A few months ago, industry expert and principal economist at ITR Alan Beaulieu spoke at the HARDI Annual Conference. Based on his observations, our industry has passed through the economic recovery stage and entered into full-blown growth. He feels the time is right for HVACR distributors to invest. Further, he went on to suggest businesses, people and technology as targets for investment.
Alan is one of the superstars of the distribution industry, and I totally agree with his prescription. But I wonder if he couldn’t elaborate on the whole “business, people and technology” statement. Face it, these three topics cover a whole lot of ground. I would like to invite you to spend the next five minutes thinking about some potential investments.
Before we start, a word of warning. Every slick-talking sales guy on the planet talks about his product as an “investment.” To illustrate this point, a friend in the car business constantly talks about cars as the second biggest investment a person makes, aside from his home. I will leave the old homestead out of the equation, but for most people, a car is an expense. Investments differ from expenses in that you expect a return. For instance, an initial investment of $150,000 (see http://tinyurl.com/kqf39oh) in a new salesman in an expansion territory stands the chance of bringing a long flow of return. As we look at investments, we’ll apply the same criteria: The Return.
Distributors face dozens of choices under the technology heading. Without too much thought, I created a page-long list of places to invest under the technology flag. What’s more, technology investments stand to interact with other areas, driving better performance in people and improving overall business process.
A smart front end for your business/ERP system
Most distributors already own pretty good business systems. These systems do a great job with inventory, accounting and other back-of-the-house functions. And, armed with the right report, a business manager can make radically better decisions. But there is a problem; most distributors lack the IT manpower to build the right report. Further complicating things, the analytic needs of distributor managers tend to shift and change over time. When outsourced, we tend to view the generation of custom reports as costly.
Many sales managers spend entire days playing with spreadsheets to get rudimentary reports: things like “sales gap analysis,” sales by product group and other information. Most have not weighed the cost of their time against the price of a special report. They continue to slug through the work, devoting weekends and evening hours to the task. Ultimately, even the most dedicated manager burns out. They begin to check information annually instead of quarterly (or monthly). The distributor’s analytics suffer.
The good news is a number of companies have developed systems that harvest data from the ERP system and serve it up in a user-friendly manner. The best-of-class systems have a number of distributor-developed reports that improve selling and provide measures for improving the overall operation of sales and customer service departments. This is an investment with a rich payback.
Smart mobile apps
According to a recent distributor survey, 94.5 percent of the distributors surveyed are using smartphones, and more than 63 percent are toting around iPads. My guess is our customer base mirrors our adaption of this technology. With these facts in mind, we must consider apps as an investment. Before we launch into their merit, let me provide a quick tutorial. A mobile app, short for mobile application, is software designed to run on smartphones, tablet computers (like the iPad) and other mobile devices. In short, they are the programs that make these things useful.
Let me start with a true confession. Until last year, I had my doubts about the worthiness of the whole mobile phenomenon. Here’s why: I had never seen an app focused squarely on our business. Most of the apps I saw people using were fine for finding restaurants, getting sports scores and keeping in touch with friends. All cool stuff, but not really investment material.
In the last year or so, all of this has changed. Companies are developing apps that tie directly to their business system. Salespeople can select products, check inventory and arrange for special delivery instantly. Imagine the power of standing at a job site and solving customer issues quickly. Think about the possibilities of a seller walking a customer through exactly what products could be shipped out tomorrow. But the app possibility doesn’t end with your sales team.
We have seen customer-facing apps that allow a contractor on the job to select and order products, study installation procedures and review counter specials anytime, anywhere. These make fabulous sense for service truck drivers during peak season and give your organization a tool for the future.
We believe both kinds of apps are investments with a return. According to Pew Research, smartphone usage continues to grow with 58 percent of the U.S. population carrying one of these devices. The percentage for the “younger generations” pushes well beyond 80 percent. Further, more than half of all Internet usage these days is, you guessed it, via mobile devices.
The “younger generations” statement is something too important to pass up. In recent years, I have seen at least a dozen generational experts talk to distributor groups. It seems most of the focus falls into the heading: How to manage the Millennial, Generation Ys (or something to that effect). All of these people forget to mention that the new generations are getting along in their lives. We’re not talking about a bunch of teenagers. It’s not a hypothetical case. They occupy the ranks of our customers. And, unlike some of the “long in the tooth generation,” they buy stuff using apps.
The old cliché lives on, “people are our biggest asset.” Yet, if distributors took care of our delivery fleet the same way they take care of their people, we’d have a herd of dirty, rusted out hulks with our name spray painted on the side. Here are some thoughts on people investments.
Sales training, not product training
I give our industry high marks on product training. Mostly, our people know the stuff they’re selling. What we lack is a system for training on processes. Topics like setting appointments, call scheduling, long-range territory planning and, even, understanding our value remain untouched.
In the last issue, we talked about the rare commodity of selling time. After deep dives with a dozen or so distributors, we are finding our worst fears realized. Most distributor sales teams spend less than 20 percent of their time actually selling. Developing strategies for driving just a few more hours a week into active selling could be equivalent to adding a new salesperson to the team. We think this is investment grade stuff.
Think about a support staff
The pendulum swing in the distribution industry may have overshot the mark. During recent decades, lean has been cool. Everybody does everything themselves. From the corporate office on down, people are hustling to somehow replace support teams with technology. I believe we’ve taken things a bit far.
Time spent with vice presidents, sales managers and even distributor CEOs reveals high-level guys doing entry-level stuff. One company president remarked he gets 15 phone calls a week that a clerical assistant could easily handle. Another sales VP remarked he would have more customer events, but he just doesn’t have time for the logistical details. We want to hold down our headcount, but it’s high time for some investment.
The current situation has $100-anhour people doing $10-an-hour work. If you are a company executive, ask yourself how much more effective you might be if somebody else made your hotel reservations, set your schedule and screened some of your calls? I know some of you are wondering if I’ve lost it, but I believe this could be an investment.
Re-evaluate your current employees
Times are good. And when times are good, we tend to not evaluate people. Short of stealing, dealing or a federal weapons charge, it’s pretty hard to get fired in this kind of economic environment. But most distributors have added a few new people to their team. And some of these may be hiring errors. In addition, some of our existing team may have lost interest in their work performance; it happens. Why wait around until the next recession to cut them loose?
The growth environment allows us the opportunity to work with low-performing employees in the most humane way. Instead of turning them out when the bitter winds of bad economy make new jobs nearly impossible to find, why not provide outsourcing assistance now? They win, you win, and it’s got both a human and monetary return.
Making some of the investments outlined above is synonymous with business investment. Freeing your people’s time to work on strategic issues equates to business investment. However, there are a couple of points that you should explore.
Pricing process is a business investment
One of the easiest ways to impact the value of a distribution business is driving higher gross margins. Think about it; the median bottom line performance in our industry hovers near 3 percent. Most of us have heard the “power of one” story dozens of times; improve margins by 1 percent and it means greater profitability. But, after hearing these talks, the margin stays the same. You can’t wish yourself to greater margins. You can’t cheerlead your people to better pricing. It takes a process. I have seen the results.
My friend, David Bauders at Strategic Pricing Associates, has developed a process that works for this industry. They have shared the mechanics of their process and allowed me to interview many of their clients. The results speak for themselves, a process that is guided by scientific analytics and backside training works. And their clients claim a 60-day payback; that’s a 500 percent ROI. Definitely investment stuff.
Demographics might provide investment opportunity
Baby boomers dominate the leadership positions of our industry. On the periphery of your territory, there are probably companies with owners in their 60s who are wondering how they gracefully exit into retirement. Some have succession plans, but a good many do not. Adding already trained people and acquiring their customers is a good investment.
Investing takes money
Sometimes more money than your business has on hand. While attending a conference recently, I had the opportunity to speak to several private equity fund managers. Things have changed in the private equity business. They are interested in distribution. And, they are willing to take “noncontrolling positions” in our business. Simply stated, distributors now have a resource for cash required if a really good opportunity for investment opens up.
A final word
Investment implies return. Don’t spend your money, invest. But more importantly, think of the one commodity more precious than good old greenbacks: time. Are you spending your time or investing?
Frank Hurtte provides Strategic Insight for New Times. He speaks and consults on the new reality facing distribution in a post-recession world. Contact Frank at River Heights Consulting via email at [email protected] or via phone at 563/514-1104.