Resting in the knowledge
The last two articles to appear in these pages were intended to create a deeper understanding of the metrics that address the effectiveness of Custom Integration (CI) businesses. We’ve looked at the true cost of labor, which is fundamental knowledge if you want to turn a profit. On balance most firms in the CI Industry realize a true cost in the $55/hr range. However, this calculation is dependent on the firm’s ability to fairly assess labor efficiency and effectiveness.
In the article that followed, we explored utilization, efficiency and effectiveness. It is understood that some firms in our Industry bill and collect as low as 35 percent of the labor hours available, (overall effectiveness). Quality is seen as the gap between hours performed and hours collected. The closer the hours billed and collected to performed, the more effective and assumptively the more profitable the firm.
With knowledge of a firm’s metrics, the retail price can be set. Judgment is important when determining retail, because the market has choice. If competitors are pricing lower, your sales personnel will need credible ways to educate clients. True, some competitors price low simply because they don’t know any better. Put that aside. If your firm is striving to really make the business efficient, you’ll learn what it takes to deliver a quality product. This can be used to educate clients, turning the differential into a selling opportunity.
Quality is achieved through iterative improvements to internal processes. Metrics provide the insights and feedback that drive the ‘why’, which, when explored, reveals the opportunities for improvement. Internal processes, therefore, are always subject to redesign. Verne Harnish’s writes in his June 23 Gazelle’s Newsletter “For all their perceived bloated-ness and bureaucracy, the … Fortune 500 … firms … generate over 4x the revenue/employee than most mid-market firms. The challenge: mid-market firms tend to throw people at problems rather than focus on improving productivity through process re-design.”
Internal processes direct and drive the effort invested to satisfy the contract. If a client doesn’t pay, or the firm feels they can’t bill, there could be many reasons. It is easy to point to technicians but the real jewels are found by paying attention to the whole process, from vision through to final sign-off. For instance, non-payment (or non-billing), could be due to poor client intake or system design, information bottlenecks, or lack of expertise. Any of these elements could be a result of poor communication, misalignment of expectations, technical shortfalls or creeping timelines. To ensure project efficiencies and maintain the company’s metrics, each job needs to be measured, reviewed and analyzed to gain useful insights.
Quality outcomes reflect a firm’s commitment to ongoing and incremental change. Poor profits are rarely the result of a single problem. It is more likely what is needed to engineer profitable improvements come from many smaller changes. Consider, for example, when to say ‘yes’ to a client and when to say ‘no’. Saying yes could seriously stress the team, leading to mistakes or turnover. It could stress other projects because delivery dates come under pressure. It could incur higher costs if ordering is expedited. Having the discipline and knowing when to say ‘no’ could mean the difference between losses and profitability, in addition to referrals from happy customers.
In smaller firms, many owners are tools on, running from job to crisis to job. For most, there is no time or inclination to really engage the team in ongoing process reviews.
This may be changing. New entrants into our industry seem more sophisticated, having prior business backgrounds. Additionally, mature firms, typically in the Security Industry, have been adding Integration services to their offerings to increase the average deal size and take advantage of new opportunities. As our industry matures there is an even greater need to employ continual process improvement monitored through consistently generated metrics.
The good news: We’ve had several decades to learn. There are many experienced people in our Industry and more choices for operational software to help capture metrics and ensure consistency.
If you have specific areas you’d like covered or questions answered in ‘Dollars and Sense’, please email me at firstname.lastname@example.org.
Marilyn is a Registered Professional Accountant and a CEDIA Fellow. Marilyn was attracted to the Custom Electronics field in 1992 when she cofounded a firm in Vancouver, Canada. Marilyn merged this business in 2000 with La Scala in Vancouver and sold the firm in 2013. She is a founding member of CEDIA Canada, and President from 1996 through 1999. From 2000 through 2007 she sat on the International CEDIA Board and was an Executive member in the latter half of her term. Marilyn is currently involved with two startup firms offering services to the Custom Installation Market: LincEdge, offering online labor sharing software, and b3pro, linking service providers and business advisors to CI firms.