By Kevin Kehoe
Everyone talks about innovation as if it were something that can be managed, when in reality it is primarily the result of experimentation in the face of adversity. In other words, most of the time necessity is the mother of invention.
For a seemingly low-tech industry, the landscape business is experiencing extraordinary levels of innovation since 2008 primarily driven by adversity in the form of economic imbalances in supply and demand in the commercial real estate market and unemployment and housing prices in the residential market.
Yet with all this adversity - by hook or crook – innovative landscape companies have not only survived, they have prospered. Industry performance benchmarks clearly tell this story of innovation. Consider some of the following benchmarks we once accepted as conventional wisdom and the magnitude of the change in such a time.
Pre 2008 benchmark for sales growth: 25% 2010 benchmark: 10%
Pre 2008 benchmark Ground Maintenance Gross Margin: 55% 2010 benchmark: 45%
Pre 2008 benchmark Design Build Gross Margin: 50% 2010 benchmark: 40%
Pre 2008 benchmark Bid Build Gross Margin: 35% 2010 benchmark: 15%
Pre 2008 benchmark Overhead Leverage Ground Maintenance: 2.35 2010 benchmark: 2.65
Pre 2008 benchmark Overhead Leverage Design Build: 3.10 2010 benchmark: 3.50
Pre 2008 benchmark Net Margin Top 10%: 14% 2010 benchmark: 10%
Pre 2008 benchmark Annual Sales per Salesman Ground Maintenance $500,000 2010 benchmark: $1,000,000
Pre 2008 benchmark Annual Sales per Salesman Design Build $1,000,000 2010 benchmark: $2,000,000
Pre 2008 benchmark Annual Sales per Salesman Bid Build $2,000,000 2010 benchmark: $4,000,000
Pre 2008 benchmark Annual Sales per Account Manager Ground Maintenance $1,000,000 2010 benchmark: $2,000,000
All these gains in performance were driven by a simple necessity – the same impetuses that drive everything in our wonderful capitalist system: (1) providing a quality product to the customer at a more attractive price, and (2) getting more productivity out of our primary assets – people.
Providing the customer with a more attractive price requires innovation in several areas: estimating, job hour management, and sales. The facts are:
- Our prices were too high. Revising estimating factors including production rates, markups and margins is essential and will reduce gross margins. But this is precisely the gateway to gaining sales and market share.
- There was too much waste in production. Implementing GPS and integrated work order scheduling software is becoming essential. It reduces wasted hours offsetting some of the gross margin loss in estimating. Of course, it is not free requiring an investment in information systems.
- Sales were generated primarily by referral. Customers came to you. Adapting big company sales and marketing strategies can increase sales volume further offsetting the effects of declining gross margins if/when volume grows faster than overhead cost. Again this is not free, but neither does it require the type of fixed cost investment that information systems require.
Market innovation requires focus and simplicity. In today’s market being everything to everyone ignores these two cardinal principles. Take the case of a mid-west grounds maintenance company that executed these price related strategies.
Their first step was to redesign their estimating system to drive pricing down in their core services: mowing, enhancements and snow. The net effect was to consciously choose to bid work at lower gross margins to increase sales close rates. From 2008 to 2010 while gross margin fell by 5 percentage points sales close rates increased from 15% to 22% helping volume offset gross profit dollar shrinkage.
Step two was the installation of an integrated work order/schedule management software system. The net affect was to reduce labor hours per job and indirect labor hours in total. From 2008 to 2010 sales per production hour increased by 5% while indirect hours fell by more than 30%. While this did not offset the price reductions entirely, it certainly buffered them.
The final innovation was hiring a sales professional and reorganizing internal staff dedicating an operations person to measurement and estimating thus freeing up the sales person to – sell. Combining this investment with investments in a CRM pipeline software and a marketing story promoted via email blasts and web blogs increased bid and close volumes in excess of 2010 goals.
In less than two years, this company grew from $2.1MM in revenues to $3.4MM. The big win was net profit, which increased from 5.1% to 10.7%. Management understood that the old way was a recipe for failure.
Getting more productivity out of your people requires innovation in several areas: job tools, compensation and staff composition. The facts are:
Most managers and supervisors act out of habit and narrow assumptions of cause and effect relying on the “same old solutions” to now very different problems. It therefore becomes essential to produce daily reports using numbers instead of “feel” to make decisions. The result is immediate cost savings instead of deferred problems.
The industry pays too little and “expects” too much from people in key positions. I am not suggesting your expectations are wrong for performance, I am saying however that we too often hire a 100 horsepower engine when we need a 200 horsepower engine to pull the load. The only way to change this is to pay more per person and have fewer people in total. While this costs money in the short run, it reduces costs in the long run.
Finally, most people are most effective in a single sphere of their jobs. There are four spheres of job capability: management, sales, operations, and administration. Asking one lower paid person to perform more than one of these roles highly effectively is usually a recipe for low productivity. Specialization coupled with higher compensation schemes pay off.
Like market price, asset productivity, too, requires focus and simplicity. In today’s organizations everyone doing everything ignores these two cardinal principles. Take the case of a southwest grounds maintenance company that executed these people related strategies.
Their first step was to design several simple reports for each key manager/supervisor to use everyday. For example a field supervisor can look at a report to help him quickly determine labor needs by route, by crew and by job two weeks in advance at the same time highlighting jobs where hours exceed budget and formulating a recovery plan. As a result from 2008 to 2010 while pricing fell by 10%, gross margins declined by less than 2% on base contract revenues.
Step two was to change the compensation plans for sales and account management people. By developing a senior and junior account management job they were able to recruit experienced talent from competitors with a combination of higher base and commissions based on the expectation of managing a book of business 40% larger than a less expensive junior level account manager. As a result, overhead costs in relation to revenue has declined, turnover is near zero percent, and junior people get hands-on job training learning from the senior staff.
The final innovation was to align job descriptions with talent and focus each job on simple primary objective like new sales, up-sells, retention, hours or safety. The results are that people have more time to invest in their primary functions improving personal results. The biggest payoff was in customer retention rates, which in comparative dollars increased from 85% to 92%.
Since 2007, this company grew from $7.5MM in revenues to $8.9MM with net profit increasing from 3.1% to 8.7%. While these changes were not greeted with overwhelming happiness at first, people can barely remember the days when it was anything other than it is now. That may be the most wonderful aspect people; their uncanny ability to adapt, especially when they see their lives and pocketbooks improve.
Would these companies have innovated as they did without the economy going south? Yes, probably in the long run, but certainly not at the accelerated pace they did. The real lesson is that innovation is not the child of brilliant ideas, but the province of hard work and clear thinking born out of adversity.