Please click on the link below for the relevant Case Study.
► Business Continuity Risk Containment
► Maintenance Strategy Study
► Quality Assurance in Service Contract Management
BUSINESS CONTINUITY RISK CONTAINMENT
This case study is based on part of a major Disaster Recovery project undertaken for an international Healthcare services provider.
Why Invite Risk?
Much has been written about the need for businesses to recognise the risk of interruption due to a disaster of some kind, and the wisdom of making and updating workable contingency plans for recovery.
This advice cannot be criticised, and due regard to disaster recovery is certainly vital in order to safeguard the interests of the enterprise and its employees and shareholders. What is less often considered is whether many potential dangers could be avoided in the first place through applying a thorough risk assessment process during the evaluation of prospective business premises. It seems an obvious step to take, but in practice seems to be largely overlooked.
Certain risks, although very small, cannot be foreseen or avoided. However, rather than lamenting about being driven from the workplace by, for example, the effects of a serious local flood, one might reasonably ask why the business found itself exposed to such danger in the first place. With the benefit of hindsight it may become clear that the risk of flooding should have been weighed at the time the premises were first inspected and that this particular risk should have been set against factors in favour of the choice of location. The same may be said of a whole range of risks that may present themselves, either due to location or the characteristics of a particular building.
Many companies occupy portfolios of commercial properties and experience regular acquisitions and disposals driven by changing requirements or leases terminating. Other businesses may be expanding, contracting or otherwise finding the need to relocate. Each time a new or replacement business facility is needed it is clear that an opportunity to consider and contain future risk exposure is created. Such opportunities should not be missed, but in our experience they are rarely captured in any organised, comprehensive or systematic fashion. So what can organisations do to address this shortcoming?
A Structured Approach
One answer is to introduce a structured approach to business continuity risk assessment as a formal and essential part of the company’s Estate Management policy. Such a policy would dictate that business continuity issues are made an integral part of pre-acquisition property and premises planning decisions. A measure such as this would be the starting point for risk control over the whole life of a lease or period of freehold ownership, and the benefits would apply equally to sole and shared occupancy situations.
The application of a policy of this kind requires a suitable control framework such as we have recently developed on behalf of a major international Client having an extensive network of branches. By way of illustration the process is described in outline below.
We began by making a general inventory of risks, which in our case fell into 15 categories such as fire, flood, vandalism, environmental hazard, etc. We then considered possible events within each risk category, and whether they could arise simply due to the location of a prospective property or would more likely depend on some feature of building design, construction, maintenance or occupancy. This lead to the definition of 10 key risk factor groups such as proximity to hazards, loss of essential building services, shared tenancy risks, and so on, and within these groups to a matrix of some 50 separate areas for assessment. This was overlaid with a scoring mechanism based on criteria for the degree of perceived risk and the level of containment afforded by the property and its surroundings.
The result was a simple but comprehensive contingency risk check-list that provides a systematic approach to risk assessment. It enables the Estate Manager to readily compare alternative prospective properties on a consistent, quantifiable basis and also to formally document the complete evaluation process.
The approach described here is designed to highlight opportunities not only to avoid hazards in the choice of premises but also to encourage Estate Managers to focus on actions that could reduce specific risks at an otherwise desirable property before any lease or purchase commitment is made. For example, if temporary loss of electrical services is judged to be a major risk, the installation of an emergency generator could be considered in order to lower the impact. Similarly, if current safeguards against vandalism or theft are few, the provision of, say, exterior floodlights and CCTV could be evaluated. Investments in risk reduction measures could then also be factored into the economics of alternative prospective premises.
All things considered it is better to be safe than sorry. Thinking through all of the exposures and risks before deciding on a particular business location or a specific building could pay large dividends, and also lower the possibility of a company’s disaster recovery plan actually being invoked!
For more information please contact us.
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MAINTENANCE STRATEGY STUDY
This case study is extracted from a review of M&E maintenance contract strategy involving 1.6 million square feet of office space, undertaken for a major London Investment Bank.
At the commencement of the study the Bank’s M&E maintenance contract could be characterised as follows:
◘ Simple cost-plus model
◘ No risk sharing
◘ No performance incentives
◘ No formal service level agreement
◘ Management tools and control specifications not well defined
The Contractor was reimbursed for all costs incurred on behalf of the Client and earned a reasonable fee mark up. Labour utilisation and productivity had not been measured, and overtime was high. Significant unplanned repairs and maintenance requests were scrutinised and approved by the Client, but the Contractor had discretion over individual expenditures up to a fixed amount.
In recognition of the foregoing, our Client brief was to recommend an improved form of contract when the existing five year arrangements terminated. While retaining a high level of knowledge and control of the subject areas, the intentions were to effect a transfer of risk to the Contractor, improve cost management and introduce suitable performance incentives.
Contract Options
The basic options in the market place are cost plus, fixed price or a combination of the two in any of several ways:
◘ Cost Plus, Percentage Fee
◘ Cost Plus, Fixed Fee
◘ Fixed Price PPM, Cost Plus Repairs
◘ Guaranteed Maximum Price: Fixed Price PPM, Cost Plus Repairs with cap
◘ Fixed Price Semi-Comprehensive: Fixed Price PPM and Repairs up to threshold value, Cost Plus for Repairs above threshold value
◘ Fixed Price Fully-Comprehensive
Our research determined that fixed price and GMP solutions were driven by the desire on the part of Clients for simplicity, cost certainty and/or transfer of risk to the contractor.
Close management, influence and control were the primary factors bearing on the adoption of a cost plus structure, which is the more common option amongst banks.
The views held within a peer group of banks were found to be generally cautious and conservative. Overall, there was no evidence to suggest a trend towards new and innovative forms of contract, such as output models, and we concluded that the traditional alternatives are likely to be dominant in the investment banking sector for the foreseeable future.
Commercial Criteria
In considering the optimum solution for our Client we believed the primary strategic criteria for all areas should be:
◘ Retention of close Client management involvement and influence
◘ Transfer of risk to the Contractor
◘ Effective cost management and control
◘ Improvement of Contractor performance in key areas
These criteria mirrored the Client’s primary objectives and recognised the view that the existing Contractor, while performing adequately, had scope to improve important aspects of its service management. Indeed it was apparent to us that the Contractor needed motivating to more proactively manage service delivery and encouraging to place more emphasis on performance analysis.
Therefore, challenging service level targets, commercial incentives and a clear specification of requirements would be features of the new arrangements.
Contract Strategy
Fixed Price
We concluded that a traditional fixed price option may impair Client knowledge of and influence over critical M&E service areas, allow the Contractor to hedge commercial risk at the expense of the Client by building in excessive commercial safety factors and/or encourage short cuts in delivering services.
A high level of confidence in the Contractor, preferably demonstrated through performance, would be required to make fixed price, particularly fully-comprehensive arrangements, attractive.
A semi-comprehensive form of contract could be overly complicated to administer in relation to any benefits arising and also reduce the scope of risk sharing.
Therefore, neither a semi-comprehensive nor a fully-comprehensive model was considered suitable as an overall solution.
Cost Plus
A traditional cost plus arrangement, as before, but with performance penalties based on key performance indicators for all services, would put the Contractor’s fee at risk but would not address the exposure to inefficiency costs in the base case. As a consequence, the strategic objectives would not be fully realised.
Therefore, we took the view that a standard form of cost plus contract, even with incentives and penalties, would be unsuitable as an overall solution.
Hybrid Model
Segmenting the service areas, which vary in critical service importance, was useful in order to assess individual solutions and by doing so we found that the strategic objectives for the most critical services, namely PPM and Repairs, could be best met via a hybrid cost plus model.
Our ideas were further developed through consideration of a Guaranteed Maximum Price model, essentially cost plus with a cap, and this eventually became our preferred solution for this Client.
For more information please contact us.
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QUALITY ASSURANCE IN SERVICE CONTRACT MANAGEMENT
This case study is taken from an outsourcing project undertaken for a major London Law Firm.
How can an employer ensure that a service provider constantly focuses on the service it is achieving and takes prompt action to bring shortfalls into line? This is a frequently encountered challenge and our solution was to use the following approach:
◘ A concise set of key performance indicators and performance targets addressing the most critical “must do” features of the service. Each KPI had to address an individual output and each had to be measurable, preferably by automatic data capture.
◘ A self assessment graded scoring mechanism, enabling each KPI performance variance versus the target to be converted to debit points on a monthly basis.
◘ A link between overall contractor performance and reward using an automatic fee calculation tool. Weightings were used to recognise differing levels of KPI criticality.
◘ Disincentives to misreport performance and to persistently fall short of monthly targets at the KPI level
The contractor was afforded a three month transition period before the fee-for-service link became operative in order for problem areas to be identified and resolved.
The result was effectively a self-enforcing Quality Assurance tool and after some months of positive experience has been shown to have changed contractor behaviour.
The objective from a Client perspective was not to save money through withholding of fees as this would mean that the service required had not been delivered. The benefit has been much clearer focus on getting the service right and keeping it that way. Thus, value-for-money has been made more certain.
This project prompted us to seek other applications of our QA tool. We have found that it can be applied to any service contract with measurable outputs, with or without a known fee element in the pricing.
To date we have constructed and installed versions applicable to:
► Building Maintenance
► Cleaning
► Front-of-House Services
► Reprographics
► Mail and Courier
► Archiving
► Stationery Supplies
► Office Planning
► Moves and Changes
► IT Installation and Maintenance Services
► Warehousing and Logistics
For more information please contact us.
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