The Little Department That Could

The Little Department That Could

Auxiliary Services is no longer the black hole of campus expense. Today it is not only self-supporting, but generating revenue to fill institutional budget gaps.

Bob Hassmiller, executive director of the National Association of College Auxiliary Services (www.nacas.org), tells a story that crystallizes what's going on in auxiliary services these days. It centers on the balance sheet of a private university, where the red ink showed an investment loss of $35 million last year--and a $3 million gain contributed by the Auxiliary Services department. Five years ago, says Hassmiller, the school might have shown a $35 million gain on investments; then the $3 million from Auxiliary Services might not have been so impressive.

"When you were making 20 percent a year on your college endowment, and when things were really good, in terms of what the state and federal government could contribute, you weren't always as concerned about the operational end of your campus. Our folks [in Auxiliary Services] have always been concerned about this, but to a certain extent, this is our time."

And in fact, whether by edict of the university president or because of the continuing pressure of market conditions, leaders of college Auxiliary Services departments around the country feel the urgency of coming through with the dollars. Most have been searching for ways to crank up their revenue-generation engines, and have been closely scrutinizing the value of subsidized services. An invigorated focus on return on investment (ROI)--a dividend that private-sector managers have long been asked to maximize--has forced many Auxiliary Service department heads to think differently about their enterprises, including retail and hotel operations.

"We're looking harder for revenue streams than we were five years ago," says Barbara Aughenbaugh, vice president of Auxiliary Services at the University of Baltimore. "It's not that we took things for granted before, but they were able to just evolve. Now we're searching much harder [for revenue opportunities]."

Strategies for increasing return on auxiliary services are as varied as the institutions that implement them, but there are some common themes: detailed P&L evaluations combined with the benchmarking of peer operations; use of outside contractors to run segments such as food service or bookstores; utilization of private sector approaches to customer service; and increased attention to marketing--particularly of services that reach beyond the campus. (More about marketing and the private sector approach to customer service, later.)

P&L and Benchmarking. Benchmarking is a hot topic for Cam Schauf, director of Auxiliary Services at Bryn Mawr College (PA), and the most recent past president of the National Association of College and University Food Service (NACUFS; www.nacufs.org). The association has long conducted a yearly benchmarking survey of its members, but when Schauf was president, demand for the data (and lessons on how to use it) grew. Now schools are looking at such benchmarking data--along with their own P&L statements--to determine if they can continue to subsidize unprofitable or non-self-supporting services. While it has long been accepted that many auxiliary campus services should be subsidized, that thinking may be changing.

"For all institutions, this economy is having the effect of changing the way certain things are looked at," Schauf says. "It may be that there are some things that the institution was supporting, that under these circumstances can no longer be supported. Some schools may now offer only those that can be offered in a break-even, or money-making, fashion."

This is exactly the case at Duke University (NC), which has long subsidized the operation of The Oak Room, a formal dining option on campus. Auxiliary Services at Duke worked for several years to increase the profitability of the restaurant, even investing in renovations in the fall of 2001, but decided this year the revenue-negative operation was, ultimately, an unnecessary luxury. The Oak Room closed in May.

"The things that will line up for elimination first are things that are considered a business outside of a college, things that generate revenue [against cost] and so are easy to measure against benchmarks, and alternatives," Schauf says.

Alternatives: in-house or outsourced? Most common among those "alternatives" is the outsourcing of operations such as food service, bookstores, and security, a trend that is steadily growing. A survey last year of NACUBO (National Association of College and University Business Officers) members found that 90 percent of institutions outsource at least one on-campus service, and nearly 80 percent outsource two or more--an increase of nearly 10 percent from two years ago. Food service was the most frequently outsourced service, followed by bookstore operations and endowment management, according to the survey conducted for NACUBO by UNICCO Service Company.

But outsourcing is not necessarily a profit panacea when it comes to increasing ROI, Hassmiller has found. Yet when it comes to the elimination of "alternatives," the question to be asked isn't simply, "Which is more profitable, in-house or outsourced?"

"The right question," he says, "is, 'What is the most efficient way to operate the campus?' Both [in-house and outsourcing] can work superbly, and in some cases, both can work very badly. It winds up being about good business decisions."

Just before lunch is not a good time to listen objectively to Joe Pietrantoni, Duke's associate VP of Auxiliary Services, talk about the strengths of the Duke dining program. His description of the 23 on-campus eateries (including outlets of local Durham favorites like Han's Chinese food, Armadillo Grill, along with the national franchises McDonald's and Subway, for instance) is really enough to make focusing on the success of the program difficult. And the university's after-hours food program--which allows students to use their Duke cards (and declining-balance accounts) to have food delivered from 15 off-campus restaurants--is enough to make one downright envious of the options available to Duke's 6,200 students.

Along with the Duke card, the revamped dining program has been Pietrantoni's baby, and represents about one-fifth of Duke's $100 million, total-cost-recovery auxiliary unit.

"Students have given us more money than we've ever had before in their declining-balance accounts," he declares. "We have an awful lot of local vendors serving on campus now. What's more, where we used to do under a million in cash from employees and visitors, now we're doing $3 million a year," says Pietrantoni, and he certainly has the long view of it. He has run Duke's Auxiliary Services for 25 years, relying heavily on the quality and customer focus ingrained in him during his earlier years at General Electric.

Under Pietrantoni's guidance, Duke has maximized revenue in its food service operations by tuning into the demands of the student population and practicing a business approach to customer service. This approach yields the dual benefit of reducing student complaints about food service to zero, while in the meantime channeling 50 percent of the university's $20 million in food service revenue through local vendors. The unique on- and off-campus system hinges on two elements: the participation of Pietrantoni's student advisory board, and equipping the participating vendors to accept the Duke card for payment.

The plan is evidently a good one: Dining services at Duke is a $21.7 million operation. Of that, $17.5 million is student money, $3 million is cash, and the rest is generated by catering. The food services operation encompasses 12 on-campus vendors, including Aramark (which runs the main freshman dining hall), and 11 others that operate the dining options across Duke's three campuses. The evolution of the Duke dining experience began about six years ago, Pietrantoni says, when he recognized that the market had "significantly changed."

"The market is so different now," he says. "The basic cafeteria approach is not what consumers want anymore." And if it's not what consumers want, it's certainly going to be tough to operate profitably, he points out.

Under the old higher ed food service model, students complained about the amount of money they were required to pay for lackluster dining options; union operation was costly; and keeping dining areas open late was a financial drain. It was no different at Duke. So, six years back, Pietrantoni began to transform dining services with the creation of a 15-member student advisory board. He asked the students to evaluate local restaurants, and eventually asked them to choose which ones should be invited to open outlets on campus. From these concessions, Duke takes a commission ranging from 14 to 18 percent, and in return pays for the buildings, utilities, and in some cases, even the restaurant equipment.

In addition, part of Duke's food services transformation involved a $1 million renovation of the West Union building (which houses The Great Hall dining area), and a $7 million overhaul of the freshman dining facility, the East Campus Marketplace. (The Duke Chronicle recently reported one-day Great Hall sales of $15,000--thought to be a record.) Realizing that many of his vendors were reluctant to stay open late as traffic dwindled, Pietrantoni devised a partnership with off-campus restaurants that were again selected by his student advisory board. Each off-campus eatery was equipped with an additional, dedicated telephone line and access to Duke dining accounts. Students can order off of the regular menu--with up to a 15 percent premium for delivery, depending on establishment--and pay for the food with their Duke account number and PIN. Auxiliary Services collects between 5 and 18 percent of gross sales in commission from the vendors.

"The advantage is that we have built a sustained acceptance of a declining-balance meal plan, running a much higher account average than the $2,630 [that is required annually]. The margins are great, and we're paying our bills," Pietrantoni says. But there's (pardon the pun) gravy, too, he adds: "We spend none of our time dealing with complaints."

At the University of Pennsylvania in Philadelphia, an increased focus on ROI has meant that Lee Nunery, vice president of Business Services, constantly considers how the three hotels in his business services portfolio can compete with the rest of the Philly hotel market. On this he is somewhat of an expert: Nunery recently completed his doctorate in university management with a study on how urban educational institutions work to develop local retail enterprises.

Beginning in 1995, UPenn began acquiring hotel properties when it bought a 300-room hotel operated under the Sheraton flag, now known as the University City Sheraton. Since then, the university has acquired the Hilton Inn at Penn, a 52-room property managed by Hilton, and the 72-room Penn Tower Hotel. Like most hotels, the properties were hit hard by the travel and general economic decline that followed the September 11 terrorist attacks. Strategies to increase ROI in recent years have included spending $350,000 to upgrade a hotel restaurant, and hiring a new, pricier chef after the old one earned poor reviews from a local restaurant critic.

"As soon as you build an auxiliary business like [a hotel], you enter into a more complex business environment," Nunery says. And yet, the hotels are net revenue generators for Nunery's department, which projects total revenue of $133 million for the year which ended June 30. This translates to $5.50 in revenue generated for every $2 in financial support provided to the department by the university. As to the total amount upstreamed to the university, "it varies annually, depending upon the performance of the units--as in any for-profit situation," Nunery says.

He believes that the biggest obstacles universities face as they transition to a more ROI-oriented focus are the challenges and intricacies of working with licensees or vendors. "Administrators don't necessarily or fully understand how to work with retail operators--how to get these operators to respond to the market, to anticipate downturns in the market, to promote themselves in the market."

At UPenn, which also owns or operates 365,000 square feet of retail space, this means holding regular meetings with merchants to keep them abreast of the university calendar, the cultural or outside activities which might draw additional customers to the area, and how they can take advantage of these events.

"We also try to get them to step up to share in the cost of promoting the area," Nunery says. "But that's hard to do because retail margins tend to thin; they're not always willing to take the extra step unless you spend the money first."

The University of Baltimore may hold the unique distinction of being the only university in the country that operates a full-service public driving range. (It also has three athletic fields available for rent, although it has no sports teams of its own.) Building the driving range on some of the school's property outside Baltimore was the brainstorm of the school's vice president of Finance; he came up with the concept in the mid-1990s--just as the school was converting from a private institution to part of the University of Maryland system. In less than three years, the University of Baltimore recouped its investment in the construction of the 18-tee driving range, and now the facility is a net revenue generator for the rest of the Auxiliary Services department.

"It's not a gold mine, but what we do for the external community in a lot of cases helps offset the services we subsidize for the university community," says Auxiliary Services VP Aughenbaugh.

In fact, the driving range is just one component of the university's facilities rental program, which also includes the athletic fields and conferencing facilities. As the school feels the pinch of the economy and seeks to bolster its revenue streams, facilities rental is attracting increased attention and investment. It's not always an easy route to dollars, however; conference facility rental, for instance, has had an uphill battle of late.

Until now, bar exam prep courses have been among the school's most loyal and profitable external conference customers, with local, state, and federal government agencies comprising the bulk of the rest of the external conferences. But as government and corporate training budgets have dwindled in recent years, facilities rental has felt the decline: Of 2,200 events held on campus last year, just 13 percent were paid for by external customers. Still, betting on--and at the same time manufacturing--a rebound has become a top priority within the department. First, the department is working to hire a sales and marketing specialist to promote the facilities. In the past, the director of conference services spent about half of her time on operations, and half on sales and marketing.

"With what's coming and the potential growth, you really need to know who is your potential market. So, we need [full-time] sales and marketing," Aughenbaugh says. "We're looking at possibly going after more corporate and association business and less state and local government, which has been hit hardest by the recession."

Next for the school may be the construction of a privatized parking garage on its property, to support increased conference traffic while keeping within a new mandate that prohibits debt financing (feasibility studies are underway right now). And finally, U Baltimore's Auxiliary Services department is preparing for the completion of a new student union in 2005. That facility will be turned over to the department and, along with it, the revenue potential of a 200-seat auditorium suited for use by outside chamber-music groups and theatrical companies.

"We're looking at the competition right now, and booking even before the new student union comes online," Aughenbaugh says. "You certainly don't want to open the building and then start taking bookings."

The vast landscape of businesses that can fall under the banner of Auxiliary Services is enough to make even a business magnate sit up and take notice. Expertise in running hotels, restaurants, driving ranges, bookstores, and copy centers is really too much to ask of a single individual; couple that with the finesse necessary to master university politics and you have a challenge that demands the experience of a super-CEO. Professional organizations such as NACAS, NACUFS, NACUBO, and others are logical places to turn to for help. In fact, NACUBO offers two good books on the topic: Maximizing Service Provider Relationships by Maurice W. Scherrens [NACUBO, 1999] and Planning and Managing the Campus Facilities Portfolio [NACUBO, 2003], joint projects of NACUBO and APPA. But the real key may in fact be to seed your organization with managers who have demonstrated private-sector success, running similar operations.

"Part of the reason I don't think our folks have a seat at the table is that they're often from the campus community," says Hassmiller of NACAS. "These days, what we need are more people who have experience and really understand how to run a business."

Rebecca Sausner is a freelance writer based in Brooklyn, NY.


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