A Contract Lost Amid Outsourcing Battle

Here’s a case study that should be perfect for the curriculum at UCLA’s Anderson School of Management:

What should an entrepreneur do when one of his most important contracts -- let’s say it’s an 8-year-old deal to provide janitorial services at a major state university -- gets summarily terminated because of pressure on the administration from a union local and a passel of politicians?

Should he point out that transferring the work to the university’s in-house staff will cost taxpayers $80,000 to $120,000 a year more, while providing fewer hours of weekend service? Or that the change means at least some of the 18 workers he employs at the site may lose their jobs on Jan. 1? Or that the university’s move came after a student group supporting the union charged that the school “promotes slavery,” based on assertions about pay, benefits and working conditions that school administrators investigated and found to be false?

Or should he simply note that this is not the way to show appreciation for a level of service with which the school says it has been “absolutely delighted”?

The entrepreneur in this case is Derek Smith, the founder of Pasadena-based Diamond Contract Services, which has performed custodial work at the Anderson School since its new complex opened on the UCLA campus in 1995. Although the current $621,000 agreement still has one more option year to run, UCLA terminated it by letter on Oct. 13, giving Smith no explanation.

“When you’ve had an account for eight years and you think you’ve had a stellar record, it’s upsetting,” Smith told me. “This is going to be a significant blow.”

The cancellation infuriated several members of the Anderson School’s board of visitors, who heard about it at an executive committee meeting late last month.

To at least some of them, the university’s action seems, at best, shabby treatment of a successful entrepreneur who has delivered good service at a reasonable price, while also providing jobs for people who might have been otherwise unemployed. At worst, it strikes some as a move, undertaken largely to appease a politically powerful union, that will saddle UCLA with unnecessary costs at a time when no institution in the state has any money to spare.

“I’m still searching for the other side of the story, one that I can believe in,” says Kip Hagopian, an executive committee member and a Smith supporter who serves as managing partner of Apple Oaks Partners, a private investment company.

The university’s point of view, as articulated by UCLA Chancellor Albert Carnesale, is that outsourcing is bad in principle, except where the jobs involved are highly specialized or temporary and thus wouldn’t warrant hiring full-time or long-term employees.

Carnesale -- who wasn’t chancellor when the Diamond contract was initially signed but was in the post when the accord was renewed in 1999 -- believes it’s only fair that jobs customarily performed by in-house employees, such as maintenance work, remain in-house.

“He told me he had a hard time rationalizing having in-house custodians doing some buildings but not others,” Smith recalls.

It should escape no one’s notice that the outsourcing of work by public institutions is poised to become as polarizing an issue in California as the recall. Gov.-elect Arnold Schwarzenegger, after all, ran for office by pledging to lasso costly public employee union contracts.

The unions, among others, believe he may try to do so by shifting a lot of their work to private nonunion contractors. This will pose exactly the sort of trade-off UCLA has wrestled with: You can reduce public spending or you can raise the wages and benefits of workers -- but you can’t do both.

In the Diamond matter, it isn’t entirely clear which workers stand to prosper. A university spokesman says the school will open up 18 new maintenance positions, and the current Diamond employees are welcome to apply. But there’s no firm indication of when those positions will become available or if the Diamond workers will have a lock on the jobs, which means that upholding high public employment standards may not do them any good. (A UCLA union official says that in previous instances where outsourced jobs have been brought in-house, all of the displaced employees who applied got hired.)

Smith’s supporters say the university’s conduct is particularly irksome because he earned his degree at the Anderson School (MBA, ‘94), where he studied in the entrepreneurial program. In fact, he wrote the business plan for Diamond while still a student.

Smith built the company into a $6-million to $7-million enterprise with 380 employees and a clientele that includes several public and private entities. UCLA, which also employs Diamond to perform janitorial work at its athletic department and Pauley Pavilion, has been one of the company’s top accounts, although Smith says Carnesale’s remarks leave him fearful that his other UCLA pacts soon may be canceled too.

Diamond eventually became the largest provider on campus of outsourced janitorial services. This landed it on the hit list of Local 3299 of the American Federation of State, County and Municipal Employees, which represents UCLA janitors and other service workers. For years the local has campaigned to bring subcontracted jobs back in-house, where workers would enjoy the gains that AFSCME has won at the bargaining table.

“There shouldn’t be two classes of workers at UCLA,” says Brian Rudiger, an organizer for Local 3299.

AFSCME has accused Diamond of harassing pro-union workers. On Tuesday, it filed a federal unfair labor practices complaint against the company, saying that at a recent employee meeting Smith had threatened to fire workers engaged in union activity. Smith vehemently denies the accusation.

The union also suggested that Smith’s prominence as an Anderson School alumnus and generous financial contributor to the school presents a “conflict of interest,” although it’s unclear why a UCLA degree and vigorous support of the school should disqualify anyone from doing business on campus. In any case, Smith’s support hardly protected him from losing the Anderson contract.

To press its case with Chancellor Carnesale, AFSCME enlisted a posse of Democratic state legislators, all of whom receive significant campaign donations from public employee unions. The strategy worked.

“Chancellor Carnesale does not ordinarily get involved in maintenance contracts involving 18 people,” says Lawrence Lokman, an assistant vice chancellor who is Carnesale’s spokesman. “This issue only came to his attention due to a lot of activity in Sacramento regarding outsourced contracts.”

In an Oct. 20 e-mail to Anderson School Dean Bruce Willison, Carnesale listed 14 Democratic state legislators “who wrote or called me to ‘encourage’ UCLA to bring subcontracted activities in-house.” Implicitly, he invited Willison to pass the names on to Smith. (As to the question of whether Carnesale’s punctuation suggested he was using the word “encourage” as a euphemism, the way one might refer to an extortion victim as having been “encouraged,” his spokesman replies that he meant simply what he wrote.)

It’s unclear how many of these correspondents complained specifically about the Diamond contract. Several lawmakers I talked with say their correspondence with Carnesale attacked outsourcing only as an abstract concept. But at least some were fully aware that AFSCME had Diamond in its cross hairs.

Diamond, meanwhile, also became the target of student groups. They circulated fliers and statements full of tendentious adjectives, describing working conditions as “horrible” and repeating the charge about harassing pro-union employees.

These accusations were rejected by Stacey Dunn, an Anderson School administrator. She said there was no evidence of harassment and noted in a memo to a student group in June that Diamond’s pay scale of $7.25 to $15.50 an hour was above minimum wage, albeit less than UCLA scale. The company also provides health insurance that is fully paid (outside a co-payment) for employees and their families. It also offers paid days off for all official UCLA holidays and paid vacation after a year’s service.

The chancellor’s office, Lokman says, never received any evidence to contradict Dunn’s findings.

He adds that Carnesale’s principles led UCLA to start moving a lot of outsourced jobs in-house a couple of years ago; indeed, the termination of a couple of other janitorial contracts is what left Diamond as the largest remaining maintenance subcontractor on campus.

“Issues of fairness and equity must be applied,” Lokman says, arguing that it would not be “responsible” to outsource a service merely to take advantage of low wages prevailing during “tough economic times.”

But fairness cuts both ways. Smith feels his company’s performance warranted better consideration.

“It’s not like we displaced existing union workers,” he says. “We’ve had this contract since day one. We’ve had it for eight years, and now the university tells me they’ve got a philosophical problem with it.”

Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.