I recently read Commercial Integrator’s 2019 State of the Industry Report and the message about increasing profitability really struck a chord with me.
We serve several markets outside of the commercial AV space, such as IT/managed services, security and alarm, unified communications, and most recently managed print/office equipment dealers. Profitability is a topic that comes up over and over – everyone wants to be more profitable, but most struggle with how to improve their profitability.
The first step to being more profitable is understanding your current profitability. Yearly profitability is probably the easiest to understand, as it is obviously highlighted in your end-of-year accounting reports. Monthly profitability can be a little bit more challenging, as you have projects that span multiple months and your monthly profitability can vary wildly on how you are paying your staff – such as if you pay them the payroll period after they turn in time or in the current period, when and how you order for projects, etc.
However, as with yearly profitability, your accounting reports tell you the profitability story for each month.
Arguably the two most important profitability metrics are also hardest to measure:
- Project profitability
- Customer profitability
Project profitability seems like it would be easy – how much did you spend vs how much did you collect? This gets cumbersome and confusing, however, when parts aren’t fully accounted for and time isn’t tracked properly. And by properly, I mean to the minute and to the dollar. When shortcuts are taken to get a project complete, the data isn’t accurate and won’t provide a clear picture of your profitability.
When all of your work is project based, managing your project profitability is crucial and probably the most important metric. However, when you move your business model to rely heavily on services revenue, then customer profitability becomes extremely important.
Sometimes when a company gets their operations organized and takes a look at their customer profitability – it’s not uncommon to discover that customers that they thought were highly profitable, were barely profitable – or unprofitable. Ouch!
So, let’s assume you can measure your profitability and use that data to make great decisions -awesome! Let’s discuss some tangible things you can do to increase your profitability.
1.) Add Services Revenue
Commercial Integrator says to pursue more service revenue, and we completely agree. Take it from the IT/managed services space – there is money in services! But don’t just start performing services and billing by the hour. Instead, create a recurring revenue stream based on services.
Don’t just start performing services and billing by the hour. Instead, create a recurring revenue stream based on services.
Recurring revenue streams are game-changers; they smooth out your cash flow and allow you to look to the future because your head isn’t down trying to make sure you can make payroll every month. Are you thinking about selling your company?
Recurring revenue is where you get the most value! Think about it – with your project-based work, your past performance gives no indication of guaranteed future performance. Even customers that reliably buy from you can’t be counted on by a new owner because there is nothing to say that their loyalty isn’t attached to the current owner, not the company.
2.) Manage Inventory Really, Really Well
When I say “really, really well,” I’m talking down to each penny and each foot of cable. When we got our start 34 years ago, one of the biggest profit bleeds we set out to solve when building an inventory management system was shrinkage; product was literally walking out the door.
If you over-order for a job, what happens to those extra parts? Are they disappearing? You need to know.
If you are not tracking your items closely, that may be happening to you as well. If you over-order for a job, for example, what happens to those extra parts? Are they disappearing? You need to know.
Shrinkage isn’t the only problem. How about ordering items that you already have – maybe they were forgotten about on a tech’s truck. Or, have you ever had inventory go stale on you – where you dusted off a box of product you could have sold for good money two years ago but now isn’t worth a dime? These types of situations simply should not happen with the tools and best practices available today. These situations may seem small, but they will nibble on your profits, and in some cases can take big bites out of them.
How often have you had a vehicle return to the shop because it was short a part it needed, or had to send another vehicle to meet them for a parts swap? If you manage your inventory at the vehicle level, you can greatly reduce these profit-eating events. A good inventory system should even allow you to set min/max values for items on your trucks, ensuring that they roll out every morning with what they need to get their jobs done.
If you track what you own, order only what you need to complete a job, and manage the distribution of those items (i.e. on trucks, in warehouses, at customer locations, etc.) you will be more profitable.
3.) Track Time
If you are serious about your profits, you need to be serious about tracking your time. Your installers should be accounting for all of the time you pay them for. All of it.
What does an hour of an installer’s time cost you if they need to return for a part? Not only does it have a hard cost, it has an opportunity cost in that you can’t bill a client for that time.
Remember that parts swap I talked about earlier? What does an hour of an installer’s time cost you if they need to return for a part? Not only does it have a hard cost, it has an opportunity cost in that you can’t bill a client for that time.
When it comes to tracking time, the best companies not only track all time, they track the type of time. In simple terms, think of two buckets: billable and non-billable. Billable time is productive time that you charge a customer for, or apply to their prepaid contracts. Non-billable time is what kills your profits.
Again, that parts swap is a great example of non-billable time. We see the best companies track time at a deeper level by considering utilization. For example, sweeping the shop may not be billable, but it is productive (i.e. utilized) time for the company. You want to keep this type of time to a minimum, but it is necessary.
I’ve seen companies increase their utilized time by compensating their techs/installers based on their utilization. A good number to start with is 80 percent utilization. In other words, when your service person accounts for all of their time, and at least 80 percent of that time is utilized, they receive a small bonus (which could scale based on how high they get their utilization rate).
This makes total sense – incentivize your service team to create more billable hours for the company, and you’ll make more money even when you give them a bit of the pie.
4.) Find Upsell Opportunities
This one seems like a no-brainer but too many companies think of a client install as a one-and-done. When a fancy new remote comes out, do you market this to your existing customers that could use and enjoy the new remote?
If you have clients that have you set up a smart home – are you marketing new devices as they become available, or are you waiting for your clients to tell you what they want?
Hint: If you are waiting for them to tell you what they want – you could be more profitable.
5.) Embrace Convergence!
“The IT industry isn’t sitting there, content with just doing the network,” NSCA executive director Chuck Wilson says. “They’re looking at AV. They’re looking at security. They’re looking at digital signage.” – Commercial Integrator State of the Industry Report
Wilson is spot on! We are seeing convergences in all corners of technology.
Consider phone systems. In the 1990s, companies that sold phone systems often just sold phone systems, and no other companies sold phone systems.
Trust me, sooner or later other industries will be eyeing your space, and they will be looking to take your customers from you. Head them off at the pass.
The tip-and-ring technology of the day required techs with extensive, proprietary training. The resellers also needed to stock a certain amount of inventory to keep their dealership. There was also price protection. I remember once we needed a handset for an Execute telephone system. We reached out to the dozens of Execute dealers that were using Tigerpaw to run their business, and no one would sell to us because the market was protected; we had to buy from our local dealer. The price was not cheap – no surprise there… Those days are LONG gone.
Now phone systems are end points on a network, and there are even hosted phone systems that even the smallest managed service provider can sell. As a result, the smart phone resellers moved into IT (and are doing quite well!), while others in the IT space have added voice solutions. Convergence.
Convergence is happening whether you see it or not – and the more quickly you can embrace this the faster you will grow your top line revenue and your profitability. Trust me, sooner or later other industries will be eyeing your space, and they will be looking to take your customers from you. Head them off at the pass and diversify; your balance sheet will thank you. And by the way, the IT/managed services/networking space is all about recurring revenue so this is a great way to build a recurring revenue stream based off services!
There are so many things a company can do to increase profits that I’ve only begun to scratch the surface. My underlying advice is get laser focused on where you are bleeding profits and fix those issues, while at the same time start moving towards network services to open up a new recurring revenue stream.
We all work very hard to get every customer we have, and to make them happy. Make sure you are making the most for your efforts!