Servicemaster Limited Partnership

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Servicemaster Limited Partnership

One ServiceMaster Way
Downers Grove, Illinois 60515
U.S.A.
(708) 964-1300
Fax: (708) 719-6878

Public Company
Incorporated: 1947
Employees: 27,800
Sales: $3 billion
Stock Exchanges: New York

ServiceMaster is a multifaceted company that provides a variety of services to residential, commercial, and industrial clients. The company franchises businesses that handle cleaning, pest control, lawn care, and other functions, and also provides management services to health care facilities, schools, and factories. In these activities, ServiceMaster employees seek to fulfill the religious goal set by its founder, and enshrined as the company’s first objective: “To honor God in all we do.” For many years the company’s primary business was the cleaning of hospitals, but as growth in that field slowed in the 1980s, ServiceMaster diversified into other fields that were in some way related to its original areas of expertise.

ServiceMaster was founded by Marion Wade, who was born in 1898 and had worked as a minor-league baseball player, a life insurance salesman, and a door-to-door peddler of pots and pans before getting into the business of cleaning and moth-proofing carpets in 1937. In 1942, Wade sold his first franchise license for his residential and commercial on-site carpet cleaning business.

Two years later, Wade underwent an ordeal that would become a turning point in his personal life and in his business. After he was badly burned in an explosion of cleaning chemicals, Wade nearly lost his sight. While recovering from his accident, Wade experienced a religious conversion. “I closed my eyes and I prayed,” he wrote in The Lord Is My Counsel, his autobiography. “I told the Lord ... I would turn everything over to Him. I said: ‘I don’t expect any miracles. I don’t intend to sit back and expect You to run everything, but I want You to tell me how to run things and send my way the men I will need to do the job.’ ”

Those men, it soon transpired, came from Wheaton College, a Bible college outside Chicago. Chief among them was Kenneth Hansen, a Wheaton graduate who was the acting rector of a small congregation in Chicago. Together, Wade and Hansen incorporated the company that would become ServiceMaster in 1947. In 1954, Hansen recruited a second Wheaton graduate, Kenneth T. Wessner, who had previously worked as an advertising salesman. In 1958, the three named their company ServiceMaster. The name they chose “struck us as perfect in every area. Masters of service, serving the Master,” Wade explained in his autobiography. At that time, ServiceMaster franchised residential and commercial cleaning businesses. The following year, the company sold its first franchise license in Great Britain.

The business in which ServiceMaster would become best known, and which it would eventually come to dominate, was an outgrowth of the company’s commercial cleaning operations. ServiceMaster got its start in the hospital housekeeping business when Wade gave a speech in the Chicago area. After the speech, he was approached by a nun, who suggested that Wade’s company should offer its services to health care facilities. Hansen and Wessner were enthusiastic about the idea, and after some research they learned that there was a company in New Zealand that had a large hospital cleaning business in Britain, Australia, and New Zealand. ServiceMaster formed a joint venture with Crothall, the firm from down under, to gain expertise in the field, and help ServiceMaster break into the American market. Eventually, however, the joint venture fell apart. Crothall took away a share in the American company, and ServiceMaster took away enough information about hospital cleaning to strike out on its own.

The company got its first contract to clean hospitals in 1962, when the Lutheran General Hospital in Park Ridge, Illinois, signed on. With this move, ServiceMaster became a pioneer in the industry of contracting to clean institutions. In that same year, ServiceMaster also sold stock to the public for the first time.

In 1970, ServiceMaster sold its first nonhospital cleaning franchise in Japan. Eventually, ServiceMaster would franchise operations in 21 countries around the world.

By 1971, ServiceMaster had contracts with more than half the hospitals that looked to outsiders for their cleaning, and the company had notched record profits of $1.2 million. Its arena for growth looked unlimited, since nine-tenths of all U.S. hospitals still handled cleaning themselves, and indeed, throughout the decade of the 1970s, ServiceMaster would average an increase in earnings of more than 25 percent a year.

ServiceMaster’s founder Marion Wade died in 1973, and his two associates, Kenneth Hansen and Kenneth Wessner, moved up to chairman and president/chief executive officer, respectively. By the following year, the company had sold over 1,000 franchise licenses in its consumer cleaning division, and by 1975, ServiceMaster’s health care division had signed contracts with 466 hospitals to clean their premises. The company added another 42 medical clients in the first six months of 1976.

By 1979, earnings had reached $11 million, and ServiceMaster had developed a method of doing business that was sensitive to the special needs of hospitals, and also worked to its own advantage. The company provided cleaning equipment and supplies, as well as management and supervision of a hospital’s own workers. The ServiceMaster system meant that hospitals got more efficient labor from their employees, and also did not have to replace their own worn out or outdated janitorial equipment. ServiceMaster ensured that their facilities stayed spotless, thereby bolstering public confidence in their care, and preventing infections caused by improper cleaning.

In 1980, ServiceMaster began the process of planning for the future by initiating the formation of a long-range growth plan, called ServiceMaster Industries 20, abbreviated and pronounced “SMIXX.” The company set up more than 50 committees of three to seven employees each, to set goals for the next two decades. As one part of this process, the company vowed to reach $2 billion in revenues by 1990, from just $400 million in 1980.

Also in that year, ServiceMaster branched out from its franchising of commercial and residential cleaning services and its health care management activities, to add management services to educational institutions such as universities and school districts to its roster. Within three years the company had 90 academic customers signed up. In 1981, ServiceMaster also began offering its services to industrial customers with over 1,000 employees and factories larger than one million square feet. Its first customers in this division were Appleton Electric in Chicago and Motorola, in Franklin Park, Illinois. Both of these moves helped to broaden the company’s potential customer base, and insulate it somewhat from factors that might effect the health care industry. By 1987, these two new areas were providing nearly a third of ServiceMaster’s revenues, but a much smaller percentage of its profits because high start-up costs, for things such as training and equipment, ate up excess revenue.

By 1983, ServiceMaster’s health care management offerings included laundry and linen services; physical plant operations and maintenance; clinical equipment maintenance; materials maintenance; and a fledgling food services sector, in addition to its traditional housekeeping services. Of the six divisions, housekeeping, laundry, and plant operations provided the bulk of the company’s revenues. Most of the company’s clients contracted for one or two of the services offered, and initial contracts were set for two years, to make the company’s initial investment in a project worthwhile.

In May 1983, ServiceMaster signed its first contract to supervise home health care, in which hospital patients were discharged before their care was entirely complete as a costreducing measure. Also in that month, the company signed up a large hospital chain, Voluntary Hospitals of America, for its standard management and housekeeping services, adding 135 new locations to its tally. Fees from contracted services, primarily to hospitals, made up about 97 percent of the company’s revenues, with the remainder being derived from franchisees, who paid the company a monthly fee and purchased equipment and supplies from ServiceMaster.

ServiceMaster’s leadership underwent a shift in 1983, as chief executive officer Kenneth Wessner moved up to chairman, and former Wheaton College administrator William Pollard took over the helm. Within several years of Pollard’s move to the top spot, ServiceMaster found that its core business of hospital cleaning had started to suffer, as strict controls on health care costs, some federally mandated, were implemented. As overall tighter hospital budgets cut into profits, ServiceMaster’s growth in earnings rate slowed from its accustomed 20 percent to around 5 percent. In an effort to rejuvenate itself, and return to its previous high rate of growth, ServiceMaster looked to expand the scope of its operations through acquisitions. Although the company had traditionally hewed to extremely conservative financial policies, taking on no debt whatsoever, its managers now began to consider the use of borrowed capital to finance the purchase of other companies.

In April 1986, the company moved to acquire a one-third interest in American Physicians Service Group, Inc., which marketed office machines and financial services to doctors and dentists. ServiceMaster agreed to advertise and sell American’s products to medical personnel. In November 1986, ServiceMaster announced an agreement to purchase Terminix International, the country’s second largest pest control concern, with 164 company-owned outlets and 150 franchised branches nationwide. ServiceMaster paid $165 million for the business, which reported annual sales of about $150 million. ServiceMaster hoped that Terminix would prove a good match with its residential and commercial cleaning businesses, as both operations could be used to generate clients for the other.

Another way that the company looked to compensate for its slowing growth was through financial restructuring. In order to maximize its returns to investors, ServiceMaster reconfigured itself as a publicly traded master limited partnership. In addition to freeing up cash for the company’s acquisitions activities, this allowed ServiceMaster to avoid paying federal taxes, and made it possible for owners of the company’s stock to avoid double taxation, paying only a lower personal tax rate on their earnings. On the last day of 1986, the business of ServiceMaster Industries, Inc. was transferred to ServiceMaster Limited Partnership. In response to this move, the company’s stock made some of the largest gains in the market in the first days of 1987, when it first moved from over-the-counter trading to the Big Board of the New York Stock Exchange.

ServiceMaster made a second large acquisition when it spent $40 million on American Food Management, a company that ran cafeteria facilities in educational institutions. In an effort to make its hospital operations more profitable, ServiceMaster began to market compound contracts to its clients, in which they signed up for several of the company’s services all at once, increasing efficiency. These “Support Service” contracts were slow to gain popularity, enticing just 12 of ServiceMaster’s 1300 hospital customers by early 1987, but the company remained confident that the program would eventually win converts. By the end of 1987, company revenues had reached $1.4 billion.

As the hospital services sector, which made up 60 percent of ServiceMaster’s revenues, grew more competitive in the late 1980s, ServiceMaster’s market share became more and more dependent on the company’s ability to provide quality service at a low price. The company relied on its extensive employee training programs and ongoing product and equipment development to maintain its competitive edge. ServiceMaster used videotapes, audiotapes, and thick training manuals that broke tasks, such as washing a floor, down into detailed five-minute steps to assist its workers. In addition, the company worked to keep its equipment state-of-the-art, developing new and more effective germicides, a battery-powered vacuum cleaner, and a longer-lasting, easier-to-use fiberglass mop handle. Training and innovation were designed to keep productivity and profits high.

Despite these efforts, however, the amount of money generated by the company’s hospital cleaning operations continued to drop, and revenues crept up just 7 percent in the first nine months of 1988. At the end of that year, ServiceMaster reported that changes in the ways medical services were provided and paid for had resulted in smaller markets for services at the company’s existing clients, and delays in signing contracts with new clients. In addition, for the first time ServiceMaster had to terminate some clients for failing to pay their bills. Given these factors, the company’s food service, clinical equipment maintenance, and home health care contracting operations had stronger returns in 1988 than its housekeeping services.

In response to this situation, ServiceMaster continued its policy of diversifying its operations to arenas other than health care facilities. Following its purchase of Terminix, which handled primarily residential pest control, the company acquired another home-based business, “Merry Maids,” in 1988. Founded in Omaha, Nebraska, in 1980, Merry Maids had built up a franchise network that specialized in cleaning customers’ homes once a week, twice a month, or for special occasions. The company hoped that this purchase would further cement its standing in the home services industry, and increase the amount of synergy generated by its different parts.

In June 1988, the company took another step in this direction when it purchased a Memphis-area home appliance maintenance and plumbing service, with about 400 customers. ServiceMaster renamed the company the ServiceMaster Home Systems Service. For $500 a year, the company promised to unclog toilets, fix leaky faucets, and handle any other necessary home repairs. After a big marketing push, the company was able to sign up customers at the rate of 40 a month. ServiceMaster made a much larger commitment to this field in April 1989, when it purchased American Home Shield, a California company which had been providing home warranties since 1971. ServiceMaster paid $120 million for the company, which had 200,000 home service contracts to its credit by 1990.

In that year, ServiceMaster’s health care operations provided just 40 percent of the company’s earnings, down from 90 percent a decade earlier. One aspect of the health care business that did show potential for growth was the home health care subsidiary. ServiceMaster had 60 programs in place by the end of the 1980s, many of them joint ventures with a number of hospitals. Since home health care was so different from normal hospital operations, administrators were more willing to bring in outside specialists to assist in managing their programs.

Also in 1990, ServiceMaster added to its home services division when it purchased in November two divisions of Waste Management, Inc.: a pest control business, and TruGreen, a lawn care service with commercial and residential customers. TruGreen’s lawn operations augmented ServiceMaster’s own exclusively residential lawn care division, which it had inaugurated in 1984.

The company branched out into another field it considered ripe for significant growth when it entered the child care business in 1990 by purchasing the GreenTree Preschool in Wheaton, Illinois. Using this facility as a base, ServiceMaster then opened additional child care centers in corporate settings in the Chicago area, providing benefits to employers and their workers.

ServiceMaster also purchased a 22 percent interest in the privately held Norrell Corporation in December 1991. Norrell provided temporary office and light industrial employees through a network of 250 company owned and franchised temporary agencies, and also augmented ServiceMaster’s home health care operations with 95 agencies which provided medical workers for residential settings.

By the early 1990s, it had become clear that ServiceMaster’s corporate structure, the limited partnership, which had provided marked tax benefits when it was instituted, had subsequently made the company unattractive to institutional investors. The company therefore began to search for a way to restructure itself that would eliminate the barriers to investment by other companies. In January 1992, the partnership’s shareholders approved a plan of reorganization that was designed to bring about the tax-free reincorporation of ServiceMaster some time before the end of 1997. With this measure, ServiceMaster prepared itself to compete in the decades to come. Backed by its staunch Christian principles and its strong standing in the service industry, ServiceMaster appears well equipped to prosper in its sixth decade and beyond.

Principal Subsidiaries

ServiceMaster Direct Distributor Company; ServiceMaster Acceptance Company; ServiceMaster Operations AG (Switzerland); ServiceMaster Limited (United Kingdom); ServiceMaster Operations Germany GmbH (Germany); ServiceMaster Operations S.A.R.L. (France).