It's no secret that the U.S. economy is on the brink of another recession. A faltering financial industry, escalating energy costs, and sky-high material costs all play into our economic insecurities. Not surprisingly, electrical contracting firms are experiencing delayed project starts, slower paying customers, and tighter credit restrictions. The first reaction by many has been to batten down the hatches and prepare for the worst. But is that the right approach for your firm? Does it make sense to downsize a business when another economic upswing could be right around the corner?
The good news is that recessions are a logical phase in every business cycle — one that often follows a period of economic exuberance. Simply put, they are a natural reflection of the market to close one cycle before starting another. Instead of fearing recessions, electrical contractors should actively position themselves to leverage the next logical step in the economic flow — innovation and corporate growth. This article offers eight ways to proactively move your organization into a position that will help you achieve higher levels of corporate value.
- Offering relevance
Do your products and services still make sense? Are your customers able to easily espouse your corporate value proposition, or have your offerings gone the way of the “wagon wheel” — those that are still useful but hardly effective in the new technological age? The reality is most businesses cling far too long to their treasured products and services, such as pulling wire and cable, hoping that new pockets of customers can be found to revive ailing revenue achievements. The truth is, with revenues slowing down, electrical contractors are in an ideal position to invest in simple forms of market research and predictive environmental analysis.
Predictive environmental analysis looks at economic factors that impact the strategic direction of a business. For example, there are a large number of foreign investors buying up U.S. properties these days — undoubtedly a response to the weak U.S. dollar. Will changes in building ownership have an impact on the products/services in the electrical contracting market? Certainly, with the global visibility of the energy conservation movement, “new” building owners may wish to introduce products from their respective countries as a way to penetrate the U.S. market. For example, Chinese building owners may seek energy improvements through the introduction of improved photovoltaic products while an ownership group from Finland may be focused on innovative ways to use wireless technologies. These products may not represent new technologies, but international business owners may have certain biases toward using products from their own countries. Understanding the culture of the new owners may go a long way toward securing new long-term business.
Your customer marketplace is always evolving — usually in response to economic factors. Where will your new customers come from? What products and services will be needed to satisfy your evolving marketplace? What will be the impact of alternative energy sources such as wind, solar, and hydro on your customers and your business? How can you get your offerings portfolio ready to meet the next business cycle?
- Asset usability
In periods of economic exuberance, businesses waste corporate resources. After all, when times are good, why should business owners be interested in squeezing a little more out of their asset pool? However, when a recession is looming and financials start tumbling downward, owners frantically seek to exploit hidden value from their organizations — often making the mistake of jettisoning assets that appear worthless. Although maximizing corporate value should be a full-time effort regardless of the business phase, it's only during recessionary periods that owners are motivated to take action.
The biggest mistake electrical contractors make when a recession hits is to fire trained service employees on the last-in, first-out basis. Instead, take a critical look at your workforce. Do you have long-term employees that are, at best, marginal workers? Likewise, do you have some new employees that were hired during the last economic peak that show a great deal of promise but lack seasoning? Ask yourself the simple question: On which employees do you want to bank your next business cycle?
Under-performing customers is another area that should be reviewed from an asset usability standpoint. Many electrical contractors sell “one-off” offerings to their customer base — that is, they only sell a single item or service with no form of follow — on selling. What results is a large customer base that yields a relatively low revenue-per-customer metric (total firm revenue divided by the number of customers). The goal should be to mimic the largest customer in your firm — where all customers attain the same revenue figure as your largest customer.
- A time to buy
Recessions create wonderful opportunities to buy undervalued businesses. Debt-wary business owners are often stuck between declaring bankruptcy or finding a suitable buyout partner. Like well-groomed vultures, investors carefully pick at folding business carcasses — looking for any morsel that can be had for a song. Low-cost growth — the result of buying undervalued assets — is a legitimate and attractive business growth strategy.
The practice of selling off distressed businesses has become so prevalent that a number of “cottage” industries have been created. Internet and live auctions of business “lots” have exposed larger populations to potential assets and, at the same time, increased the value of each “lot” sale. Realtors have started “bus tours” of foreclosed properties in hopes of reviving an ailing housing market. If growth continues to be your business objective, recessions provide a ready market for fueling your next evolutionary cycle.
But what type of business should the owner of an electrical contracting firm look to buy? The answer revolves around the principle of horizontal and vertical market expansion — a topic more fully explained in “The Power of the R5 Business Model,” from EC&M's August 2007 issue on page C20. In short, horizontal expansion is defined as moving into markets that are logical extensions of your current business model while vertical expansion relies on maintaining a subset of your existing customer base and adding niche offerings that satisfy a smaller percentage of that base. For an electrical contractor interested in horizontal expansion, the acquisition of a security monitoring firm may provide a logical extension from its current offering of installing low-voltage closed-circuit television monitors. Conversely, if the electrical contracting firm is looking at vertical expansion options, the acquisition of a long-term maintenance firm that monitors the condition of electrical equipment might be a good move. Either way, during a recessionary period, there are often deals to be had for a fraction of their true value, allowing aggressive electrical contractors to grow at a relatively low cost.
- Non-core distractions
In periods of economic slowdown, owners spend an inordinate amount of time “trying to optimize” the sales, marketing, finance, and administrative activities — an effort more akin to reshuffling deck chairs on a sinking ship. It's a nonproductive use of time as these functions are non-core activities, which have little (if any) impact on overall corporate value. Instead, resources should be expended on refining the core functions of the business: operations and delivery. These are the real value and differentiation that set your business apart from its competitors.
Of course, that's not to say there aren't opportunities to reduce costs and increase productivity in these non-core functions. After all, operational gurus know it's possible to reduce the cost of any business by 20% without negatively impacting the entity's productive output. What's important to remember is the basis for savings is less about refining the current practices and more about completely changing the way you do business. Are you really willing to significantly overhaul your non-core functions during a recessionary period?
Although the prudent answer to the question is “no,” many of you will still seek to extract some level of savings from these non-core activities. Should you venture down that path, there is one word that should be uppermost on your mind as you start this process: outsourcing. For nearly every electrical contracting business, there is an ability to completely outsource your non-core activities. On-line (on-demand) accounting systems can now be leased for as little as $20 a month — allowing you to pass off all the responsibilities of technology ownership (i.e., upgrades, backups, maintenance). Other applications associated with customer relationship databases, inventory, and dispatching can all be found in solution packages that eliminate the need to maintain any software at your site. The cost savings and operational advantages are substantial — but are you willing to make these changes during a recessionary period?
- Reinvesting in your short-term future
No, this is not the time to buy any long-term assets like new office furniture or service trucks. However, with lower levels of employee productivity, it may make sense to upgrade the skills of your workforce. Most business owners can rationalize the value of employee training but are hesitant to take them away from revenue-generating activities in periods of high productivity. Now, as customer markets cool, employees are looking for ways to increase their value to your business.
Employee training can take many forms — although technology training appears to generate the most valuable return. Whether it's learning how to master new products in your industry or interacting with new computer applications, the ability to keep employees abreast of industry changes only increases their value once the recessionary period passes.
Training also serves another purpose. It takes the employees' mind off the recession and settles their fears of losing their jobs. Skittish employees will often jump to a competitive firm in hopes of retaining a paycheck — taking with them both corporate knowledge and, in some cases, customers. Employees that see their employer actively increasing their value to the market are less likely to leave — feeling a moral indebtedness to their employer.
- Resolve the need vs. want argument
When an employee enters my office with a purchase request, the immediate argument in my head is whether this purchase solves a need or a want. In simple terms, a “need” is an item that will increase the productivity and revenues (or profits) immediately and has an established return on investment that can be measured. Conversely, a “want” often replaces an existing item that has grown out-of-favor due to style or age. I will always listen to a “need” argument and very quickly silence a “want” discussion.
Recessions have a way of moving the demarcation line between need and want. Although your business may want new computers, the reality is that your current technological setup, though aged, will certainly do the job until the recession breaks. Technology represents a long-term asset — a purchase that has a professed useful life of at least three years. But here's an interesting fact — even though the technology experts will tell you it is prudent to replace your computers every three years, most firms are able to effectively conduct business on the same technology platforms for five to seven years. Therefore, technology purchases are rarely a “need.”
- Take your vacation now
Believe it or not, recessions provide the best time for business owners to take a vacation. In periods of economic downturn, where you do not have any ability to change the business cycle, sometimes the best advice is to recharge your batteries. There is nothing you can do to speed up a recession. The best you can do is to be effectively positioned when the recession ends — and being well-rested is a big piece of your future success.
Think back for a moment. When was the last time you took a vacation? Like most business owners, peak periods of activity necessitate you being fully engaged in every business decision. Did you take a vacation during your last busy period? Doubtful. So, when will you be able to refresh your outlook, enjoying the benefits of owning your own firm?
After running my own firm for years, I have learned that business cycles are predictable and should be leveraged for the value you can obtain during each phase. Recessions, a natural part of every business cycle, provide a respite for every weary owner. Missing the chance to recharge your batteries puts you in a deficit position when the next cycle starts.
- The recession will end
Business cycles are a reflection of your industry. For dynamic industries (i.e., media), the entire business cycle may only be 18 months while, for more conservative industries (i.e., construction), the cycle may last for 10 to 15 years. The good news is that most electrical contracting firms have a business cycle of three to five years — meaning by the time you read this article, your next business cycle is about to begin.
Business cycles consist of five phases: research, release, reward, reinvest, and review. In the same EC&M article referred to earlier, the definitions of these five phases are provided. In short, most electrical contractors are in their review phase — a period where revenues have dropped off dramatically and some form of business transformation must take place to enter the new business cycle. Unfortunately, the mistake most new business owners make is trying to work harder and not smarter. The marketplace has changed, so you must adapt to survive.
Old-time electrical contractors will often share stories of their own business evolution. If they have been in business for 30 years, you can almost bet that most have modified their business at least six times over that time frame to remain in business. That doesn't mean every evolution is successful. Sometimes predicted market changes either never materialize or are trumped by larger economic issues. Right now we are in such a situation — where the recession has moved all electrical contracting businesses back to the business cycle starting line.
When will your recession end? Based on the duration of your business cycle, most electrical contractors can estimate a recessionary period of approximately six to eight months. That period of time represents a small window in which to prepare for the next business cycle. Are you ready for your next business cycle?
The next logical question you should be asking yourself is when you can expect your next reward phase — the period of overwhelming revenues. Again, using the typical duration an electrical contracting business cycle, you should be enjoying your next “boom” period in approximately two years. Congratulations, your next up cycle is clearly in sight!
Recessions are periods of corporate rebirth. Although many owners flounder while seeking resolution, it's the prudent owner who realizes recessions are part of every economic cycle and an opportunity to reestablish one's firm in a new competitive light. Focus on predicting your next market demand and position your firm to reap the benefits of the next upward economic swing.
Dawson is managing director of LTV Dynamics, an international sales management and business-consulting firm in Washington, D.C. He can be reached at [email protected]