Public sector facilities: The opportunities amid the challenges

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Frost and Sullivan’s NELLY APPELHANZ provides an overview of the current Australian facilities management market for government facilities and the opportunities and challenges it brings.

Australian governments hold one of the largest property portfolios in Australia. This is because government departments provide a wide range of services – at a federal, state and local level – to the public.
A considerable occupied area and the need to operate and maintain these facilities in line with the unique needs of government provide significant market opportunities for numerous companies that not only provide facilities management services, but also real estate and project management services.

MARKET OVERVIEW
In 2011, an estimated 7 million square metres of office space were occupied by different government tenants across all levels. Around 62 percent of facilities management services are outsourced and 38 percent are provided by in-house staff. This share varies across the different Australian states, influenced by the nature of the government in each state.
It is estimated that in 2011 around 50 percent of state government office space was located in New South Wales and Queensland. This was followed by Victoria with 16 percent and Western Australia with 15 percent.
Frost and Sullivan estimates that around 71 percent of facilities management services are outsourced in Victoria and 68 percent in New South Wales. In Queensland and South Australia, less than 50 percent of facilities management services are outsourced.

KEY DRIVERS
The trend to further outsource facilities management services, either as bundled or integrated services, drives the development of facilities management services in government institutions. Two main drivers for outsourced facilities management services are cost considerations and the need for expertise to facilitate sustainability efforts in order to meet the government client’s needs.
Cost considerations positively impact the outsourcing decision for facilities management services, because government agencies have to monitor and report costs. Public pressure creates the need for transparency in the provision of efficient services. In general, external facilities management service providers are able to provide a more cost-effective solution than in-house government departments. Additionally, sustainability efforts – to save energy and hence reduce overall costs – drive the demand for expertise from external service providers.
In this context, facilities management service providers with the capabilities to contribute with cost-effective and sustainable solutions become preferred outsourcing contract partners. The critical success factor is the recruitment and retention of qualified technical staff to deliver facilities management services to facilities that reach the end of their life cycle, as well as to modern and automated government buildings, which in the future are meant to contribute significantly to overall sustainability efforts.
Managing and operating ageing building stock is a major challenge. For some departments, replacement costs are estimated at four to five times the written down value of their ageing assets. Deferred maintenance from the past has taken its toll on facilities in which funding for repairs has been allocated elsewhere. As more buildings eventually reach end-of-life, a hands-on approach from facilities management service providers will be expected to provide cost-effective maintenance and up- or downgrades to manage such scenarios and their consequences.

KEY RESTRAINTS
Two major market restraints, namely government departments’ budget restrictions and competition among service providers, impact facilities management outsourcing decisions.
While essential maintenance is unlikely to be compromised, it is likely that backlog maintenance levels will increase in the short-term and potential projects with long payback periods may be reassessed. This means that non-critical facilities management expenditure will be deferred for a certain time, postponed indefinitely or eliminated completely. This may lead to reduced ongoing revenues for some facilities management providers, as well as fewer new business opportunities in the short term.
Additionally, competition can limit new opportunities and profitability growth for facilities management service providers. Facilities management service providers face the same pressure to remain cost efficient and competitive as any other profitable business. They compete not only on price, but also on the type of solution provided.
Traditional facilities management service providers have generally positioned themselves according to their traditional business model and growth strategy. These compete with other private firms that position themselves as real estate management service providers (with expertise in facilities and project management services). Additionally, private real estate and facilities management providers compete with public providers of facilities management services, namely internal departments that provide single or bundled services to government tenants. Depending on a number of factors, such as the size of the government office space, internal resources, cost considerations and political considerations, in-house services might be more favourable in certain areas and councils.

GROWING SHARE IN THIS CHALLENGING ENVIRONMENT
Other notable market trends, such as the efficient use of office space, green cleaning and increased expectations relating to total facilities management and property solutions delivery, will require facilities management service providers to offer customised solutions for competitive advantage. Service providers who understand these market trends and leverage qualified and reliable teams will be best placed to grow share in this challenging environment.

This article was authored by Nelly Appelhanz, consultant Australia and New Zealand Industrial Practice for Frost and Sullivan, based on Frost and Sullivan’s recently completed report ‘Analysis of the Facilities Management Market for Government Institutions in Australia’, which provides an overview of facilities management for federal, state and local government office buildings, as well as relevant trends and developments impacting the opportunity for service providers in this market.
The full research service provides more details for the facilities management market of government institutions by federal, state and local level. For each level we provide an estimate of outsourced versus in-house facility management services and an estimate for integrated facilities management versus other facilities management services, as well as hard versus soft services. A copy of the report can be obtained from Frost and Sullivan.

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