Outsourcing: Not Just To Cut Costs Anymore
- By Michael Fickes
- June 1st, 2004
Despite the public relations fiascos generated by corporate offshore outsourcing earlier this year, companies around the world continue to pursue the practice. Colleges and universities in the U.S. are following suit.
The controversy over offshore outsourcing aside, the potential benefits of well-conceived outsourcing strategies are too great to ignore. For both corporations and educational institutions, outsourcing can enhance competitiveness by cutting costs and re-directing savings to more strategic activities, improving quality and generating new streams of revenue.
According to a 2004 outsourcing study by IDC, a research and consulting firm, worldwide spending on outsourcing totaled $405 billion in 2003, up eight percent from 2002. By 2008, spending for outsourcing services will rise to $682.5 billion, a compound annual growth rate of 11 percent.
While spending related to outsourcing trends in colleges and universities is difficult to track, a 2002 College and University Outsourcing Survey by UNICCO Service Company found significant growth in outsourcing among institutions of higher education. Based on data provided by school representatives attending annual meetings of the National Association of College & University Business Officers (NACUBO) in 2000 and 2002, the survey found that schools outsourcing at least one service rose from 82 percent in 2000 to 91 percent in 2002. The number of schools outsourcing two to five services increased from 54 percent to 65 percent over the survey period.
The NACUBO survey confirms the acceleration of a campus-outsourcing trend that began in the 1990s. According to Al Allen, senior vice president for campus services with Sodexho USA of Gaithersburg, Md., senior leaders on college and university campuses have been tilting toward outsourcing for 10 years in response to economic pressures. "Government (financial) support to colleges, both private and public, has declined for the past 10 years and tuition has increased at a rate greater than inflation every year during this period," Allen says. "Senior campus leaders have had to find alternate sources of revenue and develop new strategies for providing cost-effective services."
Competing Through Outsourcing
While the desire to cut costs influenced the first wave of outsourcing growth among colleges and universities, today's goals are more wide-ranging, notes Frank Mendicino, president of Philadelphia-based ARAMARK Corporation's facility services group. "We align best with institutional leadership that is developing strategies to use financial and physical assets to enable the strategic priorities of the institution," says Mendicino. "The quality of campus facilities is key to a college's ability to attract students, faculty and staff. It is also important in connecting alumni to the campus."
Foodservice outsourcing, for example, has moved well beyond operating traditional dining halls to become a revenue engine and competitive flashpoint. "An important trend today is the 'restaurantization' of dining services on campus," says Tom Saine, vice president for business development with ARAMARK.
Restaurantization can dot a campus with restaurant-like, sit-down dining facilities, nationally branded fast food restaurants and satellite dining services such as Starbuck's or generic coffee shops. It can also extend to a network of campus convenience stores that combine food and snacks with sundries for students, faculty and staff on the run.
Lacking expertise in these new kinds of campus foodservice operations, colleges and universities have turned to outsourcing providers. "Where does a director of foodservices go for expertise and innovation?" asks Saine. "We have an entire company to back up our services. We have a culinary center that develops new concepts and we work with about 30 national and regional fast food restaurant brands. We know the top 10 items that campus convenience stores in different locations must stock to be successful."
Cutting costs plays little role in the decision to build a varied foodservice network through outsourcing. Innovative foodservice helps attract and retain students that demand college environments that meet their expectations. In addition, foodservice and related retailing activities generate revenues for schools. "We commission back a percentage of retail sales - and new retail sales, based from new convenience stores and coffee shops, increases retail volume - and so commissions paid to institutions," says Saine.
Testifying to the benefits of foodservice outsourcing on campus, the NACUBO survey found that 61 percent of the institutions responding employed at least one foodservice outsource provider in 2002.
Outside Facility Management
At the other end of the spectrum, overall facility management was outsourced by only two percent of the institutions that NACUBO surveyed. But the financial potential of outsourced facility management may be changing this. For years, campuses have outsourced individual components of facility management. The survey found that 25 percent of institutions outsource housekeeping and janitorial services; 17 percent bid-out security services; nine percent outsource energy management and mechanical maintenance; eight percent of grounds maintenance goes to outsource providers; and outside companies handle electrical maintenance and residence management for four percent of the institutions in the survey.
Today, companies that provide comprehensive facility management services are receiving sympathetic hearings from college and university leaders. And their pitch has more to do with institutional strategies than simple cost reduction. "Outsourcing has traditionally been about trying to drive savings out of some non-core component of what the institution does," says Mendicino. "That's never been our value proposition.
"Institutional financial struggles involve many issues. Two have the most dramatic impact: endowment performance and low enrollment. While we may not affect endowment performance, if we can get facility service providers to do things differently and help attract more students, keep them on campus and in the residence halls, we can contribute to institutional needs more effectively than if we were trying to reduce facility operating budgets by a couple of percentage points - although we do that, as well."
SDI of Bensalem, Pa., also provides overall facility management and promotes supply chain services designed to mesh with larger educational strategies. "We provide supply chain services in maintenance, repair and operations (MRO)," says Donald Woodring, the company's president and CEO. "We make sure necessary supplies are where they need to be so maintenance staff can work productively. We hold down costs by buying in bulk. These services are more and more important to institutional financial strategies."
According to Woodring, professional supply chain management can squeeze 15 percent to 20 percent out of MRO budgets. One SDI client saw an 18 percent reduction. The savings included a reduction from $12 million to $3 million in annual spending on various facilities maintenance activities. "This level of savings can help control tuition increases, while improving facilities and helping to attract more students," Woodring says. "It can also free up money to re-invest in student education."
Educational managers are listening to these appeals. "Today, many colleges will consider outsourcing whenever they see a key change of events," says Sodexho's Allen. "For example, the retirement of a long term physical plant director will cause them to think about whether contracting out physical plant operations is right for their school. Ten years ago, this was not a natural consideration."
New Outsourcing Activities
Expensive new undertakings are also fueling campus outsourcing. As schools develop electronic commerce strategies, for example, they are finding outsourcing providers with competitive technical know-how and cost-saving solutions. Based in Buffalo Grove, Ill., a company called infiNET has tapped into college and university interest in electronic commerce with an application service provider (ASP) concept. A student checking e-mail on a school Website can click a button to, for example, pay tuition. The button links the student to the infiNET ASP and enables him or her to pay bills online without appearing to leave the school's Website. The ASP site might also provide revenue possibilities by selling tickets to campus events or clothing carrying the school logo.
According to Harvey C. Gannon, chairman and CEO of infiNET, schools outsource this business for many of the same reasons they outsource other campus functions. As a financial strategy, outsourcing replaces the capital expense for equipment, software and upgrades with a reasonable monthly operating cost. As an operating strategy, outsourcing provides professional security and administers complex electronic commerce procedures. "It also creates new channels for revenue streams that are important to colleges and universities facing issues of accessibility and affordability," Gannon says. "It's also faster than doing it in-house. With an ASP, a school can be up and operational in weeks compared to months or years."
Years ago, outsourcing campus services simply cut costs. That hasn't changed. But the benefits have grown to include a host of strategic financial and competitive issues.