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The Good Get Better and The Bad Get Worse

I just read today’s headline about the jump in jobless claims and immediately started to contrast that story with all the good news I am hearing on the street from AV folks. For the past month I have heard almost exclusively about better than expected revenue and revenue forecasts. The mood is that good times are here again and revenue should be exceeding expectations. There have been pockets of lingering malaise – and there may be a reason for that.

The other positive sign I am seeing is in the number of calls I receive from folks seeking high level employee candidates: sales managers, operations managers, and lead technicians all seem to be in demand. These are the kinds of positions that get passed on when the economy is sour. I will say that in the past eighteen months the call for good sales people has never waned. This tells me two things: 1. People still think they can sell their way out of a recession, and 2. AV Salespeople continue to underperform when it comes to developing new business.

But where does the news of a jobless jump fit in? If the economy is getting better why are people getting let go? The answer is pretty simple – it’s because the economy is getting better. When businesses see their competitors and markets improving but their results are stagnant or declining, then it is finally time for heads to roll. Shame on these companies for not making corrections sooner, but in a recession business is a zero-sum game. It is almost impossible to create new markets therefore new business comes by taking customers from the competition. The newly fired are probably the losers in the zero-sum battle.

This also speaks to a question I often hear, “Why haven’t there been more company failures in the AV Industry?” Again the answer is twofold: 1. Many companies made quick adjustments and managed to survive. One contributing factor in this is that most AV Dealers carry very little debt – giving them the flexibility to quickly downsize their expenses. 2. Most failures occur at the beginning and then the end of a recession. Now is when we will start to see whose efforts weren’t sustainable. I expect we will start to hear about a few failures and some “mergers” that are really financing solutions for debt-ridden enterprises. And we can expect a few owners to “retire” rather than face another uphill climb.

So my read on the employment jump is that it’s actually a good sign. We’re getting better – like a cough signaling the final days of a head cold. This end of the recession shakeout will help the market and signal the start of increasing margins. Fewer competitors, smarter sellers, and a renewed focus on profit will shift the tide from a buyer’s market to one that’s more balanced.

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.

AV Matters – The Stimson Group’s eNewsletter

My latest issue of AV Matters newsletter has been sent. If you are not a subscriber, you can read it here:

‘AV Matters’.

Success and Learning Companies

I was thinking the other day about companies that I admire and enjoy working with the most. What do they have in common? At first I thought it was that they are friendly and open, but that knocked a couple of favorites out of the running. I also know some very nice companies that are not that fun to work with. They are stuck in a pattern that cannot be broken without extreme intervention. When you are in a role like mine that is designed to help people, and they won’t let themselves be helped – it’s frustrating. Still, it doesn’t mean I don’t enjoy being with them.

So if I narrow the criteria down to “I really like the people,” and “I really like working with them,” I get a handful of choices. What sets these businesses apart is a willingness to learn and an open mind that considers alternatives. And the best of the best are the fast learners. So I started thinking about all the companies I encounter but may not necessarily have the privilege of working with. The visibly successful firms seem to be highly adaptable, and very quick at educating themselves. In fact, as I recall conversations with leaders in those companies I am reminded of stories about how they overcame mistakes with speedy analysis and change. Fast learners.

This is a indirect lead-in to what makes some companies more successful than others. I am going to say that for my tastes and values it is not enough to be good at what you do, you have to also be likable to be truly and sustainably successful. Being pleasant to work with comes from sincerity and says a lot about the people in an organization. Is being an fast-learning company an enterprise trait or another attribute of the people? Analysis of successful examples generally reveals a respectful tolerance for risk. Learning – and the mistakes that go with it – is potentially expensive. And responsive learning additionally calls for taking chances in trying new things.

There are two more attributes of fast-learning companies that I think are critical and they apply to the very tip of the firm’s leadership. These managers know that mistakes are part of the process. No one wants to make an error, but when one occurs it is embraced for the valuable feedback it provides. Second, these leaders can make timely decisions often applying some variation of my favorite credo: “Don’t let perfect get in the way of good.”

Being a learning company means having the aptitude and intent to continually improve and the ability to assess risks with an eye towards action.  These folks never assume they have found the best solution, just the most sensible so far. They hire people that are smart, but aren’t committed to one particular way of doing things. Learning companies also have a process for acquiring and applying knowledge. First, they have to make room for learning and value the investment it represents. Then there needs to be a means to discuss, refine, and model outcomes. Finally once a great idea is incubated, learning companies know when and how to apply it. Risk averse companies rarely enjoy the successes of a fast learning company.

And to take it one step further, aren’t your favorite employees those that can quickly understand new tasks and roles? Do you choose a supplier that only does things one way or one that can grow and adapt with you? My money will always be on the people and businesses that choose to be smarter.

What Is Your Upturn Trigger?

2008-09 has been a study in business defense. Adjusting staffing levels, hedging operating budgets, and rethinking strategies has consumed most small businesses – and it is getting kinda old. We all seem to be waiting for some sort of sign that will trigger us back into business offense. If defense is characterized by control and saving, then offense has to be the willingness to take some risks and bet that there is more available upside than downside. The past couple of months have proven to a lot of folks that recent upticks of activity have been just bursts and not trends. What will be the your true indicator to switch gears? Here are a few potential triggers and my assessment of what they could mean to the Audiovisual events industry:

Stock Market: Conventional wisdom says that when the DJIA tops 10,000 that life returns to normal. But I caution that the corporate events market lags about six months behind the stock market. That could mean an uptick in business by late spring – just when business starts to fall off for the summer. Also, many folks believe that the current market levels are not sustainable. Financial bubbles (such as commercial real estate) are still looming and that the current stock market is being fueled by trading rather than value creation.

Unemployment: Another indicator would be the trend in unemployment rates. Currently we are hovering around 10% on a national average and recent numbers were close to flat. Employment trends move much more slowly than the stock market, so the first reduction in unemployment could trigger aggressive activity from events customers.

Increased Revenue: Seems simple enough to declare your recession to be over when business is up – but beware of spikes. I have spoken to a number of companies that have had record-breaking months recently, only to return to unmemorable results the next period. I recommend that you monitor consistency of revenue. Setting aside any large outlier projects, are the upcoming months behaving predictably? In 2009 many event companies were expecting high volumes in Q1 only to be disappointed by a high cancellation and downsizing rate. I think that one full quarter of predictable revenue at any level is a good indicator that your have reached your upturn. It may not be the starting point that you wanted, but at least you can focus on rebuild instead of just survival.

Increased Profit: Waiting for profits to return to declare the recession over? Oh no! You should be profitable now since you have been making adjustments to your business for at least a year, right? There is some logic that says once margins improve business will follow, but you have more control over profits than you do revenue so I think profitability is not a good indicator of economic upturn. Profit is a great indicator that you have done all the right things to be ready for the upturn.

What does a switch to offense mean? For one thing, it could represent the opportunity to hold the line on margin. Demand could once again begin to strain supply and drive service prices up a bit. High service businesses will be the first to enjoy the fruits of their differentiation. Contractor and transactional businesses benefit second. Offense could also mean its safe (or safer) to initiate new strategies – take a little risk. Execute a new marketing plan, open a new market, or introduce a new product or service. Make a plan and choose your upturn trigger so you can be ready to unleash all that pent up post-recession success.

Good Economic News is Premature

The Dow Jones index is hovering around 9900, October has been a busy month, and the pipeline for 2010 has new activity. It’s time to celebrate because the economy is coming back…right? As much as I want to be excited about the spurt in business so many of us are seeing, I want to caution against resuming “business as usual”. When we get busy we start to miss the people, suppliers, and perks we still had before the Recession. The natural tendency is to reward the team for their sacrifice by hiring up, suspending those furlough days, and reinstating full salaries. I don’t think it is time yet to do this – for most of us.

I know some of you reading this can make the case that your company is recovering now, but I want to point out some key macroeconomic issues that will affect the rest of us. In spite of the stock market partial recovery (remember it was 14,000 in 2007!), the indicators for long-term growth are not visible. In fact, the two things we need to be painfully aware of are that the value of the US dollar is declining and there is another banking bubble about to burst. One year ago we saw what happened when someone did the math on residential home values and learned that too many people were upside down in their mortgages. The next big bubble is commercial real estate – and we are talking much larger numbers! As banks revalue their commercial real estate assets we will see the stock market tank again (and bank loans dry up), perhaps extending the recession for another year.

Doom and gloom? Not if you are prepared for it. What I recommend is that you embrace the cost savings adjustments you have made this past year and celebrate the good months with one-time bonuses or perks. As managers we need to set metric milestones that say for instance, “If we have outsourced X-amount of labor for three months, then we will reinstate hours and benefits for our employees on a trial basis. If we have three more months of success (measured by the need for outsourcing), then we will hire new personnel.”

So if you finish up this year on a high note, then have a great Holiday Party. Your team has earned it. But I do not recommend dialing back the cost-savings measures instituted this year. 2010 may not be the fresh start we are all hoping for. If I am wrong about the economy, then you will have preserved extra earnings and can bonus it back to whomever deserves it. If I am right, then you might be saving jobs.

Are You Doing Enough for Your Company’s Recovery?

Once upon a time, AV integrators made good money from equipment and labor with a healthy premium for engineering expertise. Today, equipment and labor have become commodities and engineering is the value-added service we don’t get to charge for anymore. The burden of profit is now placed upon project management and operations, which is still pretty much based on the 1990’s model. There have been vast improvements in making project management more professional and educating installers. These changes alone are not enough. We need to discover the service, product, or convenience that we can charge for today, above the commoditized time and materials we are so familiar with.

Maybe we are going about this all wrong. Perhaps the challenge isn’t to just survive the recession. Aren’t we supposed to be reinventing ourselves? I don’t have all the answers, but I can start the line of questioning and may be we can collectively come up with some ideas. Here’s some thinking fodder:

Rich Karlgaard of Forbes Magazine spends a lot of time analyzing the trends of big business and writing about his latest consumer acquisitions (recently bicycles and airplanes). He is staunchly free market and pro-business but the first to admit he was blind to the economic collapse last year. He also believes that the US economy on a whole has been on the rebound since mid-March 2009. In a recent blog he reminds us that recovery is an uneven proposition.  On the whole it is U-shaped, but within the smooth curves there are V’s and W’s. We won’t all share equally up (or down) the curves.

“The V part of the VW economy includes dynamic growth companies and large exporters. Apple is enjoying a V recovery. Salesforce.com just reported a big, booming V quarter on Friday. Mobile broadband is an entire industry that will enjoy sustained V growth. Low-tax states like Texas, Tennessee and North Dakota are experiencing V recoveries.

America’s W economy includes all those companies, industries, states, cities and personal careers where deteriorating value propositions were masked in good times. It always happens that way. Recessions unmask bad business models. The 1973-74 recession laid bare the inherent inefficiencies of slapped-together 1960s conglomerates. The 1990 recession unmasked the problems of IBM and the minicomputer industry. IBM made adjustments and fought another day. The minicomputer industry just died.

Today’s W economy: newspapers, McMansion builders, inefficient manufacturers, high-tax state and local governments, and workers unable to adapt, relearn and relocate.”

Which brings me to the questions behind my blog today: Is the Audiovisual Industry part of the W economy? If so, can the industry as a whole adjust in time to avoid becoming irrelevant? Are there V businesses hiding amongst many outdated AV business models?

I can accept the argument that some of today’s pricing issues are the result of an overcrowded marketplace. But isn’t that one of the symptoms of a W segment? Even if the number of audiovisual companies were reduced, would that change the fact that the value proposition is outdated? Aren’t the technology barriers to entry dropping daily?

If you don’t think audiovisual is poised for a big post-recession letdown, let’s examine the typical AV integration business: High-tech, high-risk, and low profit. The AV value proposition was established in the early 1990’s when video display, control systems, and complex systems integration were all cutting-edge. Manufacturers could break new ground every few months with new products and better pricing and dealers reaped the benefits in higher profits. The margin on equipment more than compensated for the mistakes made in engineering and installation.

The basic integration business model of today still reflects this sales bias. But post 2001-3, the industry began to lose critical margin as high-tech manufacturers turned their sights from businesses to consumers. Pricing transparency and competition leveled the playing field. Lack of efficient operations, design standards, and professional credentials among audiovisual purveyors led to loss of market share to IT companies, electrical contractors, and do-it-yourselfers.

Did the game change and AV folks miss it? If IBM could miss the personal computer trend, I think it is plausible that AV missed its opportunity to evolve.

So your homework for today is to ponder this question: All things being equal in terms of product and service, what would cause a customer to pay you more rather than hire your competitor?

Are You Still Competing On Price?

If you still struggle daily with low price competitors, here are a couple of mantras for your wall:

1. At any given time, SOMEONE can do it for less.

This means that despite your best efforts, another bidder or rival for the project at hand could easily trump your low price. They may do so because they made a mistake (isn’t that how you won that big job last year?), don’t care about profit, or have secret, unfair advantage that you just don’t understand. What is more likely is that they know HOW to do it for less, but if the other excuses help you sleep at night then please use them. The fact is you cannot always be the low bidder, and you probably don’t want to.

2. At any given time, there is always something more important than price.

Regardless of what the buyer may tell you, the only time a low bid is appealing is when the other most important issue has been addressed. Consider the extreme, if the low bidder is incompetent or otherwise inadequate for the project – they can and will be rejected. If they are not rejected, then maybe your assessment of their suitability (and therefore your opinion of where you fit in) was wrong.

I often teach sales folks to focus on the second or third most important thing to the customer. In today’s economy, it’s unpopular to have anything but price as most important. Quality or suitability comes in second (but really, that’s probably their most important criteria!). If everyone addresses only the biggest two issues, the proposals will all look the same. There may even be a third criteria that the decision-maker values, but is uncomfortable emphasizing. Maybe the third priority is something you are uniquely qualified to offer. DO IT!

Don’t be the low bidder. Check.

Do address the buyer’s second criteria. Check.

Put the force of your value proposition into the tiebreaker. What have you got to lose?

Who Decided That a Month Is a Benchmark?

Is one bad month a trend? Compared to what? The month before? The same month a year ago?

Ask any manager “How’s business?” and you will likely get a response like, “Well, we are down for the year, but we just had a great month,” or “We’re having a great year, but next month looks really bad.” Why not use a week or a day? Our Wednesdays are way up this year… My issue with the use of months as a measurement is that for most of the AV Industry, one month isn’t relevant. The lead time for projects and events is often more than one month. Additionally, the success or failure of a month is often the result of a one day shift in revenue or expense. The exceptions are of course box sales and rentals.

Executives are more likely to respond the “How’s business?” questions with quarterly data and maybe tie it to the economy. “Q1 was down over last year, but we were down less than the stock market. If we can keep beating the market, we will have a good year.” Outside stakeholders will measure success in terms of expectations, which is what most stock market data is compared to, “We are way ahead of plan.” (When I hear this I always wonder if their planning is ever accurate.) Owners and C-level folks tend to look at years: “We expect to up/down x% this year.” Their bankers may be looking at months, but senior executives try to keep the big picture in perspective.

Different industries need different time measurements to be relevant. Separate companies within the same industry could use diverse time periods to gauge progress. Just because accountants and banks think in months and quarters doesn’t mean that is what is best for your situation. How much time, energy, and angst could you save if you weren’t compelled by convention to recognize revenue by a deadline based on reporting periods? Deadlines are important – don’t get me wrong. Have you ever rushed a job to finish or pressured a client to sign-off just to put the project into the current month? Maybe you have artificially inflated a traditionally slow month by closing a lot of open jobs (and then recognizing the profit)? Using the wrong period of measurement leads to games.

My point is that these arbitrary measurements don’t prove anything and often cause us to make poor business choices. If we think of period reporting as the current score in a very, very long game then  think our overall attitudes about accounting might be a bit healthier.

What about a project or job as a measurement tool? This is another thing that can get me wound up. AV companies often apply job costs to an installation or live event to measure the gross profit on a job, but does that really tell you the whole story? It’s very likely that the firm executed multiple jobs over the same period and some were more profitable than others. One project will always get access to resources that the other didn’t. Commissioned sales people certainly understand this.

This leads to firms that take very low margin jobs in slow months. Companies apply a system of arbitrary measurement (months) to potentially undermine their business strategy. The best way for a customer to whittle the price down is drag out the negotiation into a traditionally slow period.

I can’t offer a definitive solution because every firm has to set its own priorities. What I do suggest is that managers pick one time period to measure success and stick to it. Stop punishing teams for a bad month when the quarter is meeting expectations. Don’t freak out over a low profit job when overall profit is up. Conversely, don’t over-celebrate a good month in a bad year. Understand the why’s and how’s of the circumstances and share that story.