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Mar 2011 - Vol 6, Issue 3
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Industry Strategy and You
InfoComm Seminars
Best Practices Series
Closing Thoughts
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Welcome Back,

2011 is in full swing and pipelines seem to be full. That takes care of the short-term revenue worries. Now we need to focus on profit. There's lots to read in this month's AV Matters. First, we are sharing an article from NSCA's Chuck Wilson. It's a call to action that is important for anyone responsible for their business' outcomes.

In my monthly column I skip a Best Practices installment to comment on Chuck's article. While I am hearing a lot of great revenue stories from readers and clients, only one in ten cases involve improving profits. It's time to focus on the whys.

InfoComm is bearing down upon us. I would love to meet with everyone personally, but my time is limited. It's not too early to synchronize our appointment calendars. What can we talk about? 1. Your thoughts on the industry and how your business will fare into this new economic cycle. 2. I will share my thoughts on where the industry is going and how it might affect a company like yours. Email me and let's set aside that time now.

Thank-you for this email with your co-workers,

Tom Stimson
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Staged Event Awards
Staged Event Awards 2011
The deadline for your submission to the Lighting & Sound America Staged Event Awards is April 28. The awards are announced during InfoComm in Orlando June 15-17. 

Don't miss the opportunity to let the world know how good you are! For more information, please contact Benjamin Le Hay, [email protected] or call 212-352-2334, ext. 14.

 

NSCA Helps Business Owners

NSCA LogoNSCA is dedicated to helping business owners. Their website is chocked full of useful data, business templates, and advice that members should take advantage of. Here is a recent article penned by Chuck Wilson, Executive Director of NSCA. As I read it, I kept thinking "Why didn't I write this?" With Chuck's permission, I reprint his article here and have some comments in my monthly column below.  -Tom

10 Reasons You're Not Profitable & 

10 Ways to Change That

 

One of the best parts of my job is that I get to be involved on a personal level with the industry's best and brightest people. I've spoken with hundreds of members - some doing very well and others struggling. During these calls and visits, I often get to experience the company's culture. I've noticed the variety of methods of operations in our industry and can almost immediately spot why some companies are successful while others aren't. 

 

While there are some very distinct leadership styles, there are also some common elements of this business that successful integrators have figured out: 

 

Companies that struggle with profitability: 

  1. Accuse competitors of stealing their best people and bidding jobs at cost.
  2. Have an ongoing issue involving a key staff person that has gone on far too long ... and the owner is a very nice person.
  3. Use price reductions as the sole negotiation factor.
  4. Seem to have a labor overrun problem on each project that they can't quite put their finger on.
  5. Isolate themselves from other integrators and try to do everything internally.  
  6. Make every decision from the top down.
  7. Don't understand financial reports required of a systems contracting firm, much less their own, such as work in progress (WIP), etc.
  8. Are convinced they are the best in their city/area at what they do with nothing tangible to back that up.
  9. Have an owner who hopes to retire before additional investment is required to transition to a network-enabled services company.
  10. Seem to always have a bad job in process; receivables are stretched beyond standard and cash flow is a constant worry. 

 

Companies that enjoy solid profitability:

  1. Can tell me exactly which key metrics they watch everyday.
  2. Have the capitalization or access to additional capital to fund new projects, secure bonding, fund growth, and secure credit as needed.
  3. Benchmark their company against others.
  4. Truly understand the need to be profitable on every project and set minimum marks for everything.
  5. Are willing to walk away from bidding on messy jobs.
  6. Involve managers and key employees in decision-making.
  7. Understand the days of product sales and even system sales are long gone and have refocused on being a total solutions provider.
  8. Are very excited (from the top down) about the future of systems integration and want to attract new talent to their company to maximize on opportunities.
  9. Treat the accounts receivable person like royalty.
  10. Can present their company to a bank and bonding company better than most can present to a potential client.

 

Another interesting comparison goes well beyond observation and points directly at the financial reports generated by these companies. The myth is that larger companies must buy better than smaller firms because the big guys are selling below the smaller guy's cost. That may be true to some degree with end column, volume discounts, buying groups, co-ops, etc. But, the numbers tell me a very different story.

 

Here's the secret the smaller firms don't get: The larger companies (on a percentage of revenue basis) keep their total operating, selling and administrative expenses way below yours. It's not the small percentage of how they buy equipment better; it's how they keep their expenses in check. Larger companies that were profitable in 2009 and 2010 had (on a percentage basis) roughly half of the vehicle expense, insurance expense, rent, employee benefits and salary-related items that the smaller (under $5 million) firms had. So, here's the bottom line, the average member company above $5 million has a total operating expenses of 28% on average, whereas the smaller firms have an average of 37%. My point is that you need to focus primarily on this to be competitive and not simply dwell on your volume discount disadvantage.   

 

If you find yourself unhappy with your level of profitability, stop what you're doing right now and call me. The only way you are going to figure out what is out of whack in your business is to let me overlay your financials against those who do make money in the same revenue range as you. Trust me, this works.

 

Chuck Wilson

Executive Director
NSCA



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Survival Kit Courses Updated


InfoComm is upon us once again and that means it is time for me to update my seminars for the show. Registration is open!

Rental & Staging Business Survival Kit

IS053 - Thursday, 6/16/2011 08:00 AM - 10:00 AM
This course will present real challenges and applied solutions for rental and staging companies. Focus on doing business in the new economy and how that paradigm shift affects sales, operations and finance. Topics include the new sales value proposition, using credit lines as a strategic advantage, and developing an enterprise understanding of pricing and margins. Leave this seminar with the know-how to survive - and thrive - in the changing rental and staging market. Learn more here.

 

Systems Integration Business Survival Kit

IS065 - Thursday, 6/16/2011 10:30 AM - 12:00 PM  This course will present real challenges and applied solutions for systems integration and contracting companies. Focus on doing business in the new economy and how that paradigm shift affects sales, operations and finance. Topics include the new sales value proposition, using credit lines as a strategic advantage, and developing an enterprise understanding of pricing and margins. Leave this seminar with the know-how to survive - and thrive -in the systems integration market. Learn more here.

Want a preview? Just email me!


Commentary

Why Low Profit Has Become Pandemic

The world is outside your control, but your business isn't 


In the February 2011 issue of Building Connections the official newsletter of NSCA, Chuck Wilson penned an insightful letter to his members (reprinted in its entirety above). The title says it all, "Ten Reasons You're Not Profitable, and 10 Ways to Change That." Chuck's audience is integrators and contractors, but this list applies to all of my readers (and probably more so to Rental-Stagers). Read on to learn why.

In his article, Chuck has captured the contrast between managers that blame the world around them for changing the rules of the game and those that see change coming and respond to it.
He begins by listing ten qualities he sees in companies that struggle with profitability. There's a consistent pattern of justifying the status quo through isolationist posturing and self-denial. What has happened - in a nutshell - is that the microeconomic factors that affect our industry have changed and many, many companies either did not recognize the shift or didn't respond appropriately. 

I work with a lot of companies and the most difficult attitude to overcome is "If we don't drop our price, we won't win the job." When I ask, what's the bottom limit to price? No one seems to know the answer, or how to consistently calculate it. We live in a price-driven world, but I like to remind my clients that they are not negotiating price, they are negotiating profit. Managers must understand where the profit comes from, so they can tell the sales folks what the lowest acceptable profit is. At the end of the day, it doesn't matter what other companies are willing to charge; you need to sell at a profit. Unfortunately, too many of the businesses in our industry either don't have the data to analyze or do not understand what their numbers are telling them.

Benchmarking is an excellent way to uncover clues about how to manage your business, which is Chuck's point. However, if your data is not properly collected then you will benchmark the wrong numbers and draw the wrong conclusions. For example, managers often focus on gross profit by job or month. In my experience of reviewing scores of AV industry financial statements, I have not found two companies that measure gross profit in exactly the same way. Benchmarking works best when you analyze related sets of data (I feel another article coming on....). This is not necessarily intuitive and is why outside advisors (accountants, bankers, consultants) are important for your business.

Moving on to the qualities that fit the positive side of Chuck's list, we see more than just the flip side where proactive companies follow metrics, benchmark, and walk away from bad business. Chuck describes a culture where managers are involved in decision-making, financial terms are mission-critical, and strategic thinking is applied. However, adapting the practices in the "profitable" list aren't necessarily enough if your assumptions are wrong.

Which brings me to Chuck's final teaching point about the observation that big companies get their price advantage from buying more product. He's right; they do not. Big companies may buy products for less than smaller competitors, but in general their costs and overhead are lower as a percentage of revenue because at some point "scale" kicks in. When you realize that you can do twice as much business with the same overhead costs, why wouldn't you take timely projects at lower margins? In other words, every opportunity needs to be evaluated based on timing, strategy, and potential profit together

The best business decisions do not follow straightforward rules. Managers should be guided by a matrix of variables that lead to the best decision at this moment. That decision is why managers exist.

In my opinion, the reason lack of profitability has become pandemic is that the industry in general focuses too much on the outside factors that explain current conditions and not enough on the internal response to those circumstances. The basic rules for running a good business have not changed: Know your costs, balance your resources, and differentiate your services. What has changed is the margin for error. The lesson from Chuck's insightful article is in essence, that companies are in charge of their destinies, the tools for better decisions are available, and poor profits are a lagging indicator of poor management.

Questions/Comments?
Closing Thoughts

Here's a few scribbles from the margins:
  • The true value of your company is the price it would fetch if every company like yours went on sale at the same time. 
  • If you believe in your heart that making money from equipment is somehow more ethical than making money from people, then not only do you not think much of people - you probably aren't making much profit.
  • New business is never closed by email - only confirmed. Get on the phone, or better yet - get in front of your customers.

 

About Thomas R. Stimson, MBA, CTS
Stimson Portrait
 


Tom Stimson has thrived for over twenty-five years in the information communications technology industry. As a Consultant, Tom helps companies define their goals and then design a plan that will take them there. For more information visit the website.