Childcare on Board

Regional ReviewQuarter 3, 2000
by Lee McIntyre

When Stride Rite Corporation opened its on-site daycare center in Roxbury, Massachusetts, in 1971, it was a pioneering achievement. As a leading manufacturer of children’s footwear, Stride Rite was already used to thinking about the needs of families, and the concept of on-site daycare seemed a natural fit. In the beginning, Stride Rite did not see its center primarily as an employee benefit, but rather as a philanthropic mission that would serve Greater Boston. The company set aside one-quarter of its daycare slots for low-income families from the surrounding community. Today, at its new Lexington, Massachusetts, location, it employs a sliding scale for daycare tuition that is available to the community and Stride Rite employees alike.

In the intervening years, Stride Rite — and the companies that followed — have discovered the potential benefits that on-site daycare can offer: It can assist greatly with recruitment and retention, it helps to cut absenteeism, and it can give a big boost to worker morale, job performance, and a company’s public image. In short, on-site daycare creates an environment in which the worker can focus on work, because he or she knows that his or her child is being well cared for by a competent professional, just a few floors away.

So why isn’t on-site daycare more prevalent? The answer, unfortunately, is that quality daycare is expensive. And, although there are many firms that could potentially benefit from on-site daycare once they offer it, they must first be willing to commit a substantial amount of cash — and be convinced that they will earn it back — before they are willing to take the plunge.

THE SILENT REVOLUTION
Although it is often considered to be a modern phenomenon, Sandra Burud, of Burud and Associates, a childcare benefits research and consulting firm in Los Angeles, California, has found evidence that employer-supported childcare extends at least as far back as the Civil War, when women who sewed soldiers’ clothing were offered work-site childcare. Eighty years later, during World War II, work-site childcare was made available to women who worked in the shipyards of Portland, Oregon, although these centers quickly closed once the war was over.

As women with young children began to join the labor force en masse in the 1970s, the concept of on-site daycare grew and spread to hospitals, government, and private companies. Since then, the face of America’s workforce has continued to diversify. In 1975, only 34 percent of married couples with children under six sent both parents into the workforce; today the figure is almost 60 percent. In addition, today nearly 20 percent of employed parents are single and raising their children alone.

Yet, on-site daycare has not grown by nearly as much as one might expect. According to a recent survey of over 1,000 American companies, the Families and Work Institute (FWI) found that only 9 percent of companies with 100 or more employees have on-site daycare. Although this number has increased dramatically from the 200 or so available in 1982 (of which the vast majority were in hospitals, with only 42 in private firms), to the approximately 8,000 that exist today, this still lags far behind the potential demand created by the approximately 9 million families with children under six years old that are in the workforce today.

In families where both — or the only — parent works, a range of childcare options is employed (see table). Nearly one-quarter arrange their work schedules so that the children are cared for only by their parents. Another quarter rely on the help of family members or make other informal arrangements. Looking at the choices that parents actually make, however, may not indicate the depth of the childcare problem in this country or the dissatisfaction that many parents feel with their current options. In a recent survey conducted by the University of Massachusetts at Boston, one out of every six parents reported ending a childcare arrangement within the past year, most often because of inadequate quality. In a separate study, conducted by Yale University, 86 percent of U.S. childcare centers were found to provide “poor to mediocre” care. No wonder that 82 percent of on-site daycare centers — which are usually high in quality — have waiting lists, averaging 50 percent of capacity.

According to the Families and Work Institute, on-site daycare is more prevalent at those companies that are large (over 1,000 employees), that provide services (such as healthcare and financial services), and that have a high percentage of their top executive positions filled by women (see table). Indeed, 19 percent of those firms with half or more of their top spots filled by women offer daycare. One also finds on-site daycare more often in large metro areas, much less commonly in rural ones. And these days, according to Sandra Burud, it is growing fastest in fields like high-tech, which have employees who are hard to recruit.

Just because a company has on-site daycare, however, doesn’t mean that it is available at all its sites or to all its employees. Indeed, the FWI survey found that as the number of a company’s work sites increased, the percentage of sites offering daycare declined. Given the tendency for large firms to have multiple work-sites, counting the percentage of firms that offer on-site care may significantly overestimate the number of employees who actually have access to it. On the other hand, since nearly half of all employment in the United States is at companies with more than 500 employees, which are most likely to offer on-site daycare, one might wonder whether employee access has instead been underestimated.

Those companies that offer on-site daycare usually swear by it and are convinced that it has saved them money, mostly from reduced absenteeism and improved recruitment and retention. “There is no doubt in my mind that the childcare center has saved us money,” reports Marcia Hebert, the director of John Hancock Financial Services’ childcare center in Boston, Massachusetts.

But, there is surprisingly little documentation of such savings and sparse academic research on the topic. One of the more careful studies of the return on investment for on-site daycare was conducted by Sandra Burud in 1987 for Union Bank at its 1,200-employee operations center in Monterey, California. Burud found a 2.2 percent turnover rate for employees who used the center in its first year of operation, compared to a 9.5 percent rate for parents who used other arrangements. With the cost of hiring and training new workers estimated at between three-quarters to one and one-half times an employee’s annual salary, this reduction accounted for the most significant cost savings. Absenteeism too was affected, with participants missing 1.7 fewer days of work than parents who did not use the center, also saving the company money. Still another savings was in reduced maternity leave. Since the center accommodated infants, Burud found that maternity leaves were 1.2 weeks shorter for mothers who used the center than for those who did not. And, 61 percent of those who were considering job offers from the bank said that the childcare center would be a factor in their decision. In the current era of tight labor markets, such an advantage could be substantial. All in all, the center saved more than it cost.

While the financial consequence of offering on-site daycare will depend heavily upon the unique situation of a particular company, it is probably safe to conclude that some of those that do not offer on-site daycare could benefit from it. What can we learn from the experience of those companies that already have on-site care?

QUALITY IS JOB ONE
Like many companies, Lotus Corporation first considered work-site daycare when a number of its employees who were interested in family issues approached management. But if Lotus was going to do this it wouldn’t be easy. The first item on the agenda had to be quality. High quality was necessary to attract and satisfy parents; there was no point in such an undertaking if their employees weren’t going to be happy with the result. The daycare center would also reflect on their corporate image. As Marcia Lewis, director of the Lotus Childcare Center, put it, “Lotus strives to do things well. If we were going to do this, we were going to do it right.”

At the time they opened, in 1990, few outside vendors were available to run an on-site daycare center and Lotus decided to run their center on their own, as a separate department of the 2,500-employee company. This allowed them to keep quality control in-house. But it also meant that they had to become expert in a new business, far outside their normal expertise of designing software. To help, Lotus hired professional staff who were experts in early childhood education.

   CHILDCARE CHOICES
Primary childcare arrangements for children under five with employed mothers
Daycare center (workplace and community)
32%
Parent care*
24
Other family member
23
Family daycare
16
Nanny or babysitter
6
*Mother and father work alternate schedules; father stays home to care for the child; parent cares for the child at work; self-employed parent cares for the child at home
Source: The Urban Institute, 2000

In their quest for quality, Lotus focused on small classes, a low student/teacher ratio, and a highly educated staff, with low turnover. Today, in its 7,000-square-foot Childcare Center, 68 children are cared for by 25 staff members. About 90 percent of the teachers are college graduates and many have a master’s degree in early childhood education. And the average tenure of the staff is seven years, in an occupation where average annual turnover is close to 40 percent. All this has paid off in one of the most tangible measures of quality within the industry: accreditation by the National Association for the Education of Young Children (NAEYC). While 36 percent of all work-site daycare centers are accredited, the national average for all childcare centers is only 5 percent.

A similar picture is found at John Hancock, which houses one of the largest — and arguably the most lavish — on-site daycare centers in New England. Hancock’s daycare center is a showplace: palm trees and a rock garden greet the visitor on the ground floor; just beyond, a full-time chef prepares meals for the children in a sunken kitchen with a large open pass-through — sushi bar style — so that the children can watch him cook; toilets are available in five different heights; each classroom (here called a “home base”) is small enough for the children not to feel intimidated by a 40,000-square-foot center that serves 200 children; and a separate “get well” center is available for mildly ill children, with two nurses and a separate ventilation system. Each home base has no more than nine kids and the student/teacher ratio is about 3 to 1. This low ratio facilitates great flexibility; if a teacher is out sick, he or she need not be replaced for that day and the children do not need to be exposed to an unfamiliar provider. Like Lotus, Hancock’s center is accredited by the NAEYC.

Hancock’s commitment to high quality has made its on-site daycare center a visible part of the 3,000-employee firm’s “family friendly” image. Page Palmer, vice president of human resources at Hancock, has estimated that her company’s work-life benefits package as a whole (which includes a host of other “family friendly” programs to reduce the stress on busy families, such as one that offers hot take-home dinners for purchase at the end of the day) saves the company $700,000 a year, approximately one-tenth of 1 percent of their net operating income.

The center also helps with recruitment. According to Kathy Hazzard, manager of work-life programs, a number of Hancock employees have rejected job offers from other companies, citing their own firm’s work-life benefits. Lotus, too, has found that on-site care is a valuable tool for recruiting high-tech workers in today’s white-hot labor market, and for retaining them against the onslaught of headhunters. “Without our childcare center, we just wouldn’t be able to compete in this market,” says Paul Labelle, director of communications at Lotus.

COST AND AFFORDABILITY
All this quality comes at a cost. And one of the first is space. A quality daycare center requires approximately 60 to 100 square feet of indoor play space, and 75 to 100 square feet of outdoor play space, per child (in Massachusetts the state minimum is 35 square feet indoors and 75 square feet outdoors). This means that if a center expects to accommodate 75 kids, it will need approximately 4,500 square feet of indoor play space (plus more for a kitchen, staff offices, and other necessities) and 5,600 square feet of outdoor space. If it is to house infants, most state fire regulations require it to be built on the first or second floor. In some instances, a company just doesn’t have such space available. In others, it is ferociously expensive, particularly in large urban centers such as Boston, where rental rates for Class A office space are now $50 to $70 per square foot. Second, construction costs can run between $65 and $150 a square foot, depending on the physical layout. Equipment costs average about $2,500 per child. In short, even for a small center, we are talking about a substantial initial investment — anywhere from 1.5 to 2.5 million dollars, according to Kerry Malczewski, a daycare development consultant for Americare. At more elaborate centers like those at Hancock or Lotus, the costs can be much higher.

PORTRAIT OF A DAYCARE PROVIDER  
EMPLOYER CHARACTERISTICS
PERCENT THAT PROVIDE
ON-SITE CHILDCARE

All companies

9
BY NUMBER OF EMPLOYEES   

fewer than 250

7

250 - 999

5

1,000 or more

18
BY INDUSTRY   

Professional services

15

Finance/Insurance/Real estate

11

Other services

0

Manufacturing/Construction/Agriculture

5

Wholesale/Retail trade

3
BY % OF EXECUTIVE POSITIONS FILLED BY WOMEN   

0 - 24%

4

25 - 49%

10

50% and more

19

Source: Families and Work Institute, 1998

 

 

Operating costs normally run between $7,500 to $13,000 per child per year. Staff salaries can account for up to 90 percent of operations at work-site centers, where the pay is normally much higher than in the typical stand-alone center. The average national full-time pay for daycare workers is about $12,000 a year. At many high-quality work-site centers, the pay can reach $25,000 to $30,000 a year.

Such high costs raise the issue of what parents can afford to pay, which is the bête noire of corporate childcare and the flip side to high quality. Most companies cover construction and other up-front costs, and don’t expect to be paid back. Many also provide an ongoing subsidy to cover operations such as maintenance, utilities, and liability insurance. The remaining costs can still be so high, however, that some employees cannot afford to pay them. Companies have different policies for dealing with this problem. Some simply charge the going rate in the community — which can approach $325 a week for infants and $260 a week for toddlers in Boston — and boost their subsidy to cover the increased operating costs (such as higher staff salaries) that are necessary to achieve the higher level of quality that they provide. Lotus, for instance, has adopted this approach.

Other companies offer a sliding scale and subsidize the difference. At Hancock, the tuition at the childcare center is based on an employee’s annual salary, with price breaks beginning at incomes under $80,000 a year, and more significant discounts available for those who earn less than $30,000. But, depending on the size of the discounts and the number of low-income employees who use them, sliding scales can vastly increase the annual subsidy paid by a firm. Lotus once offered a sliding scale but was forced to drop it as too costly. Today, they face the poignant fact that many of the administrative assistants, receptionists, and even some of the childcare teachers themselves — despite their better-than-average salaries — cannot afford to send their own children to the childcare center. Even so, Lotus has no shortage of demand for its childcare services, with up to a one year waiting list.

While subsidies and sliding scales can solve the problem of affordability, they can raise other difficulties. For one, firms must deal with potential resentment. If a firm offers assistance to workers with lower salaries, it can cause problems both among higher-salaried employees and also among those with similar salaries who do not use the benefit (and wonder why they can’t get help with eldercare or special healthcare expenses instead). Potential resentment may also arise from childless employees — or those who prefer other childcare arrangements — to the subsidization of a childcare center at all. “It’s hard to gauge resentment,” says Elinor Burkett, author of the recent book The Baby Boon: How Family-Friendly America Cheats the Childless. But, as childcare in the workplace becomes more common, Burkett argues, concerns about inequity are bound to surface. “If you were working in a workplace that gave a $5,000 fertility benefit to the person sitting next to you, how would you feel?”

There is also the sensitive political issue of what to do if a senior executive or a hot new hire needs a slot that is occupied by a low-salaried worker. And, there is the problem of how an employee of a company that offers on-site care feels when it is not at his or her own work-site or when the waiting list is too long. Caught between the potential resentment of employees who don’t receive the benefit and the high cost of making it available to all workers, some companies may simply retreat.

And some workers may just prefer the cash. Back in 1971, when Stride Rite first opened its daycare center, then CEO and leading force behind the center, Arnold Hiatt, remembers a conversation with a union leader who said, “If you can spend so much money on the daycare center, why can’t we get a raise?”

Most companies, however, report few visible signs of resentment. Hancock, for instance, says that while only a small percentage of its employees actually use the center, there have been few if any complaints. Managers appreciate the center’s flexibility, which is open 11 hours a day to accommodate employees who use flex time or simply work long hours. And, despite warnings of a growing backlash, this kind of acceptance does not seem to be unusual. A 1996 Gallup poll asked workers how they would respond if their employer asked them to contribute a percentage of their income to on-site childcare. Almost 60 percent said that they would contribute, with one in ten offering a full 10 percent of their pay. Of course, 10 percent of the average employee’s pay would hardly cover the costs of full-time daycare, if they had children. Still, perhaps the most surprising result of the survey was that it did not break down according to whether the respondents were parents, with 54 percent of childless employees saying that they would be willing to contribute some portion of their income.

THE SMALL WORKPLACE
Although larger companies may face problems with waiting lists and fairness, smaller companies or work-sites have to solve the problem of scale. According to Ilene Hoffer, of Bright Horizons, if an employer has fewer than 800 to 1,000 employees at one work-site — or expects to enroll fewer than 50 or so kids in its center — special challenges can arise. If a company has relatively few employees, even a slight dip in childbearing rates can cause a significant loss of revenue. Although in general a company can expect between five and eight children to enroll for every 100 employees, experts counsel that employee surveys alone are a poor way to project demand, because some expected enrollments just never materialize.

Some parents may prefer not to use on-site daycare because they are put off by the idea of having to commute with a child, especially if the employer is located downtown and they would have to use public transportation. Unless both parents work at the same place, on-site care also would seem to put all of the pickup and drop-off responsibility on one parent. Some may find it more convenient to use childcare in their own neighborhood. And, if a family has more than two children, it may be more economical to hire a nanny. Owens Corning closed one of its brand-new corporate daycare centers only a few years ago because of just such a miscalculation of demand.

Distribution of demand is another consideration; if one expects to run a full-service center — with separate space and teachers for infants, toddlers, and preschoolers — one is in effect running several different centers at once. Without a steady pipeline, unbalanced demand can cause a center to run at less than full capacity.

Overhead, too, can be a problem at smaller centers. Although some operating costs may vary smoothly with enrollment, other costs like construction and equipment, that must be paid up front, can be prohibitive. As Hoffer points out, however, this all depends on the company and the need it is trying to fill. Some companies have empty space that can easily be converted. Others have such highly valuable employees that they will go to practically any lengths to retain them. Bright Horizons manages some work-site daycare centers with as few as 28 kids.

Hill, Holliday, Connors, Cosmopulos, Inc., an advertising firm with 250 employees at its Boston site, has had on-site daycare since 1985, accommodating 36 kids, infants through kindergarten. Hill, Holliday solved the problem of small size by opening vacant spots to the outside community, who pay full freight. “We never need to advertise a vacancy,” recounts Sandy McGauley, the center’s director, who juggles the delicate balance between the company’s mission and the community’s needs. “Children from the community can be bumped with 30 days’ notice if someone from Hill, Holliday needs the slot, but we’ve rarely had to do it.”

Opening a corporate daycare center to the outside community is not uncommon and creates a way to offer childcare at companies that might otherwise be too small to afford it. Without the extra revenue, many smaller on-site daycare centers like Hill, Holliday would struggle to survive. With it they can thrive, offering a high-quality program and even a sliding scale for employee tuition.

Many even smaller companies, however, couldn’t begin to afford to do this. Given that 37 percent of all American workers are at firms with fewer than 100 employees (while 55 percent of all employees work at sites this small), on-site daycare seems out of reach for many. And even some sites as large as Hill, Holliday or larger might have problems if they were located in less urban areas where there was not so much demand in the neighboring community. Although companies could share a center, this is rare, according to Hoffer. More common is for a small firm to buy the number of slots that it needs at a local daycare center.

Another strategy — employed both by small companies and those larger ones that are reluctant to commit to full-time on-site childcare — is to opt for the safer alternative of backup childcare. With backup care, several companies band together to sponsor a center, each one paying for a fixed number of slots that it can then ration for its employees to use throughout the year. When the nanny calls in sick, or school is unexpectedly cancelled, a parent doesn’t have to miss a day of work. ChildrenFirst, one of the leaders in the backup childcare industry, sells its slots to corporations for about $32,000 a year. The companies may thus offer childcare benefits to their employees and be spared the worry and headache of having to build and run a childcare center themselves. And the savings are a dream: ChildrenFirst cites an estimate by WFD Consulting that the typical return averages $3 to $4 for every $1 that a company invests.

Yet another recent trend has been “sick childcare,” where companies contract with freestanding centers, sometimes affiliated with local hospitals, to provide daycare for mildly ill children, so that their parents can go to work. While some parents may not like this benefit, for fear that it may be used to pressure them to come into work when they would choose to do otherwise, others do appreciate it. In companies that are beholden to their “billable hours” — or in any company where an employee absence might be especially costly — such a benefit might recover a substantial portion of the savings from reduced absenteeism, without incurring the full expense of offering on-site daycare.

BUILDING THE FUTURE
On-site daycare is not for every company. Given lingering uncertainty over the economic benefit it offers, the large up-front costs, and the difficulties for small firms, many companies have remained reluctant to take the plunge.

Not surprisingly, most places that offer on-site daycare don’t make the initial decision based strictly on dollars and cents. As Lotus’s Marcia Lewis put it, “We don’t do this to break even.” Even after they have instituted on-site care, few companies bother to try to quantify the benefits, convinced that some of the greatest savings are in such things as morale and performance, which are hardest to measure. Thus, opening a corporate daycare center remains something of a “leap of faith.” And, most companies cite a moral dimension to their mission. They do it not just for the economics, but because it is “the right thing to do.”

Will on-site daycare someday become as commonplace as health insurance or 401(k) plans in the menu of employee benefits? Even if it does not, the relatively small percentage of companies that offer childcare have already had an outsized effect on the national debate about the standard of quality that can be met in daycare and the importance of providing good care for our children. As one watches the smiling toddlers walk past Lotus’s Director Marcia Lewis, each spontaneously giving her a hug on the legs as they go outside to play, one becomes convinced that every child’s future deserves to look something like this.


CHILDCARE IS THEIR BUSINESS

Despite the best of intentions, most companies face the barrier that providing on-site daycare is outside their primary business expertise. In the past, firms had no choice but to hire experts to advise them as they constructed a center, designed a curriculum, and hired their own staff. In 1986, Bright Horizons arrived on the scene to help. Currently the largest vendor for childcare services in the United States, Bright Horizons manages centers for 75 of the 100 Fortune 500 companies that have them. Along with other providers such as Mulberry and Kindercare, Bright Horizons will do an initial needs assessment and demographic analysis. After this, they will oversee construction, design a curriculum, hire and train staff, and seek accreditation. They can also customize a center to match a company’s image or mission. In recent years, Bright Horizons built a center for Carnival Cruise Lines with portholes and a nautical theme, and one for Cisco Systems with toddler-height computers at every turn. For Motorola, they designed a curriculum with special emphasis on science and technology.

Timberland Corporation recently built a new on-site daycare center at its corporate headquarters in Stratham, New Hampshire. As is common with most new centers — these days only one in four choose to self-manage — Timberland chose a vendor, in this case Bright Horizons. When Timberland’s CEO Jeff Swartz appointed an employee task force to look into it, they found a genuine need for daycare, not only for their own employees but also in the surrounding area. In fact, Bright Horizons had already identified Timberland as a likely candidate for on-site daycare — based on their size and number of employees at one worksite — and sent them a letter. Attracted by Bright Horizons’ reputation for quality and community service (they run a pro bono center for homeless kids in Boston), Timberland signed up. “Running a childcare center is definitely outside our expertise. Bright Horizons made it a lot easier for us to decide to do this,” says Jackie Mitchell, senior manager of work/life programs.

When it opens this fall, Timberland’s center will accommodate 102 kids from ages six weeks to six years, and it will be open to the outside community. Still, in keeping with another recent trend, they will not be able to afford to offer a sliding scale.

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