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There is risk in facility services strategic sourcing. The risk lies in where the price falls. Sourcing tools such as reverse auctions can drive the price down into the pit where trouble lurks. Savvy sourcing professionals know when and how to apply tools to avoid the pit, but some procurement folks attracted by the lure of lower prices, use the sourcing tools without regard to where the pricing is taking them.
This pit is a dark place. It is dark because normal rules and ethics do not apply. Take, for example, the sourcing of janitorial services. Put through a reverse auction, janitorial prices may fall to the point that there is no technology or process that can improve production rates sufficiently to justify the price. Some buyers procure with eyes fixed on the bottom line, forgetting or ignoring that the janitorial service is labor intensive (labor makes up 70% of the janitorial cost).
The key cost driver for labor is the production rate* achieved in cleaning the facility (See Oct 8 post: "Under the Hood: Janitorial Pricing"). A low production rate means higher cost, and a high production rate means a lower cost. This means when the price goes down into the pit, there is a negative correlation between price and production rates. When price goes down, production rates have to go up. This calls for an important questions every buyer procuring commercial cleaning services should ask, "Is the production rate behind the current price achievable?" Otherwise, the cost will be transferred back to the buyer (E.g., complaint management) or recouped in other questionable ways by the contractor. Questionable behavior creeps into the pit when the price drops below the level where not even the best technology and process can achieve the production rate necessary for the price.
*Production rate is defined as cleanable square footage divided by daily hours.
Here are five malpractices that lurk at the bottom of the dark pit and five fail-safes buyers can look for to bring light to the dark:
Reduced scope compliance — A contractor that can’t meet the production rate necessary to match a low price will seek first to reduce the scope. The contractor knows it’s hard to manage frequencies and scope compliance.
Bidding a lower rate knowing that the contractor will not honor the periodic frequencies so as to recoup the lower cost.
Cutting overhead in pricing, reducing quality control and account management. This leads to service instability and lower quality and the transferring of management cost back to the customer in terms of complaint resolution, increased attention, follow-up and regulatory incompliance fees.
1099ing employees to eliminate payroll taxes. This practice is illegal.
Hide fees or bid zero profit hoping money can be made up by charging high markup ancillary work billings.
Look for contractors who make their work visible through technology and quarterly reviews.
Look for technology deployed by the contractor to make periodic work visible and accountable. For example, Varsity developed a web-based technology called Vektr to schedule periodic work.
Ensure bid includes proper overhead cost necessary for quality control and account management.
Have contractor disclosure employee payroll tax documentation. Have them sign an agreement that employees will not be 1099’ed.
Require fee disclosure in the RFP. Then ask contractor to explain how their profit will be made.
In 2011, Marc's team won the large company category, "Best in the Industry" marketing materials from the Building Service Contractor Association International (BSCAI). Marc also directs Varsity's proposal writing, sales process and tools development, marketing campaigns, corporate website SEO performance and customer support center.
Marc has spent his career developing strategic capabilities that enhance value to customers and the company. A Lean Sigma Green belt himself, he developed the company's Lean Sigma offering, providing an innovative solution to customers' need to lower cost while raising quality. He led the development of JanOPS, an industry-leading janitorial operating system, which brings standardization and service consistency to large campus and geographically disperse national accounts.
Prior to this position, Marc was responsible for strategic management at Varsity. He has initiated or directed multiple strategic technology initiatives, ranging from a corporate website, a corporate intranet, a web/smartphone based quality control system, a learning management system, a corporate content manager and knowledge wiki, salesforce.com deployment and customization, and an Android app which facilitates the GROW sales process he has developed.
Marc is the author of several leadership and management training manuals, field guides, marketing collateral and case studies. He speaks Portuguese and Spanish and holds a bachelor degree in English/Technical Writing and a Masters of Business Administration in Finance from Idaho State University. Marc enjoys mountain biking, skiing, fishing and golf. He is happily married, and he and his wife Victoria enjoy raising and spending time with their four children.