September 17, 2015

The Importance of Small Service Contracts to Large Organizations

The Importance of Small Service Contracts to Large Organizations

During my tenure as Pitney Bowes’ CEO, our clear long-term challenge was to identify those business opportunities that would enable us to grow when mail begin its decline.  We placed many bets, from which my successors selected a few for further investment and growth.

There were other businesses, like Imagitas, which we bought in 2005 for $230 million and sold in 2015 for $310 million, which were good bets, but which my successors decided were not the best uses of the Company’s financial and human resources.  Similarly, there were investments in international growth that worked for a while, stopped working, and were eventually wound down.

However, one set of bets and investments that simply did not work, despite our best efforts to make it work, was the attempt to build a profitable, higher growth Management Services business. Although the story in the Sunday, September 13, 2015, issue of The New York Times Business section, entitled “Swept Out of a Workers’ Paradise,” was about a messy labor dispute between WeWork and employees of a cleaning service provider called CBM Services, it evoked many of the reasons we were challenged in making Management Services successful.

The story is about a group of workers employed by CBM, but deployed at WeWork facilities.  CBM paid these workers about $10 an hour, with no benefits.  WeWork terminated the contract when the workers tried to organize a union.  WeWork then insourced the function, hired workers for $15-18 an hour, most of whom were those terminated when WeWork terminated the CBM contract.

David Gelles, the Times reporter, has an obvious bias against WeWork and for the Service Employees International Union (SIEU), the union soliciting the workers. I do not share his apparent belief that the SEIU would have made things better for the workers. However, what he described was all too familiar to me from my experience with Pitney Bowes Management Services and the mail and print services industry of which it was a part.

My predecessor George Harvey and group president Carole St. Mark formed the Management Services business in 1987.  IBM was the first customer.  The logic of forming this business was compelling:

  • Our mailroom customers asked us to help them manage their mailing functions, because we were the mailing experts;
  • We could create significant value for them employing world-class processes and knowledgeable employees in those mailrooms;
  • We could create a career path within Pitney Bowes for employees who were otherwise trapped in low-level, non-core functions within other organizations; and
  • We could provide flexible staffing across a number of mailrooms, and, eventually, consolidate mail centers to provide economies of scale across a number of customers.

In 2013, after 26 years of low-profit years under eight different business unit presidents, Pitney Bowes sold the business. I endorsed this decision when my immediate successor Murray Martin also wanted to sell the business.  The timing for the sale was not optimal, for Murray or Marc Lautenbach, who ultimately completed the sale, but it had to be done.

I was committed to making the business successful during my time, and funded strategic acquisitions to try to enhance its capabilities and scale, including the acquisition of DSI, the services arm of Danka International, a copy and print services provider.  The business produced great accomplishments along the way:

  • We provided profitable and highly innovative and secure mail services for the U.S. House of Representatives and several other government agencies.
  • We were a major force for helping our New York City customers cope with the aftermath of 9/11 and lost four employees, whose commitment to their customers caused them to re-enter the high floors of the second World Trade Center to be hit after the first tower was hit, but before the second one was hit.
  • We provided critical help for hundreds of customers in addressing the challenge of anthrax bioterrorism a month after 9/11.
  • We helped customers get the maximum value from mail and print functions, especially big accounts like the Bank of America, General Motors, Goldman Sachs, Microsoft, and Google, to name a few.

Yet the business ultimately failed to realize its potential.  Many great leaders attempted to turn it around, but, as Warren Buffett wisely noted, when a great leader meets a flawed business model, the flawed business model usually wins.

What went wrong paralleled many issues Gelles presented in his WeWork narrative:

  • Many customers delegated the outsourcing of mail and print functions to people who only wanted to secure the lowest price, not the greatest value.
  • These customers often dumped personnel problems on us, but did not give us the freedom to increase labor productivity and reduce staff.
  • Many customers made decisions based on “relationships” with competitors that were formed when our competitors wined and dined the customers.

We had great people working for us, but they often failed to deliver profitable business because of the markets in which they were competing and the kind of people to whom they were selling.

At Pitney Bowes, I was proud that we had a strong purchasing department, even for non-core functions.  As a result, we made decisions based on long-term value, rather than lowest purchase price.  For example, I considered reducing the frequency with which outside services cleaned our buildings, but I realized that less frequent cleaning increased the risk of infectious disease agents on building surfaces.

Too many CEOs consider these non-core functions too unimportant to merit their attention. I feel differently.

In his book on leadership, Rudy Giuliani had a chapter entitled “Always Sweat the Small Stuff.”  In that chapter, he pointed out that when CEOs focus on the right small details, there is significant organizational and shareholder benefit.

One incident brought this lesson home to me.  In early 1997, my wife Joyce and I were stuck in a broken elevator at the Pitney Bowes World Headquarters for 90 minutes.  We learned several valuable lessons about our administrative services and procurement functions:

  • The contact information on the card I had been provided for emergencies and which I accessed in the elevator was out of date or wrong.  We corrected that problem and regularly updated it after that.  We also created a permanent crisis management team after 9/11, and did practice drills to prepare for emergencies.
  • The elevator maintenance company had not fulfilled its contractual maintenance commitments. We terminated the contract after learning that there had been a misguided effort to retain the vendor because it was a reasonably big customer. After that, we never allowed a vendor’s status as a valued customer to determine whether we originated or continued  business.
  • The purchasing function did not re-bid or re-evaluate any contracts with less than a face value of $100,000, in order to prioritize on the big contracts. We changed this misguided practice. Many small contracts related to vital services that need careful management.  For example, the contract for our motor vehicle maintenance was not evaluated periodically. As a result, vehicles in which we carried our employees great distances under hazardous conditions were dangerously under-maintained.
  • There were opportunities to save a cumulative amount of about $500,000 on these smaller contracts by re-bidding them every three years.

We placed highly talented people in administrative services functions and projects, as well as other staff functions.  These positions helped high potential leaders learn a lot about the company and rotate eventually into  positions of greater responsibility.

To its chagrin, WeWork learned that failing to pay attention to a cleaning service contract deeply tarnished its reputation and brought avoidable adverse publicity.

This should be a lesson to anyone in, or aspiring to be, a senior leader.  Every employee and/or contractor is a brand ambassador for an organization.  Great organizations “sweat the small stuff” and get these relationships right!