Fundamentally most of us believe that the reward for a fair day's work should be a fair day's pay, so why is it taking so long for the Facilities Management industry to embrace the UK Living Wage? People tell me that it's because no one wants to pay extra, but what most don't realise is just how much that decision costs. In this blog I argue that the Living Wage is a lot more commercially viable than is popularly believed.
For those not familiar with it, the Living Wage is quite simply the hourly-rate a person needs to earn before they no longer qualify for state benefits. It's a little more complex than that of course, but that's the synopsis. If you're interested in learning more check out the Living Wage Foundation (livingwage.org.uk) which promotes a scheme of accreditation for employers who voluntarily agree to pay these rate. The UK Living Wage (LW) is calculated to be about 20% above the National Minimum wage (NMW). In London it's approximately 40% due to the cost of living in the capital.
Though I promised that this blog would be about the commercial aspects of the LW, rather than the moral justifications, it's still worth saying that in 2014, we should all feel a little outraged at the idea of employers earning a profit whilst paying people less than they need to live on and passing on a burden to the tax payer. Some might think that statement evocative, but in an age of Corporate Social Responsibility(CSR), there's a growing expectation on employers to act responsibly towards both their own staff and the communities they are part of (it's why tax evasion gets so much press) and the above demonstrates neither. Ok, moral-rant over, let's get commercial.
I'm going to start building my case with a simple statement: Good, well motivated, loyal employees are more reliable, more productive and less likely to be absent. I'm not going to bother backing most of that up with facts: it's not exactly controversial stuff. But there is one statistic from the Living Wage Foundation that I do want to quote: 80% of LW employers have noticed around a 25% reduction in absenteeism. Let's talk about that for a second shall we? It is generally agreed that high rates of absenteeism are indicative of poor workforce motivation and loyalty. They're not the only indicator, but they are more quantifiable than others like productivity, dedication and time-keeping and are therefore considered good leading indicators.
The FM industry is full of low-paid service jobs; no pun intended, but you might say they are ten-a-penny, particularly in services like cleaning, catering and porterage. At the low-end of the wage scale, loyalty and motivation are low, churn is high and as a result there is poor consistency in productivity and quality. How many times, have you found yourself telling someone or being told by someone that quality issues are the result of changes in personnel or difficulty attracting and retaining the right people? This is the reality of a low-pay workforce: managing them to ensure good standards of quality and productivity isn't at all easy. It takes a lot of time, it takes a lot of effort and (most importantly to my case) it takes a lot of money.
It's not controversial to say that absenteeism costs money – it's a foundation stone of Health & Safety principles. When staff are absent, there are overtime costs, temp labour, lost productivity, time and effort wasted on ringing around to sort things out, etc. It's also agreed that employee churn costs money too: there are recruitment costs, training cost and supervisory time amongst others. Finally, managing poor performance can really drain resources too: It's not just the money credited back to customers or the time spent dealing with complaints, it's the supervision, the retraining, the formal meetings, the letters from HR, etc. Basically, choosing to pay low wages, is also choosing to incur a lot of additional costs. Now some will argue that; wages are direct costs and the costs I've descibed are indirect and therefore difficult to quantify in any meaningful way. In one sense they're right, but in another they're wrong. They are hard to quantify, but the total cost information can usually be found in the service tender proposal: Its the line item on the breakdown identified as “management costs”.
In low-wage service contracts, management costs are often one of the largest cost areas (after wages). Depending on whether things like training & recruitment (and sometimes profit) are included in them or listed separately, they could account for a significant proportion of the total contract cost. I've even once or twice seen proposals with combined management costs that almost equal the wages costs! The point here is that management cost are built into the contract delivery cost at the commercial tender stage.
Let's talk about commercial tendering for low-wage contracts. Most tenders are calculated using pre-defined formulae. If we over simplify it: some basic volume data (such as square footage) is entered to give an idea of hours required. This figure is multiplied by a wage rate and other costs are calculated as percentages of that resulting figure and added together to generate a total contract cost. There's a little “commercial” wiggle room of course, to give the sales-person something to play with, but in a nutshell, that's how it works. So here's the issue I have with that: Surely the management costs should be calculated using a sliding scale which significantly decreases as the wage rate increases? We've just established that if wages are increased 20% absenteeism reduces by 25%. We also accept that recruitment & training costs will decrease. We accept that less time will be required to supervise and manage both performance and customer dissatisfaction. There will be higher quality, less refunds and fewer complaints. Yes, many of these things are difficult to quantify, but let's not mistake difficult to quantify for unquantifiable or non-existent.
In fact, a move to higher wages creates a lot of potential for cost-saving, especially when combined with good people management practices. So surely the correct way of considering LW commercial viability is to (at least partially) fund increased wages, using management cost savings? Should customers pay extra to support the Living Wage? I don't believe customers should accept a pass-through uplift on wages, but I do believe that there are alternative solutions which are not just palatable for customers, but commercially viable or even, commercially advantageous, for suppliers too.
And here's one final point to consider. In the fiercely competitive world of FM Services contracts, real commercial viability comes not from undercutting to win volume, but through retention of business. During a re-tender process motivated,loyal staff and happy customers, are worth their weight in sales-people and corporate hospitality.
One of the most frustrating challenges for anyone in a service industry is the customer who doesn’t really say what they want. How can you be expected to exceed their expectations, when they haven’t clearly articulated what those expectations are? Facilities people face this challenge all the time, but when the shoe is on the other foot, are we any better?
Facilities people are customers too.
Procurement is a major function of Facilities Management. In small organisations a Facilities Manager might do all their purchasing by themselves. In larger organisation they may be able to draw upon the support of various experts; procurement managers, legal teams, etc. These experts are a useful resource to the savvy FM, but at the end of the day, their expertise only extends to their subject matter: they can help you write a watertight contract, but they probably have no idea if it delivers the right level of service or not. Making sure that the service meets the requirements of the business is the FM’s job.
So how do we as Facilities professionals ensure that the deal we are being offered is going to deliver exactly what we want it to? Well personally, I’ve always thought the best way to get exactly what you want, is to start by telling people exactly what you want.
Buying Smart
I first heard the phrase "Sophisticated Customer" from a supplier and I immediately took a liking to it. I think it's the perfect way to describe someone who approaches procurement in a precise and detailed way: someone who buys smart. Let me explain.
Imagine you want to buy a car.
If you just stroll into the nearest car dealership and announce that you want to buy a car, you could be driving home in anything from a clapped-out ford Fiesta to a shiny new Porsche. If you don’t have some idea what you’re looking for, the range of options could be confusing to say the least.
Of course if you’re smart, you’ll think it through before hand; you’ll work out what you need this car to do, what sort of mileage you plan to do, etc, and the friendly salesman will be able to show you some options that don’t leave you having to stick one of the kids in the boot when you're doing the school run.
However, the sophisticated customer will work out exactly what they want before they step out of the door. If you’re buying smart, you’ll know what make and model of car you are looking for. You’ll have decided already if it’s got to have alloy wheels and a sunroof and you’ve probably picked out a fetching shade of metallic green. Basically, you’ve got a specification.
The reason for using a specification is that it enables you to give the details of your dream car to a number of garages and then buy it from the one offering the best deal. You get exactly what you want and you get it at the best price.
Getting Specific
Many Facilities professionals use specifications as part of the formal tender process, but there's nothing to stop them being used anytime you buy something and they can be used when buying almost anything. I’m surprised they don't get used more often.
So we've established you can use a specification for virtually anything, the question now is what you put in it. The answer quite simply is: as much as you can. In my time I've occasionally come across people trying to procure services using a generic specification. Maybe they've missed the point, but the clue should be in the name; the idea is to be specific.
As a customer, the more detailed your specification is, the more chance you’ll stand of getting what you want. There’s an old saying about what happens when you assume – I won’t repeat it here, but let me say instead: assume nothing. When I look to bring in a service or product, my specifications tend to cover anything and everything I can think of that might be relevant.
The most important aspect of course, is to include details about what you are looking to buy; what it is, how many, how big, what colour, etc. But you don’t have to stop there.
You can choose to specify the process for proposal submission; you can include contact information, dates for submissions and procedures for preliminary visits and queries. You may wish to define terms about ownership of equipment (like keys, phones, IT equipment), security, intellectual property, qualifications of personnel, environmental standards, Service Level Agreements, etc, etc. The list is virtually endless.
If you’ve ever struggled to get the right paperwork after the job has been completed, you might think it’s worth stating up front, exactly what you expect to be delivered before the invoice gets paid. Talking of payment; maybe you don’t want to pay invoices on the supplier’s standard 14 day terms, maybe 30 day terms suit you better. As a general rule of thumb, if you’re very specific about what want, you can usually get it, albeit, at a premium.
Finding The Right People
A detailed specification can help you to identify good suppliers.
The extent to which a supplier takes the time to read and understand your brief (and it’s easy to spot those who haven’t) and is prepared to tailor their service to meet your requirements, demonstrates the value they place on your business.
You might think that many suppliers would react quite negatively to such a dictatorial approach, but if you’ve never tried it before, you might just be surprised. In my experience, good suppliers like doing business with sophisticated customers. It’s fair; they know that they will be quoting like-for-like against other suppliers. If they don’t win your business, it’s either because they weren’t right for it or they weren’t competitive, not because they were undercut by someone offering a substandard service at a reduced rate.
Any supplier signing up to a detailed specification starts out with a clear and detailed understanding of what the service expectations are. This knowledge can be used by them to meet and exceed those expectations, to develop a successful partnership and ultimately retain the business on a long-term basis.
If this sounds like the kind of supplier relationships you want to have, my advice to you, is be sophisticated and start asking for what you want.
