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Learning
from Post-Privatization at
Virginia Commonwealth University
By
Charles Bryson
Over
the years, colleges and universities across
America have increasingly turned to outside
vendors to support specific campus services.
Today, it is not uncommon to find fully contracted
operations in such areas as bookstores or food
services.
In
the early 1990s, Virginia Commonwealth University
adopted a comprehensive strategic plan that
called for an examination of every university
function so the university could focus its resources
on its primary missions of teaching, research,
patient care and public service. Incorporated
into that review was developing a plan that
maximized the urban location of the university,
which includes more than 21,500 students on
its academic and health-sciences campuses in
the heart of Richmond, Virginia.
As
a result of that internal process, many auxiliary
units at the university have been privatized.
And along the way, the university has developed
a framework that aids in assessing services
for privatization and ensuring its successful
transition.
Most
of VCU's auxiliary services are managed by the
university's Business Services Department. The
areas it supervises include: Bookstores on both
campuses, Copy Services, Dental Store, Food
Services, Mail Services, Office Supply, Parking,
Restaurants, Surplus Property and Transportation.
All services were considered for privatization,
with the following projects selected for implementation:
- Academic
Campus Bookstore (Follett College Stores)
- Beverage
Vending (Exclusive Beverage-Pepsi Cola)
- Copying/Printing
Services (Xerox Business Systems)
- Dental
Store (Henry Schein)
- Food
Services (ARAMARK Campus Dining Services)
- Food
Vending (ARAMARK Vending Services)
- Mail
Services (Pitney Bowes)
- Medical
College of Virginia Hospitals: Patient Parking
Deck (Central Parking)
- Office
Supply (Supply Room Companies)
- Restaurants
(local contractors)
- Telecommunications
Support (Bell Atlantic)
- Transportation
(Greater Richmond Transit Company and Virginia
Overland)
The
university also reviewed the Medical College
of Virginia Campus Bookstore, the On-Line@VCU
Computer Store, Parking Enforcement and Security,
and Surplus Property. At this time, those areas
remain university functions.
From
the beginning, we acknowledged that the university
cannot merely forward management responsibility
to a contractor when services are privatized.
As I am fond of reminding my staff managers,
you can privatize operations but not management
responsibility. The practical reality of university
life illustrates that when a problem with a
service provider arises, the phone of the administrator
or manager responsible for contract oversight
still rings. Over the months, that was demonstrated
in nearly every area.
Understanding
What Privatization Offers Some institutions
view privatization as a strategy that will reduce
all costs, including administration. Although
operations may be privatized, an administrative
infrastructure must still operate. Contract
compliance issues, customer satisfaction and
problem resolution remain everyday issues.
Although
VCU has privatized many administrative services,
a business services contract manager is dedicated
to each function to appropriately advocate (for
the customer or the contractor) and resolve
concerns. This infrastructure component is critical
to ensuring that contractors are providing designated
services in a manner consistent with the university's
long-term goals and objectives. Services also
must be seamless to internal and external customers
across functions - a task handled efficiently
only by the business services staff that recognizes
the overall needs of the university. Indeed,
each proposal request developed by the university
required the continued oversight of the operation
by a VCU administrator, with the contract budget
structured to capture the indirect cost of that
infrastructure.
In
a privatized environment, university administrators
responsible for services can only be as successful
as their service provider. Administrators must
work with the lead managers assigned by the
contractors -just as if they were university-employed
supervisors. The common goal should be to recognize
that the contractors represent both the university
and its business services unit and do everything
reasonable to make them just as successful as
internally provided resources. If a contractor
performs inadequately, university administrators
overseeing that service must assess the causes
to determine whether an appropriate support
level was provided to ensure the provider's
optimal performance.
Through
VCU's many contracts for service, one common
thread has been some lack of awareness of university
culture. Higher education institutions don't
operate like private businesses; each has unique
idiosyncrasies. The university administrator
holds an important role in educating the contractor
and its employees about the school's nuances.
One primary example for VCU, in fact, is high
expectations for catering support as the university
continues on an aggressive development program.
That means that the vendor must respond with
extraordinary levels of time and energy that
might trim at profit margins, but those service
levels are mandatory to support such areas that
are critical to the university's overall mission.
New
Approach to Management Privatization challenges
many long-held concepts about management, as
contractors work to marry the university's demands
with the service provider's mission. While many
contractors struggle for a partnership balance
with their campus contracts, companies also
realize the necessity of improving earnings
each quarter, which must be weighed against
malting difficult choices that would better
guide the account in the long term.
Successful
local managers understand the campus culture
and must be strong enough to report bad news
when it's the best long-term answer to an issue.
VCU benefited from one contractor who placed
a strong manager on campus who was unafraid
to tell his company "no" when needed.
Although
not an everyday occurrence, business services
managers have intervened to stop contractors
from strategies that might have looked good
to corporate headquarters but would have been
received negatively on campus. The university
reserves the right to direct contractors on
how services will be provided, and a contractor
must remain flexible in that environment.
Success
by Service Provided Contractors and universities
both share a commitment to ensure the success
of the privatization, which for the contractor
is measured primarily by profits. Responsible
universities enter privatization agreements
that enable a service provider to make an appropriate
profit. Profitability - arrived at by a mutual
acceptance of required service levels - must
be discussed openly and candidly before a contract
is consummated.
Service
providers should expect to make reasonable profits.
However, many states limit the amount a contract's
financial value can be increased. Companies
that unreasonably minimize costs to secure a
contract aid neither themselves or the institution.
For VCU, the most-efficient contracts arrived
after negotiations in which both sides spoke
openly and honestly about the program and service
strategy. Conversely, in two areas, contractors
won proposal requests with a low-price strategy,
later returning unsuccessfully to renegotiate
financial terms. The contractors and VCU have
struggled as a result.
Critical
Issues of Change Regardless of how well
issues are defined in a RFP and the resulting
contract, things change, which can be complicated
by limiting state regulations. Successful university
managers understand their purchasing rules well
enough to make them work for the best interest
of the institution and the contractor.
Through
strong relationships with purchasing representatives,
business services has adapted contracts due
to unanticipated changes. Some changes, such
as the impact of the U.S. Postal Service's reclassification
project (which caused the state to unexpectedly
cancel a central contract for mail presortation
resulted in significant, yet unanticipated changes
in VCU's contract with Pitney Bowes), are unanticipated
and must be addressed creatively. In these cases,
university administrators must allow contractors
to make dramatic changes when necessary- just
as it would for an internal staff.
Handling
Billing Across Privatization The volume
of transactions between VCU's decentralized
(for budget purposes) departments and contractors
demands automated interfaces. As a national
leader of research grants, charges are literally
passed from contractors (through business services)
to hundreds of departmental and grant accounts.
A charge amount may be calculated in cents,
as in the use of postage, or thousands of dollars,
as VCU's typical telephone bill is about $250,000
per month. As a result, time-consuming and labor-intensive
paper transfers are out of the question.
Almost
every VCU contractor has struggled in this area.
The technical nature of supporting a decentralized,
research budget program is foreign for most
private marketing staffs. Even though automated
billing issues are detailed in final negotiations,
few vendors truly master the complexity of this
issue.
Within
walking distance of VCU's two campuses are the
state's Internal Auditor, Auditor for Public
Accounts and the Joint Legislative Audit and
Review Commission. VCU also has its own Internal
Audit Department. With such oversight, it's
hard for agencies to err. However, no contractor
who proposed to serve VCU understood such technical
oversight. Automated billing programs that pass
millions of dollars in charges annually must
meet specific audit requirements and provide
controls.
In
one case, a contractor's invoices for several
hundred thousand dollars were delayed months
because appropriate documentation of charges
could not be provided. While the contractor's
senior managers were concerned with resulting
cashflow problems, the local staff knew that
RFP requirements had not been met. Through Herculean
efforts, the contractor resolved the problems
manually before VCU's fiscal year ended.
Such
delays are particularly difficult for grant-funded
accounts as grants can expire at any time of
the year. Toward the end of a fiscal year, it's
also a serious problem for central administrations
who look for account surpluses to fix financial
problems.
Like
all state agencies, VCU encourages women-owned,
minority and small businesses to participate
in our procurements. While we are always happy
to work with these firms, small business cashflow
issues can be particularly critical. Virginia's
policy is to pay invoices 30 days after submission.
One VCU contractor provides excellent service
but does not have sufficient cash reserves to
always maintain equipment and payrolls based
upon the state's normal pay cycle. We worked
with university officials to increase the frequency
of payments to some small business contractors
so that private payrolls could be met.
No
Shortcuts in Privatization When governments
take advantage of float in payment schedules
or adopt similar requirements for contractors,
financial costs will be included in the REP
response. When originally negotiating with Pitney
Bowes for mail management services, strategies
included requiring the company to pay VCU postage
charges to the U.S. Postal Service and then
seek reimbursement or having VCU continue to
fund postage meters and audit use to insure
appropriate expenditures.
Pitney
Bowes would deliver the service either way.
However, if Pitney Bowes paid the postage in
advance, about $1.5 million annually, and then
billed for reimbursement, its finance costs
would be included as a cost of doing business.
Paying service charges in advance is an expense
to contractors, and Pitney Bowes desire to pass
along that business cost was reasonable. After
careful consideration and consultation with
VCU's Internal Audit Department, we chose to
maintain postage meters. Fortunately, Pitney
Bowes provided billing software that linked
postage use to the hundreds of VCU grant and
Medical College of Virginia Hospital's accounts.
Sometimes
the most seemingly innocent decisions can result
in serious operational problems. Our exclusive
beverage agreement was executed to run from
August 16 to August 15 of each year for a decade.
Simply enough? Not when the institution operates
on a July 1 to June 30 fiscal year. The contractor
must make certain payments to VCU at the beginning
and end of each contract period. The payments
support debt service for a project with a pro
forma based on fiscal years. Trying to explain
the payment schedule to administrators outside
Business Services has been a nightmare. If possible,
when structuring a payment schedule, always
consider how payments will be applied. If the
project is important, do everything possible
to keep payment schedules simple.
Finding
Benefits We've made some real advances as
a result of these changes. In Office Supply,
for example, privatization allowed VCU to eliminate
almost $100,000 in administrative expense. The
cost of goods sold to departments was reduced
another $100,000. In mail services and copying/printing
services, state-of-the-art equipment was brought
onto campus without any capital expenditure
by VCU. The Follett contract will also help
finance a new 28,000- square-foot superstore
on our academic campus. The Greater Richmond
Transit Company, a provider of shuttle services,
has expanded our working relationship by applying
funds to support a pass program allowing VCU
students to ride any city bus at no cost. The
list of benefits to the university continues
to evolve.
From
the first day that VCU considered privatization,
we worked to ensure that each employee impacted
would be treated fairly and with every reasonable
consideration. Those impacted by privatization
have benefited from the changes. Virginia's
General Assembly passed the Workforce Transition
Act in 1995 that provided benefits to workers
impacted by privatization. In most VCU areas
affected by privatization, staff members left
one working day with a reasonable severance
package and returned to work at the same site
on the next day as a private-sector worker receiving
comparable salary and benefits.
Prior
to privatization and university restructuring,
there were about 120 full-time equivalent positions
in various business services units; 53 of those
positions have been eliminated by privatization
or restructuring. In almost all cases, privatization
has been a win-win situation for all. Provided
that administrators perform their homework prior
to considering privatization, this concept can
be an excellent strategy for controlling expenses
and minimizing university staff.
The
above article appeared in the February 1997
issue of College Services Administration.
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