Cut Out?

Like many school districts across the United States, Indiana's Fort Wayne Community Schools had a difficult decision to make this year.

Forced to reduce spending by $15 million, the school board combed its budget line-by-line, and stopped when it reached the in-house custodial operations. With more than 200 custodians on the payroll, the numbers practically jumped off the page: it was costing the district $7.2 million dollars a year to clean its 50-plus schools.

The board made an initial decision to cut $2 million in custodial services. But after deciding to put the contract out to bid, the school district found it to be most financially beneficial to part ways with its in-house custodians and signed a three-year contract with Sodexo, a large building service contractor (BSC) who promises to save them $4.4 million dollars annually — $2.4 million dollars more than what the district expected.

In the three-year deal with Sodexo, Fort Wayne Community Schools agreed to outsource its custodial labor immediately and the contractor would start supplying the cleaning products beginning in 2011. In other words, more than 200 custodians were dismissed and it's product supplier, Janitors Supply Co., Inc., a Fort Wayne-based jan/san distributor, is out a rather large chunk of business if the BSC chooses not to purchase supplies from them.

"There's going to be a loss of product. I don't know if it's going to be a complete loss, but there will be a loss of product," says Mark Sholl, sales manager for Janitors Supply Co.

Moves like Fort Wayne Community Schools are advantageous for building service contractors, but are devastating for in-house custodians. But what's often lost in the shuffle is the fact that these deals more commonly than not, have the potential to cut out a pivotal link in the jan/san supply chain — the distributor.

Accelerated By The Recession

Outsourcing cleaning operations is by no means a new trend. The recent recession, however, has accelerated traditional in-house cleaning markets such as K-12 public schools to entertain outsourcing.

In fact, Housekeeping Solutions magazine, a sister publication of Sanitary Maintenance, recently asked in-house providers if their schools were considering outsourcing. In 2009, 14 percent said yes, and in 2010 that number has jumped to 26 percent.

Because school districts can no longer afford the thousands of dollars annually per custodial employee dedicated to health care, retirement and benefit packages, school boards across the country are approving outsourcing as a way to keep budget cuts from having an effect in the classrooms.

Nowhere in the United States is outsourcing K-12 schools more prevalent than in Michigan. According to a study released in December 2009 by the Mackinac Center for Public Policy, 20.1 percent of Michigan school districts (111 out of 551) at the time contracted out their custodial services. This number has risen significantly from 2003, where just 6.6 percent of school districts outsourced their cleaning.

In 2009 alone, 16 districts began outsourcing their cleaning. Those districts that have outsourced their custodial operations have recognized savings anywhere from $10,000 to $2.7 million a year.

Although outsourcing may lessen how much an in-house facility pays for its cleaning operations, more often than not their decision directly affects a distributors' bottom line if they are a supplier of the account. That's because most times a distributor either doesn't have a relationship with the BSC who is taking over the account, or the BSC is a large corporation that has the purchasing power to buy direct from manufacturers and cut out the "middle man," aka, the distributor.

"If a school district is doing $100,000 to $200,000 in business with you and you lose that business over night, it's obviously going to have an impact on your revenue stream," says Ed Stasiak, vice president of KSS Enterprises in Kalamazoo, Mich.

Although Michigan may be leading the country in outsourcing, distributors in other states are also feeling the heat. Dan Josephs, general manager of Spruce Industries Inc., in Rahway, N.J., says he's seen and felt the repercussions of K-12 school districts in his state going to outsourcing within the past year.

"We've had a handful of our own schools, that for budget reasons, upper management has been pushing for outsourcing and this year they finally did it," says Josephs. "It hurts us. You have a relationship with a school, you have a relationship with the facility managers and then all of sudden you're out of it and your only hope is that maybe you can have some kind of a relationship with the contractor. But 99 percent of the time, they're going to have a relationship with someone else already and you lose all that business."

Because the threat of outsourcing is not going away any time soon, distributors must be prepared to fight for their business. One way is to help their K-12 customers justify to upper management that cleaning should be kept in-house.

Justifying In-house Operations

Most times when a K-12 account goes out to bid, distributors have a small window of opportunity — as much as a few weeks to as little as a week — to try and sway a school board or superintendent's decision on why cleaning should be kept in-house. The timing is critical in getting upper management, who is only concerned about reducing their budget, to change their mind and see the value their in-house custodial staff has over an outside contractor.

A major selling point that Spruce Industries makes sure customers understand is that the savings from outsourcing to a BSC may be enticing, but it can also be a bit misleading.

"A contractor can come in and blow the doors off the labor cost because he's not paying the same things, he doesn't have the same benefits," says Josephs. "But when it comes down to doing some side work, whether it be a special project in the school, an extra cleaning for the gym, an extra coat of floor finish for the cafeteria or for the gym, there are extra charges for that."

In-house service providers need their own data to show how much cleaning should cost. That's where distributors can step in and help customers validate their operations.

Upper management, whether it be a K-12 school district's board of education, the business manager or the superintendent, is looking for information that can help make sound decisions. If a custodial staff cannot show their worth through benchmarking, upper management likely will be attracted to the savings by privatizing.

"We're in a world where everything is measured. Everything is benchmarked," says Stasiak. "In the world of custodial, especially in in-house educational situations, they have very little benchmarking that's been done over the years to somewhat justify their value to show what they do and show how that equates to dollars and cents by building, by area, by region. Any time you can do an analysis and come up with labor savings and be able to verify and benchmark and validate those labor savings, that has meaning."

By workloading a school, distributors can measure the time it takes the current custodial staff to clean classrooms, restrooms, etc., and then document it and compare it to industry standards. With this analytical data, distributors have a starting point to identify areas that can be improved. Distributors can then train customers on the most efficient ways to complete a task or clean a particular area.

"By training them to clean more efficiently they can save thousands of dollars," says Josephs. "So if you're talking about a bathroom, if it takes a custodial person 11 minutes to clean a fixture and you can cut that down to eight minutes and you can times that by the number of total fixtures in the entire school district, you're talking about a huge savings."

Detailing these labor savings helps in-house staff be as efficient as possible. Understanding the scope of work, staffing levels, and an accurate estimate of the cost to clean the building can help support or justify against bids coming in from BSCs.

"If a BSC comes in and says we can come in and save you this much money, the in-house staff, if they have the place workloaded can counter and say this doesn't make sense," says a distributor in California, who asked to remain nameless. "They can say, 'let me show you how much things should cost.'"

If in the end a school still decides outsourcing is their best option, Fritz Gast, executive vice president of P.B. Gast & Sons in Grand Rapids, Mich., says it is in a distributor's best interest financially to encourage their in-house customers to maintain control of the purchasing of supplies and only outsource the labor.

This way, distributors not only keep the account for supplying product, but if a customer decides outsourcing is not what they expected and they don't renew their contract when it expires with the BSC, the distributor still has a working relationship with the customer and can step right in to help.

Teaming With BSCs

In certain instances, BSCs can cut distributors out from the jan/san supply chain. On the flipside, distributors can thrive by teaming up and doing business with BSCs. So, as more schools are looking to privatize, distributors are looking to gain more BSC business.

When Fort Wayne Community Schools decided to outsource its custodial operations, Janitors Supply Co., the main supplier, tried not to lose the business by helping its current BSC customers bid on the account. Unfortunately, none of the distributor's BSC customers were large enough to take on a school district with more than 50 schools. But, as more K-12 school districts begin to entertain thoughts of outsourcing, the company has reached out to its BSC customers to let them know that outsourcing is something to watch out for and they are there to help mentor them through the process of winning K-12 contracts.

"We've talked with some of the contractors that we deal with. We told them that they need to be prepared because this may come up in some of the smaller school systems and they may have an opportunity to bid on them," says Sholl. "We've begun the conversations of teaming up with local BSCs and letting them know that we can help them and figure out the bidding and putting together cleaning programs so they're more efficient than the school."

Most BSCs don't have a lot of, if any, experience with education accounts. Because distributors have a history with K-12 school districts, they say they can leverage their knowledge of these accounts to win new BSC customers — for example, knowing what what type of finish to use on gym floors or how to promote hand hygiene to kids.

Some distributors are getting lucky, saying that some BSCs who are stepping in to the account will contact them because they were the main supplier and have a history with the account. So, they are able to retain the business in some fashion.

It's not always that easy though. Distributors for the most part are not able to keep an account if the BSC is not their customer because they already have a working relationship with another supplier.

But that's not to say distributors should give up. When losing out on business to a BSC that wins the supply contract in a K-12 school district, distributors shouldn't shy away. Even though at one moment distributors think that they're on the outside looking in, Rick Faber, director of corporate accounts for AmSan in Omaha, Neb., says to stay close because in most cases there are opportunities, even if BSCs are buying from manufacturers.

"With equipment for example, the last thing you want to do is shy away because there's a lot of opportunities on the service level," he says. "You don't just want to say this isn't an opportunity anymore. Some of the more profitable opportunity is there to service their equipment even though they may have not bought it from you. The major manufacturers still need somebody local to service and to respond to that piece of business as quickly as possible."

But when the large, national BSCs win K-12 school district bids, it's tough for an independent distributor to get a foot in the door due to their pre-negotiated deals with large manufacturers in the industry. So, some are affiliating themselves with industry buying groups.

Nichols, a Spring Lake, Mich.-based distributor, has been able to avoid being cut out because it is a member of a buying group, says Glen Huizenga, the company's sales manager. When certain national BSCs come to Michigan, Nichols' buying group has already negotiated a contract with the contractor, which states that they will purchase select supplies from Nichols.

The buying group is looking out for the best interests of the distributor, who may otherwise get cut out in certain instances when K-12 schools outsource their custodial operations and cleaning supplies to national BSCs. In fact, because of his company's buying group affiliation, Huizenga says Nichols has actually been able to gain business in K-12 school districts that national BSCs have won.

"As [the buying group] has picked up school districts, the BSCs have come to us and said this district used to buy from distributor 'X,' here's what they were buying, here's the usages, help us out," he says. "So we put together the right pricing and proposal for the school district the BSC just picked up, so they can be competitive in the marketplace."

In the end, distributors must position themselves in the supply chain and show their value. Working with BSCs to get a foot in the door of K-12 schools in an era of outsourcing is one way to keep business that is lost when a district decides to privatize.

"You have to be proactive and if you haven't been already, in many instances you're already probably too late," says Faber. "You're going to have to build those relationships early on and develop them."