• Contractingbusiness 1438 21862figurepng00000012034

    The 30% Principle

    July 1, 2006
    img src="/images/archive/21862figurejpg_00000012034.jpg" width="200" height="99" align="right"Perhaps you've heard the joke about the drunk who lost his
    Perhaps you've heard the joke about the drunk who lost his car keys and was looking for them under a streetlamp. A stranger walked up, offered to help, and then asked, "Where did you lose them?" "Over there," replied the drunk, pointing about 20 yards away.

    "Then why are you looking here?" "

    Because, this is where the light is," replied the drunk, "It's too dark to see over there."

    Though we chuckle at the logic used by the drunk, like many jokes this fable contains an element of truth about human nature. Think about your own business. What problems do you pay attention to? Are they those of the "squeaky wheel" variety — where the light shines brightest, so to speak — or are you the rare person who can ignore the clamor and stay focused on the highest priority problem at the moment?

    While we're being brutally honest with ourselves, let's take a look at the business performance indicators we monitor and track. How many of these do we pay attention to simply because they are easy to measure and track, rather than because of the insight they provide for preventing problems before they occur.

    Financial statements, for instance, are important and money is easy to count, but none of your financials will tell you anything about whether a major installation project is or isn't likely to succeed, or whether or not your dispatch process is operating at maximum efficiency, or why your sales closing rates aren't what they should be.

    These and other "within-process performance indicators" aren't always easy to identify or measure, but they are likely to tell you more about preventing problems and pinpointing improvement opportunities than the occasional financial report card you get from your accountant.

    With the advent of 13 SEER, there is a greater need than ever before for contractors to establish a system for monitoring and tracking certain key, within-process performance indicators.

    Why? Because, as many have reminded us, 13 SEER will level the playing field between HVACR competitors, making it more difficult to distinguish ourselves by offering customers the option of trading price for energy efficiency.

    From what we know about the law of supply and demand, the outcome is likely to be reflected in lower profit margins. And, with lower profit margins the bottom line will suffer, unless we ramp up the efficiency of running our businesses, grow our sales volume, or both.

    A carefully selected set of within-process performance indicators can assist in both of these areas: sales performance and internal efficiency. We'll come back to this, but first let's examine the guiding principle for making this outcome a reality — one that takes its inspiration from 13 SEER itself.

    Like most challenges, the 13 SEER standard can be viewed in one of two ways: as a pain in the posterior or as a golden opportunity. The position you take will be mirrored in your choice to take a reactive or a proactive stance.

    If you're among the wait-see-respond group, this article will probably be of limited value to you. However, if you're interested in exploiting the opportunities, we encourage you to look to the spirit of intent behind the 13 SEER standard. Within it you'll find inspiration for growing the efficiency of your business — where the term "efficiency" encompasses both operational efficiency as well as sales efficiency.

    As you know, 13 SEER represents a nominal 30% increase in energy efficiency over 10 SEER. But, why was the standard set at 13 SEER, rather than 11 or 12 SEER? It certainly wasn't for a lack of lobbying.

    After all, a 10 or 20% increase in energy efficiency is nothing to sneeze at, and it would certainly have made the transition easier for those of us who are in the business of selling boxes. Aside from the benefit of making a dent in our national dependence on foreign energy sources, we believe 13 SEER can serve as a kind of role model, or stretch goal if you will.

    It's Not Business as Usual
    The goal is to increase the efficiency of your company as a whole — not simply the energy efficiency of your units. For simplicity we refer to this as The 30 Percent Principle.

    Embedded within this principle is the notion that minor tweaking will do little more than promote a "business as usual" attitude. Something significant has to change or nothing will change — yet another quirk of human nature!

    If it appears we are playing off of 13 SEER for something other than its intended purpose, we plead guilty as charged. On the other hand, drawing inspiration from one arena to establish a stretch goal in another isn't something new. If it were, the practice of " benchmarking" would never have taken hold.

    Also, we're reminded of the evolution of another standard that leapt into the limelight when then-CEO, Jack Welch, embraced it at General Electric: the Six Sigma quality standard.

    This standard, which was first applied to product manufacturing, imposed a stretch goal of limiting the average number of product defects to no more than 3.4 out of a possible one million opportunities for such defects to occur.

    Even though the Six Sigma standard was predicated on statistical principles pertaining to the behavior of manufacturing processes, the spirit of intent of this standard as a stretch goal was later adopted as a standard of excellence for making ambitious quality improvements in every facet of the organization.

    We maintain that The 30% Principle can do for efficiency in running a contracting business what Six Sigma has done for reducing errors in the companies that have embraced it.

    Again, we remind you that our notion of efficiency encompasses operational efficiency as well as sales efficiency. In other words — and this is important — we're interested in sales and operational efficiency improvements that not only save time and money, but have a direct or indirect impact on customer satisfaction. Done right it's a win for your business and your customers!

    But what does this mean in practical terms? Assuming you choose to apply The 30% Principle to your business, a good place to start is to communicate your intent with your employees so they're clear that your goal is to grow the business by improving efficiency in certain areas.

    They also need to know that you're serious about making significant changes, rather than minor adjustments. In all likelihood these measures will reduce much of the grief and frustration in their jobs as well.

    But if they perceive this as a ploy to pressure them to do more with less, or as a threat to their jobs, don't expect them to share your enthusiasm. This will be a test of your leadership abilities since you will need their cooperation to make it work.

    Next, you'll need to identify key opportunity areas to target, keeping in mind that you are interested in sales and operational efficiency improvements that not only save time and money, but those that have a direct or indirect impact on customer satisfaction.

    These opportunity areas will largely depend on the structure of your business processes, but let's consider a typical example:

    If your parts inventory process experiences problems in keeping certain parts in stock — let's say expansion valves for certain units — what would it mean to your business if the inventory replacement cycle for these and other critical components were reduced by a stretch goal of 30%?

    Would it reduce costly wait-times? Would it have bearing on service-call response times, and therefore customer satisfaction?

    Eliminate Process Inefficiencies
    If so, and to a significant degree, there may be opportunities for profit enhancement in ferreting out the inefficiencies in this process.

    This is only one of many processes you'd likely need to examine — a moot point if these processes are not well defined or if your business persistently works in a "firefighting mode."

    Here are some, but not all, of the processes you may need to evaluate for efficiency-improvement opportunities:

    • Service-response process
    • Accounts receivable process
    • Accounts payable
    • Inside and Outside-sales
    • Maintenance agreement
    • Product warranty
    • Vehicle maintenance.

    Bear in mind that departments, such as dispatch, service, sales, and accounting are not the same as processes — and therein lies a challenge: your most critical processes will likely cut across department lines, making it difficult to effect changes in process efficiency by focusing on departmental improvements alone.

    Conception is always more fun than delivery, but if you've made it this far you're at least mentally prepared to go the rest of the way. In the end you'll be miles ahead of your competitor down the street. You know . . . the guy who still sees only one path to profit enhancement: by being the low-cost provider who hopes to grow profits by gobbling up market share.

    The 30% Principle will keep you from getting caught up in this game and getting into a price war in which there are no winners.