230-Previews of Coming Attractions in Public Services

A generation ago, public servants earned less than equivalent employees in the private sector. This is no longer the case. Many reports today suggest that public servants earn 25% or more greater compensation than equivalent private sector employees. While a percentage of the workforce employed in private industry union shops has steadily declined for more than thirty years, unionization in the public sector has grown rapidly. This is important because of the inflexibility of many unions in changing work rules and compensation when confronted with economic realities such as tightening budgets.

What might you expect to happen in such an environment? Growth of private sector companies offering the same services, or better, for less money. These private companies operate under the price umbrellas of the public sector. That is certainly happening today, even in the most unlikely of places. A little company in Maryland has grown into the country’s fifth largest library system, measured by number of branches. This small company, Library Systems and Services, Inc., runs fourteen library service systems operating 63 branches. It has $35 million in annual revenue and 800 employees. It ranks behind Los Angeles County, New York City, Chicago and the city of Los Angeles in the size of its branch system.

The company is finding it relatively easy to succeed by cutting overhead and replacing unionized employees with non-union employees willing to do the jobs for less. In a recent $4 million contract, the company pledged to save $1 million a year using its cost reduction techniques. (See “Audio Tip 187: The Components of Productivity” on StrategyStreet.com.)

Nor does the company need to reduce hours and services in order to succeed. The company has found that the operating policies of public libraries often serve to protect job security and ensure high rates of pay. (See “Audio Tip 182: Productivity as a Measure of Physical Costs” on StrategyStreet.com.) Of course, not all people are happy with the success of this company. In particular, the company’s most recent contract came in for severe criticism from the Service Employees’ International Union. That union has 87 members in libraries recently transferred to Library Systems and Services.

As the cost of public employee pay and pensions becomes less bearable in the future, we can expect to see a good deal more of companies like Library Systems and Services. These private companies should also be good investments. Their first need is not to generate greater revenues, though I am sure they will try that. Instead, they need only reduce costs. That should be relatively easy, due to the price umbrella held up by current public sector management of citizen services.

Posted 11/4/10

Update:

Library Systems and Services continues its profitable, if unspectacular, growth. In 2022, Library Systems and Services served over 20 library systems, up from 14 in 2010. It services 83 separate libraries, up from 63 in 2010. Its market penetration is very low, however. There are 9000 library systems in the US. Argosy Private Equity bought the firm in 2015 and helped it expand and upgrade its services. Argosy sold the business in 2021.

The US is steadily decreasing level of its unionization. In 2021,10% of US employees were unionized. That percentage has fallen steadily since 1983 when 20% of the workforce belonged to a union. There is a wide separation between public and private unionization. Almost 34% of the public-sector employees are unionized. This compares with only a 6% rate of unionization in the private sector.

As demonstrated by the example of Library Systems and Services, private companies face significant hurdles in penetrating the public-sector. Local legislators set policies and negotiate wages with public sector unions. Because of the voting power of the unions, local legislators tend to be favorable towards union demands and also protect union jobs. There is relatively little incentive to retain a private company who would reduce costs and increase economies of scale.  See HERE for more on economies of scale.

10/22

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