In the world of systems integration, talking about the diminishing margin in hardware starts to feel like the movie “Groundhog Day.” We all know it is an issue, we all feel it in our bottom lines, but we struggle to bridge the shifting economics.
While we all have a blast talking about our problems, can we agree it is more fun — or at least more productive — to solve them? In order to solve our problems, we first must understand the root of them.
In the case of commercial integration, diminishing profitability is rooted in a few things. While most notably it is the diminishing margins on hardware, it is important not to ignore many commercial integrators have shifted from being product suppliers to service providers. In this shift, not all integrators have been created equal.
As margins have moved from product to project, it is upon the business leaders to solve the conundrum of how to make the intangible projects as dependable as the hardware that once drove big margins. A great place to start is by looking at where margins get lost in a project by spending some time analyzing our respective organizations to determine if we can get those margins back.
Are you looking for your project profitability? Here are eight places to start.
1) The Wrong Suppliers. I won’t pull any punches here. Every company should take a close look at all vendor relationships, their programs with those vendors and what improvements can be made. This can drive two-to-four percent to the bottom line if it is made a focus from top to bottom.
2) Over Incentivizing. Sales are unquestionably the lifeblood of your company. But if your sales team is overcompensated, that immediately eats up potential profits. A good rule of thumb is a sales person should be paid (including benefits) no more than 25 percent of the gross margin they are creating. In my experience 20 percent is more manageable.
3) Design Efficiency. Customers don’t want drill bits, they want quarter-inch holes in the wall. If your design is heavy in equipment dollars then you probably have to reduce services and high margin dollars to meet the budget. Can you design more efficiently?
4) Forgetting G&A. Some clients don’t want to see your charges for administrative support, but that doesn’t mean those costs don’t represent 5-10 percent of your revenue. Since someone needs to order the equipment, bill the client and process your payroll, those costs need to be considered when proposing projects. Whether that adds $30 to a small job or $30,000 to a large one, it adds up and is highly problematic to the bottom line if it isn’t accounted for.
5) Time Management. Chances are you are paying your installers and technical resources for a full day’s work. The question is: Are you getting a full day’s work? Starting 15 minutes late and taking 10 extra minutes for lunch don’t appear on the surface to be a big problem. But if you have five, 10 or more technical staff all doing the same thing, those 25 minutes can turn into thousands over a year. Divide that by your hourly rate and your projects are bleeding unnecessarily.
6) Capturing Freight. With margins on hardware continuing to decrease, getting your freight pricing right is critical. Using tools to estimate inbound and outbound freight and properly charging for this is key. Also, using covenants to charge appropriately for change orders that require air freight or other highly expensive means of product acquisition are helpful in improving overall project profitability.
7) Missing the Little Things. In the quoting phase, it is easy to forget a cable, DA, or mount. When estimates are being turned quickly this can become even more problematic. “Check 11 times, cut once,” is the mantra. It is very hard to charge for hardware adds that were mistakenly forgotten on your end, so thoroughly audit your equipment list and consumables before finalizing your quotes.
8) You Aren’t Charging Enough. I know this sounds obvious, but I used to ask myself after winning a bid or project what we did wrong. While there was a certain kidding in that gesture, there was always the fear that the winning bid on price-sensitive proposals was really the loser. Bottom line: winning projects by underestimating the true cost or requiring unrealistic precision is a great way to not make money.
Driving margin back into your projects is a game changer for your bottom line. You have other ways of trying to solve the same problem, but these eight steps are critical to maintaining your company’s profitability.
So where are your projects losing margin? More importantly, what are you doing to get it back?
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