The title of the session on how to improve profitability on AV projects during Total Tech Summit 2018 was “Margin Heroes.”
Unfortunately, there was no superpower unveiled to help AV integration market with perhaps its signature challenge.
Revenue across the AV industry appears strong, according to early returns from Commercial Integrator’s 2018 State of the Industry survey. The problem, however, is that the positive trend isn’t necessarily sustainable.
“What seems weird is that there’s such a demand for what we do and our members are as busy as can be, but when we look at our financial analysis and all the numbers, I worry about how sustainable their plan is,” said NSCA executive director Chuck Wilson last month at NSCA Pivot to Profit 2018.
“The gross profits are very lean compared to the overhead. With the rising costs of labor, the reduced margins and all that, I just worry that with so little margin for error anymore, do we have the right benchmarks in place?”
He adds that he wonders if the industry is leveraging all its available business resources and appreciating how little room there is for error “in such a lean financial environment right now.”
Margin Heroes, moderated by CI editor-at-large Craig MacCormack, offered no magic bullet to solve the AV integration profitability dilemma.
It did, however, feature three AV integration professionals — Ivan Collins of Innoface, David Bishop of Pro AV Systems and Mike Harmon of ESCO Communications – speaking honestly about how strive for more profitability in AV projects.
Here are some takeaways:
Vendor Relationships Are Key
All three panelists stressed the importance of carrying fewer manufacturers, focusing on vendors that appreciate the need to maintain margin.
“Consistency of products reduces cost over time,” Harmon said, citing that it requires less unwieldy spending on training for various products.
Be Careful Bringing on One-Off Products
It’s rare for a customer to insist on a particular product, Collins said, but it does happen. “Maybe an IT guy just came back from a conference excited about a particular product.”
Another example, Bishop added, is walking into a meeting and the customer puts an Amazon Echo on the desk saying, “I want this to work in my office.”
While it’s important for integrators to reflect their customer’s needs, it’s even more vital not to haphazardly enter a relationship with a vendor that isn’t supportive of the process.
“We’ve been burned by bringing in a product that we can’t support,” Bishop acknowledged.
Of course, if a customer needs a particular product to address their needs, an integration firm has to consider it. He suggested tackling those on a case-by-case basis. In general, though, “We’re much more careful about bringing on new lines to AV projects than we were a few years ago.”
— CommercialIntegrator (@commintegrator) November 9, 2018
Emphasize Systems and Expertise, Not Tech
Integration firms that don’t understand that they’re in the business of selling system solutions and not products are quickly becoming extinct. That will accelerate in this era of low AV projects margins.
“Margins are really shrinking at this point,” Collins said. “We’re competing with online shopping, Amazon.
“Margins are really shrinking at this point,” Collins said. “We’re competing with online shopping, Amazon. Everybody has access to pretty much everything.”
The trick is not to elevate above that price comparison conversation.
“We find that we get the best margins when we focus on the system itself,” he added. “When you focus on the features of the system and what value that brings to the customer that is where our sweet spot is.”
Harmon agreed. “If you uncover that value for the customer and the complex problems you’re solving,” he said, that’s when you can increase margins.
Forget Products, Margin Is in Labor
Actually, Collins hasn’t given up on product margin. “I think there is still money to be made.”
That, however, is far from his main focus. “It’s more so about the system and the labor portion of it, which is very important in terms of making margin work and making money. You can have an awesome product, but if your margin isn’t good or the other pieces aren’t there, it just won’t work out.”
At the end of the day, he added, “it’s just about the labor.” Addressing the Total Tech Summit attendees, he said, “You have really good techs. You have to pay them well. You have to let them do what they’re paid to do.”
OK, Don’t Completely Give Up on Product Margins
“We don’t go in with the expectation of crashing margins,” Bishop said. “But we do try to sell them a system.”
To a certain degree, Harmon said it’s important to get the sales team on board with preserving that margin. He said ESCO Communications incentivizes the sales team by compensating them above a minimum margin level.
Make the Right Decisions about Subcontractors
Bishop echoed the point that the margin battle can only be won based on the integration firm’s expert labor. “That said, having a lot of techs is a risk-reward. If you have too many guys sitting around you just start hemorrhaging money.”
Each of the panelists’ firms, to a certain degree, relies on subcontractors to complement their labor force. Each, however, treads carefully.
From an AV projects margin perspective, “the nice thing about subcontractors is it mitigates some risks,” Bishop said. There is usually a fixed cost associated with a subcontractor so it makes margins easier to predict.
Other variables to working with subcontractors could create other types of risk, Collins said.
“We use subcontractors some of the time but usually when we use them they’re accompanied by one of our lead techs. We find that subcontractors have the ability to make or break you. They typically don’t know your policies and the way you’re supposed to present in front of a customer.”
That being said, Collins sees subcontractors as a good part of a margin strategy. “I think it can be very valuable, but it’s about making sure you define that price ahead of time to make sure they don’t go over budget.”
Some Markets Are More Margin-Friendly
A big part of the value proposition for customers, if presented properly, is the complexity of the task, Harmon said. “When we look at a job we look at it not just as product and labor, we look at complexity.”
It falls on integrators sometimes to help the customer understand the value of expert system designers and technicians – and some customers understand that more easily than others.
“Look at health care and all the investment in training and certification. They value that,” Harmon said. “We’re able to get much higher margins in that market in particular.”
Obviously, Service Is Significant to AV Projects
The elephant in the room during the Total Tech Summit 2018 presentation on improving AV integration profitability was the topic of service revenue – and the industry’s well-documented struggle to achieve more of it.
Harmon shared that ESCO Communications has a sales team that’s separate from its AV projects group that pursues service sales.
He explained that sometimes the service would get lost in the project sales professionals’ focus and that the service sales team brings a new mindset from outside the industry. “It’s a lot like selling insurance,” he said.
Collins predicted that within two to five years “AV as a service” will be common place. He expects customers not to purchase equipment but to pay for systems on a monthly basis.
Collins predicted that within two to five years, “AV as a service” will be commonplace. He expects customers not to purchase equipment but to pay for systems on a monthly basis.
Integrators “will be providing the monitoring almost like an ADT,” he said. “I think that’s where the industry is going. The more we can get ahead of that, the more profitable we can be.”
Yes, he said when prodded by moderator MacCormack, Innoface is trying to get ahead of it. “We are working on some different initiatives to be able to present that to the market in a very special way,” Collins said.
Harmon agreed that “parts of our business will go that way.” He compared it to the mindset of today’s consumers that pay a fee for Netflix and expect that the service is going to work.
While all three panelists agreed that service is a vital component to AV integration profitability going forward, none seemed to be giving up on product and AV projects profitability. Instead, they emphasized tighter policies and more attention to detail.
Above all, they underscored how essential it is for AV integration firms to improve AV integration profitability and to continue to evolve.