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July, 2010 - Vol 5, Issue 7
In This Issue
Your Questions
Best Practices Series
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Welcome to a new look for AV Matters newsletter. Nothing dramatic (there's only so much Constant Contact will let you do), but I wanted to freshen it up a little now that my website has been updated. I hope it's easier to read.

Since folks seem to be interested in my travels, I have somewhere interesting to go every week for the next several. Next stop is Rome, then New York, Chicago, and Sao Paulo with a couple of other trips sprinkled in - all before the end of August. I will give you a report on the state of AV in Brazil when I get back. In the meantime there are two Rental & Staging Roadshows scheduled. I hope to see you there!

I have two features this month. One is an extended reply to an attendee of one of my InfoComm '10 seminars. I do enjoy your emails - please continue to send your questions, comments, and ideas. My Best Practices column is about valuing your professional services. Too many folks in AV give away their intellectual property when it's one of the few things that haven't been commoditized. I hope I can prod you to reconsider your approach.

Happy Reading,

Tom Stimson
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Rental & Staging Roadshow
Roadshow Logo 2010The Rental & Staging Roadshow is excited to announce NEW DATES and LOCATIONS for 2010

July 28, 2010 | New York, NYC | Metropolitan Pavilion with Scharff Weisberg
August 18, 2010 |  Chicago, IL | Hosted by Intelligent Lighting Creations
September 29, 2010 | Pasadena, CA | Co-located with Digital Video Expo

Our New York day starts at 10:00 am with a full agenda and includes two presentations from me:

Keynote Presentation: Rental is a Commodity and What You Can Do About It | Tom Stimson
The problem of shrinking margins is pandemic and everyone has their own idea of whom to blame, but as an industry we have done this to ourselves. Learn how 30 years of tradition is the real culprit and what you can do to liberate your company from this cycle.

Business Seminar: The ROI of Everything - How To Make Better Decisions | Tom Stimson
We often know that updating processes is the right thing to do but then fail to execute because it would seem to cost too much. Companies need better tools for calculating the return on these costs over time, but struggle with quantifying that value. Tom will demonstrate a simple system for calculating the ROI of change using a real world example.

New York registration is open. Register now!
Business Survival Kit - Attendee Questions

At InfoComm in June I taught two business seminars - one for AV Integrators and another for Rental-Stagers. In these classes I talk about recurring challenges I find in both my clients and my casual encounters in the AV Industry. The follow-up from both courses was beyond expectations and I am now looking forward to several new engagements with folks that want to find ways to improve their companies.

A key topic for both classes centered on what I see as the correct interpretation of Cost of Goods Sold (COGS). To make a long story short, many companies confuse job cost with COGS and therefore under-manage  indirect costs by treating them as overhead. My solution is to group all indirect, above-the-line costs into one group called ACOGS (Applied COGS). This encompasses things such as installer downtime or delivery vans - things that only exist because a project was sold but are not necessarily applied 100% to job costs. One of my attendees shared these questions about how this would apply to his company. Hobie Fugate is the CEO of AVMS, a rental-staging firm in Seattle, Washington:

Regarding accounting and job costing below are my questions. I appreciate your time on these, your input is important to us.
1.       What is your opinion on how van fleet usage would be allocated between an operation of staging and hotel support. Understanding that departments are busier at different times so similar to equipment peaks, van usages peaks for one department or another. Our rule is hotels never have to rent where as staging - when vans are depleted - must rent because we can charge that expense to the job. How do you break out van usage per job?

The simplest application of van fleet expense is to apply those costs as a percentage of revenue. If vans are used to support staging 60% of the time based on number of runs, time on road, etc...then 60% of all fleet expenses (including all van overhires and courier hires) would apply to staging. On a job cost or ACOGS application for the purpose of job cost forecasting, you would apply the staging portion of trailing 12 months (TTM) fleet expense to the TTM revenue to derive a fleet expense/revenue %. This amount would be added to the total ACOGS figure to be applied in job cost forecasting. I like this method because the cost of a van run is the same for staging or a hotel delivery. In your method, the staging group incurs higher expenses.

To get the above results you will have to track van time/runs for a sample period. For best results, use 12 months' data, but you may be satisfied with an estimate. For companies with divisions under separate P&L's, an alternative method is to apply 100% of fleet expense to the dominant division then apply an internal chargeback for each run/duration when the fleet is used by the other division. In effect - one division treats the fleet usage as an outside expense.

One additional note: ACOGS is used in lieu of job cost methods to reduce the amount of accounting and record keeping required in allocating costs to projects. Resources shared by jobs but not necessarily attributable to individual jobs are good candidates for ACOGS. Extraordinary expenses such as common carrier charges for moving a semi trailer from one location to another for an individual project are still best accounted for as a COGS by job.

2.       In your presentation COS (cost of sales) is a below the line cost. What about sales commission, is this a cost to the job or ACOGS?

Sales commissions remain below the line. The reasoning is this: you do not consider the cost of commission when projecting whether a job will be profitable. While commission technically meets the requirement of ACOGS in that it only exists when a job is sold, sales compensation in all forms is a selling expense. It is one of the few things below the line that will fluctuate month to month, but you can easily budget commissions based on revenue.

3.       What about incentives for Project Manager and Hotel Manager, are commissions considered to be a cost of labor when incentives do not qualify if the cost of labor is above 35%? i.e.; incentives were made because labor was managed but the commission was applied to the cost of labor for the next month and that month may not qualify. Thoughts?

My initial thought is that this commission structure (technically, a bonus) is unfair in that the PM does not truly have control over the outcome. Business concentration will decide what the cost of labor is as a percentage of revenue. Having said that, I would consider performance bonuses to be a below the line cost for the same reasons that sales commissions are. In this case the expense is a management decision (much like financing costs and executive salaries) that should not affect the determination of profitability at the operating level. I strongly endorse bonuses to operating staff for maintaining gross profit, but I would frown on that bonus affecting that same gross profit.

4.       Back to COS, what about during a renewal of a contract or the cost of an orientation to drive sales, train hotel staffs to drive sales is this below the line or one the P&L of the hotel directly impacted?

In my opinion, these are below the line costs. At the very least this represents business development and retention costs and should not affect gross profit. I do know that some companies would capitalize the costs related to a contract renewal and depreciate over the life of the contract.

5.       What about benefits, ACOGS or below the line?

All benefits for direct labor belong above the line. When calculating ACOGS, which involves indirect labor you would also include benefits. Benefits are a real expense that need to be considered when estimating job cost. This is important in that we want to make good choices about outsourcing labor.  I have seen companies that push all benefits below the line run into trouble because this misapplication of data told them to continue using their personnel in overtime, when they should have hired more full-time staff or at least hired temporary labor.

My thanks to Hobie and his team for coming up with these great questions! - Tom
Best Practices Series
What Are Your Ideas Worth?

One of the more basic questions that Consultants must answer for themselves is how to value their services. Do you charge for time or for the outcome? If two proposed outcomes are the same, is one consultant worth more than another? Is a higher-priced professional necessarily better than a less expensive one? Or do you as several books suggest, calculate your cost of living, estimate the amount you want to work, then divide to get your hourly rate. Hmm, sounds easy...doesn't work.

AV Professionals have a similar challenge. Many companies use an hourly rate to value Design Engineers, Programmers, or Project Managers - all are professional services involving considerable intellectual property, experience, and ideas. But if everyone uses hourly rates and transparently shows them to the customer, then these services become just another line item commodity. And as important as best practices and certifications are to the industry, these conventions only serve to further quantify what is essentially an art.

Deriving a value for professional services requires that you first understand what it is you bring to the customer: something they cannot do for themselves and an outcome that will improve their condition. If you can do these well and provide an elegant solution in the process, then you have set your services apart from the line item alternative. The problem therefore isn't how to value the service; it's how to sell it. For any given project there is the value of products, cabling, and installation then there is the value of making it work. Add to that the impact of making it work elegantly: the quality that exceeds the customer's expectations, but once exposed to it they cannot live without. You cannot sell elegance in a contract bid proposal.

If you are one of those companies that already adds elegance to your services, then the following statement will make sense to you: the extended quality of your offering has an ROI to the customer than can be quantified. You can save them time, create impressions for their customers, or stretch their budget - all valuable things they would not have without your contribution. Calculate that value and ask for your share.

For those folks that aren't ready to sell professional services and are comfortable estimating hours, I suggest that you re-evaluate your hourly rates. Do the Math: if you paid your Design Engineer salary and benefits equaling $100,000 per year, then divided that by the number of usable hours (billable) of say, 1500; then added a 50% profit margin to that - you would charge about $135/hour. What if you have a team of engineers? Is their collective knowledge worth more than a competitor with only one or two? Does the range of salaries from junior to senior designers lower your cost? What should you charge?

Many folks chime in about now about what fees they feel the market will bear. "Tom, I can't charge more than $60 an hour or I will lose the project!" I understand. There some projects and customers out there that only consider the price. What you need to understand is that you are selling below your cost in most cases. The question and premise of this article is 'what are your services worth?' Given the value of engineering for instance, does it make sense to give it away? Or, could you be applying engineering resources in non-engineering roles? Does your low-price competitor have the expertise to bring brilliant ideas to the table, to wow the customer, maximize their budget - or are they just cheaper?

At the end of the day, what really matters is that salespeople have to be more than order-takers. They have to present your unique value to the customer in such a way that price becomes secondary. In a contract bid situation, there is no opportunity to sell added value much less elegance. Someone got there before you and earned the professional fees and left you the commodity opportunity. Your intellectual property and brilliant ideas are welcome but won't add to your billings. Don't sell your ideas if no one is buying; and definitely don't give them away. Determine what they are worth to the customer and then earn your share.

My closing thoughts for this issue are in regard to inertia - the energy that keeps things in place. Nothing can be more important than overcoming inertia in business. If you are not growing then you are slowly dying. The keys to overcoming complacency are to discover your call to action and to muster the discipline to follow through with your response. Without a compelling reason to move, you won't find the courage to enact the changes. Many companies are in crisis and don't even know it because inertia keeps them from looking too closely at their current state.

About Thomas R. Stimson, MBA, CTS

Stimson Portrait

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.