The Outs and Ins of Facility Management
There are few givens in the world of facilities management outsourcing. Take the percentage of colleges that have taken the plunge, for one: Most providers estimate about 20 percent of this market has turned over control of some aspect of its operations-food service, bookstore, groundskeeping, building maintenance, janitorial, energy maintenance, or security-to an outside expert.
Are any institutions farming out the whole ball of wax? According to a 2002 survey of attendees conducted during several National Association of College and University Business Officers meetings, a mere 2 percent had done so.
From Kristy Elmore's office as the director for Higher Education Solutions at Johnson Controls in Milwaukee, those numbers are definitely climbing. "In just three years with the higher education market, the conversation has gone from 'Don't say the O word' to 'We need help,'" she reports.
Yet the field report from Rick Justis, an area sales manager for Johnson Controls, is that mass scale outsourcing isn't nearing tidal-wave proportions-it's more like the tide itself. "It's really not very common," he says. "For a while outsourcing was a good thing, and for a while outsourcing was a bad thing. Now, it's situational, and the university's attitude depends on local politics, local labor pool, and so on."
The concept, of course, is solid. "As a risk manager, if it reduces your potential liabilities, it's a good strategy," says Michael Christensen, assistant vice president of Risk Management Services at California State University, Sacramento. Yet he can't identify a single outsourcing project on the IHE level.
The atmosphere is a bit chummier in Waco, Texas, where Baylor University's Don Bagby, director of Facilities Management has finally, after 12 years, shed his oddity status at Association of Higher Education Facilities Officers conventions. "We had a tough time attending activities because colleagues wanted to spend [an extraordinary amount of] time with us finding out how we outsourced and our reasons," he says. "At that time a lot of people said it would never work at their university. Now I hear they've outsourced that work."
According to a 2002 study by FMLink, an online publication for facilities and building managers, 72 percent of the nation's businesses in general outsourced custodial and housekeeping, 65 percent farmed out design and architecture, 63 percent hired others to do landscape maintenance, 51 percent said good-bye to in-house security, 50 percent contracted for preventive maintenance, and 45 percent of utilities maintenance was handled by outsiders. Of those polled, 36 percent said they were likely to add still more functions to their outsourcing lists.
Meanwhile, the folks at Philadelphia-based Aramark worked with 350 registered attendees last year when it held a web seminar on the topic, with a 67 percent increase in web traffic immediately after that event. Overall, the site has received 2 million hits since it launched last year. Such data means officials there estimate the number of IHEs now looking into comprehensive outsourcing is growing at perhaps 1 percent a year. In this large market segment, even a single-digit jump represents serious profit dollars for vendors.
Still, Elmore isn't spinning when she claims that comprehensive outsourcing as a strategy for campuses is not stagnating, but simply resting before the next crest.
The facts: Energy costs are escalating, a large percentage of college employees are nearing retirement, and deferred maintenance
issues have reached critical status (the average age of buildings on American campuses is 30 years), just as new construction hits a record pace over the next decade. It's no surprise that Thomas Galvin, vice president of marketing at energy management provider SourceOne in Boston, now sees first-timers knocking at his door instead of the other way around.
But SourceOne hasn't necessarily found a slam-dunk angle with its market niche. On campus outsourcing priority lists, "I'd say energy hasn't been at the top," Galvin admits. "In parts of the country where we see very stable, low-cost sources of electricity, there isn't the same sense of urgency as in Massachusetts, Connecticut, New York, and Texas, where there is real volatility in pricing."
So in the end, vendors and administrators agree on only one statement about facilities management outsourcing: "We are seeing, quite dramatically, an increase on the part of institutions to think about their facility needs and to consider outsourcing more often and much more seriously than before," notes Frank Mendicino, president of Aramark Education-Facility Services.
As a verb, outsourcing has outlived its headline news status. UNICCO, based in Arlington, Va., has served more than half its IHE customers in operations areas for more than 15 years. Randy Ledbetter, vice president of Business Development, says the facilities services firm retains more than 95 percent of its business-so longevity is piling up.
Nor are IHE administrators strangers to the success stories. That's why Tom Oates, who left Roger Williams University (R.I.) in 2003 to take over as vice president of Administration and Finance, treasurer, and CFO of the University of Bridgeport (Conn.), didn't mess much with the status quo there. Instead, he built on it-switching vendors in charge of buildings and grounds and janitorial but leaving the dining provider in place. Then he found a fourth company to handle security and a fifth firm to handle the mailroom. Still another group of gurus has taken over information technology.
In just three years, his policy helped turn a deficit into a $2.5 million surplus on the operational bottom line. Still, he says, he's ridden this train to the end of the outsourcing track, and he's not especially motivated to consolidate the current farmed-out functions. "You may have more than one service under your umbrella, but-to me, anyway-you have to be better in one area than the other," Oates explains.
He has a friend in Margaret Plympton, vice president for Finance and Administration at Lehigh University (Pa.). She didn't complain about the grounds and custodial contracts she inherited upon joining Lehigh five years ago. Both were with local firms with good reputations that would make competing with them in the hiring arena a tough proposition. "We've never seen that it's particularly preferable to have only one provider of both of these services, so that hasn't been a change worth making," she says.
Yet, when the university embarked on a major upgrade to its energy management systems, it made sense at the start to outsource the highly technical maintenance needs that accompanied it. "Over time, however, our facility staff had to develop expertise in those new systems, so when it came time to renegotiate that contract, it was not as financially advantageous and not as necessary," Plympton reports. So long, HVAC vendor-the boilers are back in house.
Baylor's Bagby oversees vendors that handle maintenance, groundskeeping, food service, cleaning, even elevators. Most of them came on board one at a time. That timetable is one reason he dismisses the notion this was a stressful change. "There really weren't very many fears. As long as we have the right people in place on the Baylor side to manage that, everything's fine," he says.
But vendors shouldn't expect much from a sales call on Herbert C. Peterson, vice president of Business and Finance at the University of Richmond (Va.). He did outsource food services years ago, and then tried the strategy again with information services over nearly a five-year period in the mid-1990s. "That was not a happy arrangement," he says bluntly. "It's a culture clash between two entities. It hampers flexibility. Everything has to be negotiated and renegotiated as opposed to making a decision and moving on."
Of course, many public IHEs have an economic incentive to put up with the hassles of outsourcing. For example, often they'll use money saved from outsourcing for capital improvements on campus, Peterson says. As a private institution, Richmond "can borrow money for things like renovations less expensively." Having more avenues for borrowing money makes outsourcing less important from a financial standpoint.
Such a variety of experiences signals one truth for Johnson Control's Elmore: Today's IHEs are making informed, deliberate decisions rather than being sold a program. Mendicino has seen the same shift. "Administrators are looking at facilities differently, with a greater sense of urgency to use them to the greatest advantage," he says. "The context for outsourcing and the discussion about outsourcing are different as a result."
Many of Rick Justis's contacts cite the classic reasons for outsourcing: Facilities management simply isn't a college's core business-or the task is complicated, changing often, and officials can't leverage their internal economies of scale to keep up. When the technologies needed for skills like floor cleaning, for instance, don't require certification or special tools, they keep it in-house.
In the next breath, he reverses himself. "There is another line of thought that says to do complicated stuff in-house because it gives staff more of a challenge. These campuses outsource the routine, basic stuff," he reports. "And that's what's so confounding with universities. You see just as many thinking one way as another. Then the administration changes and the new person decides to use exactly the opposite logic."
-Kristy Elmore, Johnson Controls.
In other words, there's no discernable pattern as to how IHEs handle outsourcing. Nor can vendors pinpoint whether it makes more sense for public or private institutions, large or small campuses-although some experts do admit the heavy union representation at larger schools can nix a lot of outsourcing possibilities. Perhaps most shocking of all, the players can't determine if this strategy is a savings, and whether they care either way.
From Christensen's seat, if outsourcing doesn't make sense from a financial liability standpoint and then also comes at a cost, why bother? Financial benefit weighs in as the largest factor among the IHE folks Elmore rubs shoulders with as well.
Ask John Anderson, vice president for Finance and Administration at Wake Forest University (N.C.), about their outsourced dining facilities, then get out a calculator and follow along: "Now we have a real food plan-before we just had a food service. That goes to the bottom line. It also means when we think about renovating other facilities we have a cash flow to think about. Not many endeavors that took a year of work and planning have paid off quite so well for us."
But although clients certainly bring up the cash angles with Mendicino, he claims it doesn't drive the conversation. Instead, chimes in Cathy Schlosberg, vice president of Marketing at Aramark-Education Facility Services, they are more interested in finding out how a hired gun can help leverage physical assets against pressures like increasing enrollment and competition for students.
Oates' experiences fall into that camp. He likes his budget boost at University of Bridgeport, but he really values getting top-notch advice for his investment. "I am not an expert in bookstores, I don't know all the policies relative to returns," he says. "We're getting a very good product for the price."
Plympton's initial number-crunching indicates outsourcing is the more expensive option. After all, a for-profit firm has to pay taxes (an area universities can duck) and show a profit for shareholders (again, foreign concepts to educational institutions).
"You might wonder why a university wouldn't say, 'Let's sell the entire campus and lease back the space,'" says Justis. "They don't even look into that because the numbers are shocking. The cost to rent total office space versus what it costs universities and colleges to own and operate their own campuses is outrageously lopsided."
But administrators forget the cost of finding, hiring, training, and keeping employees-numbers Plympton takes into account. To date, outsourcing in two areas has landed on the cost-effective side of the column. However, she admits, she can't currently quote a cost savings number for Lehigh University, so it's conceivable the situation has changed since the last contract negotiation.
"If somebody comes in looking at outsourcing as a way to obtain significant cost savings, I'd really question that," Bagby says. "Between 60 and 70 percent of costs related to facilities management is labor. You'd have to cut that significantly to see any difference." Ledbetter backs him on this issue: Bringing UNICCO in for a wages/benefits budget slash is a short-term approach, he explains.
Savings like Oates enjoys stem more from good management techniques, vendors say. For instance, best practices prevent repairs. They use their buying power as the representative of several campuses to drive down supply prices. They standardize inventory and implement more efficient procedures using higher-grade equipment. "We change the way [IHEs] do business," Ledbetter stresses.
SourceOne CEO Brian Casey routinely sees a shortfall in administrators' abilities to identify innovative products and stay on top of the energy marketplace's roller coaster. That alone has driven about 12 universities to outsource some aspect of their energy management. Future survival rather than immediate cash flow spurs them. It's also the death knell for any partnership that doesn't require both sides to put up a vested interest.
"One of the things we've seen in this market that was taken up pretty aggressively during the heyday of demand side are management initiatives funded by utilities as the shared savings model," Casey says. "It may work and give the appearance of avoided cost to the school, but it might not be as advantageous as it could be."
Such wildly fluctuating variables to every outsourcing question leave vendors more likely to admit their services aren't a foregone conclusion. To continue playing in this space, they must deliver improved service, greater competence, better asset protection, more optimization of resources, and efficiencies. It actually puts them in the same boat with the administrators they want to partner with.
No matter what decision is made on outsourcing, says Mendicino, facilities organization must be a strategic conversation.
Folks like Elmore are willing to bet the chips still fall on their side of the table. "Outsourcing will be a continuing trend. That doesn't mean IHEs will end up doing a full-on outsourcing of their facilities, but I think it will make sense for a lot of institutions to do some," she sums up. "At least everyone is more openly talking about it."