COVID-19 Economics For The Facilities Management Industry
April 25, 2020

FM economics needs an innovative approach to counter COVID-19 impact

Post-COVID 19, the FM industry landscape and its economics will see a paradigm shift. The industry needs to prepare itself to combat its fallout well in advance. It would require a comprehensive plan to mitigate these risks and has to build resilience during these testing times to withstand any future pressures. However, FM in these crises offers a glimmer of hope in certain areas and opportunities to tap. For instance, the soft services segment has seen an upside due to COVID-19 compliances. Post lockdowns increasing awareness on Health and Hygiene is likely to boost the scope of FM in communities and workplace management.

The sector will be under pressure to cut costs as well as will face cash crunches due to payment delays with the state of the economy. However, it is still expected to have medium to mild effect as per various forecasts, but SMEs in particular need to be on guard. While its main expense component, wages are expected to remain stable, but other cost drivers will require to take a spin to assure savings. Above all, prudent financial management would be needed to minimize market risks in terms of contacts and cash flows.

Traditionally FM margins have been hovering around a single-digit with almost 2/3 cost of wages and rest split between consumables, specialized, and overheads. The thin, slender margins provide little room to maneuver in such tight cost dynamics, but for sure particular efficiencies and innovation with technology can rule here to show better results.

In FM economics, income is based on profit markups from contract revenues and variations, whereas its expenses are the cost of sales and overheads. Both these need prudent measures and different treatments to manage enterprise goals and objectives amid these crises. These all have to operate in tandem with changing industry landscape to achieve the desired goals. These aspects will need to be played in a very tactical manner. In the days to come, the industry leaders have to rise with resolve before their clients and employees, especially with COVID-19 syndrome looming large, and these need confident postures. This will require company leadership to put the requisite preparedness with proactive attitudes. Although its inevitable challenges are tough and daunting, these can be managed should leaders in FM adopt a comprehensive strategy, not defensive but with cautious and transformative actions. Indeed, this is not the time for taking a high risk but make forthright and bold moves.

It is evolving as a clear sign that due to a contracting economy, Facilities Management will undergo pressure on revenues and margins. However, in this case, there are specific opportunities as well as good leadership skills elaborated earlier that can turn the tables. Still, these will depend on the company’s management and its teams. Companies need not immerse themselves only in contingency modes but also run a robust revival process with a focus on all elements of revenue, cost, and innovation with people at the forefront leading this.

Client retention, contract innovation, and new revenue lines

The sales being the fundamental driver, though, will come hard but not be overlooked. However, indeed there will be room for those able to demonstrate resilience and lead the business as usual before its clients, employees, and brand presence during these crises. Those able to consolidate will be able to reap the benefits, including dwarfing any competition. Additional revenue streams and technology renaissance can also corroborate secondary sales. Value additions such as cleaning and disinfection will get a shot in the arm from this pandemic scare and will lead to much bigger emphasis from the client. In the shorter run, the infection control measures will boost soft services revenues.

The company needs to expand its horizontal contract expansion by offering new services that are critical to client business. Profit margins, though will come under pressure from clients for low markups but can again be well negated by specialized tech-driven services that are going to be considered as essential post COVID-19 such as infection control, hygiene management, robotics, IoT and air quality control that will eventually be new margin and variation boosters.

Variations

Companies will also look to strengthen their overall health-related workplace strategies providing opportunities in variations. Technology-driven strategies concerning employee workplace services will get a push, therefore, negating any revenue losses coming from real estate and job losses reduction. To leverage the company’s supply chain to engage the customer for procurement consolidation with the company to expand ancillary income.

Cost of sales

On the cost front, salaries factor will be the key driver as this shall remain subdued for some time, and much can be achieved in this area with innovative compensation packages. In close collaboration with employees on a win-win rationale, a fixed and variable compensation package could be worked. Also, to achieve this, an efficient workforce deployment with an eye on maximum productivity will be a game-changer as these efficiencies on tactical deployment and automation can earn an additional 7% to 10% of the cost. Technology will be another key enabler with process automation and CAFM to deliver further efficiencies.

In the cost of sales segment of any service industry, besides salaries and direct employees cost, the two other components are the consumables and specialized services; these will need a revisit. Consumables should be as per headcount consumption basis with tactical procurement pricing and sourcing approaches. Very likely specific costs may go up against, such as in soft services; however, these can be managed by savings through emphatic supervision and consumption management. In this context, lots can result in savings of 5% to 7% of the cost of sales. In addition to the above, all specialized services will require the review of SLAs, including moving services inhouse to neutralize any additional markups. All these costs form a high value on the cost of sales and efficiencies therein can help to improvise on profits.

Overheads

Operating overheads will also require a shave, and managements have to trim these. Starting from its management perks to travel and communication cost wherever needed would need scrutiny. Going forward, COVID-19 compliance with occupancy configurations will add a cost burden on logistics and employee accommodations. Nevertheless, this can be neutralized through a reduction in overall cost of transport and rental rate reduction, that being the largest in this cost segment. Last but not the least is the SG&As cost that needs to be contained to the least as in such razor-thin margins this can be a spoiler. All management cost needs to be very lean along with the best of finance and insurance arrangements to rationalize costs

All the cost, as mentioned earlier, efficiencies can surely add to negate the likely reduction on the overall cost. These efficiencies can overall achieve between 20% to 30% in cost optimization that can neutralize the loss in margins in the economics of FM cited above. Post-COVID-19, with the market downturn, FM is likely to see between 15% to 25% in revenues and margins. Indeed, efficiencies will be the key differentiator. Therefore, it does need to toe the line of others to cut the jobs but instead builds transformative post-COVID-19 strategies on contract retention through tactical engagements with clients, build alternative revenue streams, and focus on efficiencies. Bringing employees in the fore to lead this with technology and automation leading from the front can help to emerge as the real winner. Built on resilience, innovation, and collaboration, no organization can dither from its success.



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