As procurement activities continue to pick up in the facilities management (FM) industry, it’s important to understand how suppliers determine the pricing of their services. To help buyers get the best value out of their next FM outsourcing deal, Baachu shares the following seven common factors that can influence the pricing of outsourcing services.
- The economic conditions: No doubt, the state of the economy plays a significant role in pricing trends. This is especially true in light of unexpected events like the COVID-19 pandemic, which can completely disrupt previously estimated pricing rate cards. As a result of the pandemic, some buyers asked for short- to mid-term invoice discounts, while others used it as an opportunity to renegotiate existing contracts. With markets rebounding, a scarcity of talent and travel restrictions in high-cost locations are pushing prices upward, while pricing for digital talent in low-cost locations has reached a turning point and is expected to decrease.
- RFP and sole-sourced deals: Both options have their advantages and disadvantages. Sole-sourced deals are often more efficient, quicker, and can offer greater value, particularly if the buyer has a trusted relationship with the supplier. On the other hand, RFP-led scenarios can introduce competition into the bidding process and often result in better pricing. However, excessive undercutting of prices can lead to lower quality delivery than what was promised during negotiations.
- Account Subsidization: Suppliers often use their profit-making accounts to subsidize their loss-making ones. This is why it’s essential for buyers to regularly compare prices against those of their peers and the industry as a whole.
- Financial performance of the buyer and the industry: The overall performance of the industry can also have a major impact on pricing. For example, industries like insurance and oil and gas, which typically have low margins, usually have lower time and materials (T&M) costs or managed services pricing compared to buyers in well-performing verticals like life sciences, retail, investment management, or capital markets.
- Buyer persona: The procurement team can greatly impact negotiations, sometimes in ways that buyers cannot anticipate. For example, a senior purchasing manager with experience across multiple sectors and who has seen at least two recessions will bring a different perspective to negotiations than purchasing resources who are newer in their careers and have worked in high-tech, internet, or e-commerce sectors, which can affect the pricing and duration of deal-making.
- Transformation vs straight outsourcing: In facilities procurement, the distinction between transformation and straight outsourcing deals is significant. Transformation projects, which involve extensive change management, business consulting, architectural design, and a prolonged advisory/planning phase, require the expertise of a Tier 1 facilities systems integrator or a top-tier consulting firm. These complex engagements are generally more expensive, with costs typically being two and a half times higher than those associated with a comparable straight outsourcing deal.
- Contract terms and conditions: Service levels, service credits, and penalties can have a significant impact on pricing. In Baachu’s experience, most holdbacks or fees at risk that buyers ask suppliers to commit to are factored into the deal as contingencies. Buyers should carefully consider whether they need stringent service levels and fees at risk when planning their next deal.
These are just some of the many checkpoints that can impact deal pricing in the FM industry. By keeping these factors in mind, buyers can approach pricing from a more holistic perspective and be better informed at the negotiation table. For further information on FM pricing trends and developments, contact baskar@baachu.com. Our team is ready to assist you in making informed decisions and benefiting from outsourced FM services.
