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The Exclusive Magazine for the Building Service Contracting Industry Since 1981

INDUSTRY REVIEW: Where We’ve Been and Where We’re Headed

Written by  Katherine Coe

Industry_ReviewIt was the kind of year in which BSCs see great promise for the years to come. The industry has endured the recession well and has even used it to its advantage, as budget challenges force more facilities—from school districts to hospitals—to switch from in-house cleaning and maintenance to contracting. As BSCs expand their services to meet the demands of these growing market sectors, new products and equipment are being developed to help enhance efficiency and reduce labor costs. Though they are under pricing pressures from clients on a tighter budget, many BSCs have reengineered their services to maintain their profit margins and hold on until the economy makes a full recovery. New legislation, such as the Affordable Care Act and minimum wage increases, has created uncertainty around the possibility of increased labor costs, but economic indicators suggest the economy as a whole is turning around. An eye to the future is driving the initiative to develop robotic cleaning methods that will cut labor costs and “green” cleaning products that offer both healthier environments and lower costs. The outlook, in other words, is reasonably bright.

As the clients of BSCs face an uncertain economic forecast, even the most successful BSCs are looking at increased pricing pressures. Many have seen clients threaten to take a job out to bid, forcing some BSCs to reengineer their services in order to accommodate these demands while maintaining profit margins. Reducing cleaning frequencies and implementing daycleaning has also been part of this approach. The need to reduce billings to clients has been driven by a weakened economy, in which some companies are willing to take a contract that will simply cover costs and others are even bidding at a loss.

Many BSCs, in order to separate themselves from the competition, have had to use forward-thinking strategies to manage themselves more effectively. Clients and potential clients are taking a new interest in BSCs’ management strategies, using a BSC’s compliance with administrative and procedural regulations as a predictor of compliance with other regulations. Some BSCs have employed new forms of technology, such as electronic labor tracking, to help manage their labor with the greatest possible efficiency. Dick Ollek, of Consultants In Cleaning, sees the use of technology in his own work, saying, “One of the pleasant things in my business now is that, as a consultant, I talk to a lot of contractors, and we’re seeing the younger generation latching on to that. They’re latching on to the electronics, how they work in the business, their effectiveness in communication.” One of the best reasons for early adoption, he says, is the possibility of being ahead of the competition two to three years down the road.

The economic recession has also affected the scope of services that many BSCs offer. Because of tighter cost constraints, customers are trying to consolidate services asInd_Rev_Graph7 much as possible and use fewer vendors. A customer can get better deals on services by using just one or two vendors for a multitude of services, rather than hiring five or six vendors for several different services. Hiring fewer vendors not only affords the client better deals, but also assures them consistency in the quality of work performed for each task, since they’re using only a couple of vendors who they know do a good job. Customers now look for BSCs to do more than simply clean a facility, so BSCs are expanding their services to include everything from landscaping to HVAC maintenance. “A lot of the larger companies are going with a full-maintenance service approach,” says Paul Jameson, Executive Vice President of Operations at IH Services, “which includes all the mechanical maintenance, as well as the janitorial, under one umbrella.” And as BSCs offer more services, they are able to better endear themselves to the clients they serve and solidify their contact with them. In a survey by SERVICES magazine, 41 percent of respondents said that they expect to see this trend of offering a broader range of services continue in the near future. BSCs have met this demand for a broader portfolio of services both by hiring skilled workers from other trades and by training employees already in-house in new skills and trades. Larger BSCs, of course, are able to broaden their offerings by acquiring contractors in peripheral segments of the industry.

BSCs have generally seen growth in the industry as a whole, albeit modest growth. Paradoxically, the recession has been one of the factors propelling this growth. “Even though there has been a recession, and a lot of companies have cut back,” says Dick Ollek, “I think where we’ve seen some growth is that those who have been doing their own cleaning in-house have tremendous budget challenges, and because of that they’re now beginning to outsource their facility services to people like us.” Public institutions, such as school districts and municipalities, are also facing budget challenges that are forcing them to turn more and more to contractors for facility services. This trend represents a tremendous opportunity for BSCs in the form of large market sectors, such as schools and health care facilities, with significant square footage. Despite its recent expansion into new market sectors, there is still plenty of room for the industry to penetrate more deeply with facilities and institutions who still do their work in-house. In response to a survey question of market size change in 2012, 55 percent of respondents said they expect to see this market grow, and one third of BSCs expected to expand into health care facilities.

The building service contracting industry generally weathers recessionary climates well, relatively speaking. The companies lost to cost consolidation are always being replaced by new upstarts, thanks to the relatively low entry costs. Even in an economic slump, this is an industry that lends itself to people looking to start a business. But as the economy begins showing signs of life again, the industry is starting to see growth resulting from clients’ uptick in business. Expanding their operations means Industry_Review_graph2adding shifts and increasing square footage. This means a greater need for services, and the increasing margins that often accompany these trends can result in an easing of pricing pressures on BSCs. (Of course, this applies less to high-rise space than to factory and warehouse space, which demand is more directly associated with the need for square footage and man-hours.)

As most of a BSC’s costs are labor, minimum wage legislation is always significant. The Obama Administration has recently proposed a minimum wage increase that is indexed to the rate of inflation, and many states have either experienced automatic increases or have bills pending that would increase the minimum wage. Even a slight increase in the minimum wage means greatly increased expenses for BSCs and necessitates either transferring those cots to clients or taking a cut in margins—both highly undesirable alternatives. While all BSCs dread increased labor costs, some see an indexed minimum wage in a positive light. For instance, it can be helpful in allowing BSCs justify increases to clients. A large jump in the minimum wage necessitates equally large rate hikes, but a slow and steady increase indexed to inflation allows BSCs to prepare clients in advance and work those increases into the contract, which can help BSCs hang on to their clients.

The extension of unemployment benefits presents another challenge to BSCs. Says Michael Putnam, CFO of IH Services, “everyone reads in the paper that unemployment benefits are being extended, but no one thinks about where that money is coming from.” In fact, that money comes from state coffers, which employers pay into and will be obliged to pay even more into in the coming years.

Needless to say, what eventually happens with health care reform will tremendously affect the industry, as well. The cost of the minimum health care program the act requires is projected to cost BSCs two- to three thousand dollars per employee per year. That means a BSC with two-thousand employees will spend roughly four million dollars more a year. Of course, BSCs are already making the calculation that they may well be better off simply paying the annual $695 per-employee penalty for not offering coverage to their employees. Even that cost, though, represents a significant challenge for BSCs, who are closely monitoring the various challenges to the act as they make their way through the appellate courts. At the time of this writing, the Supreme Court is set to hear arguments on the challenges to the law in the coming weeks, with a ruling expected by June. How broad or narrow that ruling is and what it will mean for the requirements the act makes of employers remains to be seen.

The majority of survey respondents mentioned illegal immigration legislation as the most important legislative issue affecting the industry over the past couple of years. The crackdown on illegal immigrants occurring in states from Alabama to Arizona has created difficulties for many BSCs, although those using E-Verify as a matter of policy have welcomed reforms that make it more difficult for competitors to hire illegal immigrants, since the reduced cost of employing illegal immigrants gives those contractors an unfair advantage. Because they don’t pay worker’s compensation, state unemployment, or any of the other costs associated with legal employees, these contractors have a roughly 20- 30 percent cost advantage by paying workers through any number of under-the-table arrangements.

Still, recent illegal immigration legislation and foreign labor could adversely affect the quality of the workforce BSCs rely on. One BSC interviewed for this article worried that “in such a labor-intensive job as this, many of the best workers areIndustry_Review_Graph3 illegal aliens who are trying to fly under the radar,” and the need to verify employee citizenship poses a threat to the quality of service that BSCs offer. Although E-Verifying employees is a great selling point for BSCs, the question remains as to who will replace the many illegal workers being forced out of states by draconian legislation. Also, second and third generations of legal immigrants are likely to go on to higher-paying jobs, and this too will contribute to a workforce shortage in the industry. The Supreme Court’s 2012 calendar also includes hearing arguments on certain anti-immigrant state laws, so the industry may have some clarity on that issue in the near future, as well.

 In anticipation of a workforce shortage in the industry and increasing labor costs, some BSCs see promise in the possibilities robotic cleaning offers. Hospital servicing is leading the way in the use of robotics. In some hospital operating rooms, robotic steam jets clean the entire space after each use, and robots are also used to fight secondary infections. These devices are motorized and move in a programmed circuit, pulsing flashes of ultraviolet light that destroys the bacteria that cause these infections. Robotic cleaning is, in many ways, a two-way street, however, with the design of the space being as crucial as the robots cleaning it. Already, interior spaces of office buildings are beginning to be designed to facilitate robotic cleaning. This Industry_Review_graph5means as much open space as possible, as few impediments on the floor, and as few nooks and crannies as possible. While some are doubtful of the effectiveness of robotics in services that rely so heavily on human labor, Gary Penrod, of Gary Penrod and Associates, makes a persuasive case for their future in the industry: “If we can have drone aircraft that can nail some guy ten-thousand miles away, why, we can certainly have a machine that’s going to take large, open spaces and clean them.” Although there is no single answer to the problem of increasing labor costs, robotics seem to be an inevitability in the long run, especially once their cost comes down as a result of scaling. Some even speculate that the human element will be nearly absent in BSCs one hundred years from now, simply overseeing the machines in their rounds. On the other hand, there are certainly those who are bearish on robots. While they reduce labor costs, they are, themselves, very expensive. “Any time you talk about a new piece of equipment versus labor, there has to be a break-even point,” says Gunter Langston, Director of Human Resources at IH Services. “You can’t buy a $60,000 Industry_Review_graph6piece of equipment to replace an $8-an-hour employee unless there’s longevity. The economics of scale come into play.” That’s hard to argue with for now, and robots are still prohibitively expensive for most BSCs.

The “green” movement, as is now to be expected, continues to expand. As LEED certified buildings continue to proliferate, the possibility of gaining points toward that certification drives more and more clients to require of BSC that their services meet stringent standards for environmental quality. BSCs have also implemented “green” standards as internal initiatives. In addition to being able to offer that feature to clients, it ends up being a money saver, since many of the “green” chemicals can serve an array of functions depending on the dilution ratio. Buying fewer products in bulk naturally costs BSCs less than buying more products in smaller quantities, so despite the impression among many that “going green” means increased costs for businesses, many BSCs see direct benefits to the bottom line. Of course, “green” alternatives don’t always offer the same performance as the “non-green” alternatives. BSCs have found this to be the case especially with floor waxes, which so far have proven to be less durable and require more frequency to maintain. This means more total product, as well as more shifts to get the job done. Manufacturers continue to develop new formulations, though, and future for the quality of “green” cleaning options looks bright. “I think it’s fair to say that the chemical manufacturers and suppliers have come a long way in making available green chemicals and supplies,” says Michael Putnam.

Research and development continues to drive incremental improvements in equipment, as well. Cylindrical brushes are increasingly replacing disk scrubbers, since they can be fitted with microfiber, brushes, or other materials for cleaning a variety of surfaces. Microfiber was noted by many survey respondents as a major product entering the industry, and it continues to be incorporated into many cleaning mechanisms besides scrubbers because of its superior absorption and durability. Scrubbers themselves are undergoing a change, too, as many BSCs replace their walk-behind scrubbers with riding scrubbers. Riding scrubbers are smaller and, because employees operating them are essentially stationary, they can clean larger areas without fatiguing. In many cases, these machines also have a longer battery life, meaning less time spent waiting on the machine to charge. These and other advances in equipment have allowed BSCs to increase efficiency and reduce on labor costs and will continue to do so. According to Michael Putnam, “Equipment advances have allowed us to use less labor to do the same square footage versus what we did five years ago, and a tremendous difference from ten years ago.”

The general forecast for the facility servicing industry is for steady, though perhaps slow, growth—first in square footage serviced, then in capital after the economy strengthens and pricing pressures lets up. Economic trends suggest continued opportunity for BSCs to gain market segments as more facilities move their services out-of-house. Between the substantial effect a variety of legislation is expected have on the cost of labor and continued development of robotics, the facility servicing industry may undergo some drastic changes in the years to come. But for now, at least, many BSCs are emerging from the recession in better shape than they went into it and with plenty of hope for the future.

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