Inside Outsourcing

How many departments does it take to run a foodservice business?

By Scott Hume, Managing Editor -- Restaurants & Institutions, 3/15/2003

Office parties aren’t the same at Texas Land & Cattle Steak House. Neither is the office.

During 2002’s fourth quarter, the 24-unit, Dallas-based casual-dining chain transitioned responsibilities for its corporate accounting, payroll and information-technology (IT) departments to an outside company. Two people remain to oversee areas once staffed internally by 14 employees.

“We’re running pretty lean, but I think we’re better focused now and that’s an improvement for any company,” says Dan Brannan, Texas Land & Cattle’s vice president for finance, who managed the shift to a financial-services company. “It hasn’t been an easy process, but I believe that, long term, it definitely was the right decision to make.”

Outsourcing is hardly a foreign concept to the foodservice industry. After all, it is what millions of consumers do daily when then they invite restaurants to prepare meals they might otherwise make at home. And contract managers such as Sodexho USA and Aramark are enjoying exceptional growth thanks to companies’ (and even the military’s) decisions to outsource foodservice in order to cut costs for employee payroll and benefits.

Those same economic pressures are being felt by foodservice companies, of course. When revenue growth slows, management looks for ways to reduce overhead and fixed costs. Administrative costs often are an easy first target for outsourcing because functions such as accounting and accounts payable, while vital, are not central to menu development, store expansion or other work essential to the business of running restaurants.

“Many companies are saying ‘if it’s not my core competency, I don’t want to do it,’” says Lynne Jacoby, food and beverage practice leader for PricewaterhouseCoopers LLP in New York City. Companies “don’t want to own people,” she says of the layoffs that usually come with outsourcing, preferring to set strategic direction while letting vendors handle the mechanics of implementation.

“Outsourcing is something we’re going to see for quite a while,” Jacoby says. “I don’t see it changing any time soon.”

TIME AND MONEY
Dale Hoyer’s job wasn’t lost to outsourcing, it just moved away.

He was the controller for Pizza Hut Inc. when parent Tricon Global Restaurants (now Yum! Brands Inc.) moved the chain’s headquarters to Dallas. When Hoyer and about 90% of the operation’s accounting staff opted not to make move, he set up a financial-services company for the restaurant industry and hired most of his former colleagues to staff it. Business has been booming and the Wichita, Kan.-based company now handles a range of business functions—from accounts payable and receivable to benefits administration, sales and deposit verification and more—for more than 100 foodservice companies operating more than 2,000 locations.

Hoyer’s company does not handle work for Pizza Hut’s corporate offices, but several of the chain’s franchisees are among his clients. The biggest growth has come from operators of between 15 and 50 locations. New York City-based fast-casual operator Cosi Inc. recently signed on, for example. What companies need from an outsource partner, he says, is help saving time and money.

“By far the biggest reason [restaurants outsource administrative functions] is to save money,” says Hoyer, adding that his firm can handle a foodservice operation’s accounting for a 20% to 40% cost savings. How? Simple economies of scale: Personnel and computer technology/maintenance costs are shared by clients rather than borne individually.

“Everybody’s looking to improve profit margins because everything is getting hit hard,” Hoyer says. “Sales are down in many areas, so companies are doing everything they can to improve the top line and that’s just not working. The next area [to look at] is general and administrative expenses and whether operators can save some bottom-line dollars by outsourcing to us.”

The other appealing savings promised by outsource firms is in executives’ time. “At smaller companies—an independent restaurateur or one with five to 10 stores—the owner’s probably doing all the accounting work himself. Maybe 10 to 15 hours a week. Outsourcing can cut that by 90%. That’s time gained that can be spent in the restaurants,” Hoyer adds.

At Texas Land & Cattle, the company has realized “a 33% reduction in ongoing costs for accounting and payroll, and that’s hard costs—salaries and benefits. That doesn’t include the technology and rent savings,” says Brannan, who points out that the company’s health-insurance premiums have been rising 15% annually. “But the other savings is in time. Probably 20% to 25% of my time was spent managing the department, with issues like who called in sick. Those are issues that just went away [with outsourcing].

“It comes down to how much time and effort an executive has to spend on the area of people management just to get the job done versus why we’re really here, which is to build sales and profitability.”

THE HUMAN FACTOR
The answer to that question is sharply double-edged. As the Texas Land & Cattle system grew—from two to 24 restaurants in the past decade—so, too, did its investment in technology and accounting staff. An outsourcing partnership frees the chain from computer maintenance costs and reduces headcount, which is a nice way of saying the concept had to lay off longtime employees who had helped it grow so large.

“It pulls your heartstrings. I had a very hard time with that,” Brannan says of letting staff go. “It never feels good, but you try to do the right thing. That means looking at the greater good for 1,700 other employees who rely on this company for jobs.

“That being said, the day after we signed the contract [with the outside accounting provider], we had a staff meeting and let everyone know what we were doing and why we were doing it. We gave them all eight weeks’ notice, so the majority had found other jobs by the time they left and had their severance pay as well. But it was tough.”

Turning longtime employees out when the economy is depressed is such a difficult decision to make that it can be the largest hurdle preventing companies from making a move that is otherwise financially beneficial, Hoyer says.

“In most cases, I think outsourcing will always make economic sense,” he says. “But that doesn’t mean it is necessarily right for every company. Letting people go is very difficult. Some executives just don’t have the mindset to accept that, and it’s understandable.”

A QUESTION OF CONTROL
Metromedia Restaurant Group (MRG)—the Dallas-based parent of the Bennigan’s, Bonanza, Ponderosa and Steak and Ale chains—has been a high-profile proponent of outsourcing and a model for other foodservice operations.

In January 2002 it moved to third-party vendors responsibilities for a broad range of finance, accounting and IT functions while retaining in-house control over areas such as financial planning, risk management and computer-application development. Service-level agreements set performance expectations and penalties for nonperformance.

According to Teri Robinson, MRG’s chief information officer, the benefits of the changes have gone beyond corporate cost savings to include access to volume-purchasing savings, deeper technologies without capital investment and more highly trained talent in finance, administration and IT.

Wichita, Kan.-based Total Entertainment Restaurant Corp. (TERC) operates 54 casual-dining restaurants under the Fox & Hound and Bailey’s names. Sales in 2002 totaled $102 million, with a corporate staff of only 12.

“We feel that outsourcing has worked extremely well for us. We get service levels we would have from in-house staff and we get the benefits of leveraging economies in technology and other areas,” says Jim Zielke, TERC chief financial officer.

In addition to most accounting and IT functions (except point-of-sale system support), outside providers handle TERC’s marketing, purchasing, legal and other responsibilities. “We even outsource our corporate chef,” Zielke says. “We need someone to take a periodic look at our menus, and we have a chef come in on contract to work on plate presentations and recipes. We don’t need that to be a full-time, in-house position.

“If you have a five-person department and someone quits, then the other four do the work of five until a replacement is hired. That can be a huge issue for a company our size,” he says. “We don’t deal with those problems now. Someone else does.”

That’s fine if that someone else is good at handling them. Concerns about turning over responsibilities to outsiders can be difficult to overcome, says Brannan, especially for unit managers who rely on headquarters for systems support.

“Our managers had never seen an outsourcing arrangement like the one we told them we were adopting and they asked: ‘Who’s going to support us? But the [vendors] are far away. How will that work?’ You have to address those concerns.”

Texas Land & Cattle’s Chairman and CEO David Franklin voiced concerns too. “He said, ‘Boys, this sounds like a good idea, but it had better be everything you say it is,’” Brannan recalls. “That’ll keep you awake at night, because the business can get away from you quickly if you go with [an outsourcer] that isn’t ready to take you on as a customer or to grow with you.”

But PricewaterhouseCoopers’ Jacoby says her experience has been that once companies begin outsourcing, they embrace the concept “and look at jobbing everything out.”

“They find it’s easier to hold a subcontractor’s feet to the fire” than to crack down on in-house staff, she says. “And if the subcontractor doesn’t get the job done, it’s easier to let them go and find a new one than it was to let your own people go.”