Ira Friedman is the CEO of Bay Audio, a manufacturer of custom speaker solutions. He holds an MBA from the Harvard Business School. Certainly the greatest challenge in the CI business is a healthy labor return on investment (ROI). Most CI companies break even on labor sales, after accounting for all the soft costs associated with labor, such as insurance, supervision, and vehicle costs, not to mention labor inefficiencies, troubleshooting, callbacks, and the hassle of actually getting to a job site.
When searching for savings, dealers often hyperfocus on cost of goods sold (COGS), but they pay little attention to labor efficiencies beyond the obvious “work smarter and faster” dictate. I maintain that manufacturer suggested retail price (MSRP) and its attendant product margin is this industry’s red herring. Dealers and vendors are complicit in this distortion. Vendors use product margin as a competitive advantage, and dealers focus on illusory margins instead of tackling the bigger, thornier issue posed by labor inefficiency. I also maintain this industry will remain rarified and nichey until labor inefficiencies are scrutinized and a new, sustainable labor model develops.
Why Product Cost is Essentially Irrelevant
CI companies sell two kinds of products: standard, mass-market offerings, such as video, networking, and some automation; and protected specialty items, like speakers, custom solutions, cabling, and some AV electronics. The selling prices of standard offerings are dictated by the market. The market establishes the selling price for a TV, an iPad, or a network switch. Pricing above market only welcomes scrutiny and client anger.
Protected specialty items, on the other hand, are price-insensitive. The seller can choose the most appropriate selling price for these items regardless of market considerations. The “market” doesn’t dictate the price, the seller does. So for these items, the seller–not the vendor–should set the asking price. This would make vendor margin programs, with all their jump-through-the-hoops mishegas, irrelevant.
Why Labor Cost is Critical
By moving virtually every part of the project in-house, you gain the efficiencies of the one-to-many model because your highly trained assembly staff can be unpacking boxes and pre-assembling TV building mounts for several clients at once. The doctor (and the lawyer and accountant) employ a “one-to-many” labor model, where one provider (the doctor) concurrently sees many clients and maximizes his or her income. The doctor employs lower priced assistants (the nurse, the lab tech) to handle non-critical aspects of patient care. The one-to-many model is the only way my doctor can run a successful practice and still charge reasonable fees per patient.
The CI business, for the most part, employs a one-to-one labor model, where a single worker–a tech, for example–travels to, and works on one project at a time. This is inefficient and puts a cap on earnings because clients are willing to pay only so much for tech labor.
Because of the one-to-one labor model, CI businesses struggle to charge enough for labor, relying on product margin to float the ship. Instead of focusing on COGS, I recommend the CI business adopt the one-to-many labor model for as many staff members as possible. In some cases, the one-to- many model quadruples the worker revenue. That’s real profit.
The One-To-Many Model in the CI Business
The VIA group of integration companies is on to something with its centralized assembly area. Building a rack in-house is one thing, but pre-assembling the bulk of a system in a centralized location shifts the model from one-to-one to one-to-many. A centralized rack technician can work concurrently on three different racks, and a centralized quality control tech could concurrently test multiple networks.
Your strategic challenge is this: Can you shift the bulk of your project away from the client’s home and into your facility? Many aspects of a job can be done in your offices, and should be.
By moving virtually every part of the project in-house, you gain the efficiencies of the one-to-many model because your highly trained assembly staff can be unpacking boxes and pre-assembling TV building mounts for several clients at once.
How many patients could my doctor see in a day if he had to travel to each home? Maybe five. But in his office, he sees 20-plus patients a day. That’s 400-percent more efficiency. And while his staffing costs are higher, his revenues far outstrip his added overhead. And that’s the magic of the one-to-many model–tremendous efficiency because the provider works from a central location. Using your offices to accomplish the bulk of a project gains you the same efficiencies.