Compass's bad press puts contracts under scrutiny

24 November 2005
Compass's bad press puts contracts under scrutiny

Jokes about Compass having lost its bearings have done the rounds in the catering industry as its recent problems have become front-page news. The joke has been sustained by a succession of punch lines like the sacking of UK chief executive Peter Harris, the UN contract crisis that provoked it, and the loss of 200 managers.

Then came reports of its deals with suppliers. Compass confirmed reports that it extracted upfront fees worth more than 1m as part of a contract with cleaning equipment business Robert Scott & Sons. Compass also told the manufacturer, which remains a supplier to Compass, to charge distributor King UK double its net price for cleaning brushes and send it the difference every month.

Purchasing discounts
It's at this point the joke might rebound on those laughing loudest. The whole area of purchasing discounts is allegedly common in the industry. And despite the fact that the sector has moved towards more stringent contract models in recent years, it hasn't necessarily translated into greater transparency.

Alongside Compass, the three other major players in the UK - Sodexho, Aramark and Avenance - told Caterer that purchasing transparency was not an issue for their clients. But following Compass's recent bad publicity, some clients are beginning to wonder if they are fully in the picture, according to industry consultants.

Traditional cost-plus contracts have been open to abuse because there's no guarantee the contract price won't rise every month.

Recently deals have been brokered on the fixed-price model, which caps the client's subsidy for a period, but some believe this doesn't stop unscrupulous contractors pocketing bulk discounts from suppliers.

Consultant Chris Stern believes cost-plus can be done well, but because clients have become increasingly risk-averse, this type of deal is used far less frequently. Fixed-price deals, are also open to abuse and could have fostered complacency among clients, he says.

He argues that many organisations in the public sector, particularly in education and healthcare, have "caught a cold" through inflated fixed-price contracts.

According to Stern, the market is moving towards hybrid contracts with guaranteed costs and targets. This process, he believes will accelerate following Compass's recent woes. "You're going to see far greater involvement of clients' purchasing departments and formal procedures," he adds.

Robyn Jones, chief executive of independent caterer Charlton House, is wary of formal procurement procedures audited by clients, which focus on price. She believes deals have become more refined over the last decade. "These days cost-plus contracts are very rare. You've got fixed-price or even concession deals, so it doesn't come down to the cost of an egg any more," she says.

Diana Spellman, managing director of purchasing consultant Partners in Purchasing, believes more secure profit-and-loss deals may be the answer. These can be nil-subsidy arrangements, where the contractor makes its money through the till, or concession deals.

"There's been a drive towards changing the structure of contracts from cost-plus to nil-subsidy over the last 10 years in order to circumvent the practice of hidden discounts," she says.

Spellman also believes that more stringent global accounting requirements, which followed the Enron scandal in America, will reduce further the 28% of clients that the British Hospitality Association believes still use cost-plus contracts.

However, she warns that nil-subsidy or fixed-price contracts can give a false sense of security and remain open to abuse.

Jerry Brand, managing director of Host Management, who first tackled the thorny issue of purchasing discounts while at his former company Russell and Brand, says he would reverse the trend towards fixed-price. "If clients can see complete transparency and have full confidence in their caterer they can go to cost-plus." He adds that moving away from fixed-price deals can save clients up to 25% on their catering bills.

Brand also argues that nil-subsidy and concession models are only a form of transparency. "Where this happens it's the employee who gets whacked. Besides, a lot of employers continue to see a subsidised staff area as an important employee benefit," he says.

There are no easy answers. Certain contract models help to limit liabilities, but they won't offer 100% transparency. And expensive formal procurement procedures could rule out precisely those smaller caterers which may be more likely to open their books to clients.

One certainty, however, is that some of the industry's antiquated business models will have to give way to something better adapted to the new, less forgiving, climate.

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