How electrical contractors can move beyond the service-based organization model and prosper after tough economic times
I think we all breathed a collective sigh of relief on September 15, 2009, when Ben Bernanke, the Federal Reserve Chairman, announced that the recession was over. (See the full report at www.marketwatch.com/story/bernanke-declares-the-recession-over-2009-09-15.) Since that time, the stock market has started to rebound — with the Dow Jones up over 10,000 points for the first time in nearly three quarters recently. According to the Bureau of Labor Statistics, as of January 2010, unemployment numbers have dropped from more than 10% to 9.7%. Although Chairman Bernanke had signaled the worst was behind us, I bet many of you feel like he was talking to a very small segment of the business population.
Few, if any of you, have participated in government bailout programs. As an industry, electrical contractors are facing more trials than ever before. As large companies have restructured their operations and instituted cash-saving practices, it's the smaller businesses that are feeling the wrath of these changes. Profit margins have evaporated, project opportunities have decreased, and, as is to be expected, competition has abounded — with many firms now expanding far outside their normal geographic regions to find new work. The recession isn't over — it has merely entered its next stage: the aftershock.
Perception is reality
At a recent national contractors' conference, the question was asked: “Do any of you believe that the recession is over?” It should be no surprise that not a single hand in the room went up. In fact, the question started a general grumbling that progressed rapidly to outright shouts of anger. It's clear that the “good news” broadcast by the Fed has not made it down to the business trenches yet.
What has occurred is a new business environment has blossomed — one that has necessitated some dramatic changes in the way you're doing business:
Profit margins have all but disappeared — Many contractors, as a way to cover their fixed costs, are bidding work at 0% profit margins. Their rationale for this tactic is to ensure that revenue continues to come into the business to cover employee and infrastructure costs. Unfortunately, the downside to this approach is there is no performance cushion should a project “turn south.” Accordingly, any project losses would need to be funded out of the idle funds of the business — a sure way to erode business savings or increase debt loads.
New competition has entered your market — Fewer project opportunities at a single location force businesses to expand outside their normal geographic boundaries in search of new revenue streams. Akin to the migration practices of wildlife — you go where the food is abundant. As these new competitors enter the market, they test pricing levels until they find a margin that allows them to win some initial projects. Once established, they use their initial contacts to build new relationships, find additional work, and presumably look for ways to put the “locals” out of business.
Payment terms have been extended — Gone are the 30- to 45-day payment cycles on receivables. Some large customers have instituted 180-day receivable cycles as a way to conserve their cash. This delay in payment requires you to use your own funds to cover the bills during the uncollected period. In this case, the risk of payment shifts from the customer to you. Oh, and forget about pre-billing as a means to cover the collectible “spread.” For the most part, customers have closed up that loophole in their contractual documents.
Cash conservation has become the new investment norm — In previous economic downturns, businesses would rely on credit or other forms of outside investment to weather the storm. Now, the practice is to conserve cash at all costs. Employee hours have been reduced to 32-hour work weeks, administrative (non-chargeable) personnel have been let go, and any forms of discretionary spending have been halted. Cash is truly King.
As a prudent business owner, you should realize there are no assurances that the current reality will disappear once the recession ends. In fact, a growing number of individuals believes we are on the cusp of a new industrial revolution — one that is moving away from our current services-based mentality to a tangible, product-based environment that rewards production over services offerings.
The next phase
Analyzing the approach of one electrical engineering firm allows us to gain some insight into what a new business model might look like for a new breed of electrical contractor. A regional electrical engineering firm that develops building systems for U.S. embassies around the world faced a problem that could not be solved with commercially available products. So the firm fabricated a solution in-house to fit the specific needs of the embassy they were working for at the time. Not only was the unique product solution an effective fit for its current client, but it also spawned an afterlife suitable for additional embassy installations. The engineering firm, by happenstance, had moved from a pure service-based company to a product-based company with a “develop once, resale often” moniker.
Electrical contractors that are able to develop tangible, visible, resalable items that can be used in a global environment should be highly successful. But how do you make this shift? Certainly, success cannot be advocated on the product development skills you currently don't possess. There has to be a way to make this evolution a reality without undermining your core skill set of electrical contracting services.
Aligning yourself with product innovators
Obviously, in a perfect world, each electrical contractor reading this article will identify a specific product need in the marketplace that has not been developed. Although this is certainly possible, it's hardly probable. Accordingly, in the absence of individual innovation, evolution for the electrical contractor is to align with product producers that are moving rapidly into the global marketplace — jumping on the viable new generational products in the market. That market is presumably associated with the alternative energy industry.
In theory, if product is necessary to retain market share in the new industrial revolution, then aligning with superior product manufacturers is the next step. At this stage, the view of the electrical contractor has to move outside the realm of domestic manufacturers and begin to look at the impact products will have on the global community. For die-hard patriots, the slogan “only buy American” may be the rallying cry. For others, emerging technologies in other parts of the world may open up opportunities to be a North American reseller of an international product. Remember, product sales come with margins in many cases of greater than 50%, while services-only revenues are fortunate to achieve double digits.
This analogy, however, is not meant to preclude you from providing any form of service offerings, which in the past business model era represented nearly 90% of your revenue stream. Presumably, in the future, the services-only segment of your business might only be responsible for 30% to 40% of total revenues — or quite possibly 10% to 15% of total profits. It is, without a doubt, a fundamental shift in business philosophy.
At the crossroads
Because time does not stand still for anyone, as an electrical contractor you have a choice to change with it. The question is, will you? Unfortunately, as you contemplate your decision, time continues its march forward, and with every passing moment, viable business opportunities are being grabbed up by your competitors. Change requires action on your part in the following areas:
Decide whether you are a product or service company. In this recessionary aftershock period, it is presumed that product-oriented companies (i.e., those that sell a product) using installation and maintenance services as ancillary offerings will attain higher profit margins and a more competitive position in the marketplace.
Reassess your definition of customer. True innovation is achieved when businesses are able to turn their competitors into customers. For electrical contractors, there may be product and service offerings that can be “sold” to your current competitors, thereby changing the overall customer dynamic. In one example, a contractor started selling CAD services to his competition as a way to help them reduce their project drawing costs.
Stop listening to the public market chatter. Wall Street and Main Street are on two very different paths out of the recession. Wall Street can continue to bank on government subsidies to erase past financial disappointments. Main Street will continue to rely on your survival instincts, forcing you to make your own business rules to compensate for economic realities.
Right now, in this economy, sitting still just might destroy your chances for future business prospects. All around you, economic chaos has created opportunities that can either be ignored or leveraged. The choice is obviously up to you. Are you ready to lead your industry into its post-recessionary plateau?
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.