As any first-year finance-major student can tell you, there are two big levers that businesses can use to maximize profit: Increasing revenues and containing costs. The latter is especially applicable in today’s competitive corporate landscape – yet when most businesses implement a cost containment initiative, they mostly focus on the most obvious cost centers – the lowest of the low hanging fruits. These might include marketing initiatives, employee benefits, or annual contracts with third-party vendors.
What many businesses do not work hard enough to tackle, however, are latent costs. These are costs hidden deep within the operational domain, and realizing the savings potential within a more efficient facilities management program is such an example. FM encompasses not only the company’s repair and maintenance program, but energy expenditure, space utilization, and asset management, as well. In short, keeping a physical space (or multiple spaces) running optimally can be expensive – and the costs associated with facility management are often poorly tracked.
When businesses implement FM software, they are able to analyze actual costs and overhead associated with facility upkeep – and this opens up the door for thousands of dollars in potential savings. Even if FM expenditure seems relatively insignificant at first glance, when compounded year over year, it can add up to major profit after only a short period of time. Let’s take a closer look at the concept of cost containment as well as a few key strategies to harness within your organization’s FM program.
What is Cost Containment?
Cost containment is the practice of controlling expenses by reducing or limiting spending to stay within specific budgetary limits, allowing businesses to improve profitability without long-term damage to the company. If your business regularly spends money on, for instance, purchasing new HVAC filters every year, choosing to clean the existing air filters rather than replace them would be an example of cost containment. There are numerous other opportunities for cost containment within facilities management, yet many are often overlooked because the overhead is seemingly small in comparison with other recurring expenses.
While cost containment strategies were formerly put into place solely for the sake of increasing savings and, therefore, profit – with little concern for the subsequent impact on operations – today, businesses must look at cost containment as a means to improve overall business efficiencies. Today’s competitive, fast-paced marketplace demands that business operations should never be compromised by efforts to reduce spending. The best cost containment practices improve operational efficiency, increase marginal savings, and complement the customer experience.
Cost Containment Strategies Within FM
Could your business benefit from improved FM cost containment? Start by looking at these three simple strategies:
1. Implement Price Controls & Contractor Benchmarking
Many organizations choose to bill for repair and maintenance work on an hourly basis, allowing them to negotiate low hourly rate caps with service providers that create the illusion of savings. Oftentimes, however, these rate caps make high-quality service providers inaccessible to the organization, leaving them with inexperienced contractors and an inconsistent quality of work. Even though the hourly rates are lower up front, a business will end up paying more money to cover the additional hours it takes for a less experienced provider to finish the job.
To ensure cost containment, businesses should implement price controls and quality controls based on set benchmarks for a particular type of maintenance or service. If charging hourly, it’s important to track the time your contractors spend on the job as well as the quality of service delivered. Comprehensive facilities management software simplifies this process: With Service Automation, for example, contractor benchmarking is carried out automatically. This takes into account hourly rates, technician experience, time to completion, and performance metrics. The resulting contractor scorecard makes it simpler to hire the right service providers for future maintenance needs.
Alternatively, businesses may also utilize a not-to-exceed (NTE) work order billing strategy, in which cost-to-completion caps are placed over every job. With a fixed dollar value assigned to each task, your organization can more easily contain work order costs – and service providers are better motivated to manage their time on the repair. Implementing a Service Automation platform helps to control NTE thresholds by analyzing historical data on trade, service, and region, ensuring that work orders are not inadvertently billed for more than the agreed-upon rates.
2. Automate MRO Inventory Tracking
In order to keep facilities up and running at all times, many businesses stock an inventory of maintenance, repair, and operations (MRO) parts – a smart idea, since rush-ordering a replacement part for an emergency repair is much more expensive than purchasing the part ahead of time, knowing that it will eventually need to be used. However, for this method of cost containment to be most effective, facilities managers need to maintain total control over their MRO inventory. This means keeping tabs on purchase orders, documenting all incoming and outgoing inventory, and making sure parts are stored properly so they hold up over time.
Technology plays a key role in the management of MRO inventory. Optimizing the supply chain across a multi-location business is challenging: Without a database through which to track each spare part, its cost, warranty information, and other key details, it’s easy to overspend or understock. Businesses that attempt to track parts inventory on pen and paper are far more likely to miscalculate overall spend, purchase duplicates, or spend money on parts that void an asset’s warranty when used.
With the right FM technology in place, however, facilities managers can automate inventory tracking and even align purchase orders with preventive maintenance schedules. For example: Supply Manager, a digital supplier catalog that integrates with ServiceChannel’s Service Automation platform, consolidates information on the diverse parts, equipment, and materials suppliers that a business has approved for procurement and enables strategic sourcing with greatly increased transparency across the FM program. Businesses also gain access to the best available prices, enjoy a longer equipment lifecycle, and maintain spending limits to meet the demands of cost containment initiatives.
3. Increase Energy Efficiency
When your parents wanted to save money during the winter, they probably had no problem lowering the thermostat by a few degrees. In a commercial setting, however, it’s not so simple: Customers aren’t likely to linger in your stores if they’re colder than the arctic (or sweltering hot during the summer). Thankfully, emerging technology has made it easier for businesses to reduce energy use and cut costs without taking away from the customer experience. In fact, from a cost containment standpoint, increasing energy efficiency presents a valuable opportunity to reduce spending while simultaneously improving operations.
To thoroughly evaluate opportunities for energy efficiency, facilities professionals should consider both energy supply costs and energy demand-reduction strategies. The ability to reduce supply costs will depend largely on whether facilities are located in a regulated or deregulated market, whether the organization is able to invest money into a new energy procurement process, and the reliability of the energy source. Demand-reduction strategies are perhaps more valuable in terms of cost containment, especially when simple switches – such as replacing older light bulbs with energy-efficient fixtures – can be implemented quickly with an obvious ROI.
Energy costs are unpredictable, but businesses can keep track of their usage, at the very least, by employing a robust digital FM solution with built-in analytics. Tracking energy expenditure often reveals where asset performance could be improved – or whether it might be worthwhile to replace an older asset with a new, energy-efficient model.
Regardless of the type of business you operate, unnecessary expenses are inevitable. Putting a strategic cost containment strategy into place will not only reduce needless overhead – it will also streamline operations and increase efficiencies across the board. When approaching cost containment within your facilities management program, start by differentiating positive costs from negative costs. Positive costs bring new business in, whereas negative costs are those that your business is seemingly “stuck with.” Make a greater effort to contain the negative costs, such as equipment and parts purchases, asset maintenance, and energy consumption.
Your ultimate goal should be meeting and exceeding customer expectations while keeping costs within carefully defined limits, tracking spending, and constantly looking for opportunities to improve.
Ready to take your FM program to the next level? Learn more about integrating innovative service automation and facilities management technology.