Outsourcing

You may have been following the debate about whether The Ohio State University should raise a pile of cash by leasing out its parking operations for 50 years. This week, the Dispatch reported that they had received a bid of $483 million - all to be paid at the commencement of the lease.

First off, I'm kinda blown away by that number. For those familiar with the concept of Present Value, this is the equivalent of being paid a little more than $30 million per year for each of those 50 years, assuming an earnings rate of 6% (which is well less than the earnings rate being assumed for the State Teachers' Retirement System). Even if you assume our current 0% earnings rate environment extends for another half-century (oh, I hope not!), then it's still like getting nearly $10 million/yr of clear profit.

My understanding is that the OSU parking operations generate little if any positive cash flow for the university, and I've heard it may be losing a couple million per year. But that may be the results of accounting treatments that include substantial depreciation expenses, which isn't real money, especially for a tax-exempt organization.

So on the surface, and without knowing all the details of the contract, this seems like a pretty good deal for OSU. One wonders what kind of modeling the bidder has done, and what kinds of assumptions have been made to make it worth paying OSU a half-billion dollars in cash today on the hope of making it back with a profit over 50 years.

Maybe the deal puts the responsibility on the new operator to maintain the pavement, gates, booths and all the other fixtures and equipment. Maybe they have to pay for the electricity to run the parking lot lighting. Could be that they will be responsible for the cost of removing snow from the lots in the winter.

Without question, a big part of their assumptions has to be that they will significantly reduce labor costs. I wonder how much that is in reality, as many of the times I've parked at OSU lately, the process was entirely automated. But maybe there are times and places when they have attendants on duty in the booths, although I've always assumed that these are usually students who work part time on the cheap. But maybe most of these folks are fulltime, and if so most likely unionized workers who are getting compensation and benefits some feel are unreasonable.

So, what does that have to do with us - a public school district?

It turns out that public school districts do a fair amount of outsourcing as well - using outside contractors to perform certain functions rather that employing inhouse staff. Perhaps the most common of those is transportation - getting kids to and from school. One of the largest of these operators is First Student, whose buses we see around central Ohio transporting kids for Columbus City Schools.

But there are a number of other functions which are sometimes outsourced, both in the public sector, and in private industry. My background is in the IT world, and that is certainly a field where outsourced resources are quite commonly used, especially since one can find skilled software developers in India or China who will work for a fraction of the salary demanded by an American-based worker.

All kinds of functions can be outsourced. The question is whether they should be.

One can come at that question from a purely financial perspective, and make decisions simply on the basis of which alternative - employees or contractors - costs less. In almost all cases, outsourcing will win.

But there's more to it than a simple financial comparison, and many of those factors are hard to quantify into dollars and cents.

In my three decades at CompuServe, our strategy was generally to do everything inhouse that we could. We purchased the license to manufacture our hosts/servers inhouse, at a facility we built in Dublin. Our communications switches/routers were designed, manufactured, programmed, maintained and operated by engineers and technicians who were employees of the firm. Our teammates mowed our own grass, plowed snow from our parking lots, and cleaned our restrooms.

Why?  Because our business wasn't so much about the technology as it was being a trusted service provider to our customers worldwide. Therefore, we wanted every person involved in the chain of delivery of that service to feel that they were part of one big team. It may not have been the cheapest way to get things done, but it promoted a sense of shared duty and responsibility - of family, as trite as that sounds. All you have to do is put out word that a group of CompuServe alumni are gathering at some pub, and the place is packed - more than a decade after the company ceased to exist.

I see that kind of spirit of team in our school district as well. Every Thursday afternoon when I'm at Hilliard Crossing Elementary, I see Tim and John, the custodians there, go down the hall with a tennis ball on the end of a pole, erasing all the scuff marks left on the floor by hundreds of pairs of little sneakers. When they're done for the day, the floor truly shines like a mirror, even though they know the next day it will get all scuffed up again.

Why?  One, because they're good guys who take pride in their work. But they also know that they're part of the team who are all there to do their part in educating the kids of our community. It's hard to put a price on that.

One function we did outsource at CompuServe was our food service operations. I think there's just something about food service operations that makes outsourcing a good choice. Maybe it's because of the high visibility and high intensity of the service. It could be because of the transient nature of many workers in this industry - it's just too much of a distraction for school administrators to make sure all the workers you need are showing up every day.

Whatever all the reasons, note that food service is the one major function we outsource in our school district as well. Aramark has been a good partner in that regard.

My CompuServe experience causes me to be generally opposed to outsourcing important function in our schools. I like it that our kids are transported by bus drivers who are part of our team, and often neighbors and friends. I think it's a good thing to have folks like Tim and John and all their teammates making sure our buildings are clean environments for both kids and staff. It's a good thing that we have an inhouse team who can take care of basic issues with our building mechanical systems.

For me, contracting for outside services makes the most sense when we have a temporary need for an extraordinary quantity of work, or when we have occasional need of certain special skills.

For example, if the IT department was asked to develop software giving us a certain valuable capability, and we don't have the skills or capacity inhouse to get the work done within the desired timeframe, then it makes sense for the IT group to contract with an outside software development company to get the work done. When the work is done, the cost for the extra capacity stops as well.

A few School Board meetings ago, the Board granted the Superintendent the authority to use the Educational Service Center of Central Ohio as the provider of substitute teachers, tutors, and various other roles. An ESC is a public entity defined by Ohio law as a provider of shared services to school districts, and is funded predominately by the fees it charges its member districts. So it's not a for-profit corporation, but rather a resource that allows public school districts to consolidate functions when and where it makes sense.

We'll see how this works out. There is concern that because we will be drawing from a larger pool of subs, our teachers might not have the same opportunities to request particular individuals for their kids. I don't know the nuances of the new system yet, but trust that we'll be able to work out the kinks.

As important as I feel the sense of team is when running a services organization, which certainly describes a school district, we can't ignore the economics. I think most for-profit companies would rather do everything inhouse too, but they have to be able to compete for customers on value, and as the Wal-Mart example has shown us, consumers may say they think it sucks that millions of American jobs have been outsourced to China, but the vast majority prefer lower prices over "Made in America."

If any segment of our school ecosystem feels they need to "win" economically - be that teachers, administrators, staff, school board members, suppliers, or taxpayers - then we'll lose as a team, and we will have failed each other. More functions will get outsourced, more labor actions will be taken by the unions, taxpayers will get angry, levies will fail, and property values will suffer.

More tragically, we will have failed our kids.