Will you pay extra for the Living Wage?

Fundamentally most of us believe that the reward for a fair day's work should be a fair day's pay, so why is it taking so long for the Facilities Management industry to embrace the UK Living Wage? People tell me that it's because no one wants to pay extra, but what most don't realise is just how much that decision costs. In this blog I argue that the Living Wage is a lot more commercially viable than is popularly believed.

For those not familiar with it, the Living Wage is quite simply the hourly-rate a person needs to earn before they no longer qualify for state benefits. It's a little more complex than that of course, but that's the synopsis. If you're interested in learning more check out  the Living Wage Foundation (livingwage.org.uk) which promotes a scheme of accreditation for employers who voluntarily agree to pay these rate. The UK Living Wage (LW) is calculated to be about 20% above the National Minimum wage (NMW). In London it's approximately 40% due to the cost of living in the capital.

Though I promised that this blog would be about the commercial aspects of the LW, rather than the moral justifications, it's still worth saying that in 2014, we should all feel a little outraged at the idea of employers earning a profit whilst paying people less than they need to live on and passing on a burden to the tax payer. Some might think that statement evocative, but in an age of Corporate Social Responsibility(CSR), there's a growing expectation on employers to act responsibly towards both their own staff and the communities they are part of (it's why tax evasion gets so much press) and the above demonstrates neither. Ok, moral-rant over, let's get commercial.

I'm going to start building my case with a simple statement: Good, well motivated, loyal employees are more reliable, more productive and less likely to be absent. I'm not going to bother backing most of that up with facts: it's not exactly controversial stuff. But there is one statistic from the Living Wage Foundation that I do want to quote: 80% of LW employers have noticed around a 25% reduction in absenteeism. Let's talk about that for a second shall we?  It is generally agreed that high rates of absenteeism are indicative of poor workforce motivation and loyalty. They're not the only indicator, but they are more quantifiable than others like productivity, dedication and time-keeping and are therefore considered good leading indicators.

The FM industry is full of low-paid service jobs; no pun intended, but you might say they are ten-a-penny, particularly in services like cleaning, catering and porterage. At the low-end of the wage scale, loyalty and motivation are low, churn is high and as a result there is poor consistency in productivity and quality.  How many times, have you found yourself telling someone or being told by someone that quality issues are the result of changes in personnel or difficulty attracting and retaining the right people?  This is the reality of a low-pay workforce: managing them to ensure good standards of quality and productivity isn't at all easy.  It takes a lot of time, it takes a lot of effort and (most importantly to my case) it takes a lot of money.

It's not controversial to say that absenteeism costs money – it's a foundation stone of Health & Safety principles. When staff are absent, there are overtime costs, temp labour, lost productivity, time and effort wasted on ringing around to sort things out, etc. It's also agreed that employee churn costs money too: there are recruitment costs, training cost and supervisory time amongst others. Finally, managing poor performance can really drain resources too: It's not just the money credited back to customers or the time spent dealing with complaints, it's the supervision, the retraining, the formal meetings, the letters from HR, etc. Basically, choosing to pay low wages, is also choosing to incur a lot of additional costs. Now some will argue that; wages are direct costs and the costs I've descibed are indirect and therefore difficult to quantify in any meaningful way. In one sense they're right, but in another they're wrong. They are hard to quantify, but the total cost information can usually be found in the service tender proposal: Its the line item on the breakdown identified as “management costs”. 

In low-wage service contracts, management costs are often one of the largest cost areas (after wages). Depending on whether things like training & recruitment (and sometimes profit) are included in them or listed separately, they could account for a significant proportion of the total contract cost. I've even once or twice seen proposals with combined management costs that almost equal the wages costs! The point here is that management cost are built into the contract delivery cost at the commercial tender stage.

Let's talk about commercial tendering for low-wage contracts. Most tenders are calculated using pre-defined formulae. If we over simplify it: some basic volume data (such as square footage) is entered to give an idea of hours required. This figure is multiplied by a wage rate and other costs are calculated as percentages of that resulting figure and added together to generate a total contract cost. There's a little “commercial” wiggle room of course, to give the sales-person something to play with, but in a nutshell, that's how it works. So here's the issue I have with that: Surely the management costs should be calculated using a sliding scale which significantly decreases as the wage rate increases?  We've just established that if wages are increased 20% absenteeism reduces by 25%. We also accept that recruitment & training costs will decrease. We accept that less time will be required to supervise and manage both performance and customer dissatisfaction. There will be higher quality, less refunds and fewer complaints. Yes, many of these things are difficult to quantify, but let's not mistake difficult to quantify for unquantifiable or non-existent.

In fact, a move to higher wages creates a lot of potential for cost-saving, especially when combined with good people management practices. So surely the correct way of considering LW commercial viability is to (at least partially) fund increased wages, using management cost savings? Should customers pay extra to support the Living Wage? I don't believe customers should accept a pass-through uplift on wages, but I do believe that there are alternative solutions which are not just palatable for customers, but commercially viable or even, commercially advantageous, for suppliers too.

And here's one final point to consider. In the fiercely competitive world of FM Services contracts, real commercial viability comes not from undercutting to win volume, but through retention of business. During a re-tender process motivated,loyal staff and happy customers, are worth their weight in sales-people and corporate hospitality.