Can IT Outsourcing Learn From Facilities Management Outsourcing?

by Pillsbury Global Sourcing Practice

2013 began with a flurry of articles about companies insourcing work or rethinking their sourcing strategies. The reasons for this vary by company, but often include a perception that outsourcing has not delivered the cost savings, innovation or other value the companies had hoped to realize, particularly in information technology outsourcing (ITO). In contrast, we continue to see high levels of satisfaction among companies that have outsourced facilities management and other real estate functions. This makes us think the ITO industry might benefit from some of the best practices used in FMO deals.

First, let's define what we mean by FMO. FMO involves the outsourcing of functions necessary to keep a company's leased and owned buildings operating. FMO deals typically include core functions like maintaining building systems, performing repairs, and handling custodial and landscaping work. They will often also include higher value services like energy demand management and procurement, space planning and support for critical facilities like data centers and lab space. They may also be part of larger outsourcing relationships in which a company outsources responsibility for managing construction projects, lease administration or brokerage transaction management. For companies with sizable real estate portfolios, the annual spend covered by an FMO deal can be in the tens of millions of dollars.

Now let's outline some of the key reasons we think FMO deals seem to have a relatively high success as compared to other types of outsourcing.

Transparency. FMO pricing is usually open-book. The supplier will perform the services using a combination of its own employees and networks of third party providers. The customer will reimburse the supplier for the salary and benefits of each supplier employee and for the actual costs paid by the supplier to the third party providers (with no mark-ups). The customer has visibility at all times into what resources are working on its account and what each of them costs.

Supplier Pricing. FMO pricing structures can vary, but the most common structure is for the supplier to charge a management fee for each square foot of real estate it manages. Management fees typically range from $0.05 to $0.20 per square foot depending on the size of the deal and the type of space to be managed, and include all supplier profit and non-reimbursable overhead. Because supplier employee and third party provider costs are passed through without mark-up, the supplier has no incentive to increase these costs (and equally important, no disincentive to reduce them). The supplier receives the same management fee whether it uses 5 or 10 employees to perform a particular function. This creates a very different dynamic between customer and supplier than the unit price x quantity (PxQ) pricing structures that often discourage ITO suppliers from proposing to automate services, virtualize servers or implement other innovative solutions that may benefit their customers but ultimately reduce the number of "units" they can charge for.

Risk/Gain Sharing. ITO suppliers often talk about risk/gain sharing mechanisms, but they almost never come to fruition, in part because of how ITO deals are structured. With a PxQ pricing structure, it is very difficult to create "gain" that benefits both parties and even more difficult to measure it when the supplier does not share its underlying costs. In contrast, FMO deals often include "savings targets" that focus both customer and supplier on reducing the customer's costs. For example, assume the customer and supplier have agreed to a cumulative savings target of 10% in year 1. If the supplier exceeds its target, it might receive a bonus (e.g., 20% of incremental savings); if the supplier fails to meet its target, it might share in the pain (e.g., reduce its management fee by 20% of the variance between actual costs and the savings target). The contract must include clear guidelines about how "savings" are to be measured, but in general this type of risk/gain sharing structure can align customer and supplier interests, motivate supplier account teams, and allow both parties to "win" when they are able to reduce the customer's costs.

Customer Satisfaction. Like ITO deals, FMO contracts typically include quantitative service levels (or key performance indicators) that are measured on a monthly or quarterly basis and obligations for the supplier to provide a credit against its management fee if it fails to meet them. However, unlike ITO, FMO suppliers will often also put a significant amount of their management fee at risk (typically 25% to 35%) for meeting the expectations of customer leadership. In other words, at the end of the year if the customer is not happy with the supplier's performance, the supplier will receive a significantly lower fee even if it is meeting the quantitative service levels and technically fulfilling its obligations under the contract. If the supplier exceeds customer expectations, it might receive 100% of its fee and a bonus that is to be distributed among the employees working on the customer account.

There are certainly inherent differences in ITO and FMO deals and in many cases good reasons to have different deal structures. Nonetheless, FMO provides some interesting alternatives to consider for customers that are unhappy with their existing ITO relationships and for suppliers that are looking for new ways to build trust and expand relationships with their customers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Global Sourcing Practice | Attorney Advertising

Written by:

Pillsbury Global Sourcing Practice

Pillsbury Global Sourcing Practice on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.