DENMARK: CLEAN MACHINE - ISS.

DENMARK: CLEAN MACHINE - ISS. - Bigger and better has proved to be true for cleaning company ISS. A country-focused approach with emphasis on quality and training has led to growth and a culture of continuous improvement. By Robert Heller productivity wo

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Last Updated: 31 Aug 2010

Bigger and better has proved to be true for cleaning company ISS. A country-focused approach with emphasis on quality and training has led to growth and a culture of continuous improvement. By Robert Heller productivity worldwide.

The old adage, 'where there's muck, there's brass', had a rider: there were also a lot of mucky companies making the brass. ISS proves the first point, since cleaning services have taken it to £1.4 billion of turnover. Since 1988, sales have soared by 103% and profits by 198%. But ISS disproves the second mucky proposition: its growth has followed from some exemplary uses of up-to-date management concepts. That's rare in cleaning companies. Nor is it common in service business as a whole.

The ISS story also demonstrates that globalism can apply to non-financial services just as effectively as in manufacturing - and that small home markets are no obstacle to bigness abroad. The group, started in 1901, is based in Denmark, where it began as a security company. In 1934 it diversified into cleaning and then started expanding abroad, not only into other Scandinavian markets but right across the Southern Atlantic - to Brazil. That country still houses an ISS business which, weirdly enough, is treated as part of Europe.

That's a little less strange in light of the career of Waldemar Schmidt, the chief executive of ISS Europe. Brazil is where he started his ISS connection. Having advised his conglomerate employer to close a printed-circuit board factory, Schmidt wanted something else to do, and was asked to buy a cleaning company on behalf of ISS. He did so and, 21 years ago, was promptly invited to take charge of the acquisition. After a month's training in Copenhagen, he entered ISS on the ground floor.

That was practically a basement in 1973; a Scandinavian business with fairly small interests, mostly in cleaning, in other European countries. The 'German' company meant just Hamburg, the 'British' merely Birmingham. But the build-up to the present size and strength had got under way in 1962, when Poul Andreassen joined the company from Scandinavian Airline Systems (whose name is obviously reflected in the full ISS title, International Service Systems). Andreassen set about three tasks: professionalising the industry, going international, and diversifying.

The first two planks still hold, but diversification has fallen away. 'We realised in the past two years,' says Schmidt, 'that the building-services market was so big that we had to concentrate.' That doesn't mean seeking to embrace the entire market. Rather, ISS is aiming at major segments, such as hospitals and food manufacturing, where it can win exclusive contracts - and ones of increasing size. Once, the largest ISS contract (for a hospital) was worth £500,000. Now it's 10 times bigger.

Buildings such as hospitals offer so much diversification within their walls - from portering to maintenance as well as cleaning - that ISS has no need to add new legs. Its USP is the management of labour-intensive services, not including security. All its security activities have gone, with one national exception: Austria. Security was fully integrated into the local company, whose managers, anyway, wanted to retain the business, and 'we don't want to break that morale'. Anyway, to do so would cut across the grain of a 'very, very decentralised culture'.

The country managers are kings in their own territories, although the crowned heads reign less easily than in the past. The kings now also belong to a strong transnational culture, in which training and development have been deliberately used to enable the implementation of new management ideas. The 'unit president concept' itself was one of these, introduced into ISS by the American Management Association; the latter has made several significant contributions towards implementing ISS objectives.

The country kings meet with Schmidt twice a year to discuss their plans and deeds. These fit within a four-year strategic plan, updated every six months. He's at pains to stress that this isn't democracy in action: 'At certain times I have to say how it's to be done.' But what's done differs significantly from country to country, and place to place. In Berlin, for example, ISS only handles waste disposal; in Austria it collects hazardous and household waste. To some extent, activities are guided by opportunities.

What's common is the insistence on 'standards of performance' - one of the areas where the AMA has helped. Every year each manager has three key financial goals and three non-financial, the quantitative and the qualitative, picked from their business plans. The Europeans write in their own goals and take them to Ken Pepper, the managing director for international operations, for approval. 'I may increase the quantities,' he says, 'but I agree 75% of the time. It's a positive dialogue.' The exchange stays positive if the achievement is negative: why weren't the goals met? What actions have been taken to remedy the causes? The goal-setting only goes down one level below the managing director in most countries. But everybody works to a budget, right down to supervisor - 'There's no reason why they shouldn't'. In fact, financial reporting is one of the group's particular prides, and a key area in which the presidential hand of Poul Andreassen has made an indelible imprint.

The reporting, like everything else at ISS, has evolved continuously since Andreassen's arrival as a young professional manager who introduced other professionals. The subsequent expansion through acquisition, though, meant that managing directors were simply promoted from within the companies acquired. Until the mid-1970s there was no governing concept to guide how they managed. Since then, however, managers have been trained 'to speak the same management language'.

One-day refresher courses every year ensure that they are still fluent in that tongue. The mid-1980s, however, added to the vocabulary. Service management has long been a Scandinavian tradition, and its concepts are now inculcated through two institutions: a new Quality Institute at headquarters in Copenhagen and (also in Denmark) a university. The academic benefits will be shared with a few key customers attending the university. Some Danes were worried by its 'too ambitious' title: the riposte was that, if McDonald's could have a hamburger university, why not a cleaning one?

As the new Institute demonstrates, ISS is also taking quality very seriously. Total Quality Management has been adopted formally, but only at group level. 'As with most things we do,' explains Schmidt, 'we start initiatives in Scandinavia and then spread them' - if, that is, they work. The role of the Institute is to co-ordinate that spread. The process got under way by training the trainers (with help from PA Consulting): now the trainers have started to train managers in the principles and practice of TQM.

In Europe, Schmidt has led his businesses along a different route. They started by seeking ISO 9000 quality certification, which was seen as important for marketing purposes. By end-1995, all the companies will be certified for all their services, which in several cases will be a service company first in their countries. Schmidt doesn't want to run a TQM activity 'in parallel to running the business', but rather as an integral part of operations, brought into the business plan. Again, a British consultancy (Marketing Improvements) has been enlisted to help.

Training of 110 managers in two three-day segments is designed to help 'build quality management into operational management'. The teaching will be cascaded down through all the individual countries, using their own managers, with the aim of improving performance on key operational parameters - like the winning of key accounts, and the retention of customers once won. The attrition rate used to be 12%. It's already down to 9.5%, and Schmidt believes that 6-7% is feasible with improved understanding of changing customer needs.

He points out that, anyway, current attrition rates equate with an average customer lifetime of 10 years, which shows a very fair degree of loyalty. Why does it get withdrawn? Customer loss analysis in four European countries in 1992 revealed a crucial truth. The real cause wasn't price, but supervision and reliability: the dissatisfied customers had been complaining for a full year without success. When they eventually rebelled, they wouldn't admit the real cause. Instead, they would say: 'We found someone cheaper.' Two encouragements flowed from this analysis. First, the customers who had terminated their contracts indicated that they would give ISS another try, all the same. More important, the market research, which is constantly quoted by ISS executives, led to important strategic conclusions. The results showed, for a start, that cleaning was regarded as a commodity: customers saw no difference between contractors and ISS itself wasn't familiar to enough 'right' prospects. In this very price-sensitive market, however, quality was a powerful factor.

In general, more than half of cleaning customers are either downright 'unhappy' or 'not completely happy' because the service promise hasn't been kept. A final point is that purchase of cleaning services is moving towards national and pan-European contracts, meaning that the financial loss through a single customer's dissatisfaction is getting larger all the time. The entire logic thus pointed towards raising the quality of all ISS services - and being seen by customers to outperform the competition on every criterion that they valued.

In any service business, given the labour-intensity, recruitment is critical to service standards. Here again Denmark has done the pioneering, using lessons learned in part from Disneyworld. The Danes have established a 'Job Centre' in Copenhagen, where its existence has become widely known. Would-be employees come in by appointment and are shown a video which is designed to emphasise the most off-putting aspects of cleaning (such as the very-early-morning starts).

If their interest survives this reverse indoctrination, they fill in an exceptionally detailed and inquisitive questionnaire. That's followed by an interview with the management team. The successful applicants' details are filed on computer, and new recruits must be chosen from among them. Once a month the files are updated: are the names still interested in a job with ISS?

The turnover of people recruited in this way is remarkably low, 20% annually compared with the typical 100%. The latter figure isn't exceptional in a business that employs so many part-timers (their proportion varies across Europe, partly because of varying employment laws). But that typical figure represents a substantial and costly inconvenience: pilot projects are under way in Birmingham and Lisbon to determine whether the job centre concept can work equally well outside Denmark.

Once again, there is no diktat from the centre. 'Our bosses,' remarks Schmidt, 'like to see output, not input.' Decentralisation is taken to extremes, with obvious impact on central establishments. Schmidt's head office consists of just seven people, including secretaries and his financial staff. Even the corporate HQ in Copenhagen only employs 40 people, half of them in finance functions. 'The added value lies in respecting the decentralised structure but realising the synergies.' The whole concept of seeking ISO 9000 certification, for example, was developed and piloted within ISS Europe. It transpired that 90% of the costs involved, often very burdensome, were covered by procedures that were already in place. An even more important concept, that 'if we really focused on the marketplace we can grow much faster', has also been pioneered in the UK.

The companies are no longer geographically based in divisions, with two exceptions: Birmingham (where, because of its historic start, ISS still has a separate business) and London. Quite recently, the British operation had no customers in the capital. It now cleans the Underground, the Royal Parks, the British Petroleum head office, even the Houses of Parliament. Terminal One at Heathrow, however, falls under ISS Airport Services. Other units concentrate respectively on hospitals, food processing and janitorial supplies. Another group services key accounts, while, in an intriguing development, three small businesses have been established to handle the medium-to-small customers. These offshoots have two unusual features: 20% of the equity is owned by the managers, and they will be spared the burden of central overheads until they are strong enough to stand on their own feet. If that doesn't happen, the ventures will cease. As the retreat from security services showed, ISS isn't afraid to change direction.

The self-confidence of management derives in part from an unusual structure of ownership - five Danish institutions, including ISS Employees' Pension Fund, hold the lion's share of the votes - which, as a competitor gleefully points out, has been satisfied with very small margins. On the other hand, the owners have little reason to complain about the 15% compound return on their own capital. Six of their nominees sit on the board alongside three executives, and the investors have been very supportive, supplying capital as and when needed.

No doubt, this partly reflects confidence in Andreassen after his long reign. He still makes his charismatic, highly motivational and innovative presence felt throughout the group, visiting London (for example) five times a year and also going annually to a couple of the countries controlled from London. He sits only on the corporate board, but 'everything that has happened at ISS,' says Schmidt, bears his mark.

That applies, as cited earlier, to all the financial systems, from contracts to the bottom line. The key is simplicity: anybody can master the ISS reporting method in half-a-day. Using the contribution approach, it is management accounting rather than the financial variety, with the unusual feature of booking costs where they arise. Shared overhead costs are at an absolute minimum.

The quick and sure controls are indispensable in a business which five years ago had plainly outgrown its structure. It had to be divisionalised. ISS employs 130,000 people worldwide, and has assumed a heavier management load since the decision to drive for higher quality standards. The percentage of sales spent on quality and training looks small at half of one percentage point: but that equates to 10% of profit - and Schmidt thinks the effort is 'adding much more than 10%' to the bottom line.

As to the vital question of what employees themselves think, the Scandinavians have compiled an employee satisfaction index. Other countries are looking to see how well this initiative has worked: the intention is to have both employee and customer satisfaction measures in place throughout Europe by end-1994. The biggest customers, however, are not passive in this process - cleaning, after all, can be a big influence in satisfying their own clientele.

The British Airports Authority is a prime example of this realisation. At Heathrow's Terminal One the ISS staff wear a special livery which costs £200 per cleaner - at BAA's request. ISS Europe marketing manager Susan Room explains that BAA was 'budgeting for the result rather than the labour'. Image was another paramount consideration - as it is now for ISS itself. Although staff normally wear ISS workclothes, the company isn't widely recognised: the corporate identity is being redesigned.

The glittering prizes available from redesigning all ISS operations are clearly shown by the experience in Belgium. The local subsidiary 'has taken many of the projects developed at European HQ and made them work'. From making losses in 1990, Belgium has become one of the most profitable companies in ISS: on turnover up by a quarter, the company raised its profit before tax from an exiguous 2.8% of sales to 6% in 1993.

Those numbers have considerable significance for the whole of ISS. The low profitability at which competitors point fingers (3% in 1992) rose to 4.5% last year. The target is 5%, combined with continuing organic growth of 15% annually. Belgium, whose budgeted 15% increase for 1994 was already in the bag by the end of February, thanks to major contract gains such as the European Union's HQ, provides encouraging support for the group's new strategy. 'Winning the right customers - and keeping them' looks capable of delivering the targets.

The strategy's reliance on differentiation has general validity for service companies. Like ISS, they all need to understand their markets and create 'a culture of customer focus'. There can't be much argument, either, that market understanding and focus are assisted by restructuring into focused companies. Nor is there any question that the Achilles' heel of service remains disappointing delivery: or that the fashionable practices of TQM and continuous improvement will help to improve performance in this vital respect.

The newer ideas, however, depend on long-established activities such as training. ISS sets great store by its three-year, modular '5-Star' programme. Trainees must pass multiple-choice exams. The whole thrust is to produce more and more uniformity of standards, right across the individual countries: the programme, however, reflects their individual national circumstances, as well as the 'core content'. The more stars that the trainees acquire, the likelier they are to move into junior management.

ISS doesn't, however, rely entirely on managerial promotion from within. Both Pepper (ex-Reckitt and Colman and BET) and Room (ex-International Chambers of Commerce) came in from outside. Rewards are high enough ('well above the norm') to attract outsiders and the first two layers of management can earn bonus payments by achieving their priority targets. Senior managers form a widely spread, but close-knit group, with two 'country management meetings' a year, and considerable interchange: any new initiatives will be led by one country manager and picked up, if successful, by another.

The transformation of ISS in these ways from an acquisitive conglomerate to a focused, increasingly productive business concentrated on building maintenance is part of an unmistakable global trend. Everybody knows that services account for more and more of the modern economy. As MIT professor Paul Klugman has pointed out, 70% of American value added is in services, with only 20% in manufacturing. It follows that a percentage-point gain in service productivity creates three-and-a-half times more wealth than a one-point improvement in the factories.

Of course, you pursue both improvements. The situation is much the same in Europe, and the need for service productivity (which lags markedly behind standards in the US, where ISS has a large operation) is even more acute. Unless service performance does advance markedly, the arithmetic shows that faster economic growth can't be achieved. What ISS is seeking for its own purposes maps out a course of action which, in their individual ways, other service organisations are bound to follow.

Bigger and better is the only way.

Head office: Holte, Denmark. Founded in 1901 as a small Copenhagen

security company it is now the world's leading supplier of cleaning

services and operates in 17 countries worldwide.

Turnover by service area (£m):

1992 1993

Cleaning and maintenance 755 983

Hospital services 69 81

Food hygiene services 23 34

Landscaping /grnds maintenance 14 21

Sales of cleaning prods./machinery 16 20

Linen services 31 34

Canteen/catering services 29 27

Energy/technical services 48 86

Security services 75 63

Other 11 20

Total 1071 1369

Profit before tax 36 61

Shareholders' equity 94 139

Turnover by division:

1992 1993

Scandinavia 44.7% 35.4%

Europe (incl. Brazil) 25.9% 24.0%

North America 26.6% 37.9%

Clorius (energy services) 2.8% 2.7%

No of employees: 115,000 125,900.

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