AV Matters
The Stimson Group Newsletter
March 2010
Vol 4 Issue 3
In This Issue
Survey Report
Awards Spotlight
InfoComm 2010
Best Practices Series
About The Stimson Group
Quick Links
Greetings,

The year is off to a great start. Most of the companies I work with have reported good results for 2009 and the rest have an action plan for a better 2010. Across the industry I have spoken with many folks who feel their companies have made the right adjustments in response to the Recession and are ready to move forward.

On the bad side, the Recession seems no where near an end. Money is getting tighter and the tweaks that improve the bottom line are becoming harder to find. So this issue of AV Matters starts with an industry survey on your biggest threats and continues with a discussion on profit margin philosophy.

Thank-you for taking the time to read and please feel free to forward to your friends. Check out the share button for Twitter, Facebook, etc... on the bottom of this email. Finally, I do enjoy your comments and questions and respond to every one of them. So please feel free to send me an email.

Thanks for reading,
 
Tom Stimson, MBA CTSAcclaro Report Cover
My Direct Email
Website

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Your Survey Results
What's the Biggest Threat to Your Business?

In Feb 2010, The Stimson Group asked 50 or so AV folks what they considered to be the biggest threats to their business. In those responses we came across some recurring themes and a few fresh perspectives. We started by first asking about what we thought would be some key issues and this is what they said:

Question: For each of the following obstacles, please rate according to how they potentially affect your company's ability to survive the Recession. (If you feel it is a threat to the industry but not necessarily to your company, answer for your company only).

Chart Feb 2010 Survey

Of these items the number one threat to the respondents is competition from channel partners. As we will see in many of the written responses, the competitive landscape has become an all-consuming concern.  22% of respondents cited this as a Big Threat and another 24% said it was Worrisome. The most frustrating trend seems to be independent contractors encroaching on the full service provider's space. The independents have no overhead but ready access to products via wholesale companies, the Internet, and distributors who seem more than happy to support whatever company makes the sale. If we consider that the fourth largest threat - Presence on the Internet - is also a competitive issue, then the channel problem takes first place by an even higher margin.

"Regarding the Internet - a guy with a fancy website - presents himself as "PLAYER" when in fact he's nothing more than a guy with a laptop, working out of his apartment... (and he just gets VER to drop off a truck load of equipment)  with NO insurance OR employees, OR any overhead..."

What happens when your supplier becomes your competitor? And whose fault is it?


"[our biggest threat is] fragmentation as a result of structured cable solutions providers being presented with demand for integrated AV requirements."

Customers are looking for the best deal and perceive one-stop shopping as a solution. Unfortunately the average AV dealer still views hardware as a key profit center and struggles with labor estimates. It's not surprising that customers are turning to high-value cable contractors for simple end-point technology installations - e.g., Digital Signage.


Customers are also guilty of bypassing the dealer channel and sourcing hardware directly from distributors and sometimes retail outlets.

"Our biggest competitive threat comes from some companies not valuing our expertise.  Because it is now so easy to buy virtually any type of equipment on the Internet, some companies are purchasing and/or specifying equipment without fully understanding how the technology works and the quality differences that exist between brands and models.  By the time the integrator becomes involved, we are limited in solving problems by the capabilities of the gear the customer has purchased and/or specified, outside our involvement.  If the system has problems, we often get the blame."

The second biggest issue would seem to compound the first - lack of access to capital is hindering many companies' ability to adjust to market conditions. A whopping 47% said this was at least worrisome.

"How many other companies who have never missed a payment in their history got their loans or lines of credit called in the past year or two?   We paid them (the bank) off but it consumed all the cash we could scrounge up."

Adding insult to injury, customers are taking longer to pay often for the same reason. When the supply chain relies on itself to finance projects, it only takes one hiccup to take the whole chain down. Cash flow has become a deciding factor on which business to pursue.

"Vendors continue to tighten their lending flexibility and Customers continue to pay slower."

Medical insurance has been a short-term issue for a number of years. Annually escalating costs have kept this a hot topic. Healthcare is still high on the threat list at number 3 with 31% citing as worrisome, but in an increasingly long recession it seems that cash flow and competition have become bigger short-term threats.
The fifth through eighth place threats are all familiar and in good times any one of them might have taken one of the top three spots. The most significant number is the 33% of respondents that said complacency within their company was on their radar.

"The single most influential driver that is threatening our Market - is the AV Business itself. We are collectively Walmarting ourselves to bankruptcy."

"The end user is much more educated now than ever before and they know it.  I believe many buyers use this to negotiate price reductions from their current suppliers.  Yes, this has always existed but in the current climate suppliers are almost desperate to maintain current client base...  This shrinks the amount of business that is truly in play. RFP's are still out there but more often than not they are used as negotiating tools."

Indeed, there was an underlying current of resignation about current conditions and a certain helplessness about the biggest threats. Still, several comments offer insight and innovation that suggests - if we have done these things to ourselves, then it is our job to find a solution:

"All of us are on the internet. If you have a good website and customers call your office the telephone sales people should be able to do their magic.  Because of the Internet things are more competitive, but if you can sell your services - competitive is not bad."

"I still don't accept the mentality of lower margins and losing a little on every sale is better.  Life is tough enough.  Isn't it time to return to making a reasonable profit?"

"Bigger issues: Inability to forecast accurately and lack of key industry metrics from which to develop a forecast."

The real question is not what we all agree the issues to be, it's 'what are we going to do about it?' In this month's Best Practices column, I take a stab at what I see as the underlying issues.

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Don't Forget to Submit!
LSA Staged Event Awards


This year's InfoComm/LSA Staged Events Awards presented by Lighting & Sound America Magazine and PLASA will recognize leaders for events held in 2009 in five categories:

· Best overall staging for a corporate or association event - Technology budget over $200,000
· Best overall staging for a corporate or association event - Technology budget $50,000 - $199,999
· Best overall staging for a Corporate/Industrial entertainment event
· Best use of A/V technology for a trade show booth for a corporate client
· Most innovative use of A/V technology for an outdoor event

Last year's InfoComm/LSA Staged Events 2009 winners and honorable mention awardees for 2008 staged events included:

· Freeman for the Miller Brewing Annual Distributors Conference, Microsoft Management Summit, and National Association of Cable Television booth
· Dodd Technologies for the Golden Goggle Awards
· Etech for the Gartner IT Expo
· On Projecoes for the Roda Skol event

The InfoComm/LSA Staged Events Awards and reception will take place on Wednesday June 9, 2010 in Las Vegas following the Rental & Staging Forum at the Las Vegas Convention Center. Deadline is April 30th! Give yourself enough time to put together a winning submission.

Submit Here

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logoTraining Seminars at InfoComm 2010
It's only THREE months away - June 5-11

InfoComm 2010 Registration is OPEN. For the past five years I have taught at InfoComm and even with presidential duties this year I will take time to share what I am learning in the field. My two seminars:

Thursday, June 10
IS38 - Rental & Staging Business Survival Kit
8:00 a.m. - 10:00 a.m.
Room N255

IS49 - Systems Integration Business Survival Kit
10:30 AM - 12:00 PM
Room N255

Both classes will present real challenges and applied solutions for their respective audiences. We will start with financial metric analysis, weigh the pros and cons of organizational structures, and show how key processes affect profit. In addition we will debunk some long-held assumptions about inventory management, proposal development, and business development.

Check
out the show website here
Best Practices Series:
Is AV in a Race to the Bottom?
Stimson Square Logo
Which things can we fix and which are here to stay?

By Tom Stimson CTS

Shrinking margins, unfair competition, price shopping customers, disloyal suppliers, greedy bankers, and a general lack of appreciation for the value of your services...does this about sum it up? Ten or fifteen years ago the industry starting mumbling about AV becoming a commodity. At that time 40-50% equipment margins and an exclusive lock on professional gear made AV dealers quite happy and the AV Industry very attractive to investors. Value-added services like design, programming, and project management were considered overhead costs and what little revenue they represented was just gravy on an already profitable transaction.

In 2010, we are singing a different tune. Hardware margins on integrated projects start at 20% and quickly erode to the low teens. And we find that as an industry we have trained the buyers to undervalue the labor we continue to underestimate. In the end, quality dealers are losing jobs to low margin competitors that can do a convincing job of estimating and are willing to work hard to recover the cost of installation. Customers have become so price-centric that they no longer take the time to consider the value of your "value-added." And why should they? A tighter scope of work and a willingness to transparently cost a job is what the fringe competitors have to offer. When the veteran AV dealer does actually win a bid job, it's either because they underestimated the labor or chose to do the work at a loss in order to win the cash flow. Which begs the question, how long can this go on?

The fundamental issue becomes, do you want top line or bottom line growth? Business has been in love with revenue ever since the dot-com boom, where profits were secondary to incredible growth. Entrepreneurs became millionaires without ever making a profit. Today's successful company is just as elusive, but looks completely different. In the contest of AV CEO's sitting around the bar jawing about their companies, the winner is the boss that can say, "We shrank by 40% but increased our overall profits." This guy is buying the drinks, because the next best brag is, "We were flat on revenue but it ate all our profit." How did anyone increase profits in these dire times? They probably started by defining an acceptable profit then engineered a company that could generate those returns. Profit is not what's left over; it's what you planned for.

Put a Stop to Shrinking Margins
In a tight economy, grabbing more market share is tough - especially if you cannot afford to do so on price. The solution therefore is to become smaller AND more efficient. The only way to stop the slide is to give up low profit opportunities (or turn them into high profit). This means giving up what may be a prized position as a BIG company, but that is just one more emotional choice. Becoming a profitable company again is a badge of honor you can get used to.

It is not enough to just set a gross profit threshold and stick to it. First you have to understand your true cost structure. (See Face Reality). Then apply gross margins in increments proportional to the risk of the project. Next, incentivize Account Executives on profit margins not volume. Charge operations with reducing overhead through better processes. And most of all protect the labor estimates made by your design and project management teams. Never fudge hours to win a job - but you can adjust the rates if it makes sense. In addition, examine your efforts on selling Project Management, Maintenance Agreements, and Design Consultation.  Successful companies are selling these services at a premium. When your sales team screams that they can't win the job at these prices, then it's time to remind them that order takers win jobs by dropping the price. Sales Professionals win by demonstrating value.

Face Reality
There are two scary practices going out there that affect our perceptions of an acceptable margin. The first is the under-recognition of direct costs in "cost of goods sold". Job costs for many companies only capture the install and project management time that has been assigned to a specific job. The time not applied to projects drops below the line into overhead expenses. This is a big mistake. All direct labor is cost of goods sold, whether it was used on a job or not. By correctly recognizing direct costs, you will have a better understanding of what a profitable margin should be. You will also learn the true effect of your overhead costs on your business. If you are still following along, when business is down then overhead needs to be reduced. If operating profit is consistently low, then you probably need to outsource more labor instead of maintaining fulltime staff. Learn how to be a smaller company, if that's what the numbers tell you.

The second scary practice is treating unfavorable outcomes as an exception. We rationalize poor results by citing a problematic job or incident, and vow that it won't happen again. Then next month there is another incident - a different one - and it gets the same treatment. Problems and mistakes are normal. We can minimize them, but to act like they won't happen again is just crazy. Mistakes are the cost of doing business and therefore are reflected in cost of goods sold. The average of COGS across all income determine what an acceptable margin should be.

Know When to Walk Away
If you went back and analyzed the business you won the past year, how much of it helped your bottom line and how much hurt? Is your business setup to make money on the kind of work you can win? Or should you be winning different work? The answer is probably a little of both. Many businesses choose to apply job costing to analyze their projects. Not all job-costing methods are accurate and most do not deliver the kind of information we need to make better decisions. The first thing job costing should tell us is whether the proposal budget was realistic. Next it should reveal whether we executed efficiently.

When it comes to writing an accurate budget, firms have to set gross margins in stone otherwise the decision about where to price a project becomes emotional. I.e., first the margin on equipment is whittled down, and then we hack the estimated installation hours to get to the magic number. Messing with labor estimates tricks you into thinking the job can be profitable. At the risk of oversimplifying, labor should be treated as an absolute just like hardware. Change the unit cost of labor, but never fudge the time.  When profit becomes too low, walk away. End of story.

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Stimson PortraitAbout Thomas R. Stimson, MBA, CTS

Tom Stimson is celebrating over twenty-five years in the communications technology industry.  As a Consultant, Tom helps companies determine their next goal and then execute the plan that takes them there. For more information visit the website.

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