Kent, and two in Stoke-on-Trent. The company, part of Nortek of the US, has "very few" outside contractors, says group financial controller Jackie Wellington. Eaton-Williams doesn't outsource cleaning, catering, accountancy or anything else: "We employ our own cleaners. And catering, we just book it as and when we need it." Eaton-Williams uses the normal alarm companies but it has its own security staff. Ralph Gray, manufacturing manager of Warwick-based hydraulic and pneumatic systems and components maker Parker Hannifin, has to manage about 30 outside contractors. For items like energy, cars or mobile phones, headquarters sets up corporate deals and tells the sites which to use, though the corporate choice isn't always the best. For security or safety work, however, each site can choose who has access. "One of the big issues," says Gray, "is whether your fate is in your own hands. If it affects the business where you're much too reliant on outside support – you want to be able to still keep that knowledge in house." That covers product manufacturing, engineering and manufacturing. But even small companies like to manage on their own. Portsmouth-based subcontract machinist DKW Engineering employs 50. It's a glowing example of the value of investment. Six years ago it lost 40% of its turning and milling business to China. Now DKW exports there. It replaced the lost business with higher-added-value contracts for more complex components made on one-hit CNC lathes and machining centres. Managing director Nick Iacobucci (right) says he deals with just four contractors of various facilities round the plant: "The only things we outsource are a few things in IT, a few major things on the accountancy side [and] some maintenance contracts on plant and equipment. "We are an engineering company. We employ a lot of CNC plant and equipment and we don't wish to employ somebody full time doing maintenance. We do our own internal planned maintenance, but in principle things of that nature we outsource because they're professionals at what they do. The rest we still contain within the company," says Iacobucci. "You've got full control internally, and the sorts of things that we outsource are the things we don't really want to get involved in. We just want that support to be there." With 250 employees, Parker Hannifin's site is also below the level at which it could justify keeping such dedicated skills: "We only outsource maintenance of machinery," says Gray, "where the specialist knowledge to maintain that machine can't be maintained in house." Dewhurst, based in Hounslow, West London, employs just under 140 to make indicators, pushbuttons and keypads for the lift, rail and ATM markets. Dewhurst is now diversifying into components for solar-powered traffic-control systems, and it makes the keypads for Tesco's petrol pumps. Dewhurst health and safety facilities co-ordinator Stephen Ward deals with about 10 external contractors. Like Gray and Iacobucci, he buys in maintenance of electronic, laser and other production machinery too complex to be run by the internal maintenance team. Security, says Ward, is about "doing enough to satisfy your insurance company that you've got adequate precautions. It's a pain, always has been." The site is guarded by CCTV during shutdowns but the insurance people insist on cover during working hours. What Ward wants from a security firm is the knowledge that simple problems can be resolved without calling him in the middle of the night, that they can arrange cover if one of the security people is off sick, and that there won't be extra charges for these or other issues. Security companies "promise you the earth," says Ward, "but it's a massive industry where they bring in the cheapest. But to be fair a lot of that's to do with me as a customer," he acknowledges. "I don't want to pay a lot." Secure choice Iacobucci says DKW's building is "totally secure". Its security contractor uses BT Redcare alarm monitoring to provide direct lines to the police: "In that sense, it's outsourcing. But we don't physically have a company coming round and looking at the premises at night or anything like that." Recession inevitably changes the outsourcing calculation. Iacobucci says DKW has a full-time IT professional to look after the firm's Jobshop scheduling, materials control and data collection system. This employee spends about 60% of his time on IT and the rest doing other work. He "half wonders" whether that role could be outsourced. Gray's knottiest FM problem is that terms and conditions are constantly changing. Switching suppliers to win a cheap deal may tie you into a contract that turns out to be poor value. "People get locked into [these] deals and find that the market moves in those two years and you'd be better staying. It's a gamble." Worse, trying to find that elusive good deal absorbs an awful lot of time and energy that could have been better spent on something else. "Sometimes you can save £5 but it's going to cost you two or three days over the next three months changing over. And then you get the problem of the disruption. But you have to make a judgment... A big organisation can get slumped into big corporate deals and then not be agile enough when the market changes." Works Management spoke to Gray as he and another manager were scouring the list of contractors for trimmable fat. That morning they had decided to retain two suppliers and change two more. The two changes meant a cost reduction of 25% or more, but there were also "issues about the quality of supply". Changing the other two would have cut costs by 10%, but there were no quality problems, so Gray could not justify the disruption to the business. National Outsourcing Association (Nao) communications director Kerry Hallard acknowledges that "there'll be tougher negotiations" but warns against overdoing it: "You've got to be careful. Don't nail your suppliers to the floor because if you do, you're not going to get what you actually want out of the deal in the first place, therefore there's no point really in outsourcing it. Everybody's in business to make a bit of money, so if you screw them down too tightly it's not going to work for either side." The Works Management/Incentive FM survey found that three out of five manufacturers don't use key performance indicators (KPIs) or service level agreements (SLAs) to measure contractor performance. Gray says these might seem like a good idea but using them isn't straightforward: "Everybody has a cleaner come round their factory units, but it's probably the hardest thing to specify... You can actually tie down a big engineering project with a specification easier than you can your own cleaning contract." But specs can cause more harm than good: "When our business demands that somebody needs to work late," says Gray, "because [our security people] are accommodating and we have a good give-and-take [relationship], it's actually a better service. But if we were to have it written down with the KPIs and all this, you might find you're compromising the service." People spend too much time in contract negotiations on KPIs and SLAs, Hallard agrees, "and not really enough on the governance of how you actually move things forward when things are changing, and that's the most important thing to be really focusing on." KPIs can be agreed quickly, she says, but business life is a moving target. If your KPIs are too rigid, you can't change as the business does. The days when offshore outsourcing of accounting and other processes reduced the costs of bill processing, invoicing, payroll and HR functions by 35% or so are over. Sterling's collapse has forced firms to bring them back in house from India and elsewhere. The savings are not completely wiped out, says Hallard, but they have been reduced to the point that companies are questioning whether the possible risk to reputation, with accusations of lack of patriotism and so on, is worthwhile. Ward says the company has rethought its outsourcing needs and found that it's tiny things they can save money on: "We have brought stuff back in, more minor things." His example is the water filters on the machines. Dewhurst now buys those in and changes them in house, with a saving of £500 a year despite the need to create a schedule and do some training. A bigger saving comes from no longer buying in rags for the shopfloor. Self-sourcing and recycling saves a net £3,000 a year including the cost of a contractor to recycle the old rags. Ward says the company will now try to source work internally, as long as "we can keep within regulations, health and safety and other things". The complication in all this is that insurance companies want to see evidence that whoever does the work is properly trained and qualified to an agreed level. "Your risk assessment has to match up with what the insurance company [requires]." Health and safety is a big worry for most companies – and they have fewer staff to make sure it's looked after: "It's top of the pile," says Malcolm Sutcliffe, operations director of online risk assessment provider Advisa, "because you ignore it at your peril." He says Advisa's online assessments offer managers suggested solutions to potential problems without having to call in the experts. Maurice Tidy, who retired as director general of the Facilities Management Association last year, says the way forward for the FMA's members is to innovate. His example is a move from planned to predictive maintenance. FM providers who use condition monitoring to direct resources towards the plant items and structures that actually need them will do better, he believes, than those who just go through fixed routines. Tidy doesn't think many large FM clients will want to bring much of the work back in house. They'll have got rid of their permanent staff, and to end an FM contract they'll have to hire new people, increasing their overheads. The advantage of FM was that it allowed them to TUPE their own people across, get rid of their pensions liability and get a better deal: "A lot of these organisations have lost the will and the knowledge of how to run their own facilities."