Six emerging trends in facilities sourcing

October 2019 Six emerging trends in facilities management sourcing , workplace strategies, and technology innovations hold immense potential for companies seeking to reduce costs and improve productivity in facilities management.

By Sourav Das Adhikari, Steve Hoffman, and Britta Lietke

For companies with distributed a growing number of vendors with operations—retailers, manufacturers, new service offerings. Still, charting a transportation and —facilities clear path forward—one that enables management can represent 10 to 25 companies to extract the most value—is percent of total indirect spending. an increasingly complex task. Several recent developments, including How should companies proceed? As a fears of a recession, trade conflicts, tech first step, executives must familiarize disruption, and rising wages, have made themselves with how six emerging trends cost cutting a higher priority in this area. could reduce facilities management But business leaders must strike a tricky costs and improve productivity. The balance to reduce noncore costs without first three involve the application of affecting the performance of core existing strategies and approaches; the operations. second three involve using technology to Companies have no shortage of options transform the way companies complete at their disposal to optimize facilities tasks. However, these trends aren’t management expenditures. Outsourcing plug and play; companies must have the is a well-established strategy that’s on right strategy and capabilities to get the the rise thanks to an influx of vendors, most from them. Facilities management while integrated approaches to facilities and sourcing leaders should focus on management, workplace strategy, and several immediate steps to mobilize their technology all hold promise. The global organization and pursue these trends. market for in-house and outsourced facilities management is estimated to reach $1.9 trillion by 2024. The outsourced segment accounts for more than half the total and has attracted

2 Six emerging trends in facilities management sourcing The evolution of facilities outsourcing noncore activities at management strategy individual locations (Exhibit 1). The consolidation, standardization, and When facing ongoing pressure to reduce bundling of these tasks across facilities operating costs, companies tends to look over time results in the outsourcing of a for savings without giving much thought comprehensive set of noncore services to the long-term repercussions. This and management to third parties. dynamic makes facilities management a particularly ripe target. During Several economic factors have made challenging economic times, companies outsourcing more relevant for facilities trim facilities management budgets; once management. Growth is slowing across the outlook rebounds, spending levels several large countries as they reach often remain low. This pattern can lead to the tail end of current economic cycle. deteriorating conditions of and Far-reaching global trade conflicts equipment, potentially costing more in have created unexpected changes in the long run. commodity and finished product prices. Meanwhile, increased tech disruptions Over the years, industries have accepted in a handful of industries are pushing outsourcing as a viable option to non- legacy companies to free up cash for core operations, including facilities technology investments. Last, lower management. Companies typically unemployment rates are pushing wage follow a progression that begins with rates higher for the best talent. Thanks

Exhibit 1 TTypicalypical evolutionevolution ofof FM FM approachapproach over ove rtime time

Savings

IFM/TFM

Bundled

Standardized Full outsourcing of wide range of Consolidated noncore services Bidding out multiple and management Out-tasked services in A lignment of One partner per site service levels same RFQ with that typically In-house opportunity for Pooling of across sites to performs major one supplier to volumes across lowest acceptable services with own deliver more sites, which is level, which also sta Outsourcing of than one service tendered by the treats employees noncore tasks on in exchange for Synergies in central alike case-by-case extra rebate delivery and s Own sta r procurement management e performing basis v function e

L noncore services

Six emerging trends in facilities management sourcing 3 to these developments, the total market inhibited adoption, such as a lack of for facilities management (both in-house digital skills within the function, other and outsourced) is expected to grow at priorities for , and a focus on more than 6 percent a year from 2018 to continuous cost cutting. These factors 2024, hitting nearly $1.9 trillion have made the facilities management (Exhibit 2). outsourcing market attractive for leading vendors that were already engaged Facilities management is ripe for directly or indirectly with this function. disruption: it lags behind other functions Several incumbents have developed such as production equipment an integrated facilities management maintenance by both digital maturity offering in an effort to capture a greater and penetration of technology. Although technology is available for facilities market share. management, several obstacles have

CExhibitomp 2anies are increasingly outsourcing fCompaniesacilities m aarena increasinglygement outsourcing facilities management

Global market outlook (in-house and outsourced FM spend) USD billions

6.2% p.a.

1,884

1,599

1,314 1,134 972 846

2009 2012 2015 2018 2021E 2024E

Source: Frost & Sullivan; GlobalFM analysis 2018; McKinsey

Six emerging trends decade. Since the attractiveness of each trend will depend on an organization’s We have identified six trends that offer needs and capabilities, the trends are cost savings or productivity improvement presented in a manner to facilitate opportunities now or could transform evaluation and comparison. facilities management over the next

4 Six emerging trends in facilities management sourcing Case example One large retailer was seeking to prioritize tasks that could be handled more cost-effectively by a third- party vendor. Its team compiled a list of categories that should be kept in-house as well as those to outsource. In-house categories were determined based on which ones could be handled through a shared- services model with high utilization of internal labor. Outsourced categories were defined by current specifications and, separately, by the essential level of service for the 1. Outsourcing facilities management achieved are not significant, some organization. It put out an RFP for Organizations are evaluating their players in these industries have the outsourced categories with two operating model to maximize value opted to fully outsource facility types of specifications and then creation. Before they outsource facility management. selected suppliers that best matched management to third parties, however, —— Penetration of integrated facility the retailer’s needs. This approach they review the appropriate mix of management (IFM). IFMs are reduced facilities management insourcing and outsourcing based on capturing increased market share spending by 15 percent, which capability, cost, and coverage. Several in outsourcing, particularly in North was reallocated to support the factors are altering the equation. America, where IFMs are close to 20 organization’s investment strategy. —— Growth in outsourcing. Outsourcing percent of the outsourced category. has now surpassed 50 percent of the Implications total facilities management market —— Cost: Is your operating model in several regions, including Europe, optimized and peers still have better Middle East, and North America. cost performance? —— Industry-based adoption. In —— Competitive advantage: Does manufacturing companies, soft facilities management provide a 15% services such as landscaping and competitive advantage over peers? reduction in facilities management janitorial are preferred categories for spending from outsourcing outsourcing. Hard services such as —— Organizational capability: Does utility equipment maintenance are the company have experienced typically still insourced. Meanwhile, personnel in facilities management retail, banking, and other non- with intrinsic knowledge of the manufacturing industries are looking location as well as highly efficient to first optimize their operating internal technicians that would be model by balancing insourcing and challenging for a third party to match? outsourcing. If the benefits they

Six emerging trends in facilities management sourcing 5 Case example A global financial institution was spending $450 million annually to maintain its thousands of locations around the world. Its fragmented supplier base included more than 10,000 vendors across about a dozen categories. To assess opportunities for outsourcing, the institution undertook a scoping and prioritization exercise, sought to gain greater transparency into spending categories, applied advanced sourcing techniques, and invested in stakeholder management. With the 2. Integrated value and related services Implications insights gained from this process, Companies are exploring the integration —— Decision making is easier, as fewer the company was able to consolidate of facilities management and related people are involved. its facilities management spending services in an effort to streamline —— A comprehensive view of all services from dozens of suppliers to just management and improve performance. with fewer providers eases the one vendor, while standardizing This offering can include the following management of these categories. business processes and service functions: quality. Adopting integrated facilities —— Suppliers that provide integrated —— Real estate. This category includes management helped reduce costs services can become strategic all services related to transaction by more than $150 million over three partners for organizations. management, , years. and other services. Factors to evaluate if the organization should pursue an arrangement with an —— Facilities management. All of the outsourcing integrator: tasks that are involved in maintaining a facility, such as equipment —— Cost: Are costs higher than maintenance and services. benchmarks for peers? —— . Activities —— Geographic portfolio: Does the focus on the conservation of energy, company have a diverse geographic including retrofits and procedural footprint? changes. —— Property portfolio: Is the property —— Production maintenance. The portfolio diverse? maintenance of production —— Organizational capability: Does equipment comprises areas such the real estate function have limited as assembly stations, process capacity or capability? equipment, and testing stations. —— Employee services. Services for employees could include mailroom, fitness center, and cafeteria and food service.

6 Six emerging trends in facilities management sourcing Case example One energy company sought to trim its real estate costs while implementing workplace strategies that would maximize its use of space and accommodate evolving employee needs. It pursued a range of densification initiatives, including doubling up offices for employees of specific positions, converting excess conference rooms to offices, and reducing office sizes for certain functions, such as accounting or reception. It also created “hoteling” zones, where employees could 3. Workplace strategy Notably, trends in this category can secure workspaces on an as-needed Workplace strategy is becoming a key increase facilities management costs (for basis. tool to enhance employee engagement companies that choose to invest more in Through these approaches, it and retention. It includes several workspace design), but they could also increased the number of available different categories: indirectly compensate for these outlays seats by nearly 60 percent with higher employee productivity. —— Modular workspace. Workspaces without expanding its footprint. can become more modular and Implications As important, an internal survey activity-based to increase agility and —— When considering workforce found that employees viewed this flexibility with changing workforce strategies, companies need to reconfiguration favorably. while decreasing total square balance employee engagement and footage. workplace investment. —— Coworking. Coworking provides —— Organizations are increasingly Exhibit 3 flexibility in selecting the type of looking for suppliers that are capable space and period of occupancy, of maintaining an evolving workplace. Spac e which can offer cost savings. Factors to help organizations determine —— Lifestyle amenities. Lifestyle if revamping the workplace is right for Fixed amenities such as yoga, meditation, them: Traditional cubicles daycare, recreation rooms, and nap —— Geographic portfolio: Is the areas have become common features Modular workspace geographic portfolio of facilities to enhance employee experience. fragmented and consistently Coworking —— Wellness designs. Companies can changing with customer location? Flexible invest in workspaces with appealing —— Employee productivity: Is current acoustics, lighting, furniture, and employee productivity lower than flooring, among other features. peer benchmarked levels, and Wellbeing Together, these categories form options would wellness design and lifestyle along the continuums of space and well- amenities have an impact? N ot explicitly considered being (Exhibit 3).

Tradit ional setup Lifestyle amenities

Wellbeing designs

Addressed through REFM

Six emerging trends in facilities management sourcing 7 Case example A mining company sought to increase rig uptime and reduce maintenance spending, which accounted for 25 percent of operating expenses. An analysis determined that top drive and pipe handling accounted for 40 percent of all downtime and 10 percent of all maintenance spending. It then conducted a thorough “digital teardown” to estimate specific opportunities in predictive maintenance for each component. To support a predictive maintenance deployment, the company focused 4. Internet of Things (IoT) evolution will have to develop multiple use on five building blocks: A number of trends and developments cases to demonstrate the impact are spurring the adoption of IoT-enabled of these technologies on occupant —— Strategy equipment by facilities management experience. —— Technology across a range of applications. —— Companies should consider —— Capabilities —— Energy efficiency. The partnering with suppliers that have —— Organization implementation of IoT devices, such an end-to-end IoT vision and the as motion sensors for lights and capabilities required to convert this —— Processes and procedures automated temperature controls, vision into reality. Its efforts paid off handsomely: the enabling more visibility into energy Executives should consider the company created an end-to-end usage and management. following factors to determine if now is system with real-time data collection, —— Occupant experience. This factor the right time to adopt IoT for facilities storage, and processing to enable could be a contributor to the adoption management: predictive maintenance. These of IoT. capabilities enabled it to reduce —— Cost: Is the cost of IoT conversion maintenance spending by 27 percent —— Computing. Data transmission costs in facilities comparable to current while increasing revenue from are determining whether edge, cloud, expense of maintenance and services thanks to higher reliability. or hybrid computing approach will operations? prevail. —— Change champion: Do IoT initiatives —— Stack ownership. Companies are have C-level sponsors beyond the trying to own multiple layers of IoT CIO? stack. Hardware infrastructure —— Device compatibility: Can systems and/or software are emerging as be retrofitted with IoT technology? preferred ownership models. —— System compatibility: Is the building —— IoT security. Security is lagging (BMS) capable behind the development of IoT of integrating with devices and devices and platforms. software? Does the organization have Implications the data management and security —— Companies have to upgrade or capabilities necessary to support IoT- retrofit legacy systems before equipped devices? facilities can benefit from IoT. —— Lingering skepticism about IoT’s impact means that organizations

8 Six emerging trends in facilities management sourcing Case example Leading companies are in the process of integrating robotics into their facilities management operations for tasks such as floor cleaning, window washing, and power washing. Innovations in early stages of development include robots for security patrol, lawn mowing, and snow removal, among other tasks. The promise of such robots is threefold: beyond the opportunity to reduce operating expenses, these machines could free up existing staff to focus on higher- 5. Advent of robots —— Organizations can pilot robots for value activities while mitigating some Robotic automation is well suited to take repetitive tasks or partner with of the risk associated with these over repetitive and hazardous tasks. suppliers that have expertise in the tasks. Thus far, Asian and European companies deployment and maintenance of are leading in adoption of robotics for robots. services such as cleaning and security; Factors to evaluate if now is the right time widespread adoption could occur within to invest in robotic automation: the next decade. —— Cost: Is the cost of owning or leasing —— Repetitive tasks. Activities that a robot less than current costs? follow the same process every time, such as sweeping a floor, are prime —— Market support: Has a service opportunities to integrate robots supply chain for the equipment been into operations. Several companies established? are currently designing and building —— Effectiveness: Is the quality of robots to automate repetitive tasks work similar or better than current such as power washing and lawn processes? mowing. —— Technology maturity: Will current —— Hazardous tasks. The use of robots technology change dramatically in for certain jobs—for example, the short term? security patrol or HVAC duct cleaning—could enable companies to reduce costs and risk. Implications Advent of robots —— Applications of robotic process automation are still in the early stages for services such as for facilities management. —— Repetitive and hazardous facility cleaning and security management tasks are prime for disruption by robots.

Six emerging trends in facilities management sourcing 9 Case example Companies are experimenting with various applications of AR to support workers in selected tasks. A remote assisted maintenance toolkit, for example, includes endoscopic and thermal cameras, a microphone, and a portable computer. With these tools, the equipment operator can connect remotely to an expert, who can guide him through the maintenance procedure. AR maintenance also offers operators support through an integrated helmet with special glasses and 6. Augmented reality Implications software that details proper Technology players are developing —— Augmented reality is still in the early maintenance procedures. end-to-end AR solutions that have stages of development for facilities the potential to transform facilities management. management. —— Organizations would have to —— Hardware. Smartphones and tablets coordinate across several functions are dominant in the hardware market, to use AR effectively. while wearables are still in low levels —— Companies should work with partners of market penetration. that are actively engaged with AR —— Content source. Information is providers and pilot technology when limited to content pulled from the market is ready with a solution. maintenance manuals and through Factors to evaluate if now is the right time user interaction. Content sources to implement AR: from IoT-based devices are also in the early stages and would ideally be —— Market support: Has the service enhanced further by data collected supply chain of hardware, software, from IoT sensors. and content been established? —— Interaction. Information can be —— IT infrastructure: Has IT visual, instructive, or interactive. infrastructure been developed to Technologies are developing across support AR on a few controlled all areas, but visualization is currently applications? the most mature. —— ROI: Does technology have a good —— Mapping. While mapping is still ROI when considering technician limited to spatial tracking, marker- time, number of visits, safety, and based and shape imposition ease of process use? technologies are being developed. —— Workforce skill level: Is the current —— Software development kit. SDKs workforce sufficiently technology are well developed for consumer savvy? applications such as gaming but are still in the early stages for facility management applications.

10 Six emerging trends in facilities management sourcing Actions companies savings. One company, for example, can take now was under pressure to reduce costs, but the procurement team was skeptical Facilities management leaders can’t of addressing facilities management simply flip a switch to harness these because of sensitivities within the trends. Some companies will need to organization. The indirect procurement adjust their strategy, organizational team asked for support from the CPO capabilities, and culture. And considering and COO to back a transformation of that a few of these trends are still in facilities management, and this support their infancy, executives should focus on created an actionable pipeline of savings laying the foundation. Several actions for the next three years. can help. Establish a cross-functional team. True cross-functional 6 actions to take now between procurement and operations is required to create sustainable impact. Elevate facilities management to a Companies should form a team that C-level priority (with a focus on COO/ includes the COO, CIO, a facilities CFO engagement). management leader, a strategic sourcing Many industries have traditionally kept leader (for facilities management or facilities management on the backburner, innovation), and a project management but this category can be a goldmine of office leader, among others. Without

Six emerging trends in facilities management sourcing 11 alignment, facility management initiatives service and housekeeping through pilots face a difficult path. One company’s in certain hotels. procurement team identified savings Partner with IFMs and set up a robust during the RFP process and moved to governance mechanism. adopt integrated facilities management, A company can view IFM suppliers as a but some stakeholders were not partner to achieve savings and manage on board. During implementation, portfolio, but it must first establish an operations team found that the a robust governance mechanism to prescribed specifications were not maintain trust with suppliers. A regular aligned with its equipment. Within a few auditing cadence can ensure that any months, the IFM contract was nullified savings are contributing to the bottom after some heated conversations line. In addition, companies should between procurement and operations. make decisions collaboratively with In another company, procurement IFMs on topics such as specification leaders were adamant about pursuing standardization and computerized IFM. Although it was the right strategy, maintenance management system they first sought to gain alignment and (CMMS) technology. At one support from the operations team before manufacturer, a factory manager set up the process kicked off. a regular auditing cadence to review IFM Assess the organizational maturity and initiatives with the finance team to ensure capabilities needed to manage vendors that savings flowed to the bottom line. and support digital technologies. Design an implementation road map. Capabilities, both from a relationship Companies should develop a and content standpoint, are important. comprehensive, long-term category Vendor relationships can be built by strategy to incorporate all facilities acting on stakeholder satisfaction management trends. A sequencing surveys, organizing joint meetings exercise can help companies to prioritize with suppliers, and managing supplier initiatives. Since technologies will performance as a team. Organizations continue to evolve, facilities management can develop content-based capabilities leaders should establish a regular by introducing supplier-led training on strategy review process of all categories digital technologies and investing in to refine and hone their vision. external expert trainings. For instance, a client set up a meeting cadence between suppliers and stakeholders to identify Traditionally overlooked, facilities and address issues every quarter. management is on the cusp of disruption. Build the business case for investment Companies that track emerging trends in selected trends. and invest in the right organizational Companies can support the adoption capabilities will be well positioned to of emerging technologies by doing reduce costs and increase the impact of controlled pilots. Projects that apply their facilities management spending. augmented reality to simple tasks Sourav Das Adhikari is a knowledge and experiment with IoT can get the expert, Steve Hoffman is a partner, organization acclimated to technology. and Britta Lietke is a senior knowledge Successful pilots can provide the expert in McKinsey’s Chicago office. business case for scaling; a similar rationale can be used for opportunities to integrate robots. The hotel industry, for example, is adopting robots for bell

12 Six emerging trends in facilities management sourcing