Number 3

Velocity and Pace

A successful owner manages the velocity or pace of their organization. He or she must be prepared to upshift (i.e. increase sales, pricing adjustments, collections) or downshift (i.e. cut spending, quality control, manipulate crew size) the focus of the organization at any moment. This may involve contract reviews, employee one-on-ones, group planning meetings, or even organizational changes. Interpretation of timely and accurate data against goals, plan or budget creates accountability and thus a forward looking mentality. This approach “bucks” the norm as most owners and managers tend to review historical data or have “rear view mirror” approach to managing. Take action! Use the following reports/tools to help manage velocity and pace in your organization.

1. Labor report with realized rate

2. Sales pipeline report

3. Rolling budget

4. Account manager status log

Number 2

Winning

Lombardi believed that winning started with the right mindset. “All the talent in the world cannot make up for a losing mindset”, he explained. He often felt he was misquoted when he said, “Winning isn’t everything, it’s the only thing” because to many it seemed to suggest victory at any cost. “What I mean”, Lombardi said, “is that there is no other purpose for which we play the game - than to win”.

Running a business and making money starts with the right mindset - the mindset that anything but making money is not an option. Those who live and breathe their numbers, make the sacrifices and hard decisions to correct problems, and hold people’s feet to the fire create a charisma about themselves which moves everyone on the team. Some of these people even get referred to as “the old man” just as Lombardi was.

There are people like this in the industry. Their companies routinely make top profits. Yes, you need systems and processes, but without the winning mindset…

Read More: “The Lombardi Rules” 26 Lessons” - by Vince Lombardi Jr.

http://www.amazon.com/The-Lombardi-Rules-Lombardi-The-Professional/dp/0071411089

Number 1

Fundamentals

Last week I made calls with salesmen in the field again. I was reminded that while many are good, most can improve their methods and results. While your people tell you they are doing all the right things, when you actually observe them they are often not doing it as effectively as they might.

Everyone needs a coach. Coaches observe, give feedback and work on the fundamentals. I recently read “When Pride Still Mattered” (A biography of Vince Lombardi) by David Maraniss. I thought I would read a football story. Turns out I got a lesson in management. It’s true Lombardi is a legendary leader. But at the heart of it – he was pure manager. One of his methods was to grade each player everyday and provide specific feedback and teaching to improve his skills. Lombardi said it best, “I am a teacher of men. If I teach them well they will win.”

Here’s a link to the book. It’s a worthwhile read.

http://gopackers92.fortunecity.com/fvincebook.htm

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.

Price:

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.

People:

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.

The Labor Tracking tool allows us to track several metrics of the business:

Estimate accuracy: For newer customers, we can compare our job time to our original estimate so we know how close we came to modeling the correct number of hours. If we consistently over-estimate our hours, it helps explain why we consistently lose bids. If we are under-estimating we may be winning jobs but potentially losing money, effectively pricing ourselves out of business.

Operational efficiency: If we track our job time at the site, we can compare this to our budgeted hours to see how efficiently we are performing the actual job tasks. To make this work, our budgeted and actual hours must consist of only the job-site time (no travel time). Operational efficiency has a direct and substantial effect on the labor margin for our business, which is typically our highest cost. We usually see a direct correlation between the operational efficiency we record from the labor tracking and the Gross Profit we realize.

Route/Crew efficiency: We can compare the job site time to our overall paid hours for a given crew to see how efficiently we are working when include travel time, paid down time, etc. Route density has a substantial impact on this metric. The tighter our routes, the less time we are wasting from site to site. This leads to lower direct labor costs and lower estimates for clients who can easily be plugged in to the route.

If you are not tracking labor right now, you will not know the element(s) of labor on which you need to focus for improvement. The result is reduced cash flow and lower company valuations. This is a metric which can be tied to incentive programs to drive your supervisors and managers, creating a company that exceeds industry benchmarks and creates the most profit and value.

The Labor Tracking Tool…just one of the many services Three Point Group offers. Want to find out more? Contact us today! 678-366-0333

Three Point Group is conducting two one-day workshops on Wednesday, March 10^th and Thursday, March 11^th 2010 for Unilock Chicago, Inc.  The workshop, Best Practices and Winning Strategies for 2010, will provide participants with facts, analysis and tools on pricing, sales and organization practices and financial and operational benchmarks.  Participants can expect information on and answers to the following questions… “What are the new realities of sales growth, costs, profits and financial/operations ratios and what do they mean to the average and high performing segments of the industry. How does your company win with the economic pressures in the marketplace?” Day one will be held in Chicago and day two will be in Wisconsin.

For more information:

Unilock®, a family-owned and operated business, originally introduced the paving stone to North America back in 1972. Backed by family values and a commitment to quality and innovation, Unilock® has grown to become the premier manufacturer of paving stones and retaining walls. Traveling the globe in search of new inspirations, Unilock® strives to stay in touch with the illuminating world of fashion, design and manufacturing techniques, all to ensure its mix of products continually reflects the evolving wants, desires and sense of style of its customers.  Visit www.unilock.com

I admit that I enjoy watching poker on TV.  I have observed the following:  the younger guns consistently beat the experienced pros.  The reason is the younger guns are not playing the same game as the older pros, and the older pros missed the memo explaining that the rules of the game were changed.  Something like this is happening in landscape contracting.  The rules of the game have changed, yet too many insist on playing by the old rules.  I therefore feel compelled to send a memo once more regarding the new rules.

Some background regarding the industry outlook is in order before talking about the winning strategies.  Unemployment will remain high and housing prices depressed curtailing consumer spending.  The commercial real estate bubble will burst reducing construction and maintenance spending.  Unemployment will continue to create new contracting firms increasing the supply while demand stays flat or falls reducing prices further.  As a result, many firms will fail or be acquired this year and next, at the same time companies embracing the new rules will lead the way in improving revenue and profits.  This is not just my view of the world.  IBIS World a third party firm that provides SIC Code forecasts for bankers and investors clearly states this is EXACTLY the outlook they are forecasting for the contracting industry through 2014!

If it is necessary to clarify the situation further, the table below shows the effect of the economy on the sales and profits from 2007 to 2009.

as the Tables shows, revenue growth in every segment is a far cry from the heady days of 2007.  Gross Margin Percentages (GPM%) are falling in all segments.  GPM% is calculated by subtracting from revenues direct job costs for labor, material and subcontractors.  Another ratio shows the impact of falling revenues and stubborn overhead costs - the Revenue / Overhead ratio.  It is calculated by dividing sales dollars by ALL OTHER COSTS:  these include salaries for sales, operations, shop and office, occupancy/utility expenses, insurance expenses, and all equipment costs including depreciation.

It is clear that the effects of the economy are significant and likely to be lasting at least in terms of pricing and GPM% performance.  But the impact on the Revenue/Overhead ratio is reversible.  In simplest terms, if gross profit margins are falling, overhead becomes a bigger nut to cover on a percentage basis.  The only way to make Net Profit then is to expand revenues faster than overhead.  The winning strategies - currently being employed with the solid results by several companies - are:

Build sales staff and systems to increase revenues

Acquire competitors to grow revenue and talent

Re-organize people and systems to get more done with fewer staff

STRATEGY 1: Build sales staff and systems to increase revenues

Adjust your pricing and do it now.  Even your 2008 pricing models are way off from the lowest prices in the market now.  While it is not necessary or desirable to be lowest in the market, you must be within 7% of the lowest to win a sufficient amount of work.  This may require price adjustments for some of as much of 20%.

Divide and conquer to bid more work.  The old model where salesmen prospect, measure, design, estimate, write proposals, make appointments, make calls, do presentations and follow-up and close is history.  In the new model these tasks are three separate jobs - prospecting, bidding, selling.  Since most companies already have capacity to use administration and production staff to measure and bid work, the only new hire is a part time prospector freeing the salesman to focus on - selling!  The payoff for this investment is substantially increased sales volume.

Keep your prospects close and your customers closer using email and the web.  Invest in a database system to manage your prospect pipeline.  Managing the salesmen this way accelerates the sales cycle - lead to decision - and minimizes inefficient activity.  In addition this database provides you with a marketing platform to maintain regular contact with your current customers and prospects.  Excel databases and software like ACT provide this platform.  The cleanest contact method is “newsletts” (brief electronic newsletters) that replay - in different forms - the same simple message near and dear to all your customers - how you save them money.  The Table below makes clear what the customer values these days - Price.  I know it wasn’t that way in 2007.  But this is 2010.  The rules are different.

What the customer values

The Table shows the responses to the question. “What is most important to you in your purchase decision?”

STRATEGY 2: Acquire competitors to grow revenue and talent

Any $3 million dollar company with a solid bankable balance sheet should be considering buying smaller competitors.  The ideal candidate is 25 - 30% of your revenues, has an owner good at sales and not so good at business, and is NOT in serious financial trouble (i.e.; having lots of debt and on COD with every vendor in town).

According to industry statistics there are 75,000 landscape contracting companies - of which 85% are smaller than $1 million in annual revenues.  This provides you with a target rich environment.  The candidate you want is capital depleted since the banks are not loaning money to most contracting firms, and management poor where the owner is unable or unwilling to make major investments in staffing to grow.

Without going too deeply into the anatomy and psychology of the purchase you want to pay the right price, and more importantly, buy the right person to keep them in a sales position.  You reduce the risk of paying too much by using less cash at closing and instead structuring the deal using earn outs, stock appreciation rights, salary and non-competes to maintain the seller’s lifestyle.  You reduce the risk of buying the wrong person by selling them on the vision of a future payout versus present payout (and they undertand it!), and by simple things like going to dinner with the spouses to learn about them as people, confirming that the proper values and chemistry are present.

STRATEGY 3: Organize people and systems to get more done with fewer staff

There’s no way around it.  The organization structure of the future will require sales, service, and production overhead staff to produce bigger numbers.  The Table below provides some simple comparables for these positions in the grounds maintenance segment.  These are not theoretical numbers.  High profit companies are doing this right now!

The only way to achieve these kinds of results is to (1) improve your management reporting through computer systems and stop relying on cell phones and paper, (2) specialize each job such that account managers deal with customers but not crews, salesmen sell but not estimate, field supervisors manage foremen but not customers, and finally (3) put the right person in the job, raise the bar and the reward, and make a better hire if they cannot adapt to the new way.  This may sound unforgiving and harsh, but as one client told me, “My father once told me that your employees are your best friends right up to the day you declare bankruptcy.”

These are strategies being employed by the winners.  They are designed to address falling prices and declining revenues and profits.  These are not the old strategies that worked so well for so long.  These are the strategies for the new reality.  As much as we hanker for them, we are NOT returning to the good old days this year or next.  We must all learn the new rules - no matter how scary they may seem.  The alternative is to resist like the old poker pros and get consistently beat by the young guns.  This concludes the memo.

February 26th, 2010 - Shareholders Adam and Todd Thomas formally announced that they have sold CRI Irrigation Services to long time manager Russell Hulsey.

Three Point Group, Inc advised on the buy-out assisting with its valuation, funding and deal structure. Todd Thomas, managing partner stated, “A change in our business model made this deal a no brainer. It is a great opportunity for Russell, but more importantly allows Adam and I to streamline and focus on our business plan. We have worked closely with Russell for a long time and will continue that relationship moving forward. We appreciate Three Point Group helping us get this closed!”

“The decision to shift the direction of the business model to include landscape maintenance services will allow us to better serve our fantastic customer base stated partner Adam Thomas. We are very pleased that this deal got done. It’s a win-win for both parties.”

Russell Hulsey added, “I’m excited about taking this company and the CRI brand to the next level. It’s nice to call this company my own and I believe the timing is right in the market for CRI to diversify its client base. With the drought behind us I feel we are well positioned to provide superior installation and repair services to the metro area. Our dedication to smart systems and water conservation not only helps the environment, but it allows our clients to save money through better water management programs! We feel CRI is and will continue to outpace the competition.”

For more information:

Three Point Group, Inc.

Jeff Harkness, of Three Point Group, Inc. advised on this transaction.  Three Point Group works with green industry business owners to create, execute, and monitor plans that help businesses and their owners grow smarter, maximize business value, and create wealth by executing an exit strategy. For more information visit: www.3pgconsulting.com : Jeff Harkness, jeff@3PGConsulting.com or (678) 366-0333

CRI Irrigation

CRI irrigation is a full-service irrigation contractor specializing in complete water management systems for both commercial and residential properties.  For more information on CRI Irrigation contact:  Russell Hulsey, Rhulsey@cri-irr.com.com or (678)725-1629

February 25, 2010 - Ed Castro Landscape Inc, has formally announced its January acquisition of Earthtones, an Atlanta based residential maintenance company owned and operated by Chris Eckl.

Three Point Group, Inc advised owner Ed Castro on deal structure and due diligence. Jeff Harkness, managing partner stated, “Chris Eckl makes this deal work. He has relationships and knowledge which will be enhanced under Ed’s leadership. Both companies work with a similar clientele plus Castro’s culture and philosophy provide a spring board for business to go to the next level. It’s a great fit.”

“We feel that this acquisition will help provide our customers with the absolute best levels of service, experience and capability. It expands our footprint and the acquisition aligns nicely with our strategic plan and business model.  Ed Castro, President of Ed Castro Landscape said.   ”Our goal is become Atlanta’s premier provider for all landscape services.  Chris Eckl will come on board as the Company’s Director of Maintenance and will manage all maintenance accounts”

Chris Eckl, CEO of Earthtones, added, “I’m excited about the opportunity this presents our customers.  Despite the economic challenges, Ed Castro Landscapes continues to grow within the community through industry partnerships and non-profit affiliations. It’s great to be part of such a winning team and I look forward to helping expanding the brand.”

For more information:

Three Point Group, Inc.

Jeff Harkness, of Three Point Group, Inc. advised on this transaction.  Three Point Group works with green industry business owners to create, execute, and monitor plans that help businesses and their owners grow smarter, maximize business value, and create wealth by executing an exit strategy. For more information visit: www.3pgconsulting.com : Jeff Harkness, jeff@3PGConsulting.com or (678) 366-0333

Ed Castro Landscapes, Inc.

Ed Castro Landscapes, established in 1992, is a full service landscape design, construction, horticultural and maintenance firm. The company currently employs 85 employees with a diverse set of skills including landscape architects, horticultural designers, production and management teams For more information visit www.edcastro.com or call 770-998-8444.