Electrical contractors can no long follow a services-only business model
The recession is over, and what’s left in its wake is a new economic era — a rebirth period that is forcing the electrical contracting community to rethink its own industry definition. For many contractors, the thought of rebuilding their business empires all over again is daunting. After all, just three years ago, many in our industry were flying high with double-digit profit margins and customer projects that forced us to fully stretch our technical staff. At this stage in the game, what’s the best way to start the climb back to prosperity?
For many contractors, the issue is less about profitability and more about cash flow. Projects are slower to start, payments are often waylaid, and higher levels of invoices are going into mediation. In an industry where cash is king, the immediate goal is to generate new forms of cash flow in a new business model format.
In general, electrical contracting businesses are separated into three size designations: small, medium, and large. Although the Small Business Administration deems a “small” electrical contractor as having revenues of less than $14 million, I advocate that the sizing levels should be differentiated based on operational infrastructure requirements, not by total sales. Accordingly, I offer the following informal sizing characteristics:
- Small electrical contractors are defined as the traditional “mom-and-pop” shops with one to three trucks and a technical staff of less than seven. These firms maintain a skeletal infrastructure and are often operate out of an individual’s home, typically without any real inventory space. The recession was especially difficult for these firms as there were little, if any, costs to cut when the economy turned down. Now these firms are facing a difficult future as service-based revenues represent practically their entire revenue stream.
- Large electrical contractors as those with revenues that eclipse the $50 million mark. At this level, the contractor has established multiple lines of business, various geographic locations and has a strong “inventory” of equipment and parts. For the most part, these larger firms have weathered the recession. Although revenues have dropped off, there was little fear of long-term survival.
- The mid-sized firms present both an enigma and an opportunity as the new economic era begins. These firms are generally going to have revenues between $5 million to $25 million. The problem is there is no established infrastructure to effectively operate these firms. Small business infrastructures create inefficiencies in pricing, staffing, billing, and other administrative activities, which are completely unusable for mid-sized firms. Conversely, these firms obtain little value from jumping up to the infrastructure requirements of the larger firm — too much horsepower and not enough horse.
Despite this reality, these mid-sized firms are ideally situated to rebound in this new economic era — more by happenstance actually than effective planning. How is this possible? The growth over the last decade encouraged mid-sized firms to invest back into their businesses, usually in the form of equipment and warehouse space. Now that the recession has limited the use of these “assets,” these same businesses have leveragable resources that can immediately jump-start their cash flows and simultaneously generate new forms of revenue.
Modern-day equipment rental facility
Take a drive by any mid-size electrical contracting firm and you will see, in most cases, a yard full of idle equipment. To combat the recession and free up some cash, some contractors immediately started to thin out their inventory of cargo vans. It was not unusual to get a used cargo van for a song — not that there were many buyers at the time. But beyond the cargo vans, look into the yard a little more closely, and you’ll see other specialized equipment gathering dust — equipment that is fully paid off. How can that specialized equipment find its next useful life?
From a one-dimensional viewpoint, the obvious answer is to go find projects that leverage these paid-off assets. Unfortunately, as most contractors have found out, this approach of working harder has yielded little fruit. Instead, the idea is to allow these assets to be used by your electrical contractor competitors — firms that are having success in getting projects that use these specialized assets.
For example, a mid-sized electrical contractor in the Northeast has a full lot of specialized equipment. Included in this mix is a large auger that is used to set telephone poles. Because this task is hardly a full-time effort, this auger sits and collects dust most of the time. However, if the contractor rents out the auger to other electrical contractors, he just generated a new revenue stream and put an idle asset to work. This contractor realized that, as opposed to investing business development dollars into finding low-margin projects, he was better off renting his assets to those colleagues that had better chances of winning these types of projects. Not only has this contractor changed his marketing approach, but he’s also become a vendor to his own industry community.
For rent. Just like idle equipment, many mid-sized contractors have open warehouse space at their facilities. Because most of these spaces are not partitioned off, the cost of utilities remains high to heat/cool the entire structure. So why not partition your space and rent it out to others?
Let’s take a look at one mid-sized electrical contractor in Texas that invested in a renovated warehouse space during the previous economic boon as an example. When the recession hit, a local sheet metal shop desperately needed space for its operations. Within just a few months, the electrical contractor had segregated a portion of his warehouse space for the sheet metal shop. The benefit turned out to be twofold: The contractor obtained rent for his unused space and developed a preferred partnership arrangement with the sheet metal contractor.
In this case, the electrical contractor went outside his primary industry and found a complementary tenant that was neither in competition with him nor infringed on his existing space needs. The tenant benefitted by having an effective workspace that allowed for the storage of raw materials and production of the final products. In addition, because the warehouse was configured with three truck bays, the tenant was able to more effectively load and deliver its product to various job sites.
The “farmer cooperative.”
The good news is that small firms can also benefit from this form of cash-flow generation. Certainly, the immediate response to such an approach for a small contractor would be to search out those mid-sized contractors and become a “client” that uses their specialized equipment. However, what about those small contractors that see great opportunities in the marketplace but don’t want to be beholden to another contractor for their revenue generation? Is there another way to prosper?
The answer is something informally referred to as “the farmer cooperative.” Historically, small farmers could never afford all of the necessary equipment to maintain their land if they had to buy that equipment themselves. To solve this dilemma, they would come together and each buy a separate piece of equipment that could then be shared by the cooperative. Very often, this equipment was all housed together at one warehouse facility and checked out like library books by each participating farmer. Of course, because the planting and harvesting seasons impacted each farmer at about the same time, there was also a pooling of labor resources to help each farmer. As a result, all of the farmers benefitted by sharing the costs.
Although I’ve not seen this specific example being used by the electrical contracting community firsthand, I predict that as the new economy takes hold, a number of energetic, entrepreneurial small contractors will begin to embrace this approach. In fact, this type of approach could potentially be one of the new roles for the contracting association communities — an equipment-sharing facility funded by the small contractor community.
It’s no longer plausible to assume that the electrical contracting community will ever rebound as a pure services-only business model. Projects are now awarded based on low price, making contracting services a pure commodity play. The evolution into the new economic age will necessitate a movement toward product orientation. This approach of leveraging idle assets to generate new cash flows is a first step in this transformation process.
What is fascinating about this approach is the customer orientation. Whereas most electrical contracting work is focused on a traditional end-customer, this approach necessitates that the definition of customer be oriented toward the contracting community. In a very real sense, your competitors are evolving into your customer base. Of course, this evolution changes forever your business development and marketing strategies.
For one electrical contractor, this evolution has been enlightening. A member of an electrical contracting association, this contractor first sought out his competitive brethren to pitch his new business model. He was initially surprised that he was treated like a traditional vendor — politely ignored and not given a priority position for call backs. He quickly learned how best to approach his new customer base: by adopting those techniques that he would respond to if approached by a similar vendor pitch. Slowly, the results started to accumulate. He had made the transition from traditional contractor to the new hybrid breed of contractor/vendor.
For those contemplating a similar move to a contractor/vendor status, here are some questions you need to answer before taking the plunge:
- What does an electrical contractor look like to you in the future? For those contractors that adopt the contractor/vendor moniker, the assumption is that you have chosen to evolve from a pure services organization to a product-centric business that effectively mixes tangible offerings with first-rate service. The expectation should be a similar evolution from single-digit to double-digit profit margins as “vendor” activities begin to blend with your traditional contractor services. For many contractors, there’s an assumption that, over time, you will evolve into a full-time vendor position.
- What assets do you have that are , or are you better off forming a contractor cooperative? Contractors must realize that, for an asset to be , it must be of specialized value. Just like any value proposition, the asset must increase customer revenues, decrease customer costs, or mitigate customer risks. For example, a single cargo van is probably not a asset while bucket trucks may have a wider potential customer audience.
- Where are the future customers? For some contractors, the definition of customer will change to incorporate your existing colleagues and competitors. With this change in customer definition, you’ll be required to modify your marketing efforts — in many cases, wearing a series of different hats at contractor gatherings.
- How do you take the first step? After identifying your assets and potential target market, contractors must test their new marketplace the same way you would with any new offering. Because you’ll be selling to your own industry brethren, it’s best to use the familiar “friend of” method to try out your pitch. In simple terms, this method involves communicating with a small group of your personal colleagues, who will give you honest feedback on your business idea, help you to modify your communication message, and, quite possibly, be your first beta customer.
The new economy is here, and the truth is the rules have changed forever in the electrical contracting industry. For those contractors that can effectively see the new vision of the industry, this is the best time to gain a competitive edge. This process of transforming to a contractor/vendor status and leveraging both your idle assets and industry relationships represents your first step in that evolution.
Dawson is managing director of LTV Dynamics, an international sales management and business consulting firm in the suburbs of Washington, D.C. He can be reached at BLDawson@LTVdynamics.com.