Performance Based Studies Research Group

www.pbsrg.com

ASU Food Services Case StudyASU Food Services Case Study

Best Value System

Identification of PotentialBest-Value

Pre Planningand

Risk Management

Managementby Risk

Minimization

PHASE 1PHASE 1 PHASE 2PHASE 2 PHASE 3PHASE 3

Traditional Selection vs Best Value Selection

• Traditional (Management)

• Qualifications

• Program

• Interview

• Financial projections

• No linkage

• Best Value (Leadership)

• Past Performance

• Risk Assessment (don’t control) / Value Added

• Interview

• Financials (simplified and proven)

• Linkage into PP/QC and Risk Minimization

Keys to Selection

• Non-Technical– Risk focused– Minimize decision making– Data and binding information– No “dining program/menu”– No marketing

• Change– Release of details and control

• 60 page RFP (compared to 200 page for similar service)• Intent not requirements

– Differentiation – less is more– Process Logic replaces experience

• Minimal technical knowledge needed

RFP Selection Phase

• Pass/Fail Criteria– Executed Mandatory Proposal Certification– Willingness to execute– Pro Forma Financial Projections

• Scored Criteria– Risk Assessment and Value Added Plan (5pages)– Management Interview– Past Performance Information – Financial Compensation (1page)

Scored Criterion:Past Financial Data (vs Time)

• Total return (in dollars $)

• Total return (as a percentage % of sales)

• Retail revenue (in dollars $)

• Catering revenue (in dollars $)

• Voluntary meal plan revenue (in dollars)

• Total sales per labor hour

• Total enrolled student population

• Total number of meals per enrolled student

• Total number of retail meals per enrolled student

• Meal plan average missed meal percentage

• Customer satisfaction (for students)

• Average

• Delta

• Slope

Pre-Planning and Quality Control Phase

• Financial Proposal Worksheet– Commissions offered to the University

• Meal plan sales

• Retail sales

• Subcontractor sales

• Catering sales

• Summer Conference Dining sales

– Capital Investment Plan

– Equipment Replacement Reserve

– What is given here will become part of the final contract

Scored Criterion: Financial Proposal

Pre-Planning and Quality Control Phase

Financial Proposal Worksheet

Scored Criterion:Interview

• The ASU interviewed the key personnel. This included:– On-site General Manager

– General Manager’s Immediate Supervisor

– Regional Vice President

– Director of Catering

– Executive Chef

• Interviews were conducted individually

Pre-Planning and Quality Control Phase

VendorNo Summary Criteria Out of A B C1 RAVA Plan 10 5.9 7.1 6.32 Transition Milestone Schedule 10 5.2 7.0 6.33 Interview 25 15.8 16.8 13.54 Past Performance Information - Survey 10 9.8 10.0 9.85 Past Performance Information - #/Clients Raw # 5.7 3.0 4.46 Past Performance Information - Financial 10 7.0 8.7 6.97 Financial Rating 10 4.0 8.0 8.08 Financial Return - Commissions Raw $ 30,254,170$ 60,137,588$ 64,000,000$ 9 Capital Investment Plan Raw $ 14,750,000$ 20,525,000$ 12,340,000$ 10 Equipment Replacement Reserve Raw $ 7,213,342$ 4,100,001$ 8,171,811$

Finanical Totals 52,217,512$ 84,762,589$ 84,511,811$

VendorNo Summary Criteria Weight/Out of A B C1 RAVA Plan 28 16.5 19.9 17.72 Transition Milestone Schedule 2 1.0 1.4 1.33 Interview 25 15.8 16.8 13.54 Past Performance Information - Survey 9 8.8 9.0 8.85 Past Performance Information - #/Clients 1 1.0 0.5 0.86 Past Performance Information - Financial 15 10.5 13.0 10.47 Financial Rating 5 2.0 4.0 4.08 Financial Return - Commissions 7 3.3 6.6 7.09 Capital Investment Plan 6 4.3 6.0 3.610 Equipment Replacement Reserve 2 1.8 1.0 2.0

100 65.1 78.1 69.0

Selection Phase Results

A financial difference of 62.3%

Best Value/PIPS System

Identification of PotentialBest-Value

Pre Planningand

Risk Management

Managementby Risk

Minimization

PHASE 1PHASE 1 PHASE 2PHASE 2 PHASE 3PHASE 3

This is the most critical phase of the process

Paradigm Shift

• Role change for the Vendor

• Becomes the leader

• Generates the “baseline plan” – sets optimal scope and schedule– Optimal for both the client and the vendor (win-win)

• Identifies, prioritizes, and minimizes all foreseeable risks

• Begins holding the client accountable for their impacts

Paradigm Shift

• Role change for the Vendor

• Risk Management Plan becomes a contractual document

• Measurement of deviation from the baseline plan is the weekly risk report

• Must learn the new paradigm to compete

Paradigm Shift

• Role change for the Client

• Must release control to the expert

• Becomes the facilitator – Identifies constraints & requirements– Provides need data to the vendor

• Provides any concerns/risks – to be addressed by the vendor

• Review Weekly and Monthly vendor reports

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Pre-Award Period Deliverables Deliverables

• Risk Management Plan

• The RMP should contain the following:1. Scope

• Clear and detailed service scope (what is and what is not included) • Detailed food services program

2. Uncontrolled Risks List • List of risks Proposer does not control with plans to minimize

3. Identified Risks List • List of all previously identified risks (by other proposers, user, and

client) with plans to minimize4. Client Action Item List5. Agreed to performance metrics with baseline numbers6. Weekly Risk Report 7. Finalized transition schedule 8. Metric reporting schedule (weekly and monthly)9. Other: agreed to value adding options, original RAVA Plan, Interview

minutes, etc…

Vendor Performs Risk Management

• RMP– became the contract– Focus on risk the vendor cannot control and their minimization– Seven (7) Primary Risks (26 sub/general risks)

• Bad Debt• Meal Plan Counts• Asbestos Abatement• Construction Delays• Loss of Sites• Client change in start date• Utility capacity

– Risk minimization steps– Identification of when the risk reverts to client with level of impact

Example: Bad Debt Collection

Bad Debt Collection Result

• ASU not certain about debt collection

• Contract formed with two options (if and if not)

• Once impact shown, decision made to eliminate risk and have ASU collect debt

• Risk identified – risk eliminated

Pre-Planning and Quality Control Phase

Helping Client Efficiency

Best Value System

Identification of PotentialBest-Value

Pre Planningand

Quality Control

Managementby Risk

Minimization

PHASE 1PHASE 1 PHASE 2PHASE 2 PHASE 3PHASE 3

This is the 2nd most critical phase of the process

Performance Metrics• Financial

– Sales– Commissions– $/Labor-hour

• Performance– Risks– Student Satisfaction– Customer Satisfaction– Missed Meal Factor– Student Worker #– Sustainability (tonnage)

• Expansion– Catering $– Retail $– Voluntary $

Pre-Planning and Quality Control Phase

Year One Results: Information Environment

– 2008 results were generated despite…• Memorial Union Fire – 80% of Tempe campus dining• Unrealized Meal Plan Counts – Keystone to financial proposal• Extreme difficulty in “finding” prior numbers

– Results shown are normalized for available data from incumbent

FY 06-07 Year 1No Category Incumbent Aramark Difference % Difference1 Total Revenue ($M) 27.02$ 30.83$ 3.81$ 14%2 Total Return & Commissions ($M) 2.17$ 2.67$ 0.50$ 23%3 Captial Investment Contract ($M) 14.75$ 30.83$ 16.08$ 109%4 Capital Investment 2006 v 2007 ($M) 0.26$ 5.70$ 5.44$ 2092%5 ASU Administration (# of People) 7 1.5 -5.5 -79%6 Customer (Student) Satisfaction (1-10) 5.2 7.3 2.1 40%7 Mystery Shopper Satisfaction (1-10) NA 9.6 -- --

A Successful Transition:Replacing a 52 year incumbent

• Aramark successfully transitioned the largest dining services in the history of Arizona State University in one month

– Over 25 venues

– Over 150 points of sale

– 600+ personnel

– Over 18 different construction projects

• All construction finished on time and within budget

• 400 of 600 employees could not prove citizenship and had to be replaced in 30 days

• Raised average wage rate

• Aramark spent $350K to refund students who did not retain their remaining balances held by the incumbent

Issue: MU Fire

• Risk management plan defines actions

• Communication is minimized

• Vendor acts in best interest of the client without direction

• Aligned environment

Memorial Union (MU) Fire

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Thursday Afternoon - 11-1-07- Fire in the MU (3:11pm email sent to all ASU)

• Aramark employees first to see fire

• Aramark activates fire alarm

• Aramark lead the evacuation

• Aramark (John J and Jim J) go back in and find people not evacuating – get them out

• Aramark modifies all markets to accept meal plan cards (usually only dining areas)

• All meal plan students have access to additional food in a matter of hours

Can the vendor act in the best interest of the client without a “directing” contract?

© PBSRG 200830

Thursday Night – 11-1-07

• John J gets call at 9:00pm to access the building

• Gets two laptops and 600 paychecks needing to be distributed

© PBSRG 200831

Friday Morning – 11-2-07

• MU closed

• Investigation switches from Tempe and ASU authorities to ATF

• Treated as a criminal investigation

• Rumors abound…

© PBSRG 200832

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Friday Morning 11-2-2007

Friday Afternoon – 11-2-07

• Aramark begins switch over to nearby gym (PE West)

• Aramark organizes resources

• Aramark begins making the calls and bringing the necessary items in (inventory lost at MU ($390,000) – all was replaced)

© PBSRG 200835

Saturday Morning – 11-3-07

• MU employees allowed to get items left behind in building

• Gym begins being prepared for MU

• Contractors brought in

• Protective floor installed

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Saturday Afternoon and all night

• GYM prep’d for electronics

• Tables/chairs/booths…etc cleaned and transferred over (Belfor)

• Kitchen ordered, refrigerator/freezers ordered

• Vendors contacted (papa johns, Chic-fil-a…)

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Work takes place around the clock

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© PBSRG 200839

Sunday Morning 11-4-07

• Still transporting

• Still setting up

• Data hookups/cash register testing

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Sunday Afternoon 11-4-2007

• Arranging gym

• Stocking

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Monday morning 11-5-07

• Open for business at 9:00 am

• Radio station was brought in

• Serving “grab and go” plus full convenience store

Can the client transfer risk and control to the vendor?

© PBSRG 200842

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Wed 11-7-07

• Freezer/refrigerator delivered

• Services expanded in gym (more hot food, etc)

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Events cont.

• Tuesday 11-13-07– Kitchen Set Up and serving food

• Tuesday – Kitchen shut down by ASU permitting

• Wed 11-14 -07 - Tues 11-20-07 (six days) no permit issued (then Thanksgiving)

• Wed 11-28-07 – Kitchen is up and running

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Summary

• Aramark had very fast response and resolution

• Did not cease operation and look for direction (no contract directives)

• Utilized their Risk Management Plan and proactively mitigated the risk, which was planned for before their service began

• Weekly report creates the documentation of how the risk is resolved– Shows value added and vendor performance

Issue: Boarder Count Inaccuracy• Client is typically the biggest risk

• Vendor should define reality for the environment, adjust baseline plan when new dominant information arrives, track impacts to the service

• Reversion and relationships

Issue Summary

• Guaranteed boarder count incorrectly measured by ASU first semester of contract– An error of 26% not found until Dec of first year– RFP contained error in actual boarders at ASU as well

• Year 2 the contract was adjusted to account for ASU boarder shortfall– Additional Years and Additional Campuses– Commissions Increased– Capital Constant at Tempe Campus and some added for other campuses

• Year 2 & 3 confusion on the boarder count process and expectation of client and vendor– BV process not followed– Risk minimized by vendor innovations in efficiency and accounting

• Year 4 (FY11) ASU was facing tremendous shortfall which would result in a $6.3M penalty and a four year projected penalty of $28M, and a contract duration of $107M– Aramark adjusted contract to minimize risk for ASU

YR 1:ASU Boarder Count Inaccuracy

• ASU transfers $ to Aramark for mandatory meal plan dollars at the start of each semester– ASU transfers anticipated meal plan # to Aramark– Aramark sets purchasing, staffing, and operations– ASU collects the meal plan $ from students

• ASU has difficulty identifying the actual number of mandatory boarders– July 1, 2007: 6,331– August 25, 2007: 6,575– October 15, 2007: 6,733– December 21, 2007: 5,221

• 19 days after the last class and 1250 students (26%) below payment #

• ASU claims overpayment to Aramark and request $1.8M back

• Despite not being contractually obligated to re-pay ASU for the “over-advanced” meal plan $, Aramark still returns $1.038M to ASU to maintain a favorable relationship

• Spring has difficulty as well: – January 1, 2008: 5,504– February 4, 2008: 5,504– February 12, 2008: 5419– April 3, 2008: 5,259– May 1, 2008: 5,221 (1133 students below the number in the RFP)

• ASU claims overpayment to Aramark and requests $217K back

• The impact was ultimately agreed to be a wash as carried over from the fall

• Agree to amend the contract for YR2+

ASU Boarder Count Inaccuracy

What should have happened…

• Best Value operates off of the plan

• Year 1– Not an operations issue, should have gone through contracts– Contract had terms in place for resolution, these were ignored– Plan should be followed:

• Penalty implemented• Negotiations of deals for long term contracts in highly bureaucratic

environments is not efficient– ASU request for contract amendment for future years

• Money, time, effort are the three variables

Issue: Engrained Stairway

• A relationship based example

• Risk is deviation from the baseline plan

• Weekly risk report tracks the deviation

• Without measurement, vendor is at risk

Stairway for Engrained Restaurant

• ASU wanted a “eco-restaurant”

• Part of contract plan

• After fire, President wanted “signature stairway” up to the restaurant– Signature stairways cost $1.4M

• ASU did not have $1.4M – wanted to use Aramark capital

• Non-revenue generating investment

• Aramark built the stairway – relationship based – but minimizing risk?

Amendment #5 Boarder Count Issues

Aggregate Amendment - History

• ASU not able to meet guaranteed minimum boarder counts Fall 2007 and Spring 2008 (first year of contract)

• ASU desires to expand contract to all four campuses– Aramark already working in good faith at Downtown location with major install

construction underway Summer 2008

• ASU and Aramark agree to set amendment to fix ASU boarder shortfall for future years and add other three campuses to contract

– Increase in commissions– Increase in total capital – keep same ASU Tempe Campus original proposal amount

• Aramark can no longer shift capital from Tempe to Downtown unless contract amendment is signed

– ASU cannot move fast enough to finalize amendment so settle on Letter of Intent– Letter of Intent Signed August 20 to all construction to continue and venue to open on time

Aggregate Amendment - History

• Letter of Intent clearly states:– FY09 – Tempe only boarder count requirement of 5815– ASU agrees and signs Letter of Intent along with Aramark VP

• Contract amendment signed (Amend #5) on Oct 9 – intended as formalization of letter of intent

• Early Spring 2009 final Fall 2008 boarder numbers - Aramark realizes ASU did not meet the required minimum boarder counts – penalty is invoked per their understanding of the contract

• ASU objects to the penalty…claims not in shortfall but above the minimum…

Amendment #5 – Aggregate Boarder Count

• ASU states that the 5815 boarder count in the amendment is aggregate across all campuses, not just Tempe

• Contract wording disputed as not being clear by ASU

• Aramark disagrees, references Letter of Intent to show clarity

• ASU states:– A meeting was held with Aramark VP and ASU Assoc VP of Res

Life that changed 5815 number from Tempe only to all Campuses– Letter of Intent is not a contract document

• Aramark does not remember the call referenced by ASU as to where they changed the original deal from the Letter of Intent

Amendment #5 – Disputed Language

Amendment #5 – References Table

What Happened Next

• Disagreement amounts to $521,000

• ASU agrees first two years are Tempe only but there is no clear Tempe only number

– Table is titled for all campuses, so no Tempe number is available

• Begin to look for a best value, win-win solution

• Takes four months to find and settle on a solution but one was found

What Happened Next

Solution:

First Transaction• ASU takes $521,000, 0% interest loan from Aramark – Loan is received as

un-invoked penalty of commissions of $521k (no money transfer)

• ASU makes scheduled payments back to Aramark for loan amount across 2 years

In a separate transaction• Aramark makes efficiency adjustments which result in savings of $333k,

these savings are paid back to ASU across two years in schedule amounts

• ASU uses some of left over capital savings from Aramark efficiencies on a separate project to pay off remainder of $188k

Aramark to ASU Loan – NO MONEY TRANSFERS- Aramark invokes penalty, counts $521k as revenue

ASU to Aramark Loan Payments

Loan Payments from Excess Capital

Aramark to ASU Payments from Operational Efficiencies

What should have happened…

• Held the Required Summary Meeting before signing

• This meeting was, by consensus of ASU Res Life and Aramark not held, at the opposition of ASU Procurement & PBSRG

• ASU claimed, ASU Res Life and Aramark held a separate, private meeting, which became the basis for much of the disagreement in the contract, explaining the terms

• Aramark had no recollection or information from this meeting

• For the lack of process application upfront, the risk was handled as well as it could have been

Arizona State University Dining Service: FY08 vs. FY09 (Overview)

No Catergory FY08 FY09 Difference % Diff.1 Total Revenue ($K) 29,977.8$ 33,135.6$ 3,157.8$ 10.5%2 Commissions on Total Revenue ($K) 1,902.3$ 2,011.3$ 109.0$ 5.7%3 Commission % 6.35% 6.07% -0.28% -4.35%

No Catergory FY08 FY09 Difference % Diff.1 Number of Mandatory Meal Plans Sold 5,361 6,159 798 14.9%2 Number of Voluntary Meal Plans Sold 2,128 2,882 755 35.5%3 Student Satisfaction Survery (1 - 10) (2x/yr) 7.34 7.27 -0.1 -1.0%

Financial Performance Metrics

Performance Metrics

Arizona State University Dining Service: FY08 vs. FY09 (Specifics)

No Catergory FY08 FY09 Difference % Diff.1 Mandatory Meal Plan Sales ($K) 8,915.5$ 8,212.2$ (703.3)$ -7.9%2 Voluntary Meal Plan Sales ($K) 294.2$ 404.1$ 109.9$ 37.4%3 Retail Sales ($K) 15,408.1$ 17,320.4$ 1,912.3$ 12.4%4 Catering Sales ($K) 2,329.1$ 2,526.5$ 197.4$ 8.5%5 Camp/Conference Sales ($K) -$ 865.2$ 865.2$ --6 All Other Sales (Subcontractors & Sushi) ($K) 3,030.9$ 3,807.2$ 776.2$ 25.6%7 TOTAL REVENUE ($K) 29,977.8$ 33,135.6$ 3,157.8$ 10.5%8 Commissions on Total Revenue ($K) 1,902.3$ 2,011.3$ 109.0$ 5.7%9 Subsidy - DPC, West & Polytechnic ($K) 391.7$ 1,381.6$ 989.9$ 252.7%10 Commissions Paid to ASU ($K) (Comm. less Subsidy) 1,723.3$ 629.7$ (1,093.6)$ -63.5%11 Commission % 6.35% 6.07% -0.28% -4.35%

Financial Performance Metrics

No Catergory FY08 FY09 Difference % Diff.1 Number of Mandatory Meal Plans Sold 5,361 6,159 798 14.9%2 Number of Voluntary Meal Plans Sold 2,128 2,882 755 35.5%3 Customer (Student) Satisfaction Survery (1 - 10) (2x/yr) 7.34 7.27 -0.1 -1.0%

Performance Metrics

Aramark Value Added Analysis:ASU Dining Service

$2,300,000 Efficiencies Added$1,200,000 Results of feasibility study of all Residential Halls

$1,100,000 Saved ASU $ on Barretts construction costs

$95,200 Food Donations$30,000 VDS Groundbreaking Catering Summer 07

$45,000 Catering Donations

$6,000 Foundations dinner

$6,000 ASU Golf Tournaments - 4

$4,000 Conference Support

$3,000 TFA Bags

$1,200 DPC Open House Event

$687,500 Other Donations$300,000 Payment of commissions on lost revenue due to MU fire

$250,000 Payment of the fire insurance deductible

$70,000 Honored and accepted incumbent M&G balances outside of original scope of contract

$35,000 Car Giveaway

$32,500 Unrecoverable funds

$3,082,700 Total

YEAR 3Performance Based

Performance Metrics – Combined ASU

FY 2010

No Category

YTD Prior Year - ADJUSTED wk 6

Sep YTD Actual YTD BudgetVar Act. vs

PYVar Act. vs

PY %Var Act. vs

BudgetVar Act. Vs Budget %

1 Mandatory Meal Plan Sales - Meals ($K) (Meal Swipes) 7,914.4$ 14,609.2$ 12,531.2$ 6,694.8$ 84.6% 2,078.0$ 16.6%

2 Voluntary Meal Plan Sales - Meals($K) (Meal Swipes) 390.5$ 372.4$ 264.7$ (18.1)$ -4.6% 107.7$ 40.7%

3 Retail Sales ($K) (Sun $, M&G Vol, M&G Mandatory and Cash & Credit Cards)16,756.8$ 17,656.1$ 22,697.4$ 899.2$ 5.4% (5,041.3)$ -22.2%

4 Catering Sales ($K) 2,475.5$ 2,502.0$ 2,733.4$ 26.5$ 1.1% (231.4)$ -8.5%

5 Camp/Conference Sales ($K) 865.2$ 822.1$ 648.9$ (43.1)$ -5.0% 173.2$ 26.7%

6 All Other Sales (Subcontractors & Sushi) ($K) 3,703.3$ 3,793.8$ 5,169.6$ 90.5$ 2.4% (1,375.8)$ -26.6%

7 TOTAL REVENUE 32,105.7$ 39,755.5$ 44,045.1$ 7,649.8$ 23.8% (4,289.6)$ -9.7%

8 Commissions on Total Revenue ($K) 2,011.2$ 2,413.2$ 2,673.5$ 402.0$ 20.0% (260.4)$ -9.7%

9 Subsidy - DPC, West & Polytechnic ($K) 1,202.3$ 604.6$ 1,157.6$ (597.7)$ -49.7% (553.0)$ -47.8%

10Commissions Paid to ASU ($K) (Commission on Total Revenue less Subsidy) 803.7$ 1,808.5$ 1,515.9$ 1,004.9$ 125.0% 292.6$ 19.3%11 Commission % 6.07% 6.07% 6.07%

No Category YTD Prior Year YTD ActualYTD

BudgetActual vs

PYVar Act. vs PY %

Var Act. vs Budget

Var Act. Vs

Budget %

1 Number of Mandatory Meal Plans Sold 6,133 7,573 7,843 1,455 23.6% -229 -2.9%

2 Number of Voluntary Meal Plans Sold 2,882 4,056 2,215 1,174 40.7% 1841 83.1%

Financial Performance Metrics

Performance Metrics

Now What?

No Contract Adjustment - Next Four FY Look AheadProjected Reality FY11 FY12 FY13 FY14 TOTAL

Guaranteed Students 9780 9910 10315 11400 41405Projected Students 7415 7778 8000 8300 31493

Guaranteed Commission $3,209,892 $3,482,904 $3,745,325 $4,168,761 $14,606,882Penalty ($6,385,500) ($5,958,940) ($6,694,980) ($9,281,400) ($28,320,820)

TOTAL ASU $$$ ($3,175,608) ($2,476,036) ($2,949,655) ($5,112,639) ($13,713,938)

Generated Solution

• Switch from student count to revenue based

• Hopefully align meal plan pricing

• Maintained Capital, reduced guaranteed commission

• With revenue model, still projected to meet expectations

Current Amend #5

Amend #5 Current Reality Amend #8 - 85%

Mandatory Boarders 156,875 124,901 137,167

Revenue MMP including DB 595,540 474,158 $499,066

Revenue Retail and Catering 700,775 557,944 $214,654

Subcontractor OI 4,316 3,436 $10,872

Subsidy 0 0 $1,588

Total Commissions 68,710 68,710 $39,230

Mandatory Boarders Comm N/A N/A $34,660

Retail Commission @ 85% N/A N/A $4,570

Remedy - Every $25K equals cost recovery 0 107,551$ $0

Total Cash $68,710 ($38,841) $39,230

Capital commitment - Original Contract $34,800 $34,694 $34,694

Total Value to ASU $103,510 ($4,147) $73,924

Where we are now

• Close to completely outsourced

• Took time and education and diligence

• Operate from Weekly Risk Report (blank)

• Minimal Transactions / Minimal Communication

• Vendor is self managed, self reporting– Set metrics to meet different user needs

ASU Dining Performance Summary

Example of Future Risk

• If we don’t hit guaranteed revenue:

– Not a operations issue– Stick to the plan, enforce the agreed to penalties– ASU to request additional contract amendment or

considerations– If possible, Aramark to offer possibilities (if any)

and agree to idea exchange– Entire resolution handled through contracts office

Questions???