Will the Education and Labor Merger Sink or Swim?

The Trump Administration proposes to merge the Department of Labor and Education into the Department of Education and Workforce.

In March of 2017, President Trump signed Executive Order 13781, directing the Office of Management and Budget (OMB) to write a proposal to reorganize the government and to eliminate unnecessary agencies and program. The OMB got right to work, and in June, 2018 issued their initial report, incorporating over 100,000 suggestions from government employees and the public, as well as the agencies themselves.

The report, Delivering Government Solutions in the 21st Century, makes for fascinating reading. Its focus on efficiency and technology is difficult to dismiss through a partisan lens. Is there any American that would oppose hiring more cybersecurity professionals in government, creating mobile-based technologies to enable students to view their student loans, or improving government customer service? Probably not.

The most newsworthy item was the very first proposal in the report to merge the Department of Education (ED) and the Department of Labor (DOL) into a single Department of Education and Workforce (DEW). If completed, it would be the largest merger of government agencies since the Homeland Security Act of 2002 combined 22 different departments and agencies, including the Coast Guard, Secret Service, Customs, and Transportation Security Administration, into the massive Department of Homeland Security.

A merger of equals?

ED and DOL are two of the smallest executive departments in terms of employees, neither of which even break the Top 10. ED is the smallest agency with 3,800 employees, while DOL has 14,400 for a total of 18,200. Combined, DEW would be the 12th largest executive department, on a par with Department of Energy’s 14,200 employees. By contrast, the largest non-military agency, the Department of Justice, employs over 111,000 employees.

From a net cost perspective, however, these agencies combined would be the 8th largest agency, spending a combined $97 billion ($54 for ED and $44 for DOL). Note also that these are net costs, as ED is one of the few government agencies that has revenue, which stems from borrowers of student loans paying back the government. ED has the 4th largest revenue of any Government agency, with $31 billion in revenue. To put this in perspective, if ED were a financial services company, it would be in a similar league as American Express or Morgan Stanley.

ExecDeptStats

Based purely on headcount, it would seem that Labor would be in the driver’s seat from an integration perspective. However, there is more business getting done at Education, not to mention that administrative staff is far more concentrated. I would bet on Secretary DeVos as “CEO” vs. Secretary Acosta. This seems to be reflected in DeVos leading the bureaucratic wrangling behind the proposal in the first place.

Synergies:

Each agency has an overwhelming number of departments, programs, and initiatives. However, if you follow the money things are pretty simple. ED provides loans and grants for college education, grants to elementary and secondary schools across the country based on financial need, and grants to subsidize support for students with disabilities. DOL makes payments to workers who become unemployed or disabled, as well as employment training, particularly for displaced workers or populations of workers (e.g. veterans) that require additional assistance.

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Looking at the core functions that appear above, one core competency emerges across agencies: formulaic funding administration. College student attending an accredited degree granting institution? Ok, here’s your loan amount. Elementary school with X number of students with disabilities? Ok, here’s your grant. With over $110 billion in loan and grant disbursements, consolidating the funding and administration of these dollars makes a lot of sense.

On the other hand, the merger has been touted by OMB as a means to focus on the American workforce, presumably by streamlining employee training (DOL) and managing programs with insights gained by knowledge of the higher education landscape (ED). This seems like the tail wagging the dog, and if this is the core goal of the merger, better to just have the DOL do it themselves.

Sink or Swim?

Could this merger even happen as planned, or is this just the President’s opening gambit in the negotiation with Congress, doomed to die a slow and painful legislative death?

The short answer is, yes, it could happen, and yes, the slow and painful death has already begun. The pathway to merger approval is through the appropriations committees of the House and Senate. Each year, Congress is supposed to pass 12 appropriations bills that allocate federal funding to various government agencies. The good news is that appropriations for both DOL and ED are housed within the same appropriations bill, called the “Labor-Health and Human Services-Education and Related Agencies” bill. This means that the appropriations committees for the House and the Senate would have to both produce a compromise bill that agreed to merge the two Departments in order for the merger to proceed.

Currently, the House and Senate have both put forward their own version of the Fiscal Year 2019 appropriations bills for Labor, HHS and Education. The bad news for the Administration is that neither version includes any discussion of the proposed Merger. Senator Roy Blunt (R-Mo), Chair of the Appropriations Committee, was quoted in an interview as saying there was merit to the proposal, but insufficient support in the Senate to get the appropriations bills passed. It is the midterm election season, after all. This means we’ll probably have to wait until next Fall as we approach the end of Fiscal Year 2019 in February before we’ll see more progress.

In the meantime, the Trump Administration’s proposal will continue the long trend of the Administration to pace and lead the public by making radical proposals, which ultimately get pared down to more moderate accomplishments. Expect legislators not wishing to see a departmental merger begin to come up with their own creative ways to give the Administration more of what it wants: more efficiency and technology in government.


Sources and Notes


The Berkshire Hathaway of Jobs

A closer look at Recruit Holdings, the largest Japanese conglomerate you’ve never heard of, and parent company of Indeed and Glassdoor.

Anyone that has applied for a job knows about Indeed, the largest job site in the world. Anyone that has gone looking for answers to the question: “What is it like to work at Company X?” knows about Glassdoor, which has employee reviews of over 600,000 companies. But, did you know that both Indeed and Glassdoor were fully owned subsidiaries of Recruit Holdings, a Japanese conglomerate founded in a rooftop prefab unit in Tokyo in 1960?

Recruit Holdings (RH) started out as a media company, and throughout the 1960’s distributed free job guides to university students filled with paid content from companies looking to hire new talent. Their products eventually expanded to paid real estate listings with more accurate calculations of walk time to nearby train stations, then travel brochures, and now myriad other offerings in the job placement and work space.

The modern iteration of Recruit Holdings was initiated in 2010, when RH began an aggressive series of acquisitions, including the 14th largest U.S. staffing firm Staffmark for $300M in 2011, the 11th largest global staffing firm Advantage Resourcing for $410M in 2012, and the #1 job website, Indeed, for $1B, also in 2012. In 2014 the company listed on the Tokyo Stock Exchange. In June, 2018 RH completed its latest major acquisition, purchasing Glassdoor for $1.2B in cash. Today, RH owns 357 individual companies.

Recruit Holdings is structured as a holding company, with 3 subsidiaries: HR Technology, Media & Solutions, and Staffing.

  • HR Technology (Indeed & Glassdoor): This business unit (BU) is synonymous with Indeed, and following the recent Glassdoor acquisition, is definitively the world’s largest job site. The combined Indeed / Glassdoor web properties will have ~260 million unique monthly visitors. Prior to acquiring Glassdoor, Indeed had ~$780M in revenue in FY 2017, and is the smallest BU of the company.
  • Media & Solutions: This BU offers marketing and recruiting support to multiple business segments in Japan, such as wedding venues, restaurants, and beauty salons, with ~$6B in revenue in FY 2017.
  • Staffing: Finally, the Staffing BU provides temporary staffing services in Japan and internationally, with ~$12B in revenue in FY 2017.

The Indeed & Glassdoor Stories:

Indeed itself has a fascinating history from a startup perspective. The company was founded in 2005 by Rony Kahan and Paul Forster, who raised one and only one VC investment, led by Union Square Ventures for $5M. Rony and Paul had previously founded jobsinthemoney.com, a job site for finance professionals that they exited to Financial News in 2003. The company was inspired by Google’s pay-per-click business model, Google itself having just gone public in 2004. Google inadvertently contributed to Indeed’s success, by indexing jobs listed on the site and oftentimes enabling Indeed’s job listings to be a top search result. Google became Indeed’s largest source of organic (i.e. unpaid) web traffic.

Glassdoor is equally fascinating from a startup perspective: it’s the third in a string of successful startups, preceded by Expedia and Zillow, that were co-founded by the same entrepreneur, Rich Barton. The company was founded in 2007 and launched the Glassdoor website in June, 2008, alongside a Series A investment from Benchmark Capital where Rich was already ensconced as a Partner. The company was build on a simple premise: share data about how much money you make, and then you can find out how much everyone else makes at your company! Less than 6 months after launching, Glassdoor had gathered 115,000 contributions from employees at over 14,000 companies. Glassdoor also has a Google connection: a direct investment by Google’s growth equity fund “CapitalG” in 2016.

Clash of the Titans:

Recruit Holdings has always been involved in significant tech competition. Indeed has competed for many years with Monster.com, LinkedIn, and ZipRecruiter. However, these competitors were all of a similar kind: successful tech startups within their space, but similarly funded and sized compared to Indeed. Over the last two years, however, the competitive environment has changed dramatically. Whether it likes it or not, Recruit Holdings has been dragged into a three-way fight with the largest tech titans in the world: Microsoft, Facebook, and Google. Check out the timeline below to see how fast things have changed for RH.

  • June, 2016: Microsoft announces a deal to acquire one of Indeed’s largest competitors, LinkedIn, for ~$26 billion in cash. The transaction closed in December.
  • February, 2017: Facebook, in a nod to over 50 million businesses that have created Facebook pages, launches Facebook Jobs to enable applicant tracking and job posting services.
  • May, 2017: Google launches Google Jobs, an integrated search results widget aggregating jobs from numerous job boards into Google’s main search engine. Indeed is no longer the “Google for Jobs”, now that Google is the “Google for Jobs”.
  • July, 2017: Google launches an Applicant Tracking System (ATS) called Google Hire, which is integrated with G-Suite (e.g. Gmail and Google Calendar) as well as Google Jobs. (Indeed primarily relies on 3rd party ATS integrations.)

Let’s take a closer look at these competitive threats:

LinkedIn v. Indeed is the oldest competitive pairing of the bunch. For its part, LinkedIn has focused on building the world’s largest social network of professionals, and knows that most employees are passive job seekers who aren’t visiting job boards regularly, but are nonetheless open to new opportunities. LinkedIn has therefore tried to create continual engagement with its users by providing notifications about the people in a user’s network, and providing a Facebook-esque feed of shared updates and likes. The idea is that higher engagement with the platform by users will enable them to charge higher  prices to companies that post jobs on the site.

LinkedIn also attempts to quantify the skills of its users so that companies can target job postings to users with the best match of skills for a particular position. However, for LinkedIn users that are active job seekers, there are no employer rankings, salary data, or any other critical information about the employer, except whatever the employer has posted to their LinkedIn profile page. Despite this lack of employer data, there is no better site for finding referrals for job postings by searching for 1st and 2nd degree connections to a particular company.

The Microsoft acquisition doesn’t change the competitive dynamic much with Indeed. The reason is that the acquisition was driven more by Microsoft’s desire to integrate LinkedIn user data into its products. Going in the opposite direction, employers that use LinkedIn will soon be able to market across Microsoft web properties. This will expand the reach of LinkedIn job postings more broadly to active job seekers, but not enormously since LinkedIn job postings are already listed with Google.

Facebook v. Indeed is another example of a social network looking to leverage its existing user engagement to monetize job postings from employers. Unlike LinkedIn, however, Facebook’s users are on the site to engage about their personal not professional lives. And, while Facebook has a huge amount of data on users, none of it pertains to their skills and qualifications except where they went to school. Hence, the low hanging fruit for Facebook Jobs is to enable better matching for job postings where skills and qualifications don’t matter: low-wage, entry-level jobs in food service, transportation, sales, etc. For businesses whose Facebook page serves as their primary web presence, the tool is ideal.

The competitive threat to Indeed is that active, low-skilled job seekers are siphoned off by Facebook before they start searching on Indeed. Similarly, small employers in particular may find that it’s easier to post a job to your Facebook page to see if it can be filled, before opening up to hundreds of job applications by posting on Indeed.

Google v. Indeed is all out, head-to-head competition. Let’s start with the fact that a large portion of Indeed’s internet traffic comes from an internet search that originates on Google. Google has for years shown Indeed job listings in its search results. Now, however, if a job is visible to both Google Jobs and Indeed, Google’s result will have the highest search placement. The direct competitive response from Indeed has been simply to prevent Google from indexing its website (although Glassdoor is still participating in Google Jobs for now, given that it started working with Google before being acquired). This means that for active job seekers, job postings are on Google Jobs OR Indeed, but not necessarily both.

Google Jobs is also a huge boon to LinkedIn, which has partnered with Google Jobs. Why? Because Google will expand the reach of job postings on LinkedIn from passive job seekers to active job seekers. LinkedIn gains traffic without giving up really any of its own territory. On the other hand, Indeed would have to cede its entire business territory to Google to accomplish the same thing.

The Future:

Indeed’s competitive response to all of the action above was to acquire Glassdoor in June, 2018, which provides substantial value-add to its core competency of providing information on job opportunities to active job seekers. Whether Indeed will remove Glassdoor as a participant from Google Jobs, its primary competitor, remains to be seen. The benefits would be to remove some of the best known salary and company review data from Google’s search results and force Google to use other, inferior services, such as Paysa for salaries, or InHerSight for reviews. However, this move would come at the cost of obtaining organic traffic from Google.

Indeed’s second, and lesser known competitive response, was the launch of Indeed Assessments in May, 2018. This services provides over 50 tests that employers can use to filter the deluge of job applications into a more manageable stream. Tests include computer skills (e.g. Excel), psychometric assessments (e.g. critical thinking), and job skills (e.g. business math). This is clearly a benefit to employers designed to ensure they continue to list new job postings on Indeed. This is also a shot across LinkedIn’s bow, by enabling employers to evaluate a job applicant’s skills. LinkedIn offers a similar capability with skill-based tags that come from users voting on the skills their peers possess. Whether employers will take the time to outline assessments for specific job openings vs. creating simple filters based on job applicant’s peer reviewed skills remains to be seen.

In the final analysis, Recruit Holdings has a huge job ahead: it must defend its dominance in the active job seeker market from Google. On the other hand, it must continue to deliver high quality applicants to employers without having its own network of passive candidates to leverage like LinkedIn. The Glassdoor acquisition will help it maintain its dominance in the job seeker market for a time. However, Indeed still needs an answer to employers hunting for passive candidates. Building its own social network seems unlikely. A better path would be to become the best tool for processing job applications effectively. Indeed Assessments is a step in this direction, but is on a par with scheduling efficiency Google will achieve with Google Hire, and similar skills assessments provided by LinkedIn.

We should expect more M&A activity to build Indeed’s capabilities in the passive job seeker market, such as the acquisition of an innovative Applicant Tracking System provider such as Lever. Stay tuned for deeper analysis of Recruit Holding’s post-Glassdoor financial performance in the future.

$1 a Day: Everyday Low Prices for College


Walmart and Guild Education partner to enable $1 a day college education for over a million U.S. workers. This is a catalytic event that will help “education benefits” become the new standard for low-wage workers.


Walmart recently announced a partnership with Denver startup Guild Education to provide online college degrees to all U.S. associates for an out-of-pocket cost of $1 a day.

The partnership is the second step in Walmart’s strategy of increasing employee wages and benefits. The first step came with a $2.7 billion human capital investment in 2015 and 2016. This investment came of the heels of a dismal performance in 2014, where same store sales barely increased year over year. Walmart’s stock price was pummeled in the months following the announcement of this investment in February, 2015, the start of their 2016 fiscal year.

wmstockpriceWalmart’s investment in human capital was rooted in the belief that higher wages would result in “improved customer experience to drive sales growth”. This was part of a two-prong strategy to turn around sales growth and compete against Amazon in the U.S., with the other prong focused on integrating online and in-store shopping experiences for customers.

After one year of higher wages and benefits, Walmart noted in early 2016 that their “fourth quarter of fiscal 2016 marked six consecutive quarters of positive comps and five straight quarters of positive traffic at Walmart U.S.” As of January 2018, the human capital investment is arguably paying off. Same store sales continue to climb, and crossed 2% year over year in late 2017.

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The Business Case for Education Benefits:

Education as an employee benefit is having a moment in the sun. Recent LinkedIn employer surveys have seen increases in tuition reimbursement benefits from 39% to 52% from 2017 to 2018. A key focus of many training efforts is targeting soft skills, such as leadership, communication, and collaboration. In addition to improving employee soft skills, there are three clear economic benefits for employers:

  1. Tax free employee benefits up to $5,250 per year
  2. Decreased employee turnover
  3. Increased promotion rates for internal candidates

This is the business case Guild Education has made to Walmart, based on its existing partnerships with Chipotle (2016) and Lyft (2017).

Guild is an education technology startup based in Denver that was founded in 2015 and most recently raised a $21M Series B in the Fall of 2017 to provide employers with tools to offer education as a benefit to employees. Guild has been rapidly expanding its partnership base in 2018, closing four new partnerships including Walmart, Lowes, Discover, and Taco Bell.

Guild’s track record with Chipotle is arguably the reason for its impressive growth today. Chipotle has reported that workers enrolled in educational programs were 100% more likely to be promoted internally, and were also also staying with the company 100% longer compared to employees not participating in education programs. To put this another way, education offerings reduced employee turnover among participating employees by 50% compared to their non-participating peers. That is a huge impact on retention rates if it persists over time.

Whether Chipotles’s success can be replicated remains to be seen. A study by the Lumina Foundation of a similar (non Guild) education benefits offering from Cigna found perhaps more realistic outcomes: a 10% increase in promotion rates, and an 8% increase in retention rates, for program participants.

It is still early days when it comes to assessing the impact of these programs, and obviously the differences between office workers, line cooks, and cashiers will impact the results. However, it is clear that these early examples of employee education benefits are making a difference to key HR metrics when they are offered and tracked.

How it Works:

The Walmart / Guild partnership model highlights the players that are coming together to make a $1 a day college degree possible.

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As the graphic above illustrates, Walmart associates receive coaching support from Guild to choose from a variety of online educational offerings, while Guild receives payments from Walmart based on enrollment levels. Online educators save serious marketing dollars, that presumably are shared in the form of cost savings with Guild and Walmart. Very intelligently, Walmart has also ensured that training programs offered internally by Walmart Academy, are given substantial “college credit” that can be used to further reduce the number of credits an associate has to pay for in order to get an online credential.

Back of the Envelope:

Below, I’ve tried to wrap my arms around some of the numbers behind the press release. We know Walmart employs a massive number of associates in the U.S., however, Walmart management expects enrollment to be ~68,000 people initially. I’ve used U.S. Census data to figure out what level of education Walmart associates are likely to have, and estimated the annual costs to Walmart and associates to participate in these programs.

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This back of the envelope math shows an annual cost to Walmart of ~$342 million. Given that Walmart has been investing over $1 billion a year for the last three years in human capital, this number is in the ballpark. Given that these costs assume associate are pursuing a full time level of education, the costs are probably lower given that many associates will pursue these education options on a part-time basis.

How these costs may be offset by reductions in employee turnover remains to be seen. Baseline turnover costs for retail employees is estimated at ~14% of annual wages, but for Sam’s Club (a Walmart subsidiary) was estimated at 44% in 2016. Combine this data with an estimate of Walmart’s annual wages, and possible levels of turnover savings based on Cigna and Chipotle’s reductions in turnover, and Walmart can expect to save anywhere from ~$17 to $335 million per year amongst program participants.

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These back of the envelope estimates show that there is a wide range of possible outcomes for Walmart, and only time will tell whether these benefits will have a tangible impact on the economic factors that move the needle for Walmart: employee turnover costs or same store sales.

Future Impact:

Moving forward, Walmart’s battle with Amazon tends to dominate the narrative when it comes to sales growth and online sales. However, Walmart employs 1.5 million U.S. workers to Amazon’s 0.5 million, and the impact of its decision to support education as a benefit is substantial.

Let’s start with the lede that was totally buried in news coverage of the Walmart / Guild partnership: the fact that dependent family members can obtain the same benefits, including parents, siblings, spouses, and children. Headline you didn’t read anywhere:

Get a job at Walmart, enroll your child in college for $1 / day.

To put this in perspective, with around a million hourly U.S. associates and an average family size of 3 people, there are (again, back of the envelope) 3 million Americans now eligible to obtain an online college degree for $1 a day. That would be around 15% of the number of students that attend college every year. These huge numbers are far beyond the more modest 68,000 students Walmart actually expects to enroll, but are nonetheless a massive expansion of educational opportunity for millions of Americans.

Follow the leader:

Walmart has set new standards before that over time became the industry norm. For example, in 2005 Walmart made substantial commitments to eliminate waste, reduce energy consumption, and purchase energy from renewable sources. Over time, this catalyzed a huge number of companies, especially its major suppliers such as Coca-Cola and Kelloggs, to be more environmentally proactive themselves. Nearly 10 years after this commitment, the Environmental Defense Fund noted that “Walmart is driving supply chains and markets on sustainability in a way that only regulation could accomplish in the past.”

In the final analysis, expect Walmart to look for the ROI of educational benefits in the next 2-3 years. Hope that they materialize so that Walmart will be incentivized to push Guild, and Guild’s educational partners to optimize the degree offerings to associates to make them more relevant, and lower cost than ever.


Sources:

  1. Lumina Foundation
  2. USA Today
  3. Walmart
  4. Guild Education
  5. Bellevue College
  6. Brandman University
  7. Penn Foster
  8. LinkedIn Report
  9. Center for American Progress Report
  10. Census household estimate
  11. College estimates