A 2014 CE Pro Recurring Revenue Study asked integrators why they might miss out on profits on a project.
26 percent said it was because of unforeseen circumstances, such as homeowner changes or weather. 11 percent said it was due to defective products.
If you think about it, that means the other 63 percent of the time integrators miss profit on a job because of self-inflicted wounds, related to poor estimating, lousy productivity by technicians, inefficient implementation of change orders and several other reasons.
The bottom line is that internal inefficiency is rampant. But there's good news.
“You have a great business model,” said Paul Starkey, co-founder and CEO of Vital Management, speaking at a CE Pro Summit panel alongside David Stang, founder and president of Stang Capital Advisory, and moderator Jason Knott of CE Pro.
CE pro businesses have relatively high margins, over 60 percent before labor costs and over 45 percent after, said Starkey. It has high return; it's capable of producing over 20 percent pre-owner income profit levels with small assett and equity requirements. It's cash-forward, as one of few cash-first models with typically 30 days of cash pre-paid. And it's evergreen. Not even counting RMR, a high percentage of business comes from partner relationships: builders, architects and designers.
So what's causing the struggle? Starkey provided a close look at the financial issues of many CE businesses.
- Profit is oftentimes off of what it could be (by 5-10 points).
- Labor productivity is typically less than it could be (10-35%).
- Margins are lower than they should be. Equipment margins are consistent but labor margins from company to company are all over the map (3-5% lower).
- Compensation is not tied to performance.
- Cash is off.
- Sales are limited.
“Cash is the most confusing thing in this business,” said Starkey. “Most of the cash in this business is a loan from a customer.”
When you look at your business, are you seeing one or more of these financial issues? If so, it might be time to make an adjustment.
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Starkey also looked at the underlying issues that may be ushering in such unreliable financial results. He named seven things he sees far too often in CE businesses.
- Most systems and processes were born out of necessity and are people-based.
- Profit levers are not always clearly understood.
- Proper measurements and accounting are not always in place.
- 'Plan, Review, Act' culture is under-developed.
- Chaos trumps productivity.
- Day-to-day often takes away from the big picture.
- Owners are very engaged in the business and too busy, so a culture of empowerment is lacking.
To his last point, Starkey said he was once asked, “What is the number one difficulty in doing what you do?”
“The owners,” he answered, eliciting a laugh from the audience. “There is a tremendous amount of chaos in this business. The owners are not visionaries alone. We need a culture of [employee] empowerment in the business.”
Invest in your people, said Starkey, especially if you plan to sell your business one day. This means training and development but also creating the right company culture.
If you're seeing these types of financial and cultural issues in your business, Starkey laid out the very first change you should make. Today.
“Count and measure your business,” said Starkey. “Make an effort to standardize this process. I can’t overemphasize this accounting and measurement part of your business. You have to get the accounting right.”
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