The cost-of-living crisis is a household issue for the NHS

Diseconomies of scale

Consumer prices, as measured by the Consumer Prices Index (CPI), were 9.0% higher in April 2022 than a year before (Harari, 2022). One way to understand a price index is to think of a very large shopping basket containing the goods and services typically bought by households. The price index estimates changes to the total cost of this basket. When we think of this ‘household basket’ in the context of our own lives, we might list food, transport, gas and electricity, property maintenance and improvements etc.

Scaled up, all these cost pressures exist for the delivery of Hard and Soft FM services across the NHS estate too.

Whilst the previous Chancellor’s statement has seen fuel tax concessions for the NHS, inflationary pressures on the NHS were left unaddressed. As a result, the Institute for Fiscal Studies estimates the NHS England budget is now expected to grow by 3.6 per cent per year in real terms, compared with 4.1 per cent in October. This will have a significant impact on the NHS’s ability to meet efficiency targets and reduce the backlog. (NHS Confederation, 2022).

What choices exist?

Particularly with new FM contracts, one obvious and straightforward solution might simply be to cap indexation to a relatively low percentage (such as 2.0%), with a fixed rate periodical uplift, before the contract is agreed.

However, based on the legacy of the financial collapse of the some of the large FM providers we know that unduly pressuring the contractor is not an effective, long term or sustainable strategy. The notion of ‘squeezing’ the supply chain in times of financial pressure is completely out of kilter with the ideology and ethos of collaboration and the generation of economic social value when it comes to public sector expenditure. Even if such principles are set completely aside, without a sufficiently robust contract and careful ongoing management, suppliers will simply look to protect their margins through workforce rationalisation and stifled investment, ultimately leading to reduced levels of service delivery and therefore poorer patient experiences and outcomes.

In any case, what about existing contracts where there is not an option to impose new restrictions on contract inflation any time soon?

Hard and Soft FM contracts rely on annual indexation uplifts, however, when it comes to FM contracts there is more than one type of indexation used. This means the costs between Trusts and FM contracts can become polarised and challenging to compare, even in the same patch.

Typically, newer contracts and those let via frameworks use CPI for indexation. Older contracts, typically those associated with the FM provision at PFI sites, are indexed based on the Retail Price Indices (excluding mortgages) (RPIX). At the heart of these contracts is a mechanism to ensure providers remain competitive with pricing and innovation to ensure ongoing value for NHS money, achieved through a contract requirement to value test the Soft FM services against the market at given anniversary dates; often 5 yearly intervals.

However, the principles of benchmarking requires that comparators are selected on a like-for-like basis. This includes details such as indexation metrics, thereby excluding newer contracts which use CPI rather than RPIX. As earlier generations of PFI contracts with RPIX as the contractual indexation metric expire, and associated FM contracts reach the end of their service life, we see the available peer group is becoming smaller year-on-year. Consequently, instead of continuous improvement and value for money, the reduced competition leads to overly inflated service costs and lowered motivation to improve service levels.

So how can the NHS and the Supplier collaborate to bring about a contract that is commercially viable and sustainable for both parties?

With pain, should come gain

If agreeing to share the pain of inflation, then contracts should also look to capture gain sharing around commercial revenue generating opportunities. In catering services for example, driving sales in the retail catering spaces might be considered as easy, proverbial low hanging fruit. There are also the (arguably more challenging to achieve) additional revenue generation opportunities which can be achieved through letting of catering spaces to host functions outside of core hours. The commercialisation of laundry and linen services and central sterile services can also open other avenues of revenue, but this requires a targeted and focussed approach to acquiring external customers. This is one reason why having an external service provider in many respects offers an open door to realising new potential income streams over and above the delivery of services in house, where the Trust would then have to leverage such opportunities by themselves.

Greater still is the potential for shared savings through making energy consumption reductions. There are three key energy uses in a building: heating, cooling and lighting. The performance of a building in terms of how effectively and efficiently it can be heated or cooled is influenced by the mechanical and electrical elements and the building fabric. The key to improving the buildings’ energy consumption therefore relies on upgrades to the mechanical and electrical efficiency and improvements to the thermal transmission of the fabric (i.e., the U-values).

Understandably, these improvements require capital interventions and can be quite outside of the control of the supply chain providing the services. What the Hard FM provider can do is bring their wider industry expertise and experience of these types of projects to the Trusts attention. They can also work with the Trust to help them understand the complexity and scale of works required and payback periods. For example, lighting projects typically involve relatively low levels of investment and can yield quick and large paybacks. The move from traditional lamps to LED fittings means not only a very quick reduction in energy consumption but maintenance requirements of LEDs are minimal, with 8 yearly replacement cycles significantly reducing annual re-lamping costs

Soft FM service providers also play a very significant part and can often have a more direct impact upon energy consumption than first considered. The catering service for example, (the largest area of energy consumption after heating, cooling and lighting the building) is an area that represents an opportunity for energy reduction through the methods of storing and preparing food (i.e., more fresh and less frozen with less reliance on gas ovens and cookers). Retail catering spaces could also be sub metered and annual reductions in energy costs could be proportionally split to keep both sides engaged in continuous energy reduction practices.

However, this kind of pain/gain sharing relationship requires careful detailing and negotiation to ensure a clear ‘win-win’ for all parties. A collaborative contract cannot in any way be considered ‘hands-off’ once it is procured – it requires consistent joint management by the Trust and the Supplier if the two parties are to effectively engage in the pursuit of cost rationalisation and third-party income stream generation.

So, where to begin?

Carefully crafted procurement

The dialogue starts at tender stage, with the development of a set of specification documents which include a supporting performance calculator to quantify service performance, providing a tool for objective measurement of the contract delivery which protects service quality performance in the face of rising costs.

There is an ever-expanding list of technologies, products and materials that permit service providers to deliver services more effectively and efficiently. Tender documents need to be able to draw these innovations out of each bidder’s response in a way that permits like-for-like comparison.

Importantly, EFM and Procurement professionals must be supported in evaluating responses from the market in a way that permits transparent and evidence-based decisions to be made against clear and auditable criteria. The tender process and the contract must be aligned. The business requirements captured in the contract must be fully examined and investigated through the tender documents and the responses from the market.

Better days are coming (but not just yet)

“The rate of inflation is forecast to keep rising this year. But we expect it to slow down next year and be close to 2% in around two years. That’s both because the main causes of the current high rate of inflation are not likely to last, and because we have raised interest rates several times over the past few months.” (Bank of England, 17/06/22)

Whilst the reassurance in the predictions provided by the Bank of England in June was no doubt welcomed by all, the impact of the rapidly changing political landscape in the UK during July is yet to be determined.

New contracts that are about to be tendered for must focus on incorporating fair and viable mechanisms to control the impact of rising inflation, both now and in the future.

Existing contracts, especially PFI, are going to face even greater challenges depending on the complexity of their mechanisms for change and potential available gain share opportunities. Senior lenders, those that funded the PFI (e.g., banks and financial institutions), who often have no proverbial ‘skin’ in the game, are typically extremely risk adverse and will want to see thorough due diligence to support proposed contract variations of this nature. There are no ‘quick fixes’ but sitting tight and hoping that the inflationary storm will soon ‘blow over’ is a high-risk strategy. The stakes are high, and we need to see engagement, negotiation and collaboration from all stakeholders. It is worth remembering in life that you procure a commodity, but you choose a partner.

No doubt better days are coming, but not just yet, which is why there is no better time to explore a modern and truly collaborative contract approach to FM.

If you need help with implementing any aspect of your FM strategy, please get in touch with Rachel Hampson.

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References

Research Briefing By Daniel Harari, Brigid Francis-Devine, Paul Bolton, Matthew Keep 27 May 2022 D. Harari et al, Research Briefing ‘Rising cost of living in the UK’, 2022, House of Commons

Consumer Price Inflation (includes all 3 indices – CPIH, CPI and RPI) QMI cpi@ons.gov.uk 20 December 2017

NHS Confederation, Spring Statement 2022: what you need to know: Analysis of what the Spring Statement means for health and social care 23 March 2022

Difference Between RPI, CPIY, CPI-CT and CPI, Tejvan Pettinger, 18 February 2017

CPI vs RPI inflation: what’s the difference? Georgie Frost, Updated July 4, 2022

Will inflation in the UK come back down? | Bank of England