Just a few years ago, knowledgeable electrical contractors believed that the trick was to virtually “give away” an initial VDV installation, and, by landing a service contract in that way, capitalize for years on the very lucrative moves, adds and changes (MACs) that followed.
Perhaps that’s still the case. However, the MACs world has been suffering since early 2000, along with the overall VDV market. Market observers and participants interviewed for this article noted that as the VDV market continues to gain new entrants—with a reduced amount of high-end work available—there’s greatly increased competition for the business of existing clients.
“We have not done a data center in quite a long while,” said Hugh McLaughlin, principal at Sullivan & McLaughlin (Boston), and head of its telecommunications operations. “We actually did win a $5 million job, in November, to start in January. But it was from Global Crossing [which declared bankruptcy].”
One result is that companies like S&McL put an increased focus on the “lower end” premises wiring work.
In California’s Silicon Valley, things are equally flat. “In February, we got about three calls from people who wanted to hire graduates of our programs,” said Bo Conrad, president and director of Crossbow Communications, a training company. “That was a break. For six months before that, we got zero phone calls.”
Conrad noted that a recent local school data-cabling job attracted 14 contractors for the walk-through, where such a job might normally have drawn only three or four competitors just two years ago.
Yet MACs work, even at lower-than-ever margins, is keeping many VDV operations in business. “There have been cutbacks on capital expenditures, so there are far fewer new installations,” said Jim Hayes, president of the Fiber Optic Association.
“Capital expenditures are examined closely by companies. But no one questions the cost of ongoing maintenance expenses—it has to be done. Installing a cable plant is a capital expenditure. Maintaining one that’s already in place comes out of a different part of the budget. It’s not going to be cut back.”
One interpretation of what’s been happening in 2001-02 is that companies in the VDV business (electrical contractors or not) have been pursuing MACs work more aggressively than ever—in up-front pricing of initial installations. Conrad, who has been in the VDV business since 1984, provided details on one recent job as an example. A smart contractor with whom he works bid $125,000 for a VDV job. The winning bidder took it at $65,000. “There are a lot of people leaving a lot of money on the table right now,” he said.
“Things have been bad. One of our suppliers says we won’t return to the year-2000 level of business until 2004,” said Bob Swanson, vice president/general manager for small Illinois-based distributor Cable Plus. “MACs work is still viable. But the market is seeing more competition for MACs work than ever before.”
New competitors are entering the market all of the time. Tom Lyga, recently promoted to director of data communications at manufacturer Pass & Seymour/Legrand, said that electrical contractors who do electrical maintenance for customers are evincing increased interest in doing VDV maintenance as well.
“We put on seminars all over the country, and it’s fairly typical for me to meet a certain type of contractor,” Lyga said. “This is a person who is working on a maintenance contract at a local plant. “He’s at our datacom seminar because his customer is asking him to take care of datacom maintenance as well.
“It seems we’ve reached a point in the VDV business where electrical contactors who do electrical service work must start thinking about stocking that service truck with more than building wire and 500 MCM and the like. Now, they’ve got to start putting Cat 5e cable, patch panels, and more on that truck.”
Lyga said he believes the actual volume of MACs work has been increasing in the past year, with or without more competition. “In tough economic times, [end-user] companies are not putting capital expenditures behind new buildings or [adding] new wings to existing buildings,” Lyga said.
“Instead, they are moving people around, shifting people, rearranging their offices. This creates a great deal of work, which is good in these difficult times.”
Times are, indeed, difficult. Whether or not there is more MACs work, McLaughlin said conditions in New England have forced VDV margins to thin out. “There’s been a 10 percentage point drop in margins,” he said. That’s not 10 percent less profit. It’s a decline of 1,000 basis points (each basis point equals 1/100 of a percent) in the profitability of VDV jobs.
Surviving the downturn
McLaughlin said there has been a lot of “tramping” on the VDV market by some contractors in the current downturn, but his company sees the current market problem as something to get through.
“We’re down 20 percent in our field people in VDV,” he said. “At this point, we still have our core people onboard—we will not lose them. We’re like a lot of VDV contractors, we have some good, homegrown people. This business will come back. That’s why we don’t want to lose our core people.
“And—it’s a good business for us.”
Conrad shares the same basic view—only from another angle. “The contractors who can do this VDV-type work have an advantage,” he claimed. “A lot of times, they start to work with a customer thanks to winning some VDV work. Then, later on, they get the electrical work, too.”
According to Conrad, VDV contractors in the West are hanging on, waiting for things to improve. “It’s been tough, especially since 9/11,” he said. “Contractors who had a workforce of 120 people are down to 40. Those who had 40 two years ago might be down now to 10 or 12. But they are still there.”
Further, Conrad noted that VDV contractors were not the only ones struggling. “I’ve got a friend in the used furniture business,” he said. “That’s a really good indicator of the economy. The telecommunications companies that are struggling or have gone out of business—companies like Exodus—bought some really nice stuff. There’s furniture, still new in the boxes, that these companies bought for thousands of dollars, selling for 5 or 10 cents on the dollar.” EC
An End to the MACs Bonanza?
Eventually, the bonanza in MACs work might end.
According to many industry estimates, as much as 80 percent of the work in troubleshooting a cable plant problem involves technicians trying to identify the cables. That’s because system documentation has generally not been a priority in the VDV industry. But the situation is supposed to change with the EIA/TIA-606 cable management standard.
In theory, if a system is properly documented up front, there won’t be as much labor time in MACs work. Is this a legitimate possibility? Perhaps not, said Jim Hayes, president of Fiber Optic Association.
“I’ve talked to installers who say the cost of fully documenting an installation is almost as much as the cost of doing the work,” Hayes said. “It’s just possible that, despite the high cost of MACs work, customers will balk at that big an addition to up-front costs.”
According to Mark Johnston, copper marketing and standards manager at Fluke Networks, there are already standards in place that would make VDV installations and MACs work more expensive. These standards, he indicated, are widely ignored.
“There’s a small catch in MACs work, and it’s an FCC requirement,” Johnston explained. “It’s the law. Basically, it says, ‘Thou shalt test datacom wiring and certify it to at least a Cat 3 standard.’ That applies to MACs work and installations.
“No one is doing this right now, because no one even knows it exists.”
Similarly, Johnston-who, after all, works for a test equipment maker-pointed out that many VDV companies are ignoring standards on testing installations. “That’s a lack of awareness of (EIA/TIA) standard 568-B, which basically says ‘thou shall test to Cat 5e minimum standards.’ There are tens of thousands of Category 5 testers out there, still in use.
“These testers can’t test to things like [equal-level, far-end crosstalk] ELFEXT-they just weren’t designed to do it. So it’s possible that most people doing MACs work right now are using the wrong tester.”
Johnston noted that contractors doing MACs work have two options in testing the installation once they are done: either do a system verification or do a certification. Most contractors, he thinks, choose the verification route, perhaps because customers favor the less expensive option.
“You can verify the link, and see that a signal is getting through,” he said. “But when the user goes to run that link for Gigabit Ethernet, or any high-end use, the customer might still have a problem.”
Hayes noted that savvy VDV contractors might consider breaking down their prices for MACs work (or initial installations) into three parts:
• The “cost per drop” for just installing the adds, or making the moves and changes.
• The cost for testing the system after installation is done.
• An additional cost for performing the work under EIA/TIA-606 (cable management system documentation).
This would give the customer a choice: a bare-bones installation, a tested installation or a fully tested and documented system.