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ADDING Facilities Management to your PORTFOLIO

6 Feb, 2007 By: Tom Callinan imageSource

ADDING Facilities Management to your PORTFOLIO

So, if you are thinking of getting into facilities management (FM) or have
been forced into FM by one of your larger customers, you’ll need to know what to
expect if you add more resources to this business. The first thing you should
look at is your current copier market share.  If you have low single digit
market share, I recommend you keep your resources—both financial and
management—focused on gaining additional market share in your core business.  If
you do have good market share in your core business, than FM just may be a
viable adjacent business.

Equipment revenue should represent slightly over 20 percent of your FM
revenue stream.  Margins on this equipment will be a few points lower than you
are accustomed to, but will be acceptable. This is not to say that FM business
is not highly competitive, but most OEMs provide special pricing for equipment
purchased for an FM contract.  You will undoubtedly experience the legendary
long selling cycles, whether you are displacing an incumbent FM provider or you
are working to convince the prospect that outsourcing their non-core functions
is the best approach, you will be changing the culture, and probably the
processes, within the prospect’s office and that requires a great deal of
trust—equal to the high risk—as well as multiple levels of approval.

All FM contracts will have service level agreements (SLAs) with cancellation
clauses.  Many times if you are involved in an RFP for an FM, the prospect will
want a cancellation for convenience clause, particularly in more mature FM
segments such as legal.  You want to get the equipment portion of the FM
agreement on a lease. You need to work to separate the cancellation request so
that your services are cancelable but the equipment is not cancelable. Failure
to negotiate this will more than likely require you to carry the equipment as a
rental asset and will increase your investment to launch a FM program.

I wish I could tell you that this was an easy negotiation but it is not since
there are many companies in the FM space who will provide cancellation for
convenience. The services portion of the revenue stream will return around 25
percent. The margin will be influenced by the ratio of full time equivalents
(FTE) to other services in the account. 

Accounts with a high ratio of the revenue driven by personnel (FTE) over
output clicks, scanning or other non-personnel driven revenue will have a lower

FM contracts average two FTEs. These on-site FTEs are supplemented by a pool
of floaters, meaning that they move from account to account to cover absences.
You will need to maintain a ratio of 10 percent floaters to contracted FTEs to
ensure adequate coverage.  This is a cost you need to take into consideration
when pricing an FM contract.

Negotiate and Promote

You will find prospects who want to outsource but who also want you to retain
their current employees. Frequently, these employees will be paid above market
wages or will be marginal performers. With the latter, you frequently find that
the prospect simply does not want to be associated with any employee

Both of these situations can be addressed if you have a large enough
portfolio of FM accounts. Simply promote that strong yet over paid employee to a
larger site or to a multi site supervisory position where the responsibility
matches their compensation.  Negotiate that as part of your contract.  You
transfer the marginal employee as well; put them under a manager who has
demonstrated good ability to develop employees.  If the development does not
work, the employee is “off the radar” of the former employer and you can then
terminate them.

What do you do if you do not have a portfolio of accounts and cannot make
these personnel adjustments?  You have to negotiate to map the highly
compensated employee to your compensation range.  It is as rare as winning the
lottery to find a business that is willing to outsource and pay you your normal
margin over their already over compensated employees. 

“...I believe FM will become more prevalent as more

companies transition into print management...”

With the marginal performer you have to negotiate him out.  If you take this
contract as the customer demands, there is a high probability you will
experience issues; issues in FM usually result in cancelled contracts after a
protracted period of adversity.

Regardless of the situation, negotiating with the human resources department
of a prospect will be a normal occurrence in an FM agreement.

Contract Expectations

Your average FM contract will be 42 months clearly indicating a split between
36 and 48 month contract terms.  Average revenue for a new contract will be
approximately $14,000 per month; this is just the service revenue stream after
the equipment portion of revenue is recognized at the contract initiation. 
About half your orders will average $5,000 per month, but you will get 10
percent of your contracts in the $30,000 to $50,000 range.  Once you land the
initial contract it is very common to write addendums, adding services as you
establish credibility with the account and uncover additional outsourcing
opportunities since you now have personnel on-site. The average addendum is just
over $1,000 per month so it represents a significant opportunity for you to
increase your revenue.

What can you expect when that contract comes up for renewal?  You will find a
renewal rate of around 65 percent.  About a third of the 35 percent non-renewals
will decide to take the service back in house, frequently driven by a cost
savings initiative where they decide they can do it cheaper.  They may have
forgotten all of the reasons they initially outsourced and simply analyze it
from a pure apple for apple financial comparison.  Half of the non-renewals will
go to a competitor. As a company gets more comfortable with outsourcing,it
becomes more of a commodity in their eyes and they begin to shop price. 

There is also the situation where you just did not provide the level of
service the customer required; you should expect to lose those customers.  About
10 percent of your non-renewals and almost all of your cancellations will be due
to poor performance.  FM has historically been a business that larger copier
companies have entered. I believe FM will become more prevalent as more
companies transition into print management.  If Pitney Bowes is any indication,
with their recent acquisitions of print companies, the FM providers clearly
believe that print management is an aspect of FM.

Tom Callinan is the managing principal of Strategy Development, a
management consulting and advanced sales training firm
(strategydevelopment.org).  From 1998 – 2005, Callinan was an executive with
IKON Office Solutions.  Prior to IKON, Callinan was the founder and CEO of
Copifax, Inc.  Callinan graduated with honors from The Wharton School,
University of Pennsylvania, and can be contacted at

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