Contract catering: Surviving in the FM landscape

06 July 2006
Contract catering: Surviving in the FM landscape

Facilities management (FM) has become big business in recent years for obvious reasons. It promises the client total management of all its services, including catering, engineering, cleaning, security, office moves, company cars and grounds maintenance, leaving it free to run its core business. Most private and public companies now outsource all non-core tasks.

The figures speak for themselves. In 2004 Mintel reported that the outsourced UK FM market was worth £12b. According to online resource i-FM, this grew a further 18% in 2005. Conversely, the UK contract catering industry, after significant growth, appears to have maxed out at £3.8b according to the British Hospitality Association's Food and Service Management Survey 2006.

Good news, then, for suppliers such as Carillion and Taylor Woodrow, traditionally associated with big infrastructure and construction programmes; less so for companies like Elior, whose roots are firmly in food service.

As a result, a new landscape is emerging as catering companies are lured into the FM markets by new opportunities and revenue streams. At the same time, traditional FM providers are interested in providing their own catering and soft services. It means catering and FM departments must work increasingly closer together.

In many cases caterers, large or small, are now signing contracts with FM companies and not directly with the clients. So how does this change working relationships and what are the key issues which will have an impact on establishing good working relationships? More importantly, what can be done to avoid problems? When the opportunity to work direct with a client is removed, food service becomes just another facility service along with mail and security. It can be harder to influence the service offering with caterers relying on the FM client to provide fit-for-purpose premises, services and maintenance.

Individual identity may also be lost as caterers fall into the FM company's brand. Avoiding unilateral branding can be beneficial although, conversely, falling under the FM company's brand could make it easier to change a failing caterer.

But catering within FM should enjoy a reasonable level of independence, so let the caterer manage its assets, invest in the facilities and maintain its equipment.

Regional Suppliers

The contract could be in a single 100,000sq ft building with 500 occupants, a multi-site MoD estate or an international bank. It could involve the same supply chain throughout, a mix of regional suppliers or bespoke to a client's requirements. The FM provider could be engineering-focused or hotel service-based. The deal could be part of a wider construction programme lasting 30 years or a more conventional five- to seven-year arrangement.

A small to medium-size FM contract is potentially less problematic than a vast UK-wide PFI project. It is easier to see how the service will work and how the constituent parts will interact. The big deals can become a circus and price becomes more important as it's the easiest benchmark. An incorrect price (say the wrong food cost percentage, or miscalculating wastage) could cost caterers dear, whereas a total FM company can more easily subsidise from other services. Caterers may try to hike the prices but that just annoys the client.

Therefore FM and caterers should enter large bid rounds with caution as bid costs up to as much as £500,000 are not uncommon. With all this it is becoming clearer that the larger caterers are best placed to be the lead FM suppliers as we see with Sodexho, and Compass under its ESS brand.

The cost of an FM contract can be in the millions, which at face value looks impressive. However, in negotiation, prices are often squeezed, causing a potential downward pressure on contract price. A caterer may go in with a workable subsidy only to find that some of it is given back, or that there's a built-in efficiency return year on year.

The worst-case scenario is that the caterer falls out with the FM company over price. Service quality suffers, customer complaint levels rise and the client is left with a damage-limitation exercise.

You can do several things. The client could terminate the deal, which may not be a practical or cost-effective solution, or the deal could be renegotiated. The FM company could hire a new catering supplier or just do it in-house. I think the caterer should make sure it's operating the best possible service and keep the customers onside, and ensure it's in a strong negotiating position. That way, if the client is drawn in, the FM company has a stronger case to maintain the desired level of catering service.

FM companies will want price certainty for their complex cost models. Pricing for caterers, on the other hand, is becoming more risk-based. If a caterer gets it wrong, it takes the hit, although there are some clauses in the contract linking building occupation and volumes to overall price.

The client pays a unitary charge, in effect a service charge for all FM services. This includes mail, cleaning, catering subsidy and so on. The figure can either be charged by occupant or more likely by area. So if building size increases or reduces the FM company needs to recalculate the baseline figure and agree with the client.

This can be time-consuming, but it's difficult to avoid. Nil-cost won't do it, because that model may not work if occupancy falls. FM companies could be more radical and lease out space, so operators could pay a turnover-based rent.

Expensive to Service

Caterers and FM companies need to be shoulder to shoulder in the planning of new-builds to get the best facility and price. If they're not, then they could struggle with a building which may be difficult and expensive to service having provided an over-expectant bid.

Workplace catering is predominantly a cash-based business and this immediate cash-flow can be attractive to an FM company struggling to make ends meet. Some kind of incentive scheme in the deal to avoid cross-subsidising failing elements may be beneficial. Some clients have kept catering out of the FM contract altogether, for example Barclays Bank. In this case FM plays a managing agent role ensuring services are provided, but the catering deal is effectively ring-fenced.

A gain-share mechanism could be deployed so benefits are shared with caterer, FM company and client. So the caterer not only needs to get the food offer right but also to analyse performance. Information on sales penetration, repeat business, average spend, wastage and so on must be to hand for the caterer to remain in a strong negotiating position.

Out of all the FM supply chain, catering is arguably one of the most emotive. In most organisations staff pay out of their own pocket for the service provided, resulting in the usual gripes of lack of choice, unhealthy dishes and poor out-of-hours provision.

Disgruntled Staff

Employers know a poor or unfocused catering service can detract from core business and result in disgruntled staff. If the restaurant becomes less busy, and more people go out or buy in lunches from high-street retailers, complaints pile up. FM companies and caterers must deal, therefore, with complaints together, and also facilitate a regime where all internal and external caterers must comply with a single food safety policy. The main benefit is that dodgier suppliers will stop supplying and the in-house caterer will respond to competition from quality suppliers and clean up its act.

Various surveys suggest that people seem to spend less money and time eating in restaurants. They want to "grab and go". In the planning stage, these outlets take up less space, are easier to run and won't need so much labour, skilled or otherwise. However, caterers will have a challenge if at a later stage it is decided that proper restaurant facilities and kitchens are needed. A total refit can be expensive and disruptive.

A full survey of customer requirements needs to take place. This can be face-to-face, at team meetings, online or by questionnaire. A local marketing survey should take place to identify what's available to eat within five to 10 minutes' walk from the building. The offer is then determined by the client's core business, age and gender profile, the culture and so on. In traditional manufacturing they'll probably want a canteen, in a busy newsroom they'll want a convenience store.

Remember that customers, guests and visitors are likely to judge your building by what they see and experience. The key indicators are security, reception, cleaning and catering. They will soon spot a lack of joined-up thinking and exploit it. At the BBC this eventually contributed to Land Securities Trillium's 30-year property deal being retendered after just five years.

Who is responsible for complaints or problems? Is it the FM company or the caterer? This can be a challenging area in contracts where there is a local FM manager, a catering manager, plus a contract support team, and the client. In better deals these people can work side-by-side, but it is a learning curve. Clear processes need to be established so everyone knows his role.

Bad processes can become a barrier with protracted response times to customers as complaints are handled by several people, logged in to a database and left there. Strong local empowerment is vital. The FM company has to take leadership over its whole supply chain.

A further aspect relates to ownership of equipment. On paper the caterer should be responsible for minimising equipment failure, but maintenance is invariably undertaken by the FM engineering provider. The kitchen often represents such as small part of the engineers' overall workload that it is relatively low risk and of little consequence. Unfortunately, having to wait for the building engineer can impact on the caterer's service delivery and margins, and if linked to penalties or

nil-cost, this can be an unnecessary business risk.

My advice is to delegate this to the caterer and let it appoint a specialised catering maintenance company.

If there's anything that really destroys a relationship, it's penalties, and adjudicating on who's right and who's wrong. If you've failed to deliver a service at an agreed time then you deserve a penalty.

It's less clear when the delivery element is more subjective and reliant on a number of factors such as equipment maintenance, cleaning scheduling and so on.

Invariably the penalties are paid out of your profit contribution. In some cases they're so severe that if you've gone in tight then your margin could be wiped out in one strike. Yet again caterers need to track all activity and work closely with the FM company as it is the one fined by the client.

Penalty Clauses

An astute business development manager will account for risk, although this may make the bid uncompetitive. Caterers (and FMs) must be absolutely clear what they're letting themselves in for and walk away from the more punitive bids.

The market is evolving and all the big players, including catering companies, want a bigger slice of the action. New competition is emerging, Compass may take on Carillion, Sodexho may become competitors of Johnson Controls.

Whatever the case, the FM company often determines the overall culture, strategy and direction of the contract with the client. To be successful, FM companies must empower their supply chain to deliver services with the minimum of fuss. Team-working, training, coaching, effective communication and an open-book approach are just some of the ways of fostering this.

The biggest opportunity thrown up by a closer relationship between FM and catering is the fantastic gene pool of skills an FM contract provides. If properly managed, it can deliver fantastic results.


Julian Fris is director of NellerDavies, a consultancy offering advice and support
in facilities management and catering.

Tel: 0146 271 1941

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