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Cutting FM Costs? Focus on AJV

13 January 2016 | Updated 01 January 1970
 

Jeff Dewing, explains why focusing on hourly rates isn’t the best way to control FM spend, and suggests that a holistic approach (and Average Job Value or AJV) will pay dividends.

With the economic climate being what it is, the pressure on FMs to drive down costs has never been greater and unsurprisingly a large proportion would identify budgeting as their single most significant and pressing challenge. But when it comes to financial planning for such a complex service – the elements involved being so diverse, and often unpredictable – the variables are such that controlling spend can seem like trying to nail jelly to a wall.

The most common benchmarking approach, used industry wide, is to use the rate that suppliers are paid by the hour. The thinking is that by negotiating the hourly rate down during the procurement process, the overall expenditure on FM can be kept on budget.  In actual fact this rarely has the desired effect as total spend is still often higher than expected.

 

Why is this?

Put simply, when suppliers compete on price, there’s an incentive to drive down the hourly rate in an effort to secure a contract – but you get what you pay for, so a provider who’s been squeezed on price is rarely going to deliver a platinum service; instead their delivery is likely to just meet the terms of the Service Level Agreement (SLA), which may leave considerable room for uncontrollable expenditure. This might manifest itself in the following ways:

  • Secondary invoices – billing for return visits after not sending the correct engineer
  • Quote requests – routinely creating quotes to resolve an issue
  • Failed permanent fixes – not spending time to find the root cause of an issue
  • Revisits and warranty work – billing and failing to govern warranties or revisits
  • Time on site inflation – billing 3 hours for 70 minutes labour
  • Parts cost inflation – charging parts at above retail prices and then adding mark-up

It’s not surprising that third party contractors will naturally look for ways to pull back perceived lost revenue by initiating remedials and quoted works, as they are just as affected by the challenging economic climate as their customers and will do what they must to survive. But this situation is not a sustainable way for our industry to operate; we need to work together to maximise value, which is best achieved through a transparent, mutually beneficial business relationship. Improving the visibility of spend can pave the way for a partnership approach in supply chain relationships, which benefits all involved.

Hourly rates simply can’t be a true measure of value, since there are so many variables outside its sphere of influence. It only truly applies to Planned Preventative Maintenance and Remedial Maintenance but not to the cost of quoted works and parts, while the impact of efficiency (including time on site, or any need for a revisit) on cost is not under its control, so hourly rate can only reveal part of the budgetary picture. A more holistic perspective on expenditure is required, and this can be offered by Average Job Value (AJV).

By factoring in all jobs – covering both PPM and RM, even including quoted works and snagging – AJV offers a much clearer picture of the true cost involved in keeping an estate compliant and avoiding businesses disruption through breakdowns.

AJV is the truest measure of ‘value’ possible (since even the rate card approach typically only applies to 40-50% of an organisation’s FM spend), but on its own it’s just a number. Maximum effectiveness in cost management is only possible when you have detailed data at your fingertips, and a sophisticated workflow system to ensure transparency and control. For example, the client must always be in charge of work generation, so that a provider cannot break jobs down into separate components, increasing the job volume and artificially reducing the AJV. Additionally, by keeping visibility of factors such as actual time spent on site (recorded accurately, so it is charged to the minute), and parts expenditure (benchmarking against industry standard costs), it’s possible to avoid some of the failure points associated with the old cost-cutting method of focusing on driving down hourly rate, achieving true cost effectiveness.

Of course, without adequate controls, a commitment to pre-agreed workflow and principles of work – plus the understanding of all parties as to the need for each to be profitable – AJV is just another red herring. However, with these basic conditions met, AJV can be tremendously useful and effective.

It may be a relative measure of value, rather than a more immediately understandable ‘price’ – it comes into its own when it’s used to track value for money improvements made through such efficiency measures – but AJV can offer a much more inclusive insight into actual FM expenditure and so offers a genuine chance to improve value - not just cut certain costs. When the correct constraints are in place, AJV actually enables customers and contract owners to prove or disprove the value of their provider in relative terms, and therefore ensure that they make the most beneficial and efficient procurement decisions.

Picture: CEO of Cloudfm, Jeff Dewing

Article written by Jeff Dewing | Published 13 January 2016

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