State of the Industry 2011

Nearly two thirds of commercial integrators expecting at-least a 6% revenue jump during 2011.

Jan. 06, 2011 — by Tom LeBlanc

When we decided to call this annual research analysis of the commercial integration dealer market the “State of the Industry,” it was a playful allusion to the “State of the Union” addresses given annually by the U.S. president.

The more we thought about it, though, the more the connection between the commercial integration market and the North American economies feels legitimate.

It’s an industry that reflects cash flow. What’s more indicative of economic performance than whether or not money is exchanging hands? When commercial integrators (CIs) are doing well, it means businesses are spending money to improve their systems and operations.

It’s an industry that reflects construction. We all know how a stymied new-construction market impacted the U.S. and Canadian economies. The healthier the new-construction and remodeling markets are, the more opportunities CIs have to pursue.

It’s an industry that reflects innovation. The “next big thing” is often the next big boost to the economy. Since offering the next big thing to their clients - whether it’s digital signage or a constantly updated and monitored IT communications network - is CIs’ business, evaluating demand for their services is as good as looking at an economic report from the U.S. secretary of the treasury
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All things considered, we should be cautiously optimistic about the economy given the results of our Commercial Integrator State of the Industry report. Consider that 47 percent of surveyed CIs say their 2010 revenues were up at least 6 percent versus that of 2009. Another 28 percent say they were flat in 2010, meaning they were neither up nor down more than 5 percent. That leaves a mere quarter of CIs that say they were down at least 6 percent in 2010.

Photos: State of the Industry Report

The outlook for 2011 is more positive - and yes, human nature dictates that business owners are optimistic about their futures. The fact remains, though, that 61 percent of surveyed CIs expect their 2011 revenues to climb another 6 percent over that of 2010. Just as 28 percent said they were flat in 2010, 28 percent expect to be flat in 2011. Only 11 percent expect to be down at least 6 percent in 2011.

Post-Recession Bounce Back
Technically, the “Great Recession” ended in June 2009, but that means little to CIs that experienced lingering effects. However, the fact that so many surveyed CIs - 61 percent - anticipate more than 5 percent growth in 2011 shows that most are seeing the market stabilize.

Things are starting to loosen up, says John M. Hoyt, CEO of Greenville, S.C.-based Homeland Secure IT. “Server renewals are going ahead as planned. Workstations are being replaced that were in need of replacement two years ago and clients held off,” he says. “All in all, important hardware updates aren’t being delayed like they were in 2009.”

Tampa, Fla.-based AVI-SPL, which can speak to various vertical markets, is also seeing companies open up their budgets, according to design engineer Joseph Thomas. “Projects that have been on hold are being reactivated. Some projects that had to be ‘value-engineered’ are having the bells and whistles put back into them,” he says.

Not every commercial integrator shares AVI-SPL’s and Homeland Secure IT’s optimism. Nearly 40 percent of surveyed CIs expect their revenues to be either flat or down in 2011. Lexington, Ky.-based Advent Pro AV, which concentrates on bars and restaurants, houses of worship (HOW) and hospitality markets, isn’t seeing (or anticipating) opportunities open up, says owner David Acton. “Business is holding steady at this point.”

To get back into growth mode in 2011, Acton says his priorities include building his brand and raising awareness of his company. He’s not alone. When asked what is his company’s biggest challenge for the year, Mark Coxon of Orange, Calif.-based Orange ProAV echoes: “Our company’s biggest challenge is in creating awareness and developing our brand.”

Orange ProAV, for example, is trying to position itself as a true engineering firm. “We have engineers on staff, not just technicians. For us, positioning ourselves with architects and designers to be part of the design team and create the A/V scope used for the RFP [request for proposal] is key.”

For AVI-SPL, risk management and personnel training are the biggest challenges it needs to overcome in 2011, according to Thomas. The survey shows several operational and technical areas in which CIs think they need to improve in 2011. At least 45 percent of surveyed CIs say improvements in the following areas would have either a moderate or great effect on their companies’ performance:

• Bid presentation (46%)
• Job costing (59%)
• System design (53%)
• Project management (48%)
• A/V expertise (51%)
• Service contracts (48%)
• Marketing (59%)
• IT/data networking (59%)

IT Improvement Factor
It’s almost a given that CIs feel like they need to improve their IT expertise in order to sustain success through 2011. Two thirds of surveyed installers expect to do more IT/data network installations this year, and suggested anticipated growth on a rate similar to that of A/V.

Bringing itself up to speed on IT-based system installation is a big reason for Norwell, Mass.-based Signet Integrated Systems’ success, says president Bradford Caron. The company now dedicates processes to obtaining information needed to engineer IP-based systems. “The convergence of IP, using the network to converge systems” was a “large learning curve,” Caron says.

Emphasizing IT education is critical, adds Hoyt. He urges IT solution providers to offer training to the dealers. “Those companies that give free training materials help us stay ahead of the game. We are utilizing every free resource we can find, as well as taking advantage of Microsoft 50 percent off vouchers, etc.”

Orange ProAV’s parent company Mad Systems places extreme value on IT expertise and “has always made a point of using PC-centric systems,” Coxon says. “We have our own video servers with edge blending and warping engines, closed captioning, multi-language support, etc. They’re used in museums across the country, and we used PC-based control and remote diagnostics in this arena as well.”

Clients are increasingly demanding IT-based systems. Surveyed CIs say that 10 percent of the time their main client contact on projects is an IT manager or director. Integrators that are less versed in IT than Orange ProAV, for instance, may struggle to relate to these point people. “There are some intricacies involved in working with an IT point person and, if navigated properly, they can be great allies,” Coxon says. “If handled incorrectly they can make IT your worst enemy to actually getting the job. IT people are territorial in my experience. They are protective of their network, have definite opinions on technology and can see A/V integrators as someone trying to do their job. Positioning ourselves as part of their team and proactively involving them in A/V decisions can go a long way.”

When AVI-SPL works on a project with an IT point person it makes sure to send certified IT technicians “to speak to him in his own language,” Thomas says, adding that he finds that it varies based on vertical market whether or not an IT person is involved. “With corporate accounts, the answer is yes, but with [HOW], the answer is no.”

Another variable, Hoyt says, is that not all IT point people know their stuff. “While IT directors are the ideal point people, we are finding many office managers having that role dumped on them, so we are dealing with lay persons who have the title of ‘IT director’ but don’t know as much about their infrastructure as desired.”

In those cases, Homeland Secure IT finds that the IT director doesn’t have as much decision-making power as one might expect. “They only influence the purchase, so we have to provide them with enough information to ensure they are able to pass on the correct data to their superiors as well as make ourselves available to answer questions or attend meetings with the real decision makers.”

Job-Costing, Bidding, Recurring Revenue
It’s clear from the survey that CIs are looking to tighten up operations and improve cash flow. About half of respondents emphasize how important job-costing and project management is to each project’s bottom line. At AVI-SPL, “proper job-costing and project management gains our projects approximately 4 percent in gross profit on average,” Thomas says.

Shrinking margins due to increased competition on bids has made job-costing more vital in recent years, according to Advent Pro AV’s Acton. “Every dollar counts and can be the difference in whether you are in business in two years,” he says. “Where your money is going and squeezing the most profit out of every job is critical.”

Improper job-costing can be devastating for CIs because it can turn potentially big-profit jobs into break-even affairs. Orange ProAV’s job-costing processes are pretty tight, according to Coxon. “We look at our percent of cost expended to total estimated costs before, during and after the job to make sure we are on track with our estimates.”

Coxon emphasizes that CIs should pay attention to margin on jobs, not revenue. “And the percentage is less important than the dollar amount. We ask how much money the company will net in what period of time. Is that enough for expending those resources? What are the opportunity costs if we are too busy now to take other work?”

In addition to upping the ante on job-costing, increased competition for projects has also led about half of surveyed CIs to hone their bid presentation processes. Count Homeland Secure IT among those, says Hoyt. He admits to being personally impressed by a competing integrator’s “beautiful full-color folder, linen cover page with gold foil logo” that he noticed while discussing a quote with a potential client. “I thought to myself that I wished we had that type of presentation,” but adds that “it’s a shame that [the other integrator] didn’t get that job. Sometimes a presentation is just better in person than a fancy package dropped off by a courier.”

Engaging the client is critical, according to Coxon. One way to neutralize the increased competition is to explain why competition has increased, he suggests. “We’ve tried to deal with increased competition by talking with project owners and raising their criteria. There are a lot of firms that unfortunately are making a very poor transition from residential to commercial work and we’re using that to our advantage. There are also firms with mediocre understandings of heat and power considerations in A/V systems, and we make sure that our prospects know to look for these pieces in a bid - and if they are lacking, raise a flag.”

The most important elements of bid presentation are honesty and flexibility, Thomas adds. “Know your audience. Say what’s in the bid. Say what is not in the bid. Offer alternatives and options. And be on time.”

CIs are likely to include more service contracts in bids in 2011 than in years past, according to the 46 percent that say they expect it to have a moderate or great effect on their businesses this year. Every CI likes the idea of recurring revenue through service contracts, but it’s easier said than done, Thomas points out. “The best way to increase service contracts is to actually provide a good product and performance on current service work,” says the AVI-SPL design engineer. “Many firms sell service contracts and then never follow up or even deliver the scheduled maintenance that was sold. Customers are not stupid. Service clients have to be maintained and cultivated just like any other customers. How many [CI] firms offer to provide service references? Not very many, because most A/V customers feel ripped off by service contracts.”

It’s a good point, and CIs that don’t have the infrastructure to provide elevated post-installation service shouldn’t be lured by the recurring revenues. Advent Pro AV would love to earn recurring revenues through service contracts, Acton says, “but we haven’t developed a solid service contract plan yet.” So the company is working on those processes.

Clients’ expectations when it comes to service contracts are growing, so CIs need to be well equipped, Coxon adds. “More folks are becoming conscious of the importance of remote diagnostics, reports, system health stats, etc. Since we have done that for years, [we’re] in a unique position to leverage that history for RMR [recur¬ring monthly revenue] purposes.”

The good news for CIs that aren’t in that unique position is that working toward putting those systems in place tends to elevate service for all their clients - not just service contract clients.

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