Who knew your first election would be such a maelstrom of controversy and emotion? There’s no escaping the fact that eminent domain is the topic of conversation. Here’s three things you need to know in order to be conversant, and ultimately in order to win:
1. What is eminent domain and why is the whole nation in a tizzy over it right now?
The Constitution, while protecting our right to private property, authorizes states to seize it so long as it is for public use and the owner is justly compensated. This summer, the Supreme Court ruled in favor of New London, Connnecticut, which invoked eminent domain not for the typical use of building a highway or clearing a slum but for creating a private mixed-use development of retail, hotels, and residences. In stinging dissents, Justices O’Connor and Thomas warned that such a ruling opened the door for massive abuses, while The Economist suggested that the case would galvanize property-rights activists like Roe v. Wade did for the anti-abortion movement some thirty years ago.
2. What does this have to do with Ardmore and with this year’s election?
The board of commissioners approved a new development plan that would cluster retail, condos, and parking around a new railway stop. They then declared the area blighted and informed shop owners of their intent to invoke eminent domain. Whether or not you think the plan is good for Ardmore isn’t the point. Here’s what’s got residents upset:
Date: December 10, 2005
To: Mr. Ronald J. Daniels, Provost of the University of Pennsylvania
From: Lee Huang, Brilliant Consulting
Subj: Privatizing the University of Pennsylvania Municipal Airport (PMA) food service
I want to thank you again for hiring Brilliant Consulting to perform an economic analysis on privatizing PMA’s food service. You can expect a full report by the end of the month. In the meantime, let me start by highlighting a few of the positives of such a plan.
Most importantly, privatizing food service allows PMA to focus on the complex business of managing an airport. You have enough challenges here, from fleet logistics and flight schedules to customer service and homeland security. Why would you further burden your managers with the headache of running a food cart? Food service surely passes the “Yellow Pages” test that Stephen Goldsmith, Indianapolis mayor and privatization guru, used to determine whether an activity was a viable candidate for contracting out.
Sourcing food service unleashes competitive forces that will provide PMA and its users with an optimal portfolio of attractive and affordable refreshment options. You can split this contract into many parts and renew it annually (more on this later), giving you lots of flexibility in providing variety and weeding out poor performers.
Outsourcing also transfers the risk of seasonality and decline to others. While travelers have hit the concession stands in record numbers after 9/11, there may be a downturn in the near future, and there will certainly be peaks and valleys in sales at different times of the year and even different times of the week. Rather than having to anticipate these fluctuations and staff accordingly, you would do well to let someone else worry about it.
There is also the combination of PMA’s relative inexperience in food vending and its clientele’s relative sophistication when it comes to food consumption. From survey data we have compiled so far, I sense that your travelers may soon no longer tolerate your learning curve. Instead, you can privatize the role, and in doing so bring in operators who are experienced and name brands consumers are already comfortable with.
Finally, while outsourcing food service represents a loss of revenue, it is not a total loss. After all, food vendors will be paying you a fixed rent plus a percentage of gross sales for the privilege of selling their wares to your travelers. So you will continue to derive cash flow from concessions even if you transfer responsibility to outside vendors.
Let me pick up on this last point as I transition to a discussion of potential risks and pitfalls, and what you can do to mitigate them if you decide to privatize. While food service will continue to generate revenue, you will capture a much smaller proportion of that money spent within your facilities. Philadelphia International Airport, for example, grossed over $8.6 million from food and other retail concessions in 2004. Thus, you are relieving yourself of the challenges and risks associated with food service, but you are also giving away the upside potential.
Privatization might not even be the most efficient way to deliver food service at PMA. Economies of scale can be achieved by having 100% of your concessions staff on your payroll. And there are many costs, often ignored, associated with supervising and coordinating so many contractors. We need to be particularly careful not to be seduced by low bids, only to be hit by with escalating costs once those vendors are on the job.
There are also disadvantages to short contract cycles. The rebidding process costs time and money to administer, and constant renewals can short-circuit both sides’ ability to develop long-term perspectives that could have improved efficiency and service.
Another potential pitfall is poor service. Contracting out food services does not absolve PMA from the responsibility to satisfy every traveler it serves. Because of the nature and pay of the jobs involved, private vendors will staff their units with low-skill workers, who may have less motivation to act professionally than if they were directly employed by the airport. Turnover higher than even our current turnover in food service also does not help. We cannot know for sure if your people or outside people will do a better job of safely preparing food and cheerfully serving customers, but we can certainly say that by outsourcing food services, you are exposed to some risk of disgruntled customers.
Of course, we must deal with the food service workers who are already on your payroll. They are part of a strong union, which will fight you hard if you decide to privatize, so you should brace yourself for a prolonged, contentious, and expensive skirmish. With contracts come other political headaches. There are many well-connected vendors in our city who will come knocking once we put this opportunity out to bid. Are you ready to say no to them if theirs is not an attractive deal? Are you ready to say yes to them and run the risk of being called out by the media?
So what can we do to mitigate these risks and pitfalls? While it may sound simplistic to say that it is all about picking the right vendors and managing them well, that is certainly a good start. We can begin by crafting a good request for proposal. We will want to be sure to communicate to prospective bidders that what you seek is a mix of food vendors that will provide travelers with attractive and affordable offerings as well as prompt and professional service. We will want to specify that contract renewals will be based not only on profitability but on indicators of customer satisfaction with the refreshments they consume and the workers they meet. And we will want to be clear that we are unable to renegotiate financial issues in the midst of a contract because of economic downturns or other unforeseeable negative impacts on sales, for you are outsourcing partly to absolve yourself from having to deal with those fluctuations and risks.
I am working with my team to develop a standard score sheet for evaluating proposals. While we are still tinkering with the details, I am fairly certain we will be looking at the following key areas: past performance of a scale equal to or greater than the size of our anticipated contract; track record of favorable customer satisfaction; demonstrated success in food operations and personnel management; innovation in product offerings and visual displays; and qualifications and experience of proposed managers. An initial screen of proposals based on these categories will help us narrow the field as well as develop specific questions for those finalists we decide to bring in for interviews. Of course, we’ll bring in your managers for those interviews, to include them in the process and to build connections to facilitate future monitoring. (We’ll be asking finalists to provide “product samples,” so I’m sure your managers won’t mind the inconvenience!)
Prior to releasing the RFP, we should sit down with the union representatives to discuss how they can participate in the competitive process. We don’t want to discount that the very things we are looking for in outsourcing – well-run food service firms and highly motivated food service employees – might already be represented on your payroll. They must know that they’ll have to compete on a level playing field with everyone else, but that we’ll give them every consideration to keep the business and retain the jobs.
Let me go back to a point I made earlier about ensuring a high quality of service and safety. We can’t afford to compromise here, so I propose we institute a streamlined customer feedback system for food services. We will locate surveys in paper and kiosk format in strategic locations inside the airport, to provide travelers with an easy way to offer their comments. We will also conduct interviews and review surveillance to round out the picture. This information will provide real-time data for airport managers to cut off potential problems and evaluate vendors. It will also be aggregated in time for a monthly meeting of all food vendors, where kudos will be doled out and complaints reviewed in a process not unlike COMPSTAT, a data-based mapping tool used by police commissioners to hold precinct commanders accountable for lowering crime. Such a process will help you offer incentives to good vendors and weed out bad ones.
You will see the detailed analysis of your food service options in our report later this month, but let me highlight for you how we are deconstructing the choices from an economic standpoint. To begin with, it is a little harder than usual for us to quantify the status quo, since the airport is so new and therefore has relatively little historical data from which to extrapolate. Nevertheless, we have constructed a pro forma income statement for the food service business unit, based on historical data and comparables from other university airports. A full explanation of the economic and operational assumptions we have made to come up with these numbers will be provided.
It is easy to just compare current revenues and expenses with those in the proposals we are about to receive. But there is more to the comparison (see table below).
current income statement
current revenues
- current expenses
= profit from in-house operations
overly simplistic approach
rent from vendors
+ % of gross sales
= profit from outsourcing
more accurate approach
rent from vendors + % of gross sales
- current expenses that are unavoidable
- cost of supervising vendors
- cost of transitioning to private vendors
= profit from outsourcing
First, many costs currently associated with food service operations will not be saved by outsourcing. For example, your food service workers did not qualify for many fringe benefits, so laying them off doesn’t lower your health care or pension costs. Also, since you are charging outside vendors rent, you are still on the hook for all major utilities and some equipment maintenance. You will also continue to bear the cost of advertising and signage, in order to maintain visual consistency throughout your terminals.
Meanwhile, other costs might go up. Your food service staff, after all, was at times an invaluable backup pool of labor when there were absences or shortages in other parts of airport operations. Absent this pool, you may have to overstaff in other areas or have temporary workers available on call. Thus, when we put the income statements of our two food service options side-by-side, these are many expense lines that don’t totally disappear on the outsourcing side, and some new ones that will begin to appear.
Also, monitoring private vendors costs time and money. Managers used to allocating a certain percentage of their time to keep an eye on food service will have to continue to do so, and perhaps spend more effort, given the increased number of parties to monitor. The customer feedback system we are proposing would be helpful even if you kept food service in-house, but it becomes vital if you outsource. So in assessing the true impact of privatization, a lot depends on how we approach the incremental cost of supervision.
Finally, there will be some transition costs involved, not just with letting go of current employees and systems, but with getting new employees and systems up to speed. This transition, however temporary, will bother travelers and consume resources. And because of the strong union participation of our workforce, you may have to make some concessions should you decide to release all of your food service workers. These can include severance pay, training, and placement. If we show the worst-case scenario for these costs, it can very quickly make privatization a less financially attractive option.
I hope I have painted a clear picture of the economic and operational considerations involved in deciding to privatize food service. We will do our best to present to you an economic analysis that quantifies all of the variables that will affect your decision.
In the end, of course, there are no perfect solutions. Whichever route you go, you’ll have to work hard to maximize its advantages and mitigate its disadvantages. The good news is that though it is difficult and time-consuming, this decision-making process yields some important benefits. No matter which way you go, you now have a better handle on the numbers and nuances of the business. You also have an opportunity to strategize and reinvent an important function within your operations, and to involve key insiders and outsiders in that dialogue.
We at Brilliant Consulting are honored to be part of this dialogue, and look forward to continuing to provide you with tools to help you make the right choice and then to help you make that choice work for you. Thank you for your consideration. I look forward to further correspondence with you on this and other endeavors.
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