In another 10 or 15 years it may well be the rule, especially in larger organizations, to farm out all activities that do not offer the people working in them opportunities for advancement into senior management.” So wrote Peter F. Drucker, in the Wall Street Journal. Contrasting the high cost of maintaining an in-house support staff with a dramatic decline in service-sector productivity, Drucker emphasized the need for corporations to “unbundle” themselves and leave the clerical, maintenance and support tasks to outside contractors.
While timely, Drucker’s theory is not new. For years most companies have bought their cafeteria, custodial and payroll services from firms like American Restaurant Association (ARA) and Service-Master. However, using an outside contractor to supply what are now being referred to as “management services” or “facilities management” (e.g., mail room, messenger and copy services) is a concept that is new to most large companies, but one that is now becoming a standard with service management firms.
Outside contractors furnish their clients with on-site, total management of mail room, messenger and copy centers, including state-of-the-art equipment, professional personnel, supplies, systems and controls. These services enable a company to completely eliminate administrative headaches-employee turnover, training, recruitment, logistical problems of payroll and benefits-and concentrate on their “core” business.
In an article in the October 21, 1989 issue of The Economist, Drucker once again analyzed the trend toward “corporate unbundling,” describing how the Japanese have adhered to this principle for years. They “outsource” a significantly higher proportion of their functions than do Western manufacturers, he explained. In this way, as the need arises, they are able to cut their costs quickly because they can shift the burden of a short-term decrease in demand to an outside supplier.
MORE, NOT LESS CONTROL
Although many CEOs fear that they will lose control over their “back office” operations if they purchase support services from an outside vendor, in reality, they will gain control because they will position themselves as buyers of a service who can take their business elsewhere if they become unhappy.
About eight years ago, a senior administrator in a large law firm that used Archer’s messenger services called me one day and said, “Help! I wanted to work in a law firm, not a mail room!” The law firm had more than 1,000 employees, and he was literally up to his ears in administrative distractions. Archer rearranged his mail room, revamped his staff and purchased the appropriate equipment for the firm’s needs. Almost immediately following the reorganization, everybody was getting their mail on time and the formerly harried administrator was back to doing what he does best-attending to the needs of the firm.
Corporate surveys reveal that most midlevel managers spend up to 46 percent of their time attempting to stabilize support services and keep pace with new technologies. These time-consuming management tasks detract from productivity. In today’s fiercely competitive marketplace, there isn’t room for inefficiency at any level.
The legal profession presents an ideal arena for unbundling service functions. Not only do lawyers traditionally hold high standards for service and performance, they also require a system that can accurately track every transaction made on a client’s behalf. A service firm can design an accounting system that can track every fax, copy and overnight package that the law firm generates.
Today, about 25 percent of the major law firms in the U.S. buy entire departments of support services from an outside vendor. These firms realize how efficient it is to allow a management services specialist to give them the highest level of service at a fixed cost, with minimal problems and total control.
A surprising discovery has been made: Most companies don’t outsource to save money; they do it out of frustration.
A CEO of a major California corporation decided to store a case of company golf balls in a closet in the mail room. When he went back to retrieve them on the day of an important company outing with clients, he discovered his stash was gone, stolen by one of his own employees.
A seemingly minor incident like this can often prompt a company to consider enlisting the aid of a professional management services company. Top-level managers and CEOs almost never hear about support-service-area glitches because lower level managers and support staff administrators tend not to notice them after a while. Inefficiencies become part of the daily routine until finally they become accepted as the costly norm.
The main reason for mismanaged service areas is that professional people don’t have the time or expertise to run mail rooms, or copy and messenger centers. A major oil company told us, “We don’t have the time to supervise.”
At a deeper level is the frustration that so-called dead-end jobs can produce. At lower management levels, people tend to be more concerned about their own job security than they are about making good decisions for their company. As Drucker said in the Wall Street Journal, “When criticized for doing a poor job, the managers of in-house support staff are likely to respond by hiring more people. An outside contractor knows that he will be tossed out and replaced unless he improves quality and cuts costs.”
PRODUCTIVITY IN THE BANK
Although management service firms do not promise an enormous reduction in expenditures, most guarantee clients an increase in service levels and productivity and a significant containment of costs that leads to long-term savings. But in a labor-intensive company that supports a mail room of 30 or more employees, buying outside services will result in a 5 to 10 percent reduction in costs almost immediately.
Service firms are able to continue those cost reductions over the course of their contract by continuously monitoring their operating systems and maintaining their equipment.
A management services company’s knowledge of the most current and efficient methods for providing service can reduce support service costs in ways that many upper level managers never consider. Outside vendors make it their business to keep up with innovations like bar-coded address labels and computer-generated and sorted mailing lists.
Stanley J. Fenvessy, a New York-based services consultant, comments: “In an age of high-tech, high-speed communications, it may seem quaint to insist that the mail room is still a vital link to the outside world for a business. But intelligent mail handling can pay off for a company in significant savings.”
At its 620-acre, 30-building turbine plant and R&D center in Schenectady, N.Y., GE trimmed 50 percent from its yearly international mailing costs and improved delivery time by 100 percent. GE used Archer’s team of industrial engineers and tracked work flow activities. Our analysis suggested better solutions, and we worked with GE to reorganize and redirect its mail system.
The GE main plant sends upwards of 150 overnight packages to its sites around the world every day. Prior to our contract with the company, each unit at the site was patronizing a different overnight vendor, causing GE to miss out on the significant volume discounts that an overnight courier like Airborne, Federal Express, or DHL will offer a large company.
Archer worked with GE’s administrative managers to pick the best overnight vendors, centralize service and implement an efficient pick-up and delivery system.
Another improvement made at GE was consolidation of services. Because there was no communication between the many buildings at the site, GE was paying for the delivery of 15 or 20 separate packages to the same international destination every night. Now that the company has adopted a computerized communication system, they send one, 20-pound package. In some instances, this saves GE 85 percent on overnight international mailing costs.
CUT HIDDEN COSTS
A management services firm can also reduce a company’s ancillary costs associated with support labor. Support service outlays once accounted for no more than 10 percent to 15 percent of a company’s total costs; they now account for 40 percent. The overriding reason for this increase is the rise in the hidden costs of running these departments.
While every company expects to pay tangible costs directly related to labor-benefits and salaries-they often do not account for the soft costs of administration time, payroll expenditures, hiring, firing, retraining, temporary help and insurance.
At Cosmair, Odette Brandt, director of general services, told us that before contracting management services for her messenger center and mail room, she “spent so much money on temporary help because of absenteeism, it almost defeated the purpose of having a permanent staff. The money I save on temporary help alone makes switching to management services worthwhile.”
DO AWAY WITH DEAD ENDS
Business is experiencing an acute shortage of qualified labor at the support services level. Over the last two decades there has been little opportunity for support department employees to rise into upper-level management ranks. This has resulted in a loss of productivity as workers began to see little or no incentive to improve the quality of their labor. As Peter Drucker observes: “It is hardly coincidental that the productivity decline in American factories set in as soon as finance and marketing replaced manufacturing (in the early 1960s) as the main avenues of advancement into senior management.” Could Horatio Alger make it today?
In most companies, jobs at the service level are boring, low-paid and dead-end, creating absolutely no motivation for a person to perform beyond a certain level. By contrast, management service firms are founded on the belief that workers will not perform their jobs with any degree of efficiency unless there are built-in incentives that reward fine work.
In an April 1989 article in American Printer, the director of office services for Hale & Dorr, a large Boston law firm that recently signed a management service firm to a three-year reprographic contract, said, “Capable, better-qualified personnel are handling our copying because they have access within the facilities management organization to a career path and growth potential that we could not provide.”
THE MOST VALUABLE COMMODITY
It’s not surprising that companies cannot find the right kind of labor to fill upper management’s needs; most companies remain overstaffed just to keep fully staffed.
New technologies, like fax machines and computers, and the plethora of overnight mailing and courier services, have changed the way we do business and increased the number of decisions that have to be made at the support level. But if an employee doesn’t get his training on the outside, he’s unlikely ever to get it at all. Because a management service firm’s most important commodity is people, a large portion of the business is dedicated to the development of a responsible corps of employees. We sometimes refer to our responsibilities as the “New 3 R’s: Recruiting, Retraining and Retaining.”
Most service firms try to absorb a client’s present support department employees when they sign a contract. One CEO asked me, “If you come in and take over my support departments, what’s going to happen to Bill in the mail room who’s been with us for 30 years?” Typically, service firms either retrain staff for their current job, or absorb personnel into the administrative structure at a lateral level.
A good management services firm is sensitive to the on-site nature of its business and seeks to establish a strong working partnership with a client. This provides for open communication regarding the most effective way to cooperate. The objective is always to provide the highest level of service within the framework of another company’s corporate philosophy and structure.
THE FUTURE OF MANAGEMENT SERVICES
Management service firms fulfill two needs within the economy. First, they enable a large corporation to increase its efficiency. Second, they provide a significant segment of the work force with a career path that otherwise would not be open to them.
The trend toward corporate unbundling is on its way to explosive growth.
As we move into an era of “total management services,” outside vendors will become increasingly specialized. This will enable them to provide on-target service specifically designed to increase productivity, and help companies retain their competitive edge. For example, late in 1989, the U.K. branch of Arthur Andersen announced that it was going to make a “multimillion pound investment” in the creation of a total support service system. The company plans to supply and manage its clients’ computing and accounting departments, as well as develop and enhance new systems and networks.
In 1987, Martin-Roche Associates, of Levittown, N.Y. began supplying “portable” personnel departments to small and mid-sized companies that don’t need to keep a full-time personnel officer on their payroll. In its third year of business, the 26-employee firm grossed more than $1 million.
There is no end to potential diversity in this field-secretarial services, desktop publishing, supply management, transportation services, travel, maintenance and even child care can each be unbundled. Not only is this trend productive for business and management, but it is leading the way to an era when business once again places a priority on quality of service and employees taking pride in their jobs.
Stanley Katz is founder and chairman of Archer Management Services, a division of Archer Services, Inc., a New York-based facilities management firm.