During the recent Commercial Integrator and NSCA 2022 State of the Industry Report webinar, there was a consistent theme that can be captured with a single word: “but.” As in, the state of the integration market is such that there are tremendous opportunities; integrators’ services are much-needed, mission-critical and in high demand; there are plenty of reasons for integration company leaders to be optimistic…
- but the supply chain creates profitability challenges on projects.
- but product availability puts project timelines and customer satisfaction at risk.
- but labor costs make healthy margins more difficult to attain.
I was honored to be part of the State of the Industry Report webinar, along with NSCA board member Christina DeBono of ClearTech Media and CI editor-in-chief Dan Ferrisi. Leveraging data from our organizations’ joint research, we tried to paint an accurate and optimistic picture of the opportunities for integrators. One element of that research data relating to typical margins that integrators see on hardware provides a sobering reality check.
NSCA has long emphasized that integrators must operate with higher profit margins. The State of the Industry Report shows a “distressingly high number of survey respondents,” as Ferrisi described it in the January issue of CI, who report hardware margins that “arguably indicate a failure to cover overhead.”
Covering that overhead is likely to be even more difficult this year. Supply-chain challenges are well documented. Meanwhile, integrators report that the job market has led to escalating labor costs. There is even less margin for error now, so profits are very much at risk. Many integrators get caught up in this web — often called the “race to the bottom” — but you can avoid it.
Emphasize Value Over Price
NSCA encourages integrators to reframe their approach to competition. Don’t be part of the “race to the bottom” by competing to land jobs based on razor-thin margins. Instead, understand the true value of your expertise and the skills you bring to customers — and project that value.
During NSCA’s Business & Leadership Conference last month, there were several sessions that challenged integration company leaders to rethink the distinct value they offer customers. Great examples are the sessions led by Scott McKain, an expert on customer experience and client retention. His closing keynote, “The Collapse of Distinction,” and his breakout session, “Culture Renovation: Rebuild or Reinforce?”, guided integration company leaders toward understanding what makes their offerings distinct from those of their competitors.
The flip side of this topic is avoiding the unhealthy hardware margins reflected in the State of the Industry Report — an imperative we discussed during the webinar. What follows are some points we tried to convey:
- The margin challenge is great evidence for why it’s so important to project the value of your offerings and never devalue what integrators do.
- The companies in the survey indicating that they earn less than 5% hardware margin are at risk of not being around to take the survey next year.
- Around 30% margin is the average that NSCA members see anecdotally and independent of the State of the Industry Report. The majority of NSCA members have overhead percentages in the high 20s. According to very simple math, a typical project has very few points of wiggle room.
- A few years back, many integrators found themselves in the “race to the bottom.” They saw opportunities for rebates on the back end and took on more volume, leading to trimmed profit margins. This often leads to cashflow problems.
- It all comes back to how you value your company and its services. If you’re selling equipment at 5% or 10%, then you’re missing the point of how important it is for end users to have the level of technology your firm is capable of providing.
This is not meant to oversimply the great challenges that integration companies have when they compete with companies that disregard margins to win projects at all costs. But the premise here is simple: You don’t have to “race to the bottom.” Sell value — not price.