In The Long Run

Why delaying, deferring or low-balling facility maintenance is a bad idea.

Historically, when the economy takes a downward turn, as it dramatically has for the past 2 years, retailers look for creative ways to improve the bottom line of their overall operations. Often, that may mean renegotiating service contracts with vendors, seeking updated Request for Quotes with a goal of reducing costs by a certain percentage or simply making cuts in vendor services.

The “cut or reduce maintenance and service” trend is drawing response from throughout the United States from retail service providers who, in many cases, are seeing their clients end up with much larger expenses instead of manageable maintenance costs.

“For example, one of my clients decided to forgo the 4th quarter PM’s on their AC units; as soon as the heat came, the clogged filters and bad fan belt iced over the unit and resulted in multiple trips to deice the unit. A simple PM service would have saved them more than five times the original PM cost,” notes Sean Burke of Burke Contracting Group, a Florida-based general contractor that provides a variety of services to the retail sector.

Another retail service provider also views this trend as more harmful to retail bottom lines in the long term: “When someone tells me that their company makes decisions that are bottom line based, I always ask, which bottom line? There is price and intrinsic value — very different. Good managers do not fall for the low price, ‘cut, cut, cut’ mentality, and drive a better decision-making process.”

“Unfortunately, some retailers only look at the ‘right now’ bottom line,” says Mark Barraclough, president of Alpine Mechanical Services: “Right now they may well save dollars and they may be able to do that for a short or long time depending on how well their facilities and equipment have been maintained. The better their preventative maintenance and service program has been, the longer they can go without seeing a detrimental effect. However, without a sound maintenance and service program on an ongoing basis, they ultimately will incur significantly higher expense in service calls or equipment replacement.”

Scott Crennan, president of Solutions Management, Inc., a national floor/window cleaning company and provider of emergency cleanup services for retailers nationwide, says some retailers are penny wise and dollar foolish. “In some cases where there has been a long term quality relationship with a retailer, decisions made by management several layers above facility maintenance have turned that relationship into being just another number. Going to the lowest bidder and still expecting the same level of service just means that eventually something will crack.”

From the service provider vantage, Crennan says his East Moriches, New York-based company has had to become more creative to cope with the trend. “We are still operating and growing but we have had, for example, to bundle our services into larger bundles at less expense to offset the margin crunching that is going on. Ultimately, we are picking up more business as retailers are using the current economic downturn to expand their business locations with very attractive lease rates even if they are decreasing service and maintenance.”

“We are finding some retailers have made cuts because they may have not been satisfied with the level of service they were receiving as compared to just cutting to reach budget. Or, they were not aware of how valuable good service is because they had never experienced superior service,” says Barraclough. “As we demonstrate the value of an effective PM and service program at retail stores in one part of the country, the same retailer, in many cases, is coming forward asking us to take on more facilities in other states. Often, it is action they are taking as they realize the program is really an investment in the lifecycle of their facilities and the comfort of their customers,” he adds.

Bob Barnard, a vice president of business development for Lane Valente Industries, a national retail service company in New York, confirms many retailers have reduced their number of PMs or eliminated them entirely. “Because of that, not having a steady flow of work, or the ability to be proactive on their repairs, has forced many vendors to reduce staff. Not having as many techs in the field has affected the response times on demand service for many vendors. This in turn has had a negative effect on the vendor’s ability to respond quickly to service requests. In the long run, repair costs will go up over time but the retailer will see a temporary savings. But at what cost to the retailer’s internal and external customers?”

Another New York-based HVAC service provider notes that the state of the economy has some retailers going so far as to cut preventative maintenance — even when it leads to total equipment replacement in the long run. “We see retailers wasting money on major repairs on systems that are past their anticipated life span because they can no longer amortize the investment over 5 to 10 years. We are also seeing retailers approving less of the work that is found while performing preventive maintenance. This is increasing the number of demand repairs that is required during periods of extreme temperatures. Add the increase in demand repairs to the decrease in major replacement parts availability due to inventory cuts and the fact that we are being asked to repair obsolete equipment, and you have the makings of a major challenge for both service contractors and facility managers.”

Bucking the Trend Pays BIG Dividends

How far will retailers go in cutting maintenance and service for short term budget gains at the expense of long term consequences? When will the slash-and-cut trend end? Most retailers contacted for this article were reluctant to speculate but at least one major player has adopted a different tactic.

Bucking the trend by some retailers and shopping center operators to show short term bottom line budget improvements by reducing maintenance, the Simon Property Group is saving some $40 million per year by doing just the opposite. According to George Caraghiaur, vice president, energy services, of Simon Property Group, the largest public real estate company in the United States is saving energy dollars and improving its carbon footprint by investing in maintenance and service for the U.S. properties in its worldwide 392-property portfolio. The program began long before the most recent downturn in the economy.

“We have just completed our response to the Carbon Disclosure Project with an analysis that shows from 2003 through 2010 we have reduced, on a comparable basis, our energy consumption by 25%,” says Caraghiaur. “For the power that we control, in common areas and where we provide cooling for our tenants, that equates to a market value of more than $40 million in terms of avoided costs on an annual basis.”

Giving advice to others in the retail industry, Caraghiaur echoes the view on how retailers should weigh the consequences of today’s budget saving actions with tomorrow’s consequences. “One of the toughest things to do is to determine the impact of something you do today on what is going to happen over the next 10 years. Some things can be cut today because they will not have an impact on the longer term. And, some things can not be cut today because they will have a longer term impact. We try to understand the implications of what we do on a lifecycle cost basis. The industry, generally, needs to do a lot more lifecycle cost analysis so we can really value the future implications of what is done today. Whether it is an investment or operating cost cutting, we need to make a decision on net present value of benefits and costs versus only blindly looking at today’s impact.”

Those comments are underscored by Alpine’s Barraclough. “We are definitely seeing more interest today from retailers who are concerned over cost containment,” he says. “In these uncertain economic times, it’s very easy for some to say ‘cut HVAC maintenance and service’ as a way to reduce costs. Realistically, Simon Property group is right. You have to look at how cutting costs can have a severe long term negative impact. No one wants to replace or continuously repair systems that would be working fine if they were just maintained and serviced properly.”

Caraghiaur notes getting the ear of the right people to make the correct decisions is sometimes the tough part but once you get the attention of the CFO and the people who understand finance, making the right decision is not difficult. “Everybody understands logic. In the case of Simon Property Group, we now implement lifecycle cost analysis on any capital investment we make that we believe will have a return on investment. That helps us make better decisions than we otherwise might make.”

Ann Moran is vice president of business development with Engineering Excellence, Inc., a national HVAC facilities management firm. “A recent speaker talked about the cost of ‘doing nothing’ and the benefits of being proactive on maintenance and in scheduling repairs as recommended during a maintenance,” she says. “I do concur with the other comments on the importance of being proactive with needed repairs as opposed to waiting. If retailers prolong repairs, they assume the risk of decreasing the life of the unit, premature failure of components and discomfort.”

Barraclough concludes: “I can’t stress enough how Simon Property Group is taking the right approach in today’s economy. Maintenance, energy, repair and capital are the four main components of costs in the retail industry. One impacts the other. Those who are now investing capital and being proactive on the maintenance side are driving down costs. It’s important to look at all four components, no matter the state of the economy. When our economy improves, and it will, many retailers will unfortunately find they have gone the wrong route when it comes to reducing or cutting maintenance and service. The current trend is not good short term for the service sector or long term retail.”