Vilfredo Pareto loved to garden. One day he realized that 80 percent of the peas from his patch came from 20 percent of the pea pods. That proportion matched the ratio that he had already uncovered elsewhere in his investigations as the economist who gave the world the 80/20 rule. Whether they have known the Pareto Principle by that name or simply as a rule-of-thumb fraction, people have understood it as an axiom in countless applications for decades since, and it is alive and well in the electrical contracting industry.
Electrical contractors would agree that a majority of their revenue comes from a small number of their customers. Large electrical contracting corporations that have publicly traded stock dutifully point out in their annual reports—which should be a warning to potential investors—that they also depend on a relatively small number of their customers for the biggest part of their total income. Most of the contractors we know, who are not compelled to make such legally mandated disclosures, would cautiously admit to the same kind of over dependency. The 80/20 rule might not apply exactly, but it fits closely.
It is time to rethink the application of this ratio. We propose the 80/20 ratio as the basis for a deliberate conversion from a project-based to service-centric business model. We advocate that electrical contractor businesses develop a multiyear plan to shift their main focus from building the contract backlog to multiplying the customer base. Instead of dreaming of a construction job 10 times bigger than the last one, electrical contracting businesses should be strategizing about how to increase their customer base by a factor of 10. If so, they will set themselves up to replace the unpredictable income from construction contracts with the recurring revenues of service work and progressively change the revenue stream of their business.
Although few electrical contractors reject outright the idea of doing any service work, industry surveys indicate that most electrical contractors focus their business models on new projects and pursue service work to some limited extent. Savvy electrical contractors have successfully outpaced their competitors, though, by developing a strong service delivery capability. These improvements have often come without attracting the same kind of attention that winning a major project creates, making it all the more significant.
The electrical contracting industry is not alone in realizing the potential market for service, though. Simply talk with any organization containing large physical assets, and they will agree that maintenance and operations is important to the future of infrastructure for the built environment. How does one get in on the early stages of this transformation?
The first step in the progression of converting an electrical contracting firm to a service-centric operation calls for the clear separation of its service work and construction project contingents. Business experts and advisers often focus on improving organizational characteristics: communications, cooperation, team building, leadership and cohesiveness within organizations. Therefore, the concept of dividing a contracting firm’s organizational chart in this way might seem like going against the grain of conventional wisdom and well-established thinking. It is not. Successful service-based businesses can attest to what it predictably contributes to its organization’s profitability each year.
“Contractors that consider service work to be an afterthought, subordinate to their construction business, will realize only a fraction of the betterments that service can bring,” said George A. Fechter, who has had the experience of founding, developing and managing service--oriented companies in both electrical and mechanical contracting. In other words, Fechter said, it is imperative that the two components—construction and service—each reside in their own separate business units.
How important is the need for a clearly defined departmental separation between service and construction? Todd Mikec, president of Lighthouse Electric, Canonsburg, Pa., said that, although his company is now running a successful service operation, “We stumbled through a trial and error process to get there.” Success came with separation of the two types of business.
Make no mistake, implementing the initial organizational division is a daunting task. It calls for sensibly and sensitively separating some members of the team from experience, work assignments and customer relationships that they have enjoyed over a long period. Their buy-in to the proposition is essential because, contrary to a worn-out adage, your workers—not your customers—come first. If your own people are happy, they will make your customers happy. Much of the successful division will rely on identifying strengths of individuals and realigning them with service opportunity. Every electrical contractor has its own handful of outside resources—advisers that include accountants, lawyers and occasional consultants, along with special friends of the firm—who can provide helpful perspectives on this point. Once a contractor has made the commitment to an organizational structure that has a team dedicated exclusively to “service work,” its attention must focus on the staffing requirements for long-term success of this strategy.
SARGENT, a 40-year veteran of the electrical contracting business based in Pittsburgh, can be reached at email@example.com. MCCOY is assistant professor in the College of Architecture and Urban Studies at Virginia Tech. Contact him at firstname.lastname@example.org.