Whether the organisation is a hospital trust, an education authority or a manufacturer, it is typically the capital-intensive building facilities and refurbishment projects that get deferred when finances are tight.
Although many managers recognise that they are storing up potential long-term problems through inefficiency and breakdowns, other operating priorities always seem to take precedence.
However, an alternative method for financing infrastructure improvements, which avoids the need to set aside capital that has to be focused elsewhere, has become widely adopted in the US. Since the mid-'80s, 'performance contracting' has been increasingly used to fund energy saving and facilities improvement programmes originally for schools and colleges, hospitals, federal buildings - and, more recently, for private sector operations.
It is an approach that is now starting to attract attention in the UK.
In particular, two of the main worldwide players in this market, Honeywell and Johnson Controls, have been behind the introduction of the scheme in the public healthcare and education sector. The basic principle is relatively simple. The selected contractor will design a solution to meet an organisation's investment needs, which can be for anything from a single problem such as a boiler replacement to the running costs for a number of buildings and will finance the implementation of this solution. Moreover, the contractor, who then maintains the facilities, will guarantee the savings on running costs. If these savings and other reductions in operational expenditure are not made, the contracted company absorbs the shortfall.
If the savings should exceed the guarantee, then the organisation gains a windfall. Most contracts run for seven to 10 years, after which time the organisation has paid off the investment and owns all of the equipment, and future savings. As Nick Ray, Honeywell Control System's UK general manager of performance contracting, observes, the main benefits of this approach over traditional capital purchase, from the client's perspective, is that it provides a solution to infrastructure problems while providing access to additional capital funding and expertise.
'The approach is really about developing a partnership to manage the estate,' says John Gilham, director of performance management at the Havering Hospitals NHS Trust, which has a £3 million performance contract under the Private Finance Initiative that has seen the updating of Oldchurch Hospital's heating and energy systems. According to Terry Murphy, a senior management consultant at NHS Estates, having seen the concept at work at Havering, other trusts are becoming more interested.
Johnson Controls has implemented a number of projects at universities, and is now talking with manufacturers. The reason for the slow take-up of this approach in the UK private sector, says performance contract director John Glisson, has been the difficulty of satisfying people that the legal structure is in place to let it happen. 'We are now getting across the message that performance contracting does not break any accountancy rules,' he concludes.