With Change Comes Opportunity
January 3, 2008
Have you been paying attention to what has been happening to our industry? I remember the days when contractors were paid profit and overhead on water damage and cleaning work; when restoration contractors had care, custody and control of cleaning projects including dry cleaning and refinishing; when reconstruction jobs included flooring and roofing; when a restoration contractor was respected for their knowledge and professionalism rather than their affiliation; when adjusters were skilled professionals with an understanding of restoration and construction and were present on every job; and when the quantity of subcontractors and trades did not dictate the amount of overhead we have.
Now I see a world that is consolidating: prices are stagnating; competition is increasing; contractors are being asked to bid on price lists and work is handed out based on the color of your uniform, leaving the unaffiliated and independent contractor at a severe disadvantage when trying to get work from insurance companies.
The direction of the industry is being fueled by changes in the insurance industry matched by changes in the restoration industry. Business trends show that as an industry matures, as is occurring with the insurance and restoration industry, several predictable things occur. Mature industries are typically defined by lower prices and profits, with fewer companies entering the industry. The new companies that do enter arrive in the niches, and others are larger companies. Existing companies go through a period of consolidation reducing the quantity of companies and increasing the size and complexities of the players in the industry.
Both industries have entered the mature business phase and the changes we are seeing are largely the result. Insurance companies are looking for ways to cut costs and remain competitive. One trend that you will hear discussed often is the desire to reduce claims-handling costs. Any dollar saved here is leveraged when costs are transferred to the actual claims cost. Insurance companies are often able to recover the claims costs through premiums, which is why the role of the adjuster is being diminished and paperwork requirements are being increased for the contractors. This trend is also fueling the rise of the third-party administers and national vendor programs; these allow adjusters to oversee more files and the companies to control their costs.
According to the Insurance Information Institute, insurance companies are aiming to increase profit margins by nearly 5 percent over recent historical trends. The past several years have been very good for their industry, but that has been highly dependent on weather issues and the relative lack of major catastrophic events. In an uncertain investing and claims world, the emphasis is squarely on reducing costs. Meanwhile, the restoration world is shifting dramatically. Regional and national claims programs have replaced the local insurance claims office. This increases the impact of contactors and programs that have a regional influence.
New companies are entering the industry, and we have seen a major impact in the Canadian market by private equity firms. In less than one year a new company has formed by rolling up some of the most significant contractors across the country. This new player is well over $100 million in revenue, and is continuing to make strategic acquisitions. At the same time, largest company in North America is quietly adding to its locations. I suspect this trend will continue and will impact the competitive nature of the industry. It is logical to assume that pricing will be impacted by these changes and other related market conditions.
The first change restoration contractors need to make is to start treating their companies as serious businesses rather than a restoration company. This change in paradigm will fuel the changes that will allow you to meet the challenges head on and excel in the new restoration landscape. This business strategy will include having a strong and proactive business plan; a comprehensive marketing strategy; a staff development program and controlling your job costs. Attention to these items will contribute to your success plan. If you are not prepared to take these steps then you may choose to sell your company to one of the larger companies that are making acquisitions in your area.
This is not flippant statement made in jest, but rather an investment in your personal health and family. Your business should be a tool to allow you to have a quality life and fulfill your personal goals. When your company starts to interfere with your priorities then you may be better off working for someone else. If you choose to be a survivor then lets take a look at these issues in greater detail.
You do not have to have a college degree to create a solid business plan. There is software you can use if you need a start or would like to have the framework to create your plan. You can also develop your thoughts and create an informal plan, a tool to direct your company. Absent a plan, you will spend your time responding and reacting to stimuli in your office. This can be a stressful situation. They key components to your business plan is defining your goals, mission and vision. These three fundamental issues create the foundation for the decisions that will be made by you and your staff. The goals should be clearly defined and measurable, with a timeline or deadline. The vision is your dream for what the company will be. This gets your staff excited about the direction and potential for your company. Your mission statement should be clear, understandable and easy to communicate. This will serve as the benchmark for decisions by your entire staff. When you have laid the foundation with your goals, mission and vision now you get into the meat of the strategy. You will require timely and accurate business measurements to understand the performance of your staff and your company as a whole. Your administrative staff should be able to provide timely profit-and-loss statements using work in progress, accurate job-costing information statements of cash and balance sheets.
If you are not certain what all these statements mean you should get help, as they are essential tools for understanding your company’s performance. There are a number of resources for learning about the financial statements, but my favorite is Making and Managing Money, available through www.remodelersadvantage.com. This book will explain in understandable language your key financial statements.
When you have developed a good baseline understanding of your company, you need to prepare budgets and financial projections for your company. This will serve as the blueprint for your financial success and a benchmark for major spending decisions. A tool to be used in conjunction with your financial records is timely job costing. You should have record of your job costs compared to the contract and budget. This information should be reviewed at least every week. This will assure that you are hitting the target in your production. When you understand this information, you can adapt your production to meet your expectations. If you are not looking at these numbers and implementing a strategy for meeting job budgets, you are likely leaving money on the table. When you understand your costs, you can make decisions that allow you to prosper if prices are stable or decrease. Discussing goals and vision can and should be exciting, but budgets, financials and job costing can be a drag. Although this does not carry the glamour of the other, it is the essential element in getting where you want to go.
An engaging but misunderstood portion of many restoration companies is the marketing plan and strategy. Often marketing is a little like government policy: we spend money on items that we spent last year with the only decision being to spend the same amount or more. Marketing staff implements the same strategy of visiting the same agents, adjusters and property managers as the previous month and all is often done without a critical eye on the return on investment of the activities and expenses.
In an effort to prevent these issues, the first step in a proactive marketing plan is to develop a marketing budget. This budget should include all costs associated with marketing activities, including salaries and employment expenses for the staff. Target numbers for budgets are from 2 percent to 6 percent. Anything less than 2½ percent is designed to maintain current levels of performance. Anything over 5 percent is designed to blow the doors off past performance. There are many variables here, including market conditions and relative profitability of the work that you are performing. Items such as Yellow Pages and recurring expenses should be analyzed based on effectiveness and compared to the opportunity cost of the activity.
Opportunity cost is defined simply as “the next best item.” If you spend money on television advertising or Yellow Pages, you should compare the cost to the other items you could include, and then make a decision based on your budget, goals and projections, business competency and your business plan. When you decide a course of action, you need to track the source of all your work and determine the effectiveness of the expense. Determining and implementing a marketing plan and strategy is a complex discussion that would require another article entirely, so for the purpose of this article, the marketing discussion can be summarized by stating that you need to align your marketing strategy with your overall company expenses and budget, your goals and expectations, production capacity and competency, and you should measure the results of all marketing expenses.
Earlier we discussed job costing, a complex issue that requires further explanation. After almost 20 years in the industry, it is my opinion that most restoration companies are inefficient, and yet, when looking to increase profits or cut costs, they look to overhead and increasing sales. A much larger impact can be obtained by looking deeply at job costs and efficiency.
We discussed measuring performance through accurate job costing. In his book It’s About Time John Guispari states, “If you cannot measure it you cannot manage it.” If you do not understand your costs in completing jobs, then your first step is to work with your staff to obtain timely costing information through your accounting program. Once you understand your costs you can put a plan in place to manage the costs and meet your benchmarks.
There are a number of ways to record costs, and different items can be measured, so the profit targets for your company will have to come from experience and investigation into your market conditions. There are a lot of areas to review to improve your job profitability, but for this discussion we will talk about the top two controllable expenses in production. In my experience, companies spend near 10 percent of their job costs on travel and material procurement. This cost can be immense when you factor the lost production due to travel to jobs and getting the right materials to the job when needed. You need to look at the habit of having your production staff, particularly carpenters and your high-dollar labor, come to the office in order to drive to the job site. This is often a symptom of poor project planning.
Your goal is to achieve at least 6 or more hours of productive labor every day from your field staff. While this may sound easy, you will find through time studies that even effective companies are operating at this level or less when you factor in breaks; lunch; materials; travel; discussions with the customer; discussions with the office, and other related distractions. You may learn that 6 hours or better is a good target. Every effort should be made to facilitate materials to the jobs without the involvement of your production staff. People frequently look at staff to run materials, or at delivery costs as an easy expense to eliminate; the alternative, however, is a very high price to pay. Use of subcontractors may be an effective way to control job costs and maintain control of your margins – just make sure to have a fixed price for the work that is being performed. Subcontractors leave you vulnerable to quality and customer service issues so make sure you take the steps to overcome these issues. The key issue is to set job profitability targets, have a plan and measure the results.
A successful company will be built with a quality staff. Today’s labor environment is another challenge that needs to be addresses. Steve Toburen mentions in his Strategies for Success class that “you need to take steps to achieve exceptional results from average employees.” This is not a commentary on the quality of your staff, just a comment on the law of averages. You need to provide your staff with the tools to be successful. This may be actual tools, information or training. It is your job as an effective manager to provide your employees with the correct tools to perform to their capacity and potential.
Robin Sharma states in his book, Leadership Lessons from the Monk Who Sold his Ferrari, that our job as managers is to liberate the potential of our staff. Training and knowledge is the primary conduit for this success. Training may come in the form of seminars, classes, online resources or even internal training programs. One overlooked factor is sharing company direction, victories, vision, plans and goals with the staff. If you do not take the opportunity to recognize staff performance or share company information with your staff, you will find that people become more interested in compensation as that becomes the defining issue in their relationship with your company. Alternatively, you can provide them with information, and use this to create a feeling of appreciation and belonging. Successful companies are not built on strong leadership alone; rather, they are built with an effective leader and an empowered team working to accomplish shared vision and goals.
While the changes to the industry provide challenges, you need to take steps to be successful in this environment. With change will come opportunity and if you act now you can put the procedures, systems and tools in place to not only survive, but also thrive in this environment. You need to create a solid plan, communicate this plan to your staff and then provide the tools to be successful. One description of the owner’s job description that has stuck with me for years is, “to provide opportunities and remove obstacles.” Create a proactive business plan and you can be very effective in a changing environment.