TENNESSEE BOARD OF REGENTS O??ice ofthe Chancellor 14?15 Min?freesboro Road, Suite sec Nashville, TN 37217?esaa Phone 615.666.4406 Fax 615.366.3922 TO: Larry B. Martin, Commissioner Department of Finance and Administration Gregory Adams, Chief Opera?iing Of?cer Governor?s Of?ce FROM: John G. Morgan, Chan ellor DATE: January 6, 2016 SUBJECT: Facilities Management Outsourcing Vice Chancellor Sims and I appreciated the opportunity to further discuss the Administration?s facilities management outsourcing (FMO) initiative with you last month. Re?ecting on the conversation, we wanted to summarize the points that were discussed and our thoughts on a potential path forward, at least from the standpoint of TBR. Everyone involved appeared to agree on the necessity for strong employee protections to be part of any proposed FMO arrangement, including guaranteed employment for existing employees for the term of agreement (including extension periods), subject to satisfactory job performance; and employee bene?t protections at least equivalent to current benefits, including any that are unique to individual institutions. There also appeared to be broad agreement that any FMO arrangement must include appropriate service levels and quality standards, as well as signi?cant savings to the institution. It is still unclear whether a consensus was reached that any MO relationship must closely align the vendor?s?nancial interest to the state?s ?nancial funding incentive system in place for our colleges and universities. We believe a vendor must have a clear ?nancial incentive aligned with the metrics on which institutional performance and funding is based. Austin Peay State University East Tennessee State University I Middle Tennessee State University Tennessee State University Tennessee Technological University University of Memphis Chattanooga State Community College 1 Cleveland State Community College i Columbia State Community College State Community College Jackson State Community College Motlow State Community Collage! Nashville State Community College Northeast State Community College 1 Pellissippi State Community College 1 State Community College Southwest Tennessee Community College 1 Volunteer State Community College Walters State Community College Tennessee Colleges ot'Applied Technology Other concerns exist among both TBR and institution leaders that are important to a determination as to whether to proceed as part of the FMO process. Among the requests for information are: 1. Clear, documented guidance on the degree of authority an institutional president will have in managing the relationship with an FMO vendor. For example, what circumstances (if any) would authorize an institution president to terminate the relationship with an FMO vendor? Could a president assess penalties or not award performance incentive payments if performance at an institution is lacking, notwithstanding, acceptable performance contract-wide? 2. Documented speci?cation of the vendor?s obligation regarding non?routine maintenance is necessary. According to institutions in other states, lack of clear understanding on this point has resulted in additional charges that, at the outset, the institution was assured would be vendor obligations. 3. And written agreement concerning whether a vendor would treat activities and services performed by current staff that are not strictly facilities related (move?in day, for example) as within their scope of services or as additional charged services. We understand that SEREM staff wishes to move forward with an FMO vested procurement as quickly as possible, but prefers all entities likely to participate be included in the next steps (RFQ). This is based on the concept that better pricing and terms can be achieved only if the maximum square footage possible is included, and we agree. It was also indicated that leadership responsible for non? RF facilities (with selected facility exceptions) are ready and anxious to move forward with an FMO procurement process (representing 21.3 million sq. ft.1). As originally envisioned, the vested procurement would encompass approximately 56.3 million square feet between State non-FRF and TBR spaces (State non~ FRF: 21.3 million sq. ft., TBR: 35.0 million sq. It is important to note that over 70% of the space attributed to TBR is managed by six universities (25 million sq. The remaining 40 institutions manage less than 30% of System space (about 9.8 million sq. We appreciate the Commissioner?s comments reiterating the Governor?s continued commitment to allow higher education institutions to decide whether to opt in/out of FMO procurement based on the perceived best interest of the institution. We note and support UT President DiPietro?s continued interest in third party validation of the results of any financial analysis upon which a decision might be based. That said, the recent announcement of proposed higher education governance changes to create separate and independent governing boards for each current TBR university has caused us to re-examine the TBR System Office?s role in attempting to represent the interest of these institutions. All available evidence, including the Whitestone benchmarking exercise, suggests that our institutions, including our universities, are operating ef?ciently; however, given the impending changes, we believe it inappropriate for the TBR System Of?ce to make a decision on behalf of institutions that may soon be independent. Leaders of these institutions will have to manage the rami?cations of whatever decision is made and would ultimately be accountable to a new board regarding the decision made. Each must be in a position to defend to the governing board any decision to opt in/out of the FMO process and should not have to defend or explain an FMO decision made by the TBR. This would honor the existing 1 All square footage estimates taken from Attachment of TN Utility Data cf: Energy Management (is: Software RFP practice within TBR of providing institutional leaders the ?exibility to make decisions regarding operational and outsourcing matters (bookstores, dining, custodial, etc), limiting the System Office?s role to responding to speci?c issues that arise during the procurement and contracting process. Given the urgency expressed by SEREM staff in proceeding and the current circumstances, we offer the following suggestion as a path forward for TBR and its institutions: 1. SEREM staff should consider engaging in direct discussions regarding interest in participating in an FMO process with leadership at the six TBR universities. For the reasons cited above, the TBR System Office will support any determination made by institutional leadership regarding FMO participation. 2. community colleges and TCATS will opt out of the FMO process at this time. Existing staff must adapt to the possibility of a new governance system and establishment of different relationships with former system universities. Continuing also represents a risk to progress being made in a number of other initiatives led by the System Office focused on student success and efficiency. The space controlled by the remaining 40 TBR institutions averages less than 250,000 square feet per institution and, in the aggregate, is not material to the overall scope of the project. Delaying a decision to participate still presents the following advantages: 0 Assuming one or more of the TBR universities opts in to the FMO, any issues unique to higher education institutions will be addressed within the resulting contract; 0 Since position is that contract pricing will be scalable, any potential pricing disadvantage by not participating initially is largely mitigated; Delaying allows the TBR System, college, and TCAT leadership to observe the resulting implementation and better understand the bene?ts and challenges of higher education and 0 Based on availability of real pricing information and observation of transition to FMO by other educational institutions, remaining TBR institutions will be better positioned to make fully informed judgments. If the elimination of community college and TCAT space is of concern, we suggest that DGS consider giving notice of termination to its existing FMO contractor and include the FRF facilities in the current procurement. It appears that the existing FMO contract for FRF facilities includes a provision (Section D3) permitting termination for convenience with. 120 days? notice, with no early termination penalty or damages owed. Doing so would add 10.l million square feet to the proposed vested procurement. By participating in this procurement, DGS and FRF would benefit from more advantageous ?nancial terms and pricing (assuming the operating premise of greater square footage participation results in better pricing for all). We also understand that a better managed vested procurement process will result in better general terms and conditions for the FRF. And managing one FMO vendor relationship would be an advantage for DGS, a point cited by SEREM staff as an advantage in the Texas MO procurement. Under this concept, the vested procurement could still encompass 56.6 million square feet between TBR and the State (excluding UT) more than the 56.3 million square feet envisioned in the original SEREM concept. We believe pursuing this option provides the following advantages: Permits SEREM staff to immediately engage with TBR universities and determine their level of interest in further participation, potentially accelerating the FMO process timetable and meeting the needs of the non-FRF agencies; Maintains alignment of decision making authority at TBR universities with responsibility for management of the results of decisions and is consistent With current understanding of goal of creating operational ?exibility for TBR universities; Should ensure aggressive competition for the resulting contract by including the square footage proposed for inclusion between the State and Preserves the opportunity for remaining TBR institutions to participate at some future date as circumstances warrant; and Should result in ?nancial and other terms that are at least as advantageous for the FRF as those that currently exist. Again, we appreciate the opportunity to have a candid conversation on this topic. We hope the concept outlined herein provides a constructive path forward. As always, we are available to discuss this with you at your convenience. CC. Mr. Terry Cowles, Director Customer Focused Government Dr. Joe DiPietro, President University of Tennessee Mr. Chris Cimino, Vice Chancellor for Finance Administration University of Tennessee at Knoxville