Hey folks, Phil Zito here and welcome back. In this post, we are going to be tackling the topic of how to organize your team to scale your revenue.
So, I was talking with a customer of ours the other day, and they mentioned that they have been doing things one way, and they’re now really trying to figure out how to do them another way, because they want to scale their business. Now, I'm purposely being pretty vague in the descriptions I just gave because I don't want to identify who this person is, as it was said to me in confidence. But this is a consistent theme that I've heard over the past five years of running our training business. I’m often asked, “What do I do? What are the exact steps I should take to scale my business?” So, we're going to dive into that today.
Whenever I'm engaged in, or my organization is engaged in, a consulting conversation related to scaling revenue at a building automation contractor or system integrator, we follow this approach that I'm going to lay out for you.
The first thing that we dig into to identify the current structure of the organization we're dealing with. Now, this seems pretty obvious, right? Identify how the organization is run. What I tend to find, especially in single office organizations, is that their structure grew organically, and this isn't a bad thing. If you've read E-Myth by Michael Gerber, he talks about the transition from the technician to the manager to the owner. I see that a lot of folks who are trying to grow their organization are stuck somewhere between a manager and an owner. So, my hope is, by the end of this post, you will be able to identify where you are on that journey, you'll be able to identify your structure, your goals, and then what needs to actually happen to reach those goals.
So, when I look at a structure, I look at the customer’s journey. We first ask, how do you get customers? How does revenue enter the business? If you can't identify how revenue enters the business, then you can't identify how you're going to scale revenue and ultimately deliver greater profitability.
So, how does revenue enter the business? Does that look like an outside facing salesforce? Does that look like something where you're using BDRs, Business Development Reps, or SDRS, Sales Development Reps to go out and prospect? Then you've got account execs. Does this look like marketing? What avenues are you utilizing to draw people into your sphere of influence, into your business?
Once we've identified that, and we've started to figure out how money comes into your business, then we can look at, how do you take those opportunities you've discovered and convert them to contracts? Whether that's a service contract, whether that is a construction contract, how do you convert that? What is your estimating process? What is your sales process? What is your CRM? You'd be shocked by how many millions of dollar companies we run into that do not have CRMs. They have no way of really managing leads, managing accounts, etc.
Then, from there, we look at what is your sales to ops handoff? Then from that sales to ops handoff, what does your actual operations team look like? Whether that is a service team, or that is a construction team, or it's both, how are they organized? How do you execute work? How do you track execution of work? How do you close out work?
Then overlaying this whole thing is culture, talent management, and talent retention. It is easier to keep a good employee than it is to try to hire a new, good employee. It just is, especially in today's world.
So, from there, we move on to what is your goal? What do you want to achieve? Do you want to bring more revenue into the business? Do you want more profitability out of the business? Those are two completely separate goals, although they can be synergistic.
Remember, revenue, that is dollars coming into the business, but profit is the actual money that remains after all of your costs are absorbed by that revenue. You can have a $10 million revenue business that is barely squeaking by on the profitability side, maybe 5 to 10% profit margin, pretty small profit margin. Whereas, you see the growth companies, you look at some of the larger system integrators, some of the larger contractors that are expanding and that are acquiring other contractors. They tend to be anywhere in the 18-to-25% range. Some are even higher, depending on the type of work they do and how they're organizationally structured. So, what is your goal? What do you want to achieve? That is the next thing you have to figure out.
From there, we go into a question that you've probably heard me ask before, and I use quite often, which is, what needs to be true to reach that goal? If you've been through our IT training, you know I will often ask what needs to be true in order for you to get IP addresses, or what needs to be true in order for you to get submittal approval, in the case of design submittals?
Well, in this case, we're asking a similar question. We're asking what needs to be true in order for us to hit a revenue of $10 million at 20% profit margin. Then, once you can answer that question, you can actually start to back into the solution. So, let's talk through the three areas we can scale in order to hit these revenue or profit goals.
I do want to say that sometimes people and companies are willing to absorb lower profit margins in order to expand and consume competitors. So, if you have healthy cash flows, I have seen organizations that will say, we've got a healthy margin, we're willing to take a temporary dip in our margin to put our competitors out of business, or to take over a specific vertical market that our competitors are very strong in. You see this with a lot of large OEMs when they go after marquee jobs. You'll see them take it at a lower profit margin because they can absorb that, because of the marketing benefits as well as the potential service and lifecycle opportunity that will come from that larger project.
There are really three areas that we can scale in this space, and those are going to be:
So first off, if you have determined that your operational processes are efficient, you are hitting your target margins, then ideally, everything staying equal, if you increase revenue, you should hit your profit goals. So, if you have followed what I've talked about previously on how to be more operationally efficient, things like job task coding, things like having a feedback loop into your sales and pre-estimating team, having the ability to incorporate training, whether it's through an organization like us, or internally based, on actual job tasks performance, then you probably have a solid operations process and team. If that is the case, then how do you go about scaling your revenue?
Well, the first thing we have to decide is, what are you trying to scale? Are you trying to scale construction? If you are trying to scale construction, is it plan and spec, is it design build, is it owner direct? What kind of construction is it? Then furthermore, what vertical market is it? Is it K through 12? Is it commercial real estate? Is it higher education? Once you've identified these things, then you can then identify the levers you need to pull in order to bring in deals in those verticals.
So, for example, if you're targeting the higher-ed vertical, the first thing you would want to do is an honest index of who we have in the higher-ed vertical who are customers of ours. Then the easiest quick hit thing, referral sales. Okay, “Mr. or Mrs. Facility Manager, who do you know over at XYZ college or XYZ University?” Get introductions and get referral sales. That is kind of at a very high level.
Additionally, there is a marketing component to this. I see a lot of businesses wanting to scale past $10 million in revenue, that tends to be the magic number. So, if you're trying to get beyond that point, that's usually maybe one-to-two-to-three office shop, and you want to scale beyond that point, you have to consider marketing, you have to consider the ability for people to know your message.
Now you could do knowledge marketing, which is a lot of what we do as an organization, but we're a training organization, so it makes logical sense. You can do influence marketing. You could build up a following. We have a pretty big following. That's another strategy we utilize. You can also do things like spec influence, things like owner influence, there's a variety of ways you can market. I want to be clear that influencing the market is not the same as sales. Influencing the market should bring prospects to your sales team, which then move through your sales process.
So, once you've identified that, you have to ask yourself, do we need to upscale our marketing efforts? Do we need to use retargeting? Do we have to do paid advertising? Do we have to do webinars and thought leadership? Do we have to attend BOMA, AHSE, etc? What do we have to do to reach our target market?
Once you've done that, and you have inbound leads, there's another aspect that I don't see a lot of construction companies utilizing, especially if you're targeting the owner market, which is the BDR/SDR role. You'll see the analytics companies using those roles, but you don't see a ton of system integrators or contractors. A solid, well trained Business Development Representative or Sales Development Representative is a great way to take a market. Use a tool like ZoomInfo, LinkedIn Sales Navigator, build a process in your CRM, and then prospect the heck out of your market. Just following a cold calling script, hitting up your target audience at your target market, and then bringing them into your orbit, setting up initial meetings so that your sales team can pursue those opportunities.
Now, you may say to yourself, but that doesn't work in construction and plan and spec. It's a contractors game. I'd say, you're absolutely right. However, is there a way to use BDRs and SDRs to set up lunch and learns with engineering firms, to set up lunch and learns with contractors, to set up strategy discussions with contractors? There is a possible way to do that, as well as there's a way to do more of a hybrid BDR/Sales Engineer role, where these folks are doing pre-estimates, things like going through dodge, pulling out leads, figuring out, do we need to submit an ad-alternate to this flat spec spec? These are all things that your sales organization can do. So, you scale your sales.
Now, you have your sales going, so sales process. For the love of Pete, if you do one thing, even if you don't market, just have a sales process. I've seen too many organizations, we've worked with too many organizations, who seem to reinvent the wheel for every salesperson. It doesn't have to be that hard.
Let me tell you that there are some reoccurring events in the sales process. You have reoccurring information that you'll send, catalog sheets, information sheets, customer references, etc. If you have a solid CRM, like we use HubSpot, you can make these things into snippets that your sales team can easily just insert right into an email. You can make sequences that literally follow. So, you can have a contractor sequence, you can have an owner sequence. All of these things could follow a process that drives your sales team, and it just increases sales efficiency. So, use tools. Use processes.
Alright, let's move to what a lot of people think about when they want to grow their revenue/profit, which is scaling their operational teams. Now, I've covered this in previous posts, so I'll keep it somewhat high level, but I have gone into much greater depth in past posts.
First thing we want to do, if we want to scale our revenue, is we need to know our numbers. Now, depending on where you are in the world, depending on what customer base you serve, you can have all sorts of different numbers. So, I'm not going to give you a hard set number, but I'm going to challenge you to learn your own numbers, but do realize there's a certain number; I usually will say it's 3-4x. If you have a technician and they make y dollars, they can usually handle three to four times their salary in project costs. All things being equal, assuming we're following the rule of thirds, which is project cost = 1/3 material cost, 1/3 labor cost, 1/3 subcontractor cost. So, your rule of thumb typically is 3-4x. Your salary, or burdened rate, is how much that person can handle in contract work for the task they're doing. So, install, programming, design, etc. Knowing these numbers, if you want to have you know, $10 million in revenue, you can back into kind of where you need to be labor wise. So, that's the first thing, figuring out what number of people you need.
Now, you have to look at the projects you're doing. Are you doing primarily data center work where the design is largely done for you, and you're simply implementing a standardized design? Are you doing commercial real estate where it's kind of up in the air, and you're having to be different potentially every time? This will determine your loading. Some organizations, ones that use data center work, they may look like they're heavily loaded on the programmer side and on to point to point checkout side, because those tend to have full-fledged commissioning. But they may look a little lighter on the design side and the physical install side because that installation may be being done by a subcontracted electrical.
So, with that information in mind, once you know your blend of labor, and you can say that you need this much labor for this kind of vertical, then you can start to back into your numbers saying, I want to do $10 million, I know that we need this many people in this role.
Which brings us to the biggest kind of shift I've seen in organizations moving into that higher revenue, so moving into that eight-figure revenue spread, and that is taking a conveyor belt approach to installation and operations. Very often, when someone starts a controls company, they will start it because they have a sales background and they have customers, or they have a technical background and they just got tired of working for someone. So, they will often be the super-tech salesperson, then it progresses to them hiring other super techs.
Eventually, you can't afford a super-tech to do everything. You're paying people north of $100 grand to do install or to do basic design, and that isn't scalable, it's not profitable. So, as quickly as possible, you need to take the roles and break them out into a conveyor belt, knowing that you will have lower skill, lower wage labor doing some tasks, and higher skill, higher wage labor doing other tasks.
So, once you've identified that, and you've broken these roles out, here's what I typically recommend. If possible, outsource physical install, pass that risk on to the electrical subcontractors, train them well, manage them properly, and pass that on. It's a low return level of effort, in my opinion, on larger projects. Sure, it's great to have some folks who can do an install for quick hit $5,000 projects. But for a large project, you definitely want to be able to essentially pass that risk on.
What you want to continue to do is you want to continue to say, I have install that's covered by my electrical sub, I'm going to have point to point done by my base level technician, design done by my designer, programming done by my programmer, check out done by the same technician who does point to point, and then some form of PM management. That will enable you to build a solid install team.
All right, moving to service. Now, service is interesting, because you ask someone what building automation service means, and you tend to get several different answers.
- Some folks will tell you that service means that you are doing PMs, preventative maintenance.
- Some folks will tell you that service means that you're acting as augmented staff. So, you're essentially selling time to an organization who has your person come in and they act like a staff member for that organization.
- You also have service calls. This is unplanned, it's unpredictable, and these people are going to respond to issues. So, if the owner has issues, they're going to respond to the owner. It's a service call.
- You have retrofit service and anything that is more use-case based. So, this is energy engineering, ESCO, meeting with a customer to implement retro commissioning, continuous commissioning, retrofits, etc. That usually falls under the umbrella of service.
- I would be remiss if I did not discuss the acronym of the hour, which is MSI, master systems integrator, work. This is basically someone, more of the install side of things, who comes in and manages the integration between multiple different building systems to achieve custom use cases.
So how do we scale service? This is the more difficult one to scale. Whereas, scaling install is pretty easy based on a book of business. So, your salespeople will sell, they book the projects they sell, that comes in as backlog that you need to then execute. So, it's pretty easy to say if we are consistently year over year growing in our backlog, we can do a prediction as to what we need to do with our install operations team.
On the service side, things get a little bit wonky, depending on the service. So, if it's PM service, preventative maintenance service, if it is retrofits service, which is basically owner direct installation and you have that booked in backlog, those are fairly easy to predict from a revenue and growth perspective. Where things get a little wonky, once you start hiring service technicians, is you never know, are you going to get a slew of service calls? Maybe, maybe not, and these people are just going to be sitting there.
So, what I tend to like to do, when I was running a service team, is I'd like to get most of my labor on PMs and retrofit jobs. Then I would leave a 30% wiggle room for service calls. If I continued to see an uptick in service calls, I could scale accordingly, because on some service calls, you're going to make more money.
Personally, I find that you make the most money on retrofit projects, because you're owner direct and you're bypassing that kind of margin stacking that happens on the construction side. So, you're tending to be anywhere from 30 to 45% margin on service retrofit jobs. That's predictable. and if you have solid processes, you can really make some good money there.
The downside of service is you tend to be at a fixed rate. Now, if you're doing service right, you should be generating retrofit opportunities from your service opportunities. So, you perform a service call, you identify that an inlet vane pneumatic system is about to die. Well guess what, that's a retrofit opportunity.
So, scaling service is a little more difficult. What I tend to say is, initially, I would do a construction focus to build your book of business. Then once you have a solid book of business, on every opportunity you sell, I would upsell a service opportunity, either a PM service flat hours negotiation, or some sort of maybe retro commissioning negotiation. I would work that out with my owner customers.
Alright, folks, I do hope this has given you some ideas. Remember to reach out if you have any questions. Love to hear from you all.
Thanks a ton, and take care.