After checking into a hotel for the 23rd time since March of 2020, there is something that is eating at me as a consumer. The travel and hospitality industry continues to operate with a fraction of the staff that it had pre-COVID. Everywhere you look, hotels, airlines, rental car companies, and restaurants have reduced or eliminated non-essential or complimentary services in an effort to keep operating costs low. At the risk of sounding like a spoiled traveler who is bellyaching about not getting my usual upgrade or having the hotel staff make my bed each day, the big question I have is whether these businesses will ever return to the normalcy we were all accustomed to.
As someone whose job is to be an operational critic, I suppose the only thing to do is look at the situation objectively and see if there are lessons to be learned. For companies in the service industry, one big upside to the COVID pandemic has been a hyper focus on business continuity; more specifically, on waste reduction. This effort was necessary for many to survive; for others it presented an opportunity to trim some fat and lean out their operating processes. The results were so impactful that many changes will likely be permanent. Adapted services like virtual doctor’s appointments, remote meetings, electronic real estate transactions, QR code restaurant menus, self-service kiosks, and many, many more are all examples of ways companies have improved operating efficiencies and eliminated procedural waste.
Fortunately, restoration contractors did not feel many of the shutdown impacts that industries like travel and hospitality had. However, that does not mean they should be immune to the movement. Nor does it imply that they can sit by idly as the world races to establish a new normal that will undoubtedly be more efficient than the pre-pandemic era. I may even go so far as to say that if restorers don’t embrace some of the same cost-saving measures, they may find themselves taking a back seat to national conglomerates and franchise groups that are already moving in this direction.
To articulate this point, I’m going to steal a chapter from my own work, Gross Profits Harvesting, published by R&R in 2016. This article was written to provide contractors with ideas for ways they can maximize their gross profit lines by focusing on internal elements of the business that are completely in their control. One of the most impactful elements is waste. The following is the excerpt from that article.
There is a ton of waste in the restoration business and I’m not talking about dirty water. I am talking about time and service. Waste is defined as those activities that do not add value to the form or function of a product or service. Value is the worth placed on something for which a customer is willing to pay — the operative part of that statement being the willingness to pay. Now think about all the activities that are performed on just a routine water loss that the customer may not be willing to pay for: loading equipment, taking inventory of supplies and equipment, waiting on decisions, completing paperwork, cleaning and maintaining equipment, call backs, supply runs, etc. The list is long.
These non-value-added activities can often account for the majority of the total project time. This means there is more waste in the service than billable value. Yet, most operators in a service industry like restoration will put more effort into trying to improve value-added activities when they should really be looking to minimize waste.
Along those same lines, we can look at the value-added activities being performed every day on a jobsite but not being billed. These are the freebies, giveaways, or even oversights by well-intended technicians that were either missed on the initial scope or simply given to the customer in a manner of goodwill. Someone is paying for these activities and if it isn’t the customer, then it’s the contractor. I once worked for a very wise businessman whose motto was simple. He said, “We are not a bank, and we don’t work for free.” Those are good words to operate by.
I have always said that profitability in business is a very simple equation: sell your products and services for more than it takes to produce them and you will never go wrong. But, we must remember that there are two sides to that equation. There is plenty of profit already built into restoration services. If there wasn’t, then investment firms would have no interest in buying companies in the restoration industry. The profit is there. It’s just waiting to be harvested.
Many top Total Quality Management (TQM) experts and Six Sigma gurus agree that there are eight wastes that can be focused on in manufacturing environments. In the service sector, there are seven of those that are immediately transferable. Let’s take this concept to the next level by identifying those areas where restorers can reduce or eliminate waste.
Callbacks, warranty claims, and workmanship issues with services performed are all examples of defects in the restoration industry. The vast majority of these issues arise from the individuals doing manual labor where the desirable output is heavily reliant on the technician’s skills. Each failure that occurs costs the company three times the cost of that service because the company: 1) paid to have the initial service completed incorrectly, 2) paid to have it done another time correctly, or 3) lost the opportunity for that resource or service technician to complete new services for another customer.
This occurs any time more resources than necessary are used to perform processes or services. We see this over and over when restorers put two technicians in a vehicle to go to a job site and perform services that only require one person. Meetings are another source of overproduction. When senior managers routinely call meetings to “review information” or “discuss situations” in which no decisions are made. If you really want to see this proven, download one of the many meeting cost calculator apps and try it out for your next meeting. Then compare the cost of the meeting to the benefit received in dollars from that meeting. Was it really worth it?
Nonproductive, non-billable, direct or indirect labor costs are a killer for profitability. Unfortunately, this is prolific in almost every business in which labor services are involved. While the ideal scenario would be that every employee is working on revenue-producing activities every minute of the workday, we must realize this is but a pipe dream. The reality of the situation is that employees will spend a good portion of their payroll hours waiting — behind the windshield getting to and from the jobsite, at the suppliers for materials, in the office looking for instruction, around the water cooler listening to the latest gossip.
While today, most contractors are running perpetual employment ads and feverishly searching to supplement capacity with subcontractors, many overlook the existing capacity that is not being utilized in their organization. This goes beyond just idle resources. It comes in the form of poor planning and inappropriate resource allocation. Just as it would be overkill to take an aircraft carrier on a fishing trip, the same holds true for high-cost, top producers who are assigned to tasks well below their paygrade and productivity levels, such as having a project manager pull permits or a lead technician pick up supplies and materials. This results in opportunity costs that can easily erase any benefits received.
Many restorers look at equipment inventory as a status symbol. The more shiny, fancy, new toys they have in the warehouse, the bigger the perception. Personally, I want to cry every time I walk through a client’s warehouse and see drying equipment lining the shelves or vehicles parked in the parking lot. These resources are not making the company money if they aren’t on a job. If you have this scenario, more often than not, you have too much inventory.
Movement is one of those wastes that most people take for granted as not being able to be changed or, worse yet, they view it as an acceptable inefficiency in a process. In a manufacturing environment, this is measured by the distance a worker must travel to get parts, supplies, tools, or other components required to complete the assembly of product. In the service world, I would challenge companies to look at movement as any time when a worker is “on the job” but doesn’t have the right tool in their hands. It could be the amount of time to move from one area of the job to another, back to the van to get equipment or tools, or even around the warehouse looking for supplies.
The restoration industry is littered with redundancy. Any time more than one employee performs the same task on the same project more than once, there is redundancy. This could be as small as recording job logs in multiple locations or as large as making numerous revisions to estimates at the insurance carrier’s or Third Party Administrator’s request. Much like callbacks and warranty claims mentioned earlier, redundancy costs a company three times the actual price of doing these activities a single time.According to my calculations and observation of operational improvement initiatives across a variety of different sizes of restoration contractors, these wastes (including the opportunity costs) can represent as much as 4% to 6% of revenue. That’s no small chunk of change for any company with a meaningful top line. Now we understand why some companies have cut non-value-added services in the wake of the pandemic influence. My conclusion is that we will not only see these changes stick in the long term, but we will most likely see this as the beginning of a new direct labor revolution in which many of these process activities and services become automated in the very near future through advanced technology like AI and robotics. A new era of business is upon us; prepare your company now, because it’s about to get VERY interesting.