News Column

Details of University's Outsourcing Contract Released

Nov. 23, 2012

Allen Reed

By all accounts, Texas A&M got a sweetheart of an outsourcing deal.

The university system, to generate more revenue, outsourced more than a thousand staff positions in August, but it has taken months for the details of the deal to become public.

The Eagle has obtained contracts between the system and Compass Group USA, Inc. for dining services, landscape management, custodial services and building maintenance services. The North Carolina-based corporation took over the services at the beginning of the fall semester.

A Compass Group spokeswoman said it's the "largest contract of its type within the industry," and the corporation for months fought to keep the details confidential.

According to the contracts, the A&M System received $40 million of a $46.5 million signing bonus from Compass Group on Oct. 2. Chancellor John Sharp touted that amount previously and said the deal will be worth $260 million in extra revenue and cost savings over the life of the 10-year contract.

"My goal was to provide the most efficient and effective dining and facility maintenance services to our students, faculty and staff while respecting and maintaining the employment of our current members of those organizations," Sharp wrote in an emailed statement to The Eagle. "As I said, if successful, we would be in a position to better support our core functions of teaching and research as well. Today, I can say that we have been very successful in attracting a partner who completely shares our vision and we have obviously struck a huge financial deal to the benefit of teaching and research for A&M."

The Eagle requested copies of the contracts from the A&M system in August, Compass Group lobbied the Texas Attorney General not to release the information in a 25-page appeal in September, and the contract information was ruled to be public in October. The management giant argued that releasing its contract information with the public institution would harm its competitive edge.

"The size and scale of the incentives offered by Compass is unprecedented," wrote Compass Group lawyer Richard Keeton in his appeal to the attorney general. "Not only do the various agreements represent the largest combined services management program Compass has ever entered into for a university, it is the largest comparable deal in the industry."

Services Breakdown

Chartwells, a subsidiary of Compass Group, took over the dining services at Texas A&M University in August. It operates food service at 230 colleges and universities nationwide.

In the first year of the dining contract, A&M gets a 5 percent commission on retail sales, catering, conferences and meal plan sales. That percentage rises to 10 percent for the remainder of the contract. There is a minimum guaranteed commission that runs from $2.6 million per year to $6.2 million per year over the life of the contract.

The total contract value for what Compass Group will make is not specified. However, if the second-year commission rate is 10 percent with a $4.7 million guarantee, the company stands to pull in a minimum gross revenue of $47 million that year.

Chartwell has pledged to not increase the cost of meal plans more than 3 percent a year, pending fluctuations in operating expenses, and has agreed to invest $25.5 million in capital improvements and $1 million in pre-opening expenses.

Landscaping, custodial services and building maintenance for the university system will be administered by Compass Group subsidiary Southeast Service Corporation, or SSC. The details of those contracts are as follows:

-- A&M will pay SSC $6.8 million per year, which can be adjusted by changes in the Consumer Price Index, for landscape maintenance. The company will make $3.8 million in capital investments and purchase $2.1 million of existing A&M equipment.

-- A&M will pay SSC $18.3 million per year, which can be adjusted by changes in the CPI, for custodial services. The company will make $1.4 million in capital investments and purchase $783,000 worth of A&M equipment.

-- A&M will pay SSC $25.4 million per year, which can be adjusted by changes in the CPI, for building maintenance. The company will make $2 million in capital investments and purchase $1.1 million of university equipment.

'A coup for anybody'

The system made more money by bundling the services with one contractor and received an $11.5 million multiple contract bonus on top of the individualized up-front bonuses.

A management company insider, who requested anonymity, told The Eagle that the contract "seemed fairly standard." The person said A&M was able to get a good deal because it gave Compass Group a large client by which to showcase its abilities.

"An A&M is going to be a coup for anybody," the management expert said. "Getting a person to consider outsourcing is the hardest part. ... Having this sort of contract is really a feather in their cap, and it's going to take gross neglect to lose that."

The abundant money A&M gets out of the deal, the person said, is because the university has a large student body, an exclusivity clause is written into the contract and the school likely has a large percentage of its students who use the dining facilities.

"I think A&M is one of the last large universities to privatize when you look at the national landscape," the person said.

Chartwells' communications manager, Kristine Andrews, shared a similar sentiment.

"The contract with Texas A&M is the largest contract of its type within the industry and covers a broad spectrum of services, including dining services, janitorial, landscaping and building maintenance," wrote Andrews in an emailed statement. "It represents a significant opportunity in and of itself, as well as an opportunity to showcase our capability for other campuses."

B.J. Crain, A&M's vice president for finance, said the August transition of duties to Compass Group went "smoothly" with "no hiccups."

She said almost all of the approximately 1,600 former A&M employees retained their jobs under Compass Group management, whose corporate officials are housed in various office spaces around campus with no central hub.

Crain said Chartwells is well networked and that hungry Aggies should expect new name-brand eateries on campus. However, she declined to elaborate on which establishments were interested in setting up shop at A&M.

"They [Chartwells] have national partnerships with eateries and are seeing if they can bring some to town," Crain said. "There's also a local food establishment they're trying to get on campus."

Crain said Chartwells tries to purchase food from vendors within the Brazos Valley.

"They do have a national procurement line, but they have made some great strides in trying to continue utilizing the local vendors in food purchasing," she said.

Crain shared the sentiment that A&M's business was a good get for Compass Group.

"We're one of the largest campuses in the nation, and for any partner to come in and secure our business, that's a huge accomplishment for that company," Crain said. "I think that's why some of the financial benefits were as good as they were at Texas A&M."

The outsourcing, Crain said, will allow A&M to reinvest the majority of savings back into education.

"We have not historically been very aggressive in outsourcing on this campus," Crain said. "I guess with the recent budget limitations that we've suffered in the state, you start looking at other places to save money."

Distributed by MCT Information Services

Source: (c) 2012 The Eagle (Bryan, Texas)

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