Friday, November 18, 2011

“Middleman” Businesses, Job Creators or Price Inflators?

Throughout history you can find “middleman” businesses, in fact almost any retail business is in essence, a middleman business.  However, the concept of the “middleman” business has evolved over the years, and even more rapidly so over recent years.  The advent of the internet was supposed to eliminate the middle man, but the need to understand regulations, handle insurance concerns, and segment processes for the sake of cost has drastically increased their popularity and frequency, and rapidly expanded their role in ways no one could have seen coming.

A few years ago I got a call from a small business owner.  He needed me to look over their books and work up some financial statements.  When I got there-as with every new client-I sat down with him for a few minutes so he could explain how his business worked so I could be more effective in helping him.  He began by saying that they were a maintenance contracting company.  Not really knowing what this meant, I said "Okay, so you maintain buildings?"  This made sense to me, he had a crew of janitors that maintained office buildings and such in the area right?  No.  It turns out that his business was as follows:

Let's say a toilet gets clogged at a local department store.  Not clogged like it needs a plunger, but clogged like it needs a plumber.  Or maybe a door breaks, lighting goes out, whatever it is, something breaks.  Well the store manager calls a store hotline, a 1-800 number that goes to a national center for that department store.  They file what is essentially a work order on the telephone with that conversation.  When they get off the phone the operator they were just on with calls a maintenance division.  That maintenance division then refers to a list based upon your location, and calls a maintenance company like my new client's that covers that region.  This maintenance company then turns around and finds a plumber local to the department store-or carpenter, or handyman, or whatever is needed-negotiate a rate based upon the rate they were given.

My head almost spun as he was wrapping up this explanation.  What had once been as simple as picking up the phone and finding "Joe the Plumber" in the yellow pages, had apparently turned into at least four phone calls that involved call centers all across the country and put at least three people between the person who had the problem, and the person who was going to fix the problem.  Take 20 years off the participants in this process and they'd just be a bunch of kids sitting around playing a game of "telephone", which is what the process basically became, as the number of plumbers, electricians, or carpenters that eventually showed up often showed up with eh wrong tools, or a complete misunderstanding of the problem they were about to fix.  Additionally, there was no real way for the maintenance company to meet the contractors they hired, so there was little way for them to qualify the worker, or the work itself.  Often in fact, you'd find that the stores this particular maintenance management company covered were in parts of the country that the company wasn't.  For instance this store represented primarily stores in the southeast and Texas.

Add in the mark-up of 10% at every step along the way, and ultimately the department store is paying an additional 30---40% for a service that is often performed with less efficiency and effectiveness than if they'd simply had the store manager call a local guy he or someone else at the store knew to snake the toilet.  And do you think these stores just eat those costs?  No, they pass them on to you and I, the consumers, jacking up prices on us.  Now this sort of thing is almost entirely set up for insurance, fraud, or legal reasons, and are a great example of the real costs of regulations on businesses.

This practice of hiring businesses to streamline simple processes like snaking a drain or fixing a door handle are mind boggling to say the least.  They almost spur one to wonder if companies like this department store hire these services specifically to create jobs, or if regulations are set up in such a way to encourage the creation of jobs such as this.  Either way the concept of the middle man business has morphed into one that is more of a destructive force in our economy, raising prices on the consumers while in many cases producing no actual benefit.

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