Risk and Insurance: Aramark Risk

Risk and Insurance: ARAMARK

Risk Assessment of ARAMARK Corporation

Today, ARAMARK Corporation employees almost a quarter million people around the world in various food service and hospitality enterprises. The company is also a major supplier of uniforms and work apparel, as well as operating various institutional facilities for a wide range of commercial and municipal concerns. The company has also been cited time and again as a leader in quality and human resources management, but ARAMARK did not become an empire overnight and the company is still faced with some serious issues at home and abroad. This paper provides an overview of ARAMARK Corporation and its far-flung enterprises, relevant financial and employee information, as well as an analysis of the company's strengths and weaknesses from a risk assessment perspective. A summary of the research and salient findings are presented in the conclusion.

Review and Discussion

Background and Overview.

Founded in 1936 by Davre Davidson, ARAMARK Corporation (hereinafter alternatively "ARAMARK" or "the company") is headquartered in Philadelphia and is a global leader in professional services, providing food services, hospitality, facility management services and high-quality uniform and work apparel to its clients in 18 countries. The company also operates a chain of private correctional facilities across the country. According to Caddell, "Working in partnership for more than 28 years with state, county and community correctional facilities and detention centers, ARAMARK Correctional Services, Inc. continues to lead the corrections marketplace in support service management. ARAMARK's tightly managed, customized programs help prisons and jails contain costs, increase efficiency, improve quality, meet ACA and other applicable standards and offer inmate vocational training." The ARAMARK Correctional Services business segment operates in collaboration with jail and correctional administrators to provide a wide range of cost-effective food service management, state-of-the-art commissary programs and comprehensive facility/building maintenance services, thereby reducing the manpower and management requirements for municipalities and states, and ARAMARK currently serves more than 450,000 inmates in 40 states.

According to Steelman, "Philadelphia-based ARAMARK is one of the world's largest service companies. The firm's employees distribute magazines and books, serve food, supply uniforms, provide child care, and clean buildings for hundreds of companies, schools, and government agencies." If consumers do not run into one of ARAMARK's enterprises in these venues (or prison), they will likely have encountered them at school, work or a professional sporting event. In this regard, Steelman note that, "More than 350 colleges and universities have contracted with ARAMARK to run their cafeterias and concession stands, as have major league teams like the Boston Red Sox, Philadelphia Flyers, and New York Mets." Perhaps more than any other U.S. company, ARAMARK has benefited from and contributed to the recent trend toward corporate outsourcing."

In his recent interview with Al Vicere, a management consultant who has worked closely with ARAMARK over the years, Hayes reports that, "Philadelphia-based ARAMARK a world leader in managed services including food service, facilities management, and uniform services. Since 1983, the company has gone private in a highly successful leveraged buyout, built a record sustained performance that is enviable on any account, gone public in what might be the most successful IPO of 2001, doubled employment, and tripled revenues." These enormous strides have not taken place by themselves, but were accomplished under the leadership of chief executive Joe Neubauer. According to Hayes, "ARAMARK was ranked number one in its industry in the 2004 Fortune 500 survey and was also named one of "America's Most Admired Companies" by Fortune in 2004, and since 1998 has consistently' ranked as one of the top three most admired companies in its industry as evaluated by peers. Neubauer himself consistently has been listed among America's most respected CEOs."

Today, besides its 40-state chain of correctional facilities, ARAMARK also caters special events and operates cafeterias for a number of large corporate clients, but the company also owns schools, nurseries, and day care centers; however, it has just recently started developing relationships with various local public schools as well. The company is clearly diversified in terms of business operations, but it has a stated commitment to diversity in its workplaces as well. These vast resources, combined with the company's healthy financial picture, would likely suggest that ARAMARK has some room for a false start or two, but the picture is not quite as rosy as all that, and these issues are discussed further below following a recapitulation of relevant current financial information for the company.

Financial Information.

Sales. Fiscal 2006 Total Sales -- $11.6 billion.

Earnings. Fiscal 2006 Net Income -- $261 million.

Assets. Total Assets (as of 9/29/06) -- $5.3 billion.

Number of employees. The company has almost a quarter million (approximately 240,000) employees serving clients in 18 countries (Belgium, Canada, Chile, Czech Republic, Germany, Ireland, Japan, Korea, Spain, United Kingdom, and Mexico; other countries in which ARAMARK competes include Argentina, Azerbaijan, China, Luxembourg, Netherlands, and Peru).

Current Risk Issues.

Strengths. The company is widely recognized and is an award-winner as a leader in promoting a diversified workforce and providing its employees with the training they need to accomplish their organizational goals. ARAMARK's commitment to diversity in its far-flung workplaces represents a fundamental strength that may be sufficient to overcome the various criticisms leveled against it in recent years. According to Alleye, "With a 'kaleidoscope' commitment to diversity, ARAMARK makes it its business to foster inclusion as a key part of the company's business strategy. The proof is in ARAMARK's employee base, which counts 56% of its workers as minorities. African-Americans comprise 29% of the total workforce, including one executive on Black Enterprise's 75 Most Powerful African-Americans in Corporate America list. As an $11.6 billion company, ARAMARK spent 1.8% of its total procurement with black suppliers in 2006."

In addition, ARAMARK is also committed to providing its end customers with high quality products and services, as well as contributing to the communities in which they operate. The company has been relentless in seeking better ways of communicating with their clientele, going so far as to physically locate some of their customer service executives in the offices of their major customers. For example, according to one market analyst, "The customer-focused perspective blurs the boundaries between entities in the value chain. Take the case of ARAMARK Corp. Nancy Naatz, resident district manager for business services for ARAMARK, has an office in the premises of her customer, Sears, in Chicago. Since Ms. Naatz is on location at her client's company, she is able to observe and interact with the local vendors ARAMARK has contracted to supply and serve Sears."

By being in close proximity to their major clients, these ARAMARK executives are better able to identify new opportunities for improvement while their competitors are forced to rely on less timely and insightful information. In this regard, John emphasizes that, "Ms. Naatz is able to understand Sears executives' and employees' nutritional needs and interact with the vendors to ensure that the appropriate choices are made available. In this case, ARAMARK matches the food vendors' solution with the needs of the Sears employees who are the real customers."

Weaknesses. Notwithstanding the company's stellar performance in recent years, Hayes suggests that there has been a "kicking and screaming" quality to the successes accomplished to date because of the company's rigid organizational structure and the problems they have encountered in trying to make appropriate changes. "Because of the nature of the ARA Services business," Hayes advises, "low-margin, transaction-based, cash flow as king, profitability as a driving force -- the culture of the company at that time was very hierarchical. There was an enormous deference to hierarchy, it was very focused, there wasn't a lot of push back, there wasn't a lot of dialogue. That was a big nut that we had to crack in order to move the organization forward." This point is also made by Weiss and Kolberg, who quote Ray Welsch, president of Healthcare Services for ARAMARK Corporation, concerning his initial impression of the company: "The environment at ARAMARK was very different than anyplace else I'd ever worked. My history was with a big company that was very organized, very process driven. ARAMARK is an organization that's really relationship driven, with a higher level of accountability."

In fact, in spite of an increasingly competitive marketplace which the company readily understood otherwise and recommendations from its management consultants to streamline their administration, the company's chief executive was reluctant to make any substantive changes until the handwriting was on the wall. In this regard, Vicere emphasizes that the company was uncertain about the industry environment and needed more timely intelligence in order to make decisions concerning whether to consolidate or decentralize their operations.

While these are not insurmountable issues, even for a global concern such as ARAMARK, the organizational hierarchy and structure at the company precluded any meaningful dialogue between the company's senior executives about what should be done. According to Vicere, "The issue was that in the ARAMARK culture there wasn't time to dialogue, to engage people and get them on board with new ways of thinking. They were just so intense, so focused, so transaction-driven, there literally wasn't time for people to put ideas out and discuss and debate them."

These constraints to effective management oversight and innovation were further exacerbated when the company went private in 2001. According to Stopper, "ARAMARK went from a leveraged buyout situation in 1984, with only some 50 people having equity in the company, to an initial public offering (IPO) in 2001 with 97% ownership by employees. It was a huge cultural shift. Many employees incurred debt in order to have ownership in the company. In his view, HR's power and influence came from performance and creating value, not from advancing or acceding to personal agendas."

To their credit, though, Hayes reports that the company finally took action to remedy this situation by creating an action project team to assess the potential threats involved in retaining the status quo and what opportunities for improvement were available to overcome the communication problems noted above and implemented them to good effect. In this regard, Stopper reports that:

Overall, the CEO likes the idea of an independent, operationally diverse board, one that questions, challenges, and does not rubber stamp management proposals. The CEO has traditionally tested issues with the board. In the current climate, ARAMARK thought it prudent to survey its board on how governance is going: the composition of the board, the structure, content, and time of meetings, the visibility of management, how decisions are made, the roles of the HR executive and the corporate secretary. HR is in the thick of these discussions.

Despite these initiatives, it is reasonable to assume that any substantive organizational transformation such as those experienced at the company during this leveraged buyout will continue to require fine-tuning in the coming years, a task made all the more difficult by virtue of the issues discussed further below.

The company also remains at risk of encroachment by unions seeking to gain control of the bargaining rights of the ARAMARK line employees and is subject to fallout by affiliation with some of the large companies for which it operates cafeterias and other institutional services. For instance, according to Manheim (2001), the National Organization of Women (NOW) objected to a sexual harassment lawsuit settlement because the investment firm of Smith Barney had also been identified as a secondary target in a union's campaign to organize food service employees at ARAMARK, which merely operated the cafeteria at Smith Barney's headquarters.

Such initiatives may well meet with some success in the venues in which the company competes based on observations by Vannoy and Dubeck, who point out that, "Corporations such as Marriot, McDonald's, J.C. Penny, and ARAMARK make up part of the new 'low-wage vanguard' of the new economy, a breed of employers who prosper by hiring younger, less educated, minority, or immigrant workers who are willing to work at jobs with low wages that offer little potential for advancement." Notwithstanding the ethical considerations involved in these practices, the "low-wage vanguard" has been carefully studied and manipulated by the company to ensure that recruiting costs are kept at a minimum and the on-the-job learning curve severe.

In this regard, Steelman notes that even the company chief executive officer admits that, "At ARAMARK, the key to successfully training and keeping employees in entry-level jobs has been decentralization. 'What works in Baton Rouge won't necessarily work in Boston,' says Neubauer. With more than 6,000 different 'profit-centers' around the country, ARAMARK has hundreds of front-line managers who act, in effect, as the CEOs of their units. For example, while ARAMARK has no company-wide transportation subsidy program, units in areas with low unemployment rates have set up their own, as a way of attracting new employees."