Cleaning contracts: Low margin, high volume business

Personally, it is my 20th year in the cleaning business and I always feel proud of be part of a community that works towards keeping the environment clean. Many of us started the business when we actually didn’t know much about it. We all took chances. Some of us probably had some hands-on experience in hotels or hospitality segment which may have been good enough to make a start with, but not adequate enough to manage a business. In fact, the business we are in, not only demands that we know all about cleaning, but also face the challenges of management capability expected of its owner. In this light, our industry portrays a very sorry picture, as there are very few business school talents unlike in the FMCG, finance, consultancy and retail sectors. Our industry has no mention in the placement list of reputed business management schools. Yet, this industry challenges our management skills!

In the cleaning business there are no entry or exit barriers. This is one of the reasons for mushrooming of start-up cleaning companies. The question is whether we accept this phenomenon or resist it? In reality, these small start-up companies have very high mortality rate. Why do they die? Some of them have good technical knowledge and are hard-working, but are not able to continue because they lack business.

In the cleaning business there are no entry or exit barriers. This is one of the reasons for mushrooming of start-up cleaning companies. Some of them have good technical knowledge and are hard-working, but are not able to continue because they lack business.

Presently, the market does not give more than 10 to 12% margin (bigger volumes may come at lesser ones). The problem is compounded when the client delays payment. In such a situation, the ‘budding entrepreneur’ continues paying salary to its staff even into the fourth month cycle before his client pays up. Here the cost rises manifold and wastage of money & energy lead to negative returns. In fact, I have failed to locate any cleaning company which has started in the last three years and has become prominent in any market of India.

It is a low margin and high volume business.

Most of the clients of the start-up companies do not help build the business in the long run. A payment defaulter opens doors to a new player as he wants to avoid stoppage of work. Lured by the offer, the new cleaning company does its best to plough back resources of machines & materials and later gets trapped by the same client when payments don’t show up. About 80% of the cost of billing is the cost of manpower; the working capital gets eroded with each passing month.

The effect on the contracting company starts with the reduction of manpower and then on the quality of delivery. Consequently, there will be an immediate pressure on margin reduction.

Making a judgment is thus, extremely important. The business owner should have the acumen to understand the client’s business and its capability to sustain in the long run. The appraisal of the client business needs to be done every six months.

It is more critical when we have the lowest legal protection in our contract documents. Most of the small players do not have the legal depth to frame a contract and often it is just an e-mail confirmation which works as a contract. Even the most detailed contract papers are more in favour of the client than the contractor. Cleaning contracts are generally very fragile and are broken as per the wish of the client.

There is the challenge of HR management too. In a start-up company initially the owner himself plays supervisor at the site first. Slowly, manpower is added and fresh challenges begin. The most dependable person becomes second-man to the boss. In the worst situation it could be his brother, neighbour or even his gym buddy. At that point of time, it is the loyalty that

counts.

Soon the shortcomings show up as the person may or may not know the technical part. The owner being new to the business takes time to recognise the faults. By the time he gets busy with more clients and day-to-day fire fighting, the problem gets deep rooted. Being loyal, he remains beyond criticism and becomes a power centre within the organisation. At times he desires for a solo run like his boss. Such HR issues make the organisation unprofessional and shy of skill building and attracting professional talent in future.

Lastly, the financial and compliance related issues. It is very important that one understands the concept of cost spread-over. The costing of staff uniform and semi and fully durable tools need to be understood in this light. Often new business owners become cash dry at the moment of replenishment of the same. The budgeted expenditure needs to be carefully met to avoid quality issue and client satisfaction. In terms of compliance, one needs to understand the whole area of labour laws and ESIC, PF, PT, etc.

There are consultants in the market to help but getting a dependable one is difficult, as laws are very complex and differ from state to state. There are various case laws criss-crossing each other and there are Government inspectors in the market who only catch the small fish. The entrepreneur, in spite of his best intentions, gets in to the vicious cycle of penalty and legal cases. At times, the total payout becomes so big that he becomes a defaulter in his day-to-day payment and loses total control over his business. It seems only big players can sustain in the present scenario.

The question is how does the entrepreneur sustain in this situation? The answer is quick updating and ability to acquire knowledge, both technical and managerial.