p a r t i i

The Forms and Consequences of the Fissured Workplace

d In his book Th e Big Squeeze, New York Times reporter Steven Green- house recounts a cavalcade of woes facing people in their daily work life. Drawing on hundreds of interviews, Green house summarizes the worsening conditions at the workplace faced by millions of workers:

One of the least examined but most important trends taking place in the United States today is the broad decline in the status and treatment of American workers—white- collar and blue- collar workers, middle- class and low- end workers— that began nearly three de cades ago, gradually gathered momentum, and hit with full force soon after the turn of this century. A profound shift has left a broad swath of the American workforce on a lower plane than in de cades past, with health coverage, pension benefi ts, job secu- rity, workloads, stress levels, and often wages growing worse for millions of workers.

Th e book recounts case after case of eroding wages and benefi ts and the often egregious violation of basic labor standards, abrupt termination of long- standing and loyal employees, fl agrant discrimination, and abusive behavior by supervisors.

Scholars and pop u lar writers alike have documented for more than a de- cade the fact that working conditions in the United States— and those in many other industrialized nations— have declined. Even before the onset of the Great Recession in December , a growing part of the U.S. workforce became increasingly vulnerable to a range of economic, health and safety,

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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 t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace

and social risks. Th ese troubling conditions have been examined in consider- able detail in a number of recent studies.

Part I discussed the origins, causes, and dynamics that have led to the fi s- sured workplace. Th e strategy pursued by lead businesses in many industries is to pursue core areas of value creation while shedding activities— and employment— to other, subsidiary, business entities. Lead businesses balance the pursuit of core competencies against the eff ort to shed activities to other organizations via a variety of mechanisms that provide a means of assuring that subordinate organizations adhere to quality, technical, time, and brand standards.

Part II looks at subcontracting, franchising, and supply chain structures: three or gan i za tion al mechanisms used to ensure this balance that result in fi s- sured workplaces and their connection to worsening conditions as described by Green house and others. Table II. presents examples of these three forms that lead to fi ssured workplaces and examples of each from a variety of indus- tries, ranging from some of the oldest (mining) to the newest (cell phones). Although the occupations that fi ssuring aff ects are concentrated at the low- wage end of the labor market ( janitors, warehousing, home health aides, fast food), the practice increasingly includes mid- level employees (machine oper- ators, cell tower workers, customer ser vice providers) and even highly skilled workers ( journalists and lawyers).

In subcontracting, the lead fi rm contracts out activities to separate parties. Once shed, these activities are typically further broken apart into subcon- tracting to other parties, resulting in cascading levels of employment. In con- trast, under franchising, the lead business keeps overall control of manage- ment of the brand but creates an or gan i za tion al structure that allows separate business entities— franchisees—to carry out the activities. Finally, in supply chain structures, the lead company plays the key role of coordinator of com- plicated networks of subsidiary organizations that together provide goods or ser vices.

Each lead business is orbited by successive tiers of business enterprises (described in each row of Table II.). Th e nature of the relationship between each tier is specifi ed in the types of contracts or agreements between the respective businesses. For example, the cellular tower industry begins with major cell carriers like AT&T and Verizon who contract with “turfers,” large companies who act as lead contractors. Turfers, in turn, contract the actual

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace 

work to a next tier, and often several tiers, with small subcontractors provid- ing maintenance ser vices on specifi c towers. Each subcontracting tier oper- ates for the one above it through bidding systems and highly detailed con- tracts specifying terms of work.

In a franchised industry like fast foods, the tiers are linked through de- tailed franchise agreements that specify business operations central to the brand and expectations by the parties on maintaining it. Supply chain struc- tures like retailing rely on standards specifying how each tier will coordinate with others, usually through the adoption of standards regarding both prod- uct characteristics and logistics.

Th e agreements underlying subcontracting, franchising, and supply chains— and the market relationships that arise around them— diff er in form but have similar impacts on the pressures facing each tier’s bottom line. Since labor is usually a signifi cant component of cost, the tiered structure and the glue that holds it together have consequences for employment con- ditions. When shifting employment outward to other businesses in more competitive settings operating in low- wage labor markets, the incentive for skirting workplace standards can be signifi cant. Th e rise of labor standards violations— from failure to pay minimum wages or overtime to requiring employees to work off the clock— refl ect this problem.

As discussed in Chapter , shifting activities outside of lead companies to successive tiers also means a change in the wage- setting pro cess. When jani- tors were direct employees of manufacturers, hotels, or fi nancial institutions, the higher wages earned by others inside company walls pulled up the wage levels of janitors. Once janitorial activities shift to other businesses in orbit- ing tiers, those job referents become irrelevant to wage setting. Janitorial wages move closer to those prevailing in the more narrow market of other contractors of cleaning ser vices or of franchised janitorial ser vice providers. Th e downward pressure on wages and associated benefi ts intensifi es with each cascading tier of fi ssured employment depicted in Table II..

Finally, the tiered or ga ni za tion of fi ssured workplaces can create coordina- tion failures, particularly where it is superimposed on complicated production pro cesses. When the steps of production are broken into activities overseen by diff erent business organizations, the actions of workers of one employer are more likely to create risks for the workforce of another. Th is has been a long- standing problem in construction. As more and more places of work are

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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Table II. Th ree or gan i za tion al forms resulting in fi ssured workplaces (selected examples in parentheses)

Industry Lead business st tier nd tier rd tier th tier

Subcontractor model Coal mining Mine controlling

business (Massey Energy)

Mine operators (Per for mance Coal Co.)

Contract operators (Black Diamond Construction Inc.)

Cellular phones Cell phone carriers (AT&T)

Turfi ng managers (Nsoro)

Lead subcontractor (WesTower)

Second- level subcontractor (ALT Inc.)

Th ird- level subcontractor

Logistics operations

Retailer or manufacturer (Walmart; Hershey)

Logistics provider (Schneider Logistics)

Temporary help company (PWV)

Second- level temp. agency (Rogers-Premier)

Cable ser vices Media provider (Time Warner)

Regional cable turfer (Cascom)

Installers as in de pen dent contractors

Franchise model Fast food Franchisor

(KFC; Pizza Hut) Franchisee (Morgan’s Foods Inc.)

Labor contractor

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Copyright © 2014. Harvard University Press. All rights reserved.

Janitorial and building ser vices

Lead company in variety of sectors

Franchisor (Coverall)

Regional franchisee Local franchisee Labor contractor

Hotels (hybrid model)

Hotel/motel brands (Marriott)

Franchisee/own er (Host Hotels and Resorts)

Brand or in de pen dent operating company (Crestline Hotels and Resorts)

Labor staffi ng company (Hospitality Staffi ng Solutions)

Subcontracted landscaping or janitorial ser vice

Supply chain model Apparel Manufacturer

or retailer (Forever )

Contract manufacturer/ subcontractor (CMR Clothing Inc.)

Second- tier contractor (CUI Sewing Inc.)

Th ird- tier contractor

Food industry Food pro cessor Growers Farm labor contractors Farm workers as in de pen dent contractors (prior to )

Computer industry

Computer brand (Apple)

Contract manufacturer (Foxcomm)

Subcontractors Sub- subcontractor

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avid. T he F

issured W orkplace : W

hy W ork B

ecam e S

o B ad for S

o M any and W

hat C an B

e D one to Im

prove It, H arvard

U niversity P

ress, 2014. P roQ

uest E book C

entral, http://ebookcentral.proquest.com /lib/sfsu/detail.action?docID

= 3301409.

C reated from

sfsu on 2024-09-23 23:28:14.

Copyright © 2014. Harvard University Press. All rights reserved.

 t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace

composed of multiple employers operating under one roof, new risks arise, and with them health and safety problems, including elevated fatality rates (as we shall see in the case of cell towers).

Part II explores the three major or gan i za tion al forms that create fi ssured workplaces and examines their impacts on workers. We start in Chapter  with the use of subcontracting. Its use, once a hallmark of a small number of industries, has spread widely. When paired with in de pen dent contracting, its consequences can be particularly pernicious.

Chapter  looks at a more subtle form of fi ssuring— franchising. Born out of core strategies focusing on building brands, franchising represents a distinc- tive form of fi ssuring that allows the franchisor to focus on core competency while ensuring that the businesses that provide the products and ser vices keep up with standards. Franchising has now spread far beyond the fast- food in- dustry commonly associated with it.

Chapter  looks at supply chains in the context of fi ssuring. Whereas com- panies like Ford and IBM once built internal empires of suppliers through expansion and vertical integration, modern supply chains achieve even more complicated coordination of hundreds and often thousands of suppliers. But they do so by carefully steering that network from the center, establishing detailed, demanding, and high- stakes requirements and thereby satisfying the core requirements of the lead businesses at their center. e

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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6

Fissuring and Franchising

Lead companies retain activities that are central to their competitive strategy while shedding activities where doing so reduces costs, increases fl exibility, and shifts liabilities. But this decision is guided by the constant balancing of the potential impact of shedding an activity that might in the long- term un- dermine the core competitive strategy. Franchising is an or gan i za tion al form used to connect the lead company with subsidiary organizations that pro- vides the required glue to keep the pieces of the fi ssured strategy together. Franchising is an old form of business or ga ni za tion. It historically solved the unique problems faced by manufacturers in fi nding eff ective ways to distrib- ute products. In more recent times, it has proved a powerful means to tap the capital and entrepreneurial drive of new business own ers who seek opportu- nities to expand an established product or ser vice. But, less recognized, fran- chising also provides a way to glue the two pieces of the fi ssured strategy together.

Franchising potentially provides a lead business with a method of preserv- ing the benefi ts of a strong brand while controlling labor costs (particularly important for ser vice businesses, where labor represents a signifi cant share of costs). It has become a pervasive form of business or ga ni za tion in a wide variety of industries, spanning fast food, hotels, car rental, home health care, and janitorial ser vices. Since it also allows lead companies to focus on enhancing the gains of branding while using fi ssured employment to lower labor costs, exploring its use and consequences helps illuminate the broader eff ects of fi ssuring. We explore examples of franchising as an or gan i za tion al form that leads to fi ssured workplaces in three diff erent settings: fast food, janitorial ser vices, and the hotel/motel industries.

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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f i s su r ing a nd fr a nchis ing 

First Principles for Fissured Franchising

Build the Brand

In many of the industries where fi ssured workplaces have become common, major companies have sought to enhance the value of their products and ser- vices to increase revenue streams. Brand- focused competencies enable busi- nesses to create a distinctive bond between customers and the products and ser vices they consume. Successful branding allows a company to diff erentiate its products in the minds of consumers, who, over time, become willing to pay a higher premium for them. Branding acts on the revenue side of profi tability: the more successful the brand, the greater the ability of the business to charge a premium and expand and retain its customer base. Once established, the benefi ts arising from branding can be expanded by broadening product off er- ings and managing the expectations of the brand’s devoted customer base.

Branding is particularly important in industries where perceptions of the quality, consistency, and variety of the product are critical to competitive performance— that is, in areas where the product or ser vice is not viewed as a commodity. By establishing a brand, a company can diff erentiate its prod- uct and create a large and loyal customer base. Return business for a company and the willingness of customers to pay a higher price are based on a variety of product or ser vice attributes that companies can control through production, by infl uencing customer perceptions, or both. A branded competency involves major investment in the creation of the brand identity on the production/ delivery side and in the realm of marketing. It also requires huge investments in protection of brand image over the long term given that investment. Brand core competencies also require an ongoing ability to manage and expand the brand, in response to competitive brands, threats from new entrants, or the inevitable product fatigue that a consumer group may develop over time.

In the fast- food industry, return business is based partly on the customer’s belief that the experience will be the same in any outlet of the company vis- ited. Th e investment in brand name and protection of its image is therefore a central part of the competitive strategy of national chains and an integral part of the way they make operational decisions. As a result, franchise agree- ments begin with statements about the importance of adhering to the chain’s

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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 t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace

basic standards. For example, the franchise agreement with Taco Bell states, “You must operate your facilities according to methods, standards, and pro- cedures (the ‘System’) that Taco Bell provides in minute detail.” Not surpris- ingly, the methods, procedures, and guidelines regarding the creation of a good or the provision of a ser vice are the “crown jewels” of a branded busi- ness. Th e books of standards associated with fast- food or hotel/motel brands are highly confi dential documents that are provided only to franchisees who have been approved. Monitoring mechanisms, contract terms, and high- powered incentives (including, in the worst case, loss of the franchise) are associated with adherence to those standards.

One of the key operational decisions made by companies is how to ex- pand. In ser vice industries like eating and drinking establishments, hotels and motels, and rental cars, companies expand by adding outlets. Th is can be accomplished in a franchised structure in one of two ways. Th e fi rst way is by opening new outlets that are both owned and operated by the franchisor it- self. Expansion through the creation of company- owned outlets is an attrac- tive option because the branded company (or “franchisor”) retains control over operational decisions and can therefore be better assured that brand standards are maintained. However, expansion through company own ership entails using the franchisor’s capital directly and introduces managerial chal- lenges about ensuring effi cient operation of the outlet.

Th e second way a company can expand is by off ering outside investors the opportunity to franchise. Strong brand identity benefi ts franchisees: by pur- chasing or operating a franchise of an established brand, a franchisee gains a proven business strategy with a known and trusted name. At the same time, franchising allows for expansion by tapping into the capital of franchisees, potentially expanding the opportunities for growth of the brand. Franchisors receive revenue streams both in the form of upfront fees by franchisees to purchase the franchise and as ongoing payments based on sales. Under a typical franchise agreement, the franchisee purchases the right to own and operate an establishment using the franchisor’s brand name and products for a set period of time. In return, the franchisee pays an upfront fee and agrees to provide a portion of revenues (typically around %, although it may go as high as % in the case of McDonald’s) to the franchisor.

Franchising is also an attractive own ership form for geo graph i cally dis- persed, labor- intensive, and service- based industries. In such an industry, an enterprise’s profi tability is closely tied to the productivity and ser vice delivery

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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of its workforce. Assuring workforce productivity, in turn, requires eff ective management, including careful monitoring of the workplace. A large com- pany with geo graph i cally dispersed outlets can therefore use franchising— rather than relying on company- owned and – managed outlets— to better align the incentives of the franchisee, whose earnings are linked to the outlet’s profi tability. For these reasons, restaurants represent the most highly fran- chised industry in the United States.

Gaining Access to Capital for Second- Tier Firms

Franchising provides a means for the branded company to expand, drawing in large part on the capital provided by individual franchisees. One reason franchising has grown and expanded in scope is the expansion of capital sources for franchisees.

In the developed franchise model found in fast food, part of that start- up capital comes from the franchisor itself. Franchisors provide capital not out of altruism but as an additional source of revenue: by loaning money to fran- chisees at a higher interest rate than they can access capital for themselves, they earn a nice spread. In many cases, this represents a legitimate way for the franchisor to arbitrage risk itself, benefi ting both parties. However, in some cases (such as with janitorial franchising, as we shall see) it represents a perni- cious way for franchisors to take advantage of unsophisticated franchisees.

In the hotel/motel industry, with its far higher requirements for capitaliza- tion, franchisees draw on more sophisticated sources of capital, including, increasingly in recent years, private equity providers like Nobel Investment Group and Blackstone. A second source of capital is real estate investment trusts (REITs), an investment vehicle expressly developed by Congress for industries like hospitality that allows multiple investors to pool their capital and receive tax benefi ts from real estate investment.

Th e other capital market option for franchised industries with lower up- front capitalization requirements such as janitorial ser vices and home health assistance (and, in general, for lower tiers of many fi ssured structures) is rela- tively high- interest sources of fi nancing like personal and business credit cards. Small businesses are particularly reliant on credit cards as a source of capital. In  almost % used some form of credit. While % of small fi rms used six traditional types of loans, such as credit lines, mortgage loans, and others, about % used nontraditional sources such as own ers’ loans and

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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