Back in the late 1990s, the residential systems industry was only just beginning to seek out the basic management and business training necessary to remain profitable and competitive. Years before, however, Engineered Environments president Randy Stearns was already well ahead of the curve.
Stearns, whose likeness graced the cover of Residential Systems’ inaugural issue, in January 2000, had already implemented his MBA-level management techniques within the industry that was still evolving from its retail and hobbyist roots. Having earned a bachelor’s degree from Dartmouth and an MBA from the University of Southern California, Stearns had quickly established his Oakland, California-based company as one of the premiere, ultra high-end integration firms in the country.
This past September, Stearns and his 40-plus member team were officially acknowledged for their achievements when Engineered Environments was crowned as CEDIA’s Dealer of the Year. Earning this honor was all the more impressive considering what happened during the company’s “goal-setting session” at the beginning of the year. “The company’s 2002 theme, in keeping with the nation’s excitement around hosting the Winter Olympics, was ‘Going for the Gold’,” Stearns said. “We likened the ‘gold medal’ in the residential systems industry to winning the CEDIA Dealer of the Year award, and established this achievement as one of the year’s major milestones.” Winning the award, Stearns says, is the result of many years of determination by an “exceptional team of professionals” that comprises Engineered Environments.
“The entry requirements for the CEDIA Dealer of the Year award are stringent,” he explained. “The entry submittal requires a company to have spent years developing a fine-tuned and well-documented operation, not to mention weeks to assemble and properly present the award-entry material.”
Stearns and his staff have stayed on course with its other business goals as well, despite a growth-inhibiting economic downturn over the past year. “The biggest mistake we made this year was assuming that the slowdown in the economy would not have an impact on our business because we operate in the ultra high-end sector of the market,” Stearns admitted.
Even though the company’s wealthy clientele tended to be sheltered from hard times in the past, they have been less free-spending this year.
“The tumble in the market did not cause them to completely delete our systems from their homes, but the systems have just not been as elaborate,” observed Fred Reacer, Engineered Environments’ director of business development.
Reacer says that when the market was soaring, clients would, for example, put surround sound everywhere except for the kids’ bedrooms and the kitchen. “But now, they limit it to two or three rooms, and it’s not as high-end, except for where they have a dedicated room for a home theater,” he explained.
Because there’s not much Engineered Environments can really do about the softening of the market, Stearns has looked toward more internal efficiency and productivity to improve his company’s profitability. To this end, Engineered Environments believes strongly in educating and training its employees. Besides taking advantage of CEDIA EXPO educational courses, CEDIA Regional education and numerous vendor trainings, the company conducts its own monthly, all-day technical training sessions. Topics range from discussing their own system design philosophy and a review of electrical theory to vendor-sponsored product/technology trainings. Considering the cost to remove the company’s technical personnel from the field for a day (estimated at nearly $10,000/day) all trainings are thoroughly planned in advance, often including formal agendas and PowerPoint presentations.
The company also continues to work toward broader goals such as successful project closeouts, providing complete system pre-production, improving a cash-management plan, streamlining a pricing structure and payment terms and becoming more image conscious. These individual areas have been handled with such a strong attention to detail that each could prove useful for other residential systems firms around the country:
* Successful Project Closeouts: Stearns says that, like many companies in the industry, Engineered Environments historically had difficulty completely closing out large projects. Now with its “Sprint to the Finish” philosophy the company does “whatever it takes” to complete projects on schedule and to their clients’ satisfaction. This flurry of work is followed by a formal closeout meeting with the client and his/her representatives along with Engineered Environments’ sales and design consultant, project manager and service manager. The meeting is comprised of a systems overview, a presentation of a complete documentation package and user manuals, a review of any outstanding punch-list items with a schedule for completion, a review of the final accounting and presentation of the final invoice, the initiation of a limited warranty, a discussion about the company’s ongoing service and support programs and presentation of an appreciation gift to the clients.
* Complete System Pre-Production: Stearns says that years ago Engineered Environments came to the conclusion that it was critical to completely rack, wire, program and test systems in-house before delivering them to a job site. This new approach improves product quality and reliability, reduces labor time on site, prevents delays caused by product failures and allows the company to work on its schedule instead of the schedule mandated by the general contractor due to site conditions.
Engineered Environments’ director of engineering, Greg Jensen, oversees engineers throughout this process. “We’re literally hooking up the entire system here in our office,” he explained. “Now our field guys can work on field items, not be building a rack shelf on site. It creates a lot of efficiency for us.”
Engineered Environments’ director of system design and estimating, Bob Stearns, added that the company’s design philosophy is generally based on ease of use for the client. “Many clients have fears around technology and how to use it, so they avoid it,” he explained. “Our philosophy is “provide a simple, intuitive user interface and robust, very reliable systems.”
* Cash Management Plan: Engineered Environments has battled with swings in cash flow for years. This problem, Stearns admitted, often limits the company’s ability to operate effectively and to capitalize on prompt-pay discounts. To remedy this situation, Stearns and his team have begun implementing contract payment terms that ensure that they are never funding a project for the client. The company also has hired a contracts administrator who focuses on invoicing and collections. Additionally, they have implemented a cash-management procedure that forces the company to provide a well-explained invoice at the earliest possible time and to follow up immediately to ensure that the invoice was received and that any questions are answered.
* Pricing Structure/Payment Terms: “By performing regular job-cost analysis, management learned that we were regularly incurring labor cost overruns in specified labor categories, and as a result, significantly eating into our profits,” Stearns explained. To remedy this situation, the company has developed a formal pricing policy and completely re-structured its labor pricing and contract terms. Engineered Environments now offers its clients the option of going under contract on a lump-sum basis or on a time & materials basis. With time & materials contracts, Stearns said, labor costs are estimated in the proposal and the client is billed for labor, bi-weekly, and Engineered Environments isprotected against labor cost overruns. If the client selects the lump sum option, the client understands that labor has been marked up 10 percent over estimated labor to protect against labor-cost overruns that may result from project delays, poor construction management, etc.
* Image Consciousness: Last year, Stearns realized that this company had grown to become one of the nation’s largest and most-respected residential systems contractors without ever having spent a penny on marketing. Feeling “self-conscious” about this lack of marketing capability, Stearns recently hired a marketing manager and set out to create a brand and image consciousness. “We’ve now designed an exceptional website (www.engenv.com), developed quality sales tools and, for the first time, have begun to seek industry recognition,” Stearns said. Meanwhile, he is pleased to see the rest of the industry develop more professional businesses management attitudes, as well.,p> “While an egotistical entrepreneurial spirit is still present, if not prominent, many owners are taking their business more seriously and are hiring general managers, CFOs and professional project managers to help them run and grow their businesses,” Stearns said. The upshot, he added, is that the residential systems industry is now on the radar screen of major multi-national technology companies that view home networking as the new frontier. “As such,” Stearns observed, “whether the goal is acquisition or simply preservation, a few business objectives are clear. If the goal is preservation, it is critical to command market share and possess an indisputable reputation. If acquisition is the goal, I believe that a business must either be scaleable or be built on a solid foundation of business infrastructure, which enables it to continue to grow and succeed under separate ownership.”
And, as has always been the case, employee retention is critical to the success of all residential systems companies. For Engineered Environments, Stearns said, the key is making sure that there is a good cultural fit between the company and the people who work for it. For instance, while Engineered Environments follows a strict outline for every person’s role and responsibility and authority level, while most other companies in the industry use a “shoot-from-the-hip” style instead. “We’ve ‘passed’ on a lot of very talented people because they were too much of a free-spirit to fit within our structure,” Stearns said. “This business was started as a business with business objectives in mind.”
To find the best employees for their business-minded structure, Engineered Environments often looks outside the industry for qualified project managers. Although these staff members may come from the aerospace or telecommunications industries, it is important for them to understand the keys of communications, coordination and planning, and for Engineered Environments to provide these industry neophytes with the proper infrastructure and support.
“That’s a matter of having very clear-cut procedures and processes that basically any competent project manager can follow,” said Engineered Environments’ director of operations, Tim Johnson. “They are steps that are chronologically laid out in a group of documents. We also have a sales group that is divided up so that there are specific people doing system design work, and they work very closely with our engineering team. Our engineering team is responsible for the detailed design of the system so the technical skills that may be required of a project manager in another company are not required for us.”
It all helps contribute to what Randy Stearns describes as an industry that is becoming the most sophisticated construction trade in the residential market. “I think our industry is beginning to take the lead from a standpoint of communications and quality of documentation and project management. I don’t see other construction trades documenting their work in the manner that we do, as an industry, or interacting with their client at the level that we do.” Stearns concludes that, for a long time, there has been a mystique about industry-representative companies like Engineered Environments. But that’s beginning to change. “As people start understanding what we do and what it looks like, I think it’s migrating from a mystique to a perception of sophistication and a respect as a more advanced type of trade,” he said.
And with its new title as the industry’s dealer of the year, Engineered Environments can now unselfconsciously step forward as a truly qualified representative of an industry that continues to seek out more acknowledgement and recognition from other construction trades, product manufacturers and a huge, untapped potential-customer pool.
Jeremy Glowacki is editor of Residential Systems.