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The Stimson Group Newsletter March 2010
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Vol 4 Issue 3
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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 CTS 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).
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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Training 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.
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Best Practices Series: Is AV in a Race to the Bottom?
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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About 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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