Here are four business trends you should embrace to strengthen your business and make it capable of riding out economic dips.
Change" is the byword in today's electrical construction industry. And many of these changes can broaden your revenue base and increase your bottom line. It's just a matter of learning of new changes, recognizing these opportunities, and taking initiative. Let's look at a few.
MegaTrend No. 1: Focus on profit instead of volume. Remember these business "guidelines" from yesteryear? "Increase your volume to strengthen your business." Or, "Take a low margin job to keep your people working." Well, our industry is finally realizing the fallacy in these so-called business tenants. The truth is, increasing your volume generally results in increased cash flow problems. Payroll, overhead, fringe benefits, insurance, taxes all pile up to create a monthly headache when receivables start to lag. And they will begin to lag beyond 60 days, even beyond 90 days.
The smart contractor and engineer are focusing on profit instead of volume. That's because they're realizing the risk/reward relationship in our industry is totally out of kilter. For example, contractors have the highest rate of bankruptcy in the business world yet have the lowest levels of average return on equity.
Don't fall into the volume trap. Make sure you size your business on your available organizational resources rather than on the amount of credit line you can get from your bank or surety.
MegaTrend No. 2: Discover industrial maintenance. To broaden their revenue bases, contractors are quickly moving into the industrial maintenance sector. Those that are successful have in-house experience and extensive knowledge of industrial facilities. And, their marketing is based on their excellent reputations in this field of work. Others are getting into this via acquisition of another contractor having the necessary experience, knowledge, and reputation.
There are some obstacles to pursuing this revenue source. First, you need a large, technically qualified workforce with a specific expertise. Second, it takes a long time to establish strong relationships with medium and large industrial customers. But, the benefits are huge: Steady cash flow and no bonding requirements.
This new source of revenue is a result of overhead cost reductions by major industrial, petrochemical, etc. manufacturers. The thinking is to reduce or eliminate full time maintenance employees and to contract out the maintenance work. The contracts are established yearly on a time and material plus overhead and profit basis.
MegaTrend No. 3: Increase market focus. The prominent thinking was you had to be "all things to all people" to be successful as a contractor or consulting engineer. Now, the smart contractors and engineers are asking themselves "What am I good at?" It's become a way of differentiating themselves from competitors.
If yours is a large firm, it's probably good at several things. But, you should identify those specific areas and organize your business around them. The result: enhanced productivity. Try focusing on capacity, capabilities, technology, and/or specialized skills.
MegaTrend No. 4: Look at datacom and power quality. Datacom wiring is the fastest growing and most lucrative component of today's electrical construction industry. This is due to the growth of computers and telecom equipment. After all, contractors historically did the raceway rough in and pulled the datacom cables as part of their subcontracts with specialty datacom contractors. The terminating and testing went to the specialty contractor, who retained the majority of the datacom installation contract monies.
With training and experience, traditional electrical contractors and engineers are becoming certified by BICSI (Building Industry Consulting Service International) to design, install, and test datacom systems. Many of these firms are setting up separate divisions, and evennew companies, focusing on this emerging industry component. Even national contractor organizations such as the International Brotherhood of Electrical Workers (IBEW) and Independent Electrical Contractors (IEC) recognize this blossoming area and have apprenticeship datacom wiring training programs.
Power quality is another emerging component our industry now embraces. Site analysis capabilities and troubleshooting expertise are just a few of the areas you can use to promote and differentiate your company. As with datacom, the IBEW and IEC have training programs on power quality.
Look for these EC&M articles for more detailed information: "On-the-Job Training in the Datacom Industry," April 1999; "Opening Your Own Low-Voltage Division," February, 1999; and "Contracting in the Datacom Arena," January 1999.
Sidebar: MegaTrends That May Affect Your Business
Look for stiffer competition from large conglomerates. Fewer companies dominate the construction industry, because many are on a buying binge, purchasing smaller, but profitable firms, and strengthening their position in certain geographical areas. What's behind this strategy? First, it's financial strength and capacity: you need both to be capable of handling large and complex projects. Design/build and privatization projects require financial stability.
Second, there's a marked improvement in the level of competition and sophistication in our industry. Today's companies are more efficient and use more modern technologies to improve the bottom line. So, it stands to reason those companies with marginal abilities to process work and manage business won't be around in the near future.
Finally, there's an emphasis on taking market share from the "established" large companies. These latter companies (as measured by Engineering News Record in its ENR 400 listing of top specialty contractors) have steadily increased their market share over the last 25 years.
What's this consolidation leading to? We're starting to see a two-tiered market. At the upper end are large, sophisticated, regional or national firms that are well capitalized and well managed. So, they're able to focus on larger projects. At the lower end are small, local niche contractors with expertise in only few areas.
Look for a decline in the competitive bid system. Many creative contractors, engineers, and developers recognize this trend as an opportunity to secure projects at a competitive advantage. They're pushing privatized funding and operation of traditional public services. Contractors realize they can expect higher profit margins on negotiated projects. Engineers and owners know the lowest bidder isn't necessarily the best-qualified bidder.
Also, design/build and turnkey methods are growing modes of construction delivery. Turnkey projects that require bonding are pushing the movement. Contracting and A/E firms are finding mutual strategic alliances as the way to meet this need.
Construction and design firms are buying and/or absorbing one another. There are two sides to the benefits: A/E firms get construction capabilities or become construction managers while contractors get closer to the customer. And, the customer avoids costly disputes and litigation.
Look for a renewed focus on increased productivity. Historically, productivity in the U.S. construction industry has been a major problem. It declined almost 20% in the past 20 years, with further decline expected. Statistics from the Bureau of Labor Statistics show that almost a third of every dollar spent on labor is wasted.
Helping to reduce this problem is increased R&D expenditures by the U.S. construction industry. Some foreign firms are spending large sums of money on basic research on productivity. This is forcing our industry to innovate and devote funds on research into construction technologies.
What can we expect? Labor cost and schedule reductions around 50% are not unrealistic.
So, if you're innovative and creative in project design and execution, you'll have a great advantage over your competitors. If you embrace new construction and product technologies, you'll have an even greater advantage. Make sure you set aside funding for new processes, methods, techniques, and types of materials. The result will be a significant profit improvement.