Hey folks, Phil Zito here and welcome back. In this post, we are going to be talking about how to grow your controls business during a recession. So, two quarters negative GDP growth, we're in a recession, stuff is trending downwards, energy's going up, supplies are hard to get. How do we continue to grow our controls business in this unique environment? Well, that is what we're going to unpack.
So first off, don't freak out. Just because there's bad economic news, we in the building automation industry are still in a pretty good spot. So as an industry, we are benefiting from the fact that we have huge backlogs; backlog being the amount of money left to execute from a project perspective. We have an increasingly risky energy market as well as a utility market that is very volatile. Prices are shifting up, prices are shifting down, there's craziness going around in the world geopolitically. All of that impacts our ability to run our buildings, from an operational perspective, from a supply perspective, from a utilities perspective. Then all along this, you have this huge push to electrify everything; everything needs to be renewable. All of these changes are going on in the built environment.
So, the good news is, is that while the economy is contracting, we have a lot of things in our favor, if we are willing to think about things a little differently, maybe take on some new behaviors. So, I'll share with you some of the things we're doing in our business, and I'll share with you what I believe you can do in your business, having researched this topic quite a bit, having been in this industry for a long time, having been through a couple of recessions already in this industry.
So first off, what does this mean? Well, it means that people are going to be reacting emotionally. So, depending on your customer base, if it is something where there is a huge dependence on public sentiment to drive that industry, be aware that maybe that's not the industry for you to be in. So, if you're like real estate, where we see real estate markets contracting, where we see people still working from home, maybe you want to consider things like the institutional market. Maybe you want to consider things like K through 12, higher ed. Maybe you want to consider things like light industrial. All of these industries that are still growing and/or have governmental funding that is going to keep them operating.
I was talking with our sales team about this recently saying that we can't just depend on a single company. We have several companies that spend a lot of money with us, very big companies, and then we have a lot of smaller to mid-sized companies. I told them we have to expand that smaller to mid-size market even more, because all it takes is one finance person at a large organization to say, “Well, we're suspending training,” or “We’re suspending construction.” All it takes is that one person, and then if you're heavily invested in a single customer, or a single vertical market, that could really impact your business.
So, how do you go about kind of growing in this scenario? Well, I do believe that this is one of the best times to grow, if you're strategic, because you're going to be able to buy talent at a lower price as people start to get laid off. You're going to buy businesses at a lower price, you're going to get lower costs on your goods, potentially once the supply catches up. So, you're really going to have a lot of things in your favor, if you do things right.
The first thing that I want to cover is more on the sales side, then we’ll move to the operational side, and then we'll just cover in general. So, on the sales side, if you aren't prospecting, which a lot of organizations have gotten fat and happy off of their capital projects, and they're booked backlog. So, if you are not aggressively prospecting for new customers, then you definitely should be.
This is where you want to start to switch more to an owner focus, start to get into markets that are going to have predefined budgets for their operations, and see how you can tie yourself to those. K through 12, higher ed, government, those are good markets to tie to in a recession. That being said, you also want to understand that cost pressures are going to be hitting your customers, right. So, as cost pressures, hit your customers, your costs start to become more of a big deal, because the profits go down, costs basically stay the same, and that gives less working capital. So, people start to cut things.
So, you have to start thinking from that perspective of being in your customers’ shoes. Maybe this is someone who runs some basic commercial real estate, and their tenants are starting to contract their businesses, so they're leasing less square footage, they're not doing space renewals, things like that. Their cost pressures are hitting them. So, you need to be cognizant of that as well, when you're discussing people. You want to think of how can I position my control system from an operational efficiency perspective, make you more effective, reduce your operational costs? How can I position the control system from an energy perspective?
So, how can you position from those two perspectives? That will be something that if you refuse to go after the governmental market, the K through 12, the higher ed, the more stable market, and you insist on focusing on commercial real estate, and private business, and corporate campuses and things like that, then you need to shift your messaging. I mean, you should shift your messaging in general, but that's pretty much going to be the way that you sell to people moving forward in those markets.
Realize that this is not just a recession, it's also an energy and supply shortage. So, there's pros and cons to that. The benefit of this being an energy shortage, you know, hearing about rolling blackouts in the Midwest is crazy. Seeing people switch to all these renewables, which may or may not be reliable all the time. That then leads to some conversation points about, if you're dependent on a grid that is not potentially up and you’re a life-critical facility, how are you handling that? How many of your customers have UPS’, uninterruptible power systems, on their control systems? If they get a rolling blackout, stuff suddenly goes down and maybe they don't have generator capacity. Maybe they have nothing to keep their controllers up and running, even if they do have generator capacity, when they switch from normal to emergency power. Maybe they have nothing to keep those controllers up and running. Some of these older controllers, they get reset, and maybe the controllers don't come back on.
These are reliability issues that you need to think about. So, you definitely want to think about how you communicate around keeping a facility up and running. You know, I mentioned tht healthcare training is the first to go, right, operational training development of your team. Yeah, I get that, but if you can tie to stability of the power systems, and their ability to impact life safety, and patient reimbursements, and being in compliance, those are the conversation points you can have.
Are you going to make huge bucks selling some load shedding strategies and UPS’ to customers? Probably not. It's not the same as a new controls retrofit, but it gets you in the door with customers you may not have been talking to before. It provides some capital infusion, offset by our historic backlogs, to carry you through. Remember, the controls industry tends to lag the market by 12-to-18 months. So, while we're probably not going to see anything, and many people are probably thinking they’re so busy and can’t worry about this right now, it's that same thinking that I saw in 2008, 2000, and 2020. Don't think about it because you're fat, dumb and happy, and then all the sudden, you get hit, you see the market collapsing around you and you're like, I'm still fat, dumb and happy, everything's good. Then 12 months later, boom, all the tenders are dried up. You're sitting there trying to execute work, and there's no work to execute, because you didn't shift to a more stable market that has predefined budgets.
So, that's something I want you all to consider as you continue to work in this market. Right now, maybe everything's great. What is that outlook for 12 months? You should be planning a 12-month outlook. I mean, that's just general good business to think about that.
We didn't talk about the supply shortage. So, materials are going up, but they're going down at the same time. You know, I live in northern Arizona, every time I go down to Phoenix, I drive by three semiconductor plants that are being built right now. So, supply capacity is coming on. If you’ve read some Harvard Business Review reports, you'll read about people bringing manufacturing back into the US, specifically around semiconductor, steel, and things like that.
In the controls industry, the majority of our shortages come from semiconductor chips. I believe it was, and if I'm wrong, I'm wrong, so I will preface that, but I believe it was Automated Logic that moved from ARCnet to BACnet IP/MSTP, because they were having trouble getting ARCnet chips. I could be wrong, but you know, that's an example of supply shortage impacting things.
So, those are another opportunity for customers who are maybe with legacy buildings, in critical environments, that may be a retrofit opportunity. You know, cash still is relatively cheap, even though we've had some increases in interest rates. It's still, if you look historically, I think it was back in the late 70s, it was like 20% for the funds rate, and we're only at 2%, if I remember correctly. So, money is still cheap and retrofits for stability purposes are a good conversation piece to have.
I'm going to shift to something that's a little uncomfortable for a lot of people, and this is cutting underperforming accounts. Oftentimes, and I get this as a business owner, I never want to stop doing business, but you know, if I have a limited sales team, and you're going to have a limited sales team, because as costs and pressure increases, as business contracts, you're going to start letting go of nonperformers, which is going to limit your sales capacity.
You also want to start limiting your business with non or underperforming accounts. People who don't pay, and cash is king, people that take 180 days to pay, you probably want to reconsider doing business with them. Unfavorable terms and plan service agreements, things of that nature, maybe you want to reconsider those. People who routinely just low bid you, you maybe you want to reconsider looking at maybe a more owner-focused relationship where you get some higher margin and direct to customer purchases. These are things that I would encourage you to consider as you are looking at planning for the next 12 months.
Something that's pretty obvious, and we've talked about this a lot, becoming more consultative. So, what does that look like? We're going to have some posts on consultative and surrounding topics. Those of you who are truly just construction sales folks, you play your relationships, which I'm not diminishing the skill to be a construction salesperson. A lot of people tend to put construction salespeople, or owner salespeople, or solution salespeople in a bucket, and they look at one as more skilled than the other. You know, though, some folks will believe that solution salespeople are more skilled than the other two. Some folks will say owners. The market can be complex for any of those.
That being said, for those of you who are solely construction focused, I want to encourage you to become more consultative, more business outcome and pain focused. The reason why is I am a firm believer that within the next 12 months, we'll start to see tenders dry up, we will start to see new construction in certain areas start to dry up. I think I read we're at like 700% foreclosures on residential property increase last month. If I remember that correctly, I mean, that's a crazy number. You look at the average loan rates, you look at debt to income ratios. There's all these things that show that people, personally, are under a lot of financial pressure, which when consumer purchasing decreases, that decreases profit for businesses, which all just kind of trickles uphill. And that means right, new builds, new construction is potentially going to go down.
So how do you counter that? Well, you counter that by becoming consultative. There's a good book by Neil Rackham called Major Account Sales Strategy. I'm also a big fan of SPIN, although my Director of Sales prefers some other stuff. But I like SPIN from a methodology perspective of situation, problem, implication, needs pay off. I think it’s a very simple way to think.
If you can go to customers, you can connect with your vertical markets and you can start to understand their situation. How do they make money? Become a student of that vertical market or markets. Who makes decisions? You know, basic Sales101. Then you start to become consultative. “I see you run a hospital, you are having issues potentially with keeping your facility up and running due to parts, maybe due to energy, etc. How do we help you achieve that?” You become a consultative salesperson, and you do smaller scale, consultative, quick hit Project X.
Let's shift gears off the sales topic and onto the more operational topic. So, the first thing we're going to do, if folks asked me how did we become the fastest growing training organization in building automation? Doing it online, which I mean, I personally don't appreciate this as much as I probably should, but when I first started this business in 2017, I told folks I was going to train people online. They kind of laughed at me. They're like, “Okay, yeah, you're gonna train building automation. Good luck with that, “ because it has to be hands-on, has to be out in the field, has to be done this way.
Then, COVID hit, and I looked like a freaking genius, just out of dumb luck, because everything had to move online. All these companies were scrambling because they needed an online curriculum. Oh, Smart Buildings Academy! We’ve got an online curriculum. That's great!
But how did we get to that? How did we produce 40+ courses, 10,000+ students, in five years? It all comes down to standards and processes. So, what I would highly encourage you to consider looking at is, your business from a perspective of standards and processes. There's a couple of good books on this. There's the E Myth by Michael Gerber that's really, really dry. I’ll be honest, I’ve probably only completed 30% of the actual book, but I've completed the executive summaries of it. I just can't get through his writing style. There are other ones out there if you really start looking.
Getting really clear on your processes and your standards will make you efficient. One, when you establish a standard, it's very easy to determine if something deviates from the standard. Once you're able to determine if something deviates from the standard, then you're able to say, this is not meeting the standard, this is not where things should be. How do we fix it? How you fix it is through processes. So, standards are the expectation and those are supported by KPIs, key performance indicators, that basically show you're adhering to the standard. Then processes are the individual processes you do to meet the standard.
So, in our organization, I think standard, if I remember correctly, is 50 cold calls a week, 12 meetings a week,15 existing customer touches a week, and that's per sales rep. Those are our standards. Now, how do we do it? We do it through our processes. We have a specific sales process.
It’s the same thing with our courses. Our courses have specific standards. They have video standards, like things need to be at a minimum 1080p, 60 frames per second. How do we actually implement a video in that? Well, we have a specific video shooting process and we do these steps. How do we execute a class? We do these steps.
So, you can take that, and you can extrapolate that to your business. You can say, these are our standards for our sales team and these are our standards for our operations team. That's one really cool place to reduce cost, but it’s also, when you get good at standards and processes, is a way to actually increase revenue.
Some may ask, “Phil, how do you increase revenue?” Well, two ways. One, you increase revenue by reducing operational inefficiencies, thus doing more with the same amount of time, thus more revenue in the door. You're able to execute more revenue. The second way, though, is if you get really efficient with standards and processes, you sell those and train your owner operators on them.
If you have a service organization, and you have a really good troubleshooting process, you can sell that troubleshooting process and train your owner operators on that. In our case, we have a really good training program. We can go to universities, package up our training programs, and train people, or train the trainer to execute it at their university or trade school. Now, we’ve been approached about this, but we have not yet done it as we haven’t had the need, but if I wanted an additional revenue stream, that would be it. So, that is another way to reduce costs and increase revenue.
Now let's talk about the painful, usually not fun topic of staff optimization. So, staff optimization is a positive and a negative thing. It's a positive thing if you have followed our previous blogs and podcasts where we've said to log your job task codes, create standards, expectations, and performance standards by role, analyze job task code performance against actual standards on those jobs, and determine inefficiencies and train your team. Then, optimization of staff can be really good because that's how you increase your profitability.
You would say, okay, we really suck at VAV boxes. Why do we suck at VAV boxes? Well, we suck because our folks don't understand electrical, or they don't understand actuator mounting, or they don't understand airflow, whatever. Once you determine that, you create a training and mitigation plan, and you support that through processes. This is the literal step-by-step process with pictures or video on how to install a VAV box controller. You could also do that with sales or even with finance, all day long you could implement those standards and processes.
With a recession, and this is a touchy topic, you need to start considering, do you have that 40–50-year person who can only do is VAV boxes, and they complain all the time. Maybe you need to let that person go. Maybe you have a brand new person, who's new to the industry, who's not performing. It's not just about the experienced folks and their high salaries and them not having an ROI for that salary. There are plenty of people who have high salaries and experiences that you'd be stupid to let go and you really should keep them on board.
It is less about, is this person 40 years experience or one year experience? Are they super expensive or super inexpensive? It is more about, are you getting an ROI on that labor or is that labor costing you more? A lot of folks in the larger OEMs are really good at this. They have people who just sit there and analyze this all day long. Now, on the smaller companies, they tend to struggle with this because it's like a family. You don't want to let go of your family or your team; you want to kind of make things work for people.
What it really comes down to is having a way of determining if this person is providing revenue. I usually say you should do 3x to the business, whatever your salary is. So, if you're a tech and you're getting paid 80k a year, you should be executing 240k worth of revenue profitably. So, if I have a tech, and I have a million dollars’ worth of business, I should have four techs. That's kind of how I tend to look at it if those techs each are making like 60k to 80k.
So, with that in mind, you have to analyze, is this person returning a 3x return? If they're not, you have to ask yourself, why. Is this a standards and process issue? If it is, you should not terminate the person, you should fix your standards and processes. Let’s say you get rid of the person, and you bring someone new in. You're still going to have the exact same issues because you haven't fixed the underlying issue.
This is where I see a lot of small to medium sized companies struggle. This topic is where we do a lot of our consulting. How do you determine if it's a standards and processes issue? How do you determine if it is a cost imbalance? What do you do to figure this out? Then, once you know this, what do you do from there? Well, that's a topic for an upcoming post.
I know we've covered quite a bit. We've gone through a lot of different topics. I hope it has given you some things to consider. I don't ever want to tell you this is the only way. You know, even though I know I have strong opinions, I want to give you information. Then you, with your own experience, can determine if this applies to me, this doesn't apply to me, this works, this doesn't work. Then take that and hopefully, build a better business, hopefully build a better career. Hopefully have more fun, make more money, and do the things that you enjoy.
Thanks so much for being here and take care.