It’s time to improve margins and be selective about the projects your company takes on. Integrators not only need to stop de-valuing the work they do, but also start charging an amount that reflects the talent and expertise they bring to the table.
Many NSCA members pretend—or even believe—that they’re “winning” on an AV project when, in reality, they’d be better off leaving that job behind and moving on to something else.
If this sounds strange, it might be time to peek at the financial metrics behind your own jobs—the true labor costs, sales expenses, and hidden costs. They may reveal valuable information you didn’t know about project performance, which could be a big motivator to skip past the projects that won’t pay the bills (instead of finding out after the job is done that you broke even or lost money).
During NSCA’s 25th annual Business & Leadership Conference, Feb. 28 to March 1, attendees heard these words first-hand during a much-anticipated keynote called “Don’t Sell Yourself Short.”
During the session, NSCA CEO Chuck Wilson, Ford AV President Jim Ford, and ECD Systems President and CEO Mike Bradley gave integrators a hard dose of reality: Chasing projects with low profit margins will never pay off. In fact, doing this even puts your company at risk.
The industry’s steady decline of margins began in the 1990s, but here’s a recent snapshot of the last few years, according to data from NSCA’s Financial Analysis of the Industry reports.
Integrator Net Profit
|Year||Up to $5 Million||$5.1-$10 Million||$10.1-$20 Million||>$20 Million|
A few decades ago, these numbers looked very different. NSCA members earned between 8% and 10% net profit every year.
Why is margin erosion happening? Wilson, Ford, and Bradley agree that part of the problem comes down to passion. AV integrators love their work—to a fault.
“We love doing the project work, and we will go the extra mile every time,” says Ford. “It’s not a job. It’s a life. But we have a problem with underestimating labor. If you have $100,000 in revenue and end up with $1,000 in profits at the end of the year, you can’t educate and train your teams. You can’t invest. You can’t grow your business on those margins. You’ll be struggling to get to the next level if you don’t start thinking beyond that.”
It’s a situation that far too many integrators have become comfortable with: loss of profit.
“We treat the industry like some contractors do: bidding, low margins, give our work away, and hope we make it up on the other side,” says Bradley. “The culture has to change. I don’t think we can worry about what the other guy is going to do. You can’t control them, so what are you going to do? What is your culture going to be like? What are you going to commit to within your business?”
7 Ways to Improve Margins Right Now
It’s time to be selective about the projects your company takes on. Integrators not only need to stop de-valuing the work they do, but also start charging an amount that reflects the talent and expertise they bring to the table (while factoring in the increasing price of talent, supply chain issues, inflation, etc.).
“When we look at the amount and type of work that we do, and the amount of risk we have on every job, we are worth it,” says Wilson. “You can set these kinds of prices because you are offering mission-critical AV. You’re worth earning a net profit.”
Here are seven ways to improve margins—starting today.
1. Learn How to Say No
It starts with the sales team, says Ford. While they may have good intentions, they can also be overly excited to make a sale and earn a commission. Or they may end up spending too much time on bidding or creating proposals for customers that ask for constant redos or changes.
“Train your salespeople on what warrants a ‘no,’ and to get to the ‘no’ quickly,” he explains. It’s a “yes” if:
- You trust the customer
- It’s a good fit for your company
- It’s something you’re familiar with and have expertise in
- It’s something the team wants to do
- It’s something that works in terms of timelines
- You have the right number of staff to take it on
- You can get the equipment you need
Otherwise, think twice.
2. Watch Your Costs
Carry the “saying no” concept over to your business costs.
“Half the equation has to be managing costs,” says Ford. “If you can say no to things and better manage your costs as a result, you’re probably going to improve margins.”
He uses a recent instance at Ford AV as an example. When Ford mentioned that he wanted a computer, the person responsible for overseeing funds (who also happens to be his wife) quickly asked, “What’s wrong with those computers in the corner? Can you use one of those?”
This thought process applies to everything: software, lease payments, business travel, cell phones, memberships and subscriptions, taxes, and banking and credit card fees. Look at every expense line and see if there are savings to be gained. It all counts.
3. Pursue Recurring Revenue
You need to build your culture around profitable services, not profitable jobs, says Bradley. “Every industry is conducive to recurring revenue. If you aren’t taking advantage of that in your particular niche, then it’s your fault. You just haven’t committed to it.”
But he’s also quick to point out that recurring revenue isn’t a fix to improve margins—it’s an absolute. From his perspective, it’s a necessary part of doing business. It adds value to the bottom line—and adds value if you ever choose to sell your company. “Recurring revenue is paying the bill every month and every year, and that has serious value to a buyer,” he explains.
4. Standardize Procedures and Policies
By formalizing and documenting what you do as much as possible across every part of your business—from shipping and receiving to sales and marketing—you can win back time, stop reinventing the wheel, and make it easier for employees at all levels to make confident decisions quickly.
As part of this process, set minimum project sizes and minimum margins you are willing to accept—and stick to them.
5. Analyze Contract Language
“We’ve been helping our people ask, ‘What are the non-starters?’ If parties won’t budge, and if we can’t negotiate, then it’s a non-starter,” says Ford.
If there are items you don’t want to agree to, speak up. (In other words: “Change the contract, or we won’t sign it.”) Look closely at the payment terms and conditions.
Included in some contracts are waivers of subrogation. If something happens to your employee on the jobsite, a signature indicates that you agree to waive claims from your own insurance company seeking damages against the client or its insurer. Agreeing to this puts your own workers’ compensation insurance company on the hook—without prior knowledge—for an incident that could’ve been the fault of the client.
6. Empower Financial Leaders
This is the year to empower financial leadership. And great financial leadership starts with having the right advisors in the right places. From there, they must be empowered to make changes that protect your integration firm from vulnerabilities while also supporting profitability.
Your organization’s financial leaders should be able to pinpoint whether a project has profitability potential. They should also watch employee utilization and budget over/under and make sure actual time on projects translates into future quotes.
7. Use NSCA’s Project Contribution Simulator Tool to Improve Margins
NSCA’s Project Contribution Simulator was built by Solutions360 to demonstrate how properly burdening labor, spearheading eroding margins, and understanding your true costs of doing business can affect the bottom line (operating income).
It’s free for NSCA members to use at nsca.org/profit/.
“There’s a lot of inherent risk in what we do, but it’s even riskier to not be profitable,” says Wilson. “We want to see this trend reverse back to the days when the industry had enough profitability on projects that we weren’t putting our companies at risk.”