Blockchain in Facilities Management: Refocusing on the Office Experience
Facilities management (FM) for the uninitiated are one of those industries which you never pay heed to unless an issue pops up at your office. The FM industry essentially focuses on providing efficient and effective support services for tenants in a building (commercial real estate for the purposes of this article). Eyes dried out from the air-cond blowing in your face? Complain red-eyed to your FM provider; Office feels like a club? Inform your FM provider of the loose lighting (or not); Spiders running around the office? Work with your FM provider to find a new office while you burn the current one down.
In all seriousness, for many, FM as it is now is similar to insurance in that you pay for it in the hopes that you would never have to deal with it until there is a need for renewal. Tenants in a building just want to have the day-to-day operations run without any hiccups so that they can focus on their core business. The FM service industry have popped-up in order to relief companies of this responsibility. Companies are willing to pay the premium for the convenience and value which service providers present. In many cases, having a service provider might actually be cheaper than hiring a full headcount to manage all their service contracts while also minimizing their liabilities in this case.
At its core, service providers play a market-matching role in the FM industry. Service providers have strong established networks with vendors as they are able to leverage their economies of scale. Vendors are willing to quote lower prices to service providers as they bring in more business without the vendor having to source for additional clients. Although this is essentially a middleman role which is hated by decentralization purists, the goal of introducing blockchain here is not to replace the middleman but rather streamline the existing processes. Moreover, given the heterogeneity of real estate (RE), there will always be a demand for such services. One benefit that might be realized through blockchain adoption is that barriers to entry will be lowered therefore providing the industry with more options pushing the focus away from a pure cost basis.
For the large majority of companies, FM is just another major cost of doing business. It is a long term commitment to a significant cost with minimal room for negotiation once agreed. Additionally, FM costs will usually be among the top spends for such companies. When coupled with the fact that the complexity of FM is all but flattened into a single number in their financial models, clients are extremely price sensitive. This focus on pricing often overshadows other considerations and has resulted in a race to the bottom for many service providers. What’s more is that the industry faces competition from the rise of co-working which provides significant flexibility with regards to costing and contracts. Moreover, they will only have to deal one provider in this case instead of managing their leases and service contracts separately.
The good news is that the CRE industry is slowly waking up to the fact that FM has the ability to actually drive returns in their core businesses via increases in employee productivity. You would just have to look at the multi-hectare campuses which many tech companies have built in the past decade to see this trend. The rise of such campuses has also resulted in employees demanding more of their employers when it comes to their workplace. The advantage which FM providers have is that they can leverage their experience in the space to aid their clients in coming up with a FM model that suits the client’s strategy. This is arguably the most valuable service which the FM industry should provide and blockchain technology will enable the industry to focus on just that.
Poor data practices lead to tunnel vision
Similar to the finance industry, it is an open secret that much of the FM industry actually survives due to the inefficiencies inherent in the current system. Much of this comes about due to data obscurity, be it through capital controls on data or difficulties in obtaining the data in the first place. Though it is easy to criticize the current industry as it has both issues in abundance, it is necessary to recognize that it is a system which developed after years of professionals trying to streamline the processes given the costs of available technology.
As such, having had some limited experience on the FM service providers side, this piece will be largely informed via such a perspective. For a start, the general business flow is outlined below:
- Clients send out a Request-for-Proposal (RFP) for a new contract or if their previous contract comes up for renewal.
- Service provider digest the information provided and conducts a site visit to decide whether to bid for the contract.
- Service provider fine-tunes the requirements and forwards it to the relevant vendors if there is no existing master service agreement.
- Vendors provide quotation based on their best knowledge.
- Service providers aggregate all these quotes and drafts a response to the RFP which includes justification of service provider costs.
- The response is submitted to the client. Larger contracts usually undergo a presentation to the clients to allow for final clarifications.
- Clients have a limited time frame agreed in the RFP to announce a winner for the contract.
- If the contract is awarded to a new service provider, the transition period begins else it is business-as-usual till the contract is up for renewal.
All is well and good until you realize that the RFP usually takes the form of a pdf with no set structure. It does however include the contact details for any clarifications on the client’s side although I wouldn’t wish this fate upon my enemies. Any additional documents, if provided at all, are usually sent via email together with the RFP. Even winning the contract provides no relief as the service provider must then adapt to the client’s systems, each with their own embedded practices and intricacies. Adding to this chaos is the fact that much of the invoicing (at least in Singapore) on the vendors side is still being conducted on paper. Unsurprisingly, much of the resources in the industry actually goes into reconciliation of data rather than into progressing the client’s goals.
As per the generic marketing pitch, blockchain architecture (specifically permissioned blockchains) is the prime candidate to reduce the resulting inefficiencies from having siloed databases. At its core, blockchain technology is just a shared database but the benefits of having a single source of truth can not be understated, especially in an industry where there is significant friction when it comes to data movement. Blockchain technology introduces a data governance model using a standards based focus while also providing additional security and reliability guarantees. With regards to FM, the pain points addressed are:
- Data coordination: This is related to the wider problem of data discovery and essentially centers around redundant communication channels. For example, if the data provided in the RFP is insufficient for the vendor to provide a quote, clarifications will be made via the service provider who will then need to check with the client and revert back to the vendor. This goes both ways if there is suddenly a change in RFP details. Is it no wonder that FM professionals can never seem to keep up to date with the torrent of emails and phone calls. Given the tight time frames for many RFPs, many of the prices quoted would need to price in the risk of incomplete information. Granted, the uniqueness of each property is the main reason why this is required but there is no reason why we can’t move to a more efficient data architecture.
- Data reliability: As a result of the above, stakeholders in the industry can never be sure whether they are working with the most relevant data. Adding to this is the fact that historical data is non-existent as such data are obscured by those which have had experience with the particular property, either to maintain a competitive advantage or because they were bounded by NDAs. Consequently, the prices quoted are based upon experience with similar properties but differences in the specifics might result in significant changes in costs. With no reference point, all stakeholders are left guessing as to what is a reasonable price to pay for such services. This one sided data obscurity leads to higher risk premiums so that service providers and vendors can protect their baselines.
- Barriers to entry: A combination of data obscurity and data capital controls also results in a less competitive industry as it forms significant barriers to new market entrants. There are some startups tackling this issue via establishing a searchable platform to connect FM stakeholders but the industry is still largely driven by established networks. This is compounded by the fact that incumbents in the industry have a significant competitive advantage as they do not have to conduct any guesswork when it comes to actual operations. Additionally, transitioning out from an incumbent brings with it major risks and costs. Consequently, it is not surprising that the FM industry faces significant resistance to change of any sort.
- Incentive misalignment: As hinted earlier, the industry as it is now is currently in a race to the bottom. Given that it is a support industry, performance in the industry has mostly been relegated to counting the number of non-performance breaches in accordance with the contract. Those on the ground are also stuck in an endless cycle of attending to tickets, checking of systems, and stock taking. Consequently, service providers and vendors are too busy trying to secure decreasing margins, leaving the industry as a whole little time to think about alternative ways to achieve value add.
Is blockchain the answer?
In short: it depends. Blockchain is just one of the technologies available to tackle the aforementioned issues but it is important to talk about it in relation to other technologies. This is especially so with regards to the Internet of Things (IoT) which is set to disrupt the RE industry. IoT is on track to tackle the issue of data discovery via smart sensors but the ownership and reliability around such data is likely to be an even more difficult problem to overcome. It is at this intersection of blockchain and IoT where there is significant opportunity for value add. Critically, any technological solution can never be considered in isolation as real world problems come with all the subtleties and fickleness of human behaviour.
Arguably, the main advantage that blockchain brings to the table is its ability to incentivize stakeholders to adopt an agreed upon data governance model. As covered here, the obstacles to widespread adoption are plenty but the benefits to be realized are even greater. Ideally, IFM data on the blockchain should be mapped to the master chain of core property data thereby ensuring minimal data redundancy. Additionally, with the proper data classes set up on the main RE chain, the FM industry can reference such data and only update FM state changes. The biggest question then is around the type of FM data that should be committed to the chain and the access rights to such data.
- Property: This includes location and building data which is more in the domain of the transactions and markets team. Hence, as long as the incentives are set up accordingly for each industry, the FM industry should just be able to reference such data without the need to replicate such data on the FM chain. Certain types of property data might necessitate read access rights but FM professionals will not need to make any state changes to such property data.
- Plant and Equipment: This forms the lifeblood of the FM industry and there is an upcoming torrent of data with the introduction of IoT. Having the specifications and maintenance schedules on the chain will be key to realizing the benefits of a shared ledger. Moreover, equipment manufacturers will be able to verify the exact model of equipment being used at each site as it can be checked against their own transactions. Having historical data (performance data, service orders, EHS, etc) for each equipment will also enhance the lines of accountability while also enabling vendors to prove their experience with specific machinery. Benchmarking across equipment with similar functionalities will also aid in establishing vendor reputation. Ultimately, having such data on the chain will remove much of the guesswork and resource redundancy in the industry but there will of course be significant challenges around data accessibility.
- Soft Services: This is the realm where the data gets less objective and therefore also where service providers can truly differentiate themselves. Nonetheless, as many of these services are agreed in contract, it would still be beneficial if the generic scope of work as per historical RFPs are made available. Similar to how there are industry standards when it comes to things such as cleanliness level, this should be rolled out as much as possible for the different soft services. Such transparency will level the playing field for service providers and vendors while also ensuring that clients are presented with the best available options.
- Utilization: Driven by the rise of IoT, the future of CRE will also be rife with building utilization data. For the FM industry specifically, such data will prove invaluable to optimizing the services provided as it brings the user experience much closer towards the individualized workspaces of the future such as those seen in award winning The Edge building in Amsterdam. Although promising, data confidentiality from the clients perspective as well as privacy concerns on the part of the office user will be the biggest hurdle when it comes to such data.
Where blockchain technology does provide advantages over current technology is in streamlining the processes below via the optimization of systemic trust.
- Consensus: For the sake of practicality, Proof-of-Authority is the most likely protocol to be adopted as it closely mirrors that of the reputation system in the industry. Adoption will likely need to be driven via regulation else through a consortium of professional bodies and industry big players (remember this will be in relation to other RE chains that might come up). With a better view into operational data, reputations will align more closely with actual capability as every stakeholder will be accountable to their transaction history (wins, losses, contract changes) rather than their network of stakeholders. Simultaneously, with the growth of the network, the data on the chain will progressively become the most representative state of the industry, in other words, the single source of truth. Critically, no single party has whole ownership over the data.
- Confidentiality: With shared ownership, data confidentiality requirements can then be tackled with the evolving cryptographic models available in blockchain. The FM industry will have to be the one to settle on what data should be publicly available but as for the rest of the data, it is possible to create access control systems and hash such information so that key transaction data is available. For example, if plant specification must be kept confidential, the specification details can be hidden via a hash but vendors can still prove that they carried out maintenance by having their transaction reference the header of the specification hash (which is likely to be the plant identification no). Zero-knowledge proofs also seem like a promising solution to these requirements. With such varied access rights, how these are distributed will be one of the key considerations to how the blockchain should be structured.
- Device reliability: A subtle but important change is that trust in a blockchain system will be transferred from individual parties to the technology itself. This is less of a concern with regards to commercial applications (relative to consumer) but having the assurance that the data is tamper-proof does remove another concern (and therefore also risks) around non-core business operations. This is especially important given the volume of data that IoT devices are set to monitor. Of course the whole connection between devices and the blockchain will have to be tamper-proof as well in order to function as effective oracles. Resources will go into maintaining the devices rather than in manual checking and handling of devices and data.
- Automation: This is where much of the redundancy in the FM industry can be minimized. It is not that there is a lack of trust in the system but rather data reconciliation has such high costs resulting in a significant portion of resources going into administrative work. Automation here does not only take the form of real-time data synchronization made possible via an industry-wide data structure but also the automation opportunities provided by smart contracts with smart devices acting as the triggers for such contracts. Many of the clauses in an FM contract are reducible to binary options. For example, contracts with vendors might stipulate reparations if their equipment fails a certain number of times during the agreed period. A smart contract could be created on the chain with potential fees from service provider to vendor being locked in the contract, only to be released upon completion of the terms in the stipulated contract else if a breach does occur, the fees can be deposited back to the service provider’s account. Of course this will be limited to well-defined use cases but it does promise to eliminate a lot of redundant processes.
Ultimately, blockchain technology in this context is not meant to revolutionize the industry through decentralization but rather provide a shared truth for the parties that require it. Blockchain technology is actually mundane database technology but the implications of a shared truth is overwhelmingly positive. It will drive real value add by enabling the industry to refocus on its core business through introducing new standards, streamlining processes and interoperability, as well as rebalancing the risks in FM. The above definitely leaves out many subtleties to actually realize the technology but blockchain technology does seem to be a very promising solution, especially when used in combination with other technologies.
Thanks for reading this far. I would love to know what you think so do drop a comment :)