Labor Sources
Labor is approximately 90% of the cost cleaning companies incur. In this article we are going to investigate how cleaning companies staff their organizations. There are three major sources of labor – W2 employees, subcontractors and franchisees. Below we will explore each labor source and weigh the pros and cons of each. When weighing pros and cons it is important to look at it from three different points of view, the employee’s perspective, the parent organization’s perspective and the end client’s perspective.
Types of Labor Sources
W2 Employees
W2 employees are hired directly by the organization and are paid directly by the organization. They are subject to all payroll taxes and are protected by all employment laws on the municipal, state and federal level. The are covered by a worker’s compensation and liability policy provided by the organization at no additional cost to the employee.
Pros
Employee Perspective
If you look are looking for employment within a janitorial organization you can feel confident that if you are hired as a W2 employee you will receive all of the benefits of an employee working within the state you are working in. If you are hurt on the job, you are covered by workers comp. If your employer has greater than 50 employees, you have access to health insurance. You also will receive unemployment benefits if you lose your job. These are great benefits for an employee to have.
Employer Perspective
The only way you can legally control what tasks and processes a person will follow is to employ them directly. The only way you can tell a person what time they must be at work is to employ them directly. Employees are vital to an organization’s growth. As an employer or manager, you will receive the greatest job satisfaction by seeing an employee succeed. As an employer you will grow the strongest team, where everyone is headed in the same direction with the same goals, if you have employees.
Client Perspective
Clients love the idea of having an employee working at their site. They see the transparency the relationship creates and are happiest when you have the right employee assigned to a site. From the Client’s Perspective, this is the best solution.
Cons
Employee Perspective
The greatest negative to working for a janitorial organization can be pay rates. I continually see jobs being offered online for $8.40 per hour. These are full time jobs. Can you imagine trying to support even a basic lifestyle on approximately $285.00 a week after taxes. This leads to employees needing to work multiple jobs and can cause employees to try to cheat time just to make ends meet.
Employer Perspective
If you speak to a senior level manager or owner of any company, what’s the biggest headache they say they have? Employees! You hear the quote often – “If my employees did exactly what I say, everything would be perfect.” Most employees go to work at a work site where a senior manager is located for at least part of the day. Not for janitorial employees. They drive to their clients work sites, work the day and then go home. They can work long periods of time without seeing anyone from the management team of the company they work for. That can create a lot of headaches for employers. It’s easy for employees to skip time (there are lots of great apps to help to mitigate this, but nothing is perfect), not complete all tasks and to have problems where employees feel like they need to do these items to make ends meet.
Client Perspective
Clients love the idea of an employee until the employee does not show up and there is not someone to immediately replace them. Employees, that are not directly working with a manager, have the weakest relationship of all labor sources. If decide they would rather go out at night vs going to work, they have the least to lose. If the organization does not have a strong management team, an employment model can fail quickly.
Subcontractors
In the janitorial space, subcontractors are traditionally micro companies (5 employees or less) that work under larger companies. Their employees are normally friends and family members. They have experience in the space and traditionally started out working for a larger company before wanting to “do their own thing”. In order to fit the role of subcontractor they legally have to be able to set the time they and their employees do the work (this can be within a range set by an end customer), have their own liability and workers compensation insurance and make a profit when employees are working.
Pros
Subcontractor Perspective
Subs feel like they are in control of their destiny. They like working as a sub and are confident in the quality of work they provide.
Parent Company Perspective
Subcontractors can help parent companies a lot by providing quality services to end clients. Subcontractors have access to labor sources that can greatly improve work output and can fill in when needed. Subcontractors are great if you are trying to manage a site several hours away or that has infrequent service.
Client Perspective
Clients that have a broad footprint (multiple locations over several states or a large central location with a few outlining locations), subcontractors are a must. They can provide great service to these locations and should be accepted if the company you have hired is using them.
Cons
Subcontractor Perspective
The main negative for a subcontractor is that their customers are not “theirs”. Communication with the end client must go through their parent company. They also do not negotiate pricing with the end customer and are often left with a “take it or leave it” type approach in negotiation with their parent company. If pricing is not in the subcontractor’s favor, they may be forced to cut costs by not spending enough time at a site or by not providing products that are required.
Parent Company Perspective
From a parent company perspective using subcontractors may seem like a great way to delegate management responsibilities. Parent companies cannot be susceptible to this type of mindset. If they do, communication will break down and a subcontractor will fail. Parent companies also may tend to over value their role and not adequately pay a subcontractor. If a parent company can sell their value to an end customer and inflate their margins in that manor, great, but if not, you must allocate enough margin that a subcontractor can make a profit.
Client Perspective
Most clients, when initially learning a company is using subcontractors as labor sources, are not happy with the relationship. They feel cheated and feel like the parent should be using employees only. Clients may have trouble getting information as to who is on site and when they are scheduled to be there. This can be frustrating.
Franchisees
Franchised organizations have grown greatly within the janitorial space over the past couple of decades. The model is different than one would think of as a traditional franchise, such as a McDonalds or Planet Fitness. They are also completely different from any other labor source in the market today. This is going to take a minute to explain, so please bear with me here. Regional or Master Franchisees purchase a territory that is traditionally the size of the TV viewing area of a city. Costs for a regional franchise territory range from $50k to over $1MM. Regional Franchise owners are traditionally executives at large organizations that are recruited to run their own companies. They are granted the right to sell unit franchises within the territory. Unit franchises cost in the range of $1k to around $50k. What defines the cost of a Unit Franchise is the amount of guaranteed revenue promised to the franchisee. Guaranteed revenue can be as little as $500 per month to as much as $20k per month. For a Unit Franchisee to grow their business they need to either buy contracts from the Regional Franchisee or learn how to sell. There are other nuances to the Regional/Unit Franchise relationship. There is a non-compete between the two organizations. The Regional Franchise will provide (and charge) for insurance, royalties and administrative fees to the unit franchisee. The Regional Franchisee is also paying royalties to a national parent organization. There is a lot of discussion within the space. We will look at Pros and Cons here.
Pros
Unit Franchisee Perspective
Unit Franchisee feel like they own their own business. They are proud of the work they do and can do it well. They can own a business and not have to sell or worry about a lot of administrative tasks – accounting, insurance etc.
Regional Franchisee Perspective
Regional franchisees can own a business that can potentially provide multi-million dollars in revenue and maintain a small staff of 2-10 people. They eliminate a lot of risk in their business by moving most of their operational support to the team of franchisees.
Client Perspective
Theoretically an end client has two owners taking care of their building. A sales and administrative owner and an operational owner. If you have an owner coming in to clean your building every night, they should take great pride in their work do a phenomenal job. Statistics seem to show this is true about 33% of the time greater than six months.
Cons
Unit Franchisee Perspective
Profitability for Unit Franchisees can be difficult. There are often a lot of fees associated with their business and some can be unexpected. The expected business life of someone operating a Unit Franchise is less than two years. The operational integrity of a Regional Franchise is particularly important to the success of their units.
Regional Franchisee Perspective
Regional franchises are stuck in the middle. They are the sales force for both their unit franchisees, themselves and their parent organization. There are basically three companies trying to profit from each customer. That means a Regional Franchisee morally has to sell its services at a higher price than an organization that does not have to support three organizations. Sales pressure often causes this not to happen. They then have to offer poorly priced opportunities to their unit franchises which can cause what the industry causes churning. A unit franchisee accepts a new client contract, over the course of three months they realize they cannot make a profit and their quality goes drastically downhill, and the regional franchise will pull the contract from the current unit franchisee and move it to another franchisee. This can happen over and over until the client gets so unhappy that they will fire the Regional Franchise.
Client Perspective
Clients can get lucky and get a unit franchisee that really cares about the work they are doing and has the management skills to hire employees or is willing to do the work themselves. When this happens, the fit is magical, and the relationship can become remarkably close over a short time frame. Unfortunately, this only happens about 33% of the time. When this does happen is the client willing to be patient with the Regional Franchise to churn their account until they either find someone that sticks or not? This can lead to major frustrations and a negative outlook on the franchise industry. Many government requests for proposal specifically spell out that they will not accept “franchise companies” to return bids.
Blink Facility Solution’s Perspective
Blink management has operated in all three spaces and found value in all three. Unfortunately, the unit franchisee space seems to be the poorest way to structure an organization. The weakness stems from several different things coming together at one time. First, it is legally impossible for a parent organization to control what products and processes are used within their sub’s business. As an example, a parent organization can promise a customer that they will be using specialized equipment and chemicals, but it is up to the unit franchise to execute that promise. They will often execute a cheaper business model. Next instead of interviewing and selecting employees, a Regional Franchise Office is selling and trying to get employees to “purchase a franchise”. If a unit franchise does not make the money they want, often will litigate against the parent.
Blink has operated as a hybrid employee/subcontractor model since our founding. We will use the right labor source based on the situation. There are times where one model fits better than the other. Determining factors are total labor required for site, location of the site to a regional office and availability of qualified labor.
We will create a series of articles based shortly, to break down these labor sources in more detail.
