Some of what follows has been written by me previously in this blog, and on Mealtalk, and discussed in my training sessions. However, the topic is so important, that I am again visiting this issue. Hope this helps.
Whenever, I do a workshop or presentation on the topic of a Food Service Management Company operating in a school cafeteria, I almost always get the following questions:
What does a management company do differently to make money?
Does the Contract and bid process really protect the school/district and the taxpayer from an unscrupulous company?
Can bid specifications really make a difference?
To what extent should a school business administrator be involved once a bid is issued and awarded?
Should our school contract out its program?
What can the school/district do to protect itself and maximize its financial benefit while minimizing that of the FSMC?
These are all very good questions and ones that cannot be adequately answered in one or two sentences via this blog. They are questions that very few have the background, experience, or willingness to fully and candidly answer. Therefore, I make each a separate topic to be explored and discussed in detail on this blog.
Why would a FSMC want to operate the program in my district?
That's easy - Money. School Lunch and Breakfast Programs are big business. Many school cafeterias (even those operating in the red) generate Millions of Dollars in Revenue each year. You don’t have to be a financial genius to know that when any business venture has the ability to generate considerable revenue, there is a profit to be made and someone will attempt to capitalize on that. Moreover, most State Agencies either do not have an adequate “bid process” established, or they lack staff who are adequately trained, and do not know how these companies really make their money in a school cafeteria bids. When I worked for New York State’ Office of Child Nutrition (which was a very progressive State Agency, with a model FSMC contract process), I thought we knew it all and that I was as competent an auditor as I could be. Wow was I ever wrong. As I look back at that time, I really did not “have a clue”. The same holds true for the Staff of many State Agencies today (with respect to Management Companies), they simply don’t have a clue. Having worked on both sides of the fence I know first hand that even in a very large progressive State Agency like New York the staff will never fully audit a FSMC school district with respect to anything other than the requirements of the program regulations. Why?
1. Their experience is normally from outside school food service.
2. Few of them have ever worked for a FSMC
3. They do not have the time to spend on an in depth audit of a FSMC’s billings/invoices
4. They believe it is the school’s responsibility to audit the company’s billings.
5. They really do not know where to look, or how to find the way some of these companies make their money.
When it comes to larger school districts, those with multiple buildings and growing enrollments, a FSMC can and often does guarantee a return to the school. Often this can be a substantial amount of money ranging from a few thousand dollars to tens of thousands. And despite this “guaranteed return”, the FSMC will still make an extremely large profit.
As for small one building schools or non-public schools, the company I worked for would always submit a bid to operate the program even when other companies were not interested. Why, because, once again, there was money to be made and making less on a small account is not so bad when (because of the lack of competition) you can bid much higher, and “get it all” - that is all the program revenue generated each month. And although they were making a lesser amount on each school, if you have 8 or 10 small schools under contract, in a year’s time that lesser amount can easily equate to a hundred thousand dollar profit, or more.
What makes it even better is that the smaller school will be grateful for the presence of the management company and take comfort in the knowledge that contracting out the program would not cost them anything. That was and is (to them) the best thing they could hope for. All the benefits of a school lunch or breakfast program at no cost to them. Think about that for a moment. The school gets the program at no risk or cost whatsoever, guaranteed – that’s pretty good. But the company gets all the revenue. A win, win?
A
case in point
When the FSMC that I worked for was “acquired”, I sat listening to the President of the new company (one of the big 3) conduct an orientation session for our staff, and I was amazed at the things I heard. Nothing he said surprised me, but I was amazed that they were spoken aloud. I immediately knew the corporate sharks were in town, and could only correlate what I was witnessing to the movie “Pretty Woman”, and the Richard Geer character that “acquired” small companies. These companies use the word “acquired” not “purchased”, or “merged with”. To me that says a lot about their philosophy, vision and true goal.
At any rate, I listened as this individual explained that his company only operated schools in the K-12 category. Imagine one company to operate only K-12 school cafeterias in this country. That is amazing. He explained that their corporation owned another company to manage colleges, another for business and industrial accounts, and so on. He boasted that his K-12 company had a huge operating budget; I forget the number but it was something in excess of one hundred Million dollars, and that he could do things that schools could not do, and it was obvious that he wanted to grow the company much larger. He then went on to say that they would be focusing on school breakfast because of the huge available market. He actually had a “hit list” of schools/districts that he wanted the company to target. Nothing wrong or illegal with any of this but hearing it said aloud can have quite an impact. At least it did with me.
As he continued to speak, he explained the difficulty his company had in “bidding contracts” in New York State because “the process” was so difficult. He said they had repeatedly tried to submit winning bids, but they, “just didn’t’ know how to bid those “Per Meal Bids” in New York State”. I liked hearing that because as a former NYS Child Nutrition Program professional, I contributed to establishing that process years before. Anyway, he said that the number of contracted programs was increasing in New York State (as well as the rest of the country) and the potential was so huge that he decided to “acquire” our small company to “get a foot in the New York State door”. As I said, all this was nothing I didn’t already know, but I was shocked to hear a corporate giant say aloud that there was huge profits to be made in the K-12 school lunch community.
Aside, that was 10 years ago. That company is now one of the largest contractors of school food service in the country.
Through the years, I have conducted an extraordinary number of Financial Assistance visits to schools and Financial Management Training Seminars all intended to help school cafeterias operate on a “self-supporting” basis. School cafeterias (even small ones) have the ability to generate huge amounts of revenue each year. In my opinion they all should operate “in the black” and can generate a profit. I know we are not supposed to use the word “profit” in school feeding – after all we are non-profit but let’s face it, profit is what we are discussing and profit is what the FSMC sees in school cafeterias. And it is time School Food Service Directors across this country started talking about “making a profit”.
For most school’s Food Service Directors in this country operating at a profit is a challenge. He/she will encounter many obstacles and must clear many hurdles before a profit can be made. These hurdles, and obstacles include employee contracts, unions that may refuse to concede or compromise on benefits, the politics of the school/district, the need to keep everyone happy, the occasional lack of administrative support, limited budgets, the lack of the acceptance of “change” by staff, and of course there are individual philosophies on nutrition, and making a profit. Often the School Food Service Director has a background in nutrition, health care, was promoted from a “head cook” position or was just an active member of the school community who “can cook”. The problem is that most of these individuals do not have the business experience to operate a "big business" in a “profitable” manner. Conversely if a person has the business experience they normally lack the food and nutrition experience.
The FSMC does not have to contend with any of these obstacles and so the “playing field” is not level. The FSMC is at a distinct advantage. However with proper training and administrative support, the school’s Food Service Director can succeed. When a school business official, the board of education, and purchasing agent know how to write bid specifications, know what restrictions must be placed on the bidder, and know how to “control” the FSMC once the bid is awarded, they will succeed in maximizing their return while minimizing the FSMC profit.
The FSMC is at a distinct advantage when they “target” a program and they know it. Their sales staff is professional, they can promise a “guaranteed return” or a “no cost” to the taxpayer program. Both options are very attractive to a school business official, or a Board of Education who is struggling with an increasing budget, loss of revenue, and the potential for an increase in local taxes. A FSMC can guarantee a return to the school/district because it knows the amount of revenue that the program can generate. And more importantly they know exactly what its operational costs will be, so calculation of the potential profit or the amount that can be “guaranteed” becomes a "no-brainer".
As for a “no cost to you” program, that promise doesn’t give the school/district anything; it only allows the FSMC to take all the profit. Nothing is ever at “no cost”.
So, why does a FSMC want to operate your cafeteria? Money, large amounts of money, with little or no risk for them.
Next week, I will begin to answer some specific questions.
