Manufacturers of many heavy-duty, engineered industrial products—such as gas turbines, electric drives, wind turbines and heavy trucks—derive most of their top-line revenues from their factory production, while the sweetest part of their bottom-line profits comes from aftermarket services. They have one company, and two different kinds of businesses.
In electrical contracting, a similar principle applies. New construction and service activities are not different magnitudes of electrical work; they are different kinds of business.
In other words, service work is not a scaled-down version of new construction.
If you organize your company based on the premise that new construction and service work are different but compatible businesses, you can create a built-in source of competitive advantage for each. You can make most new construction projects a launch pad for the service and maintenance activities that will commence immediately after and run for decades to follow.
Conversely, as the incumbent electrical service and maintenance provider for a facility, you can leverage your company’s regular presence there to win profitable pull-through work, and sometimes even larger jobs as a “preferred contractor.”
Here is where a new kind of scorekeeping should come in: namely, tracking the hand-offs from your construction group to your service group, and vice versa. Other industries refer to these tallies as attach rates.
Construction contractors are often criticized for inadequate financial reporting. To a larger degree, however, contractors are usually lacking even more in their nonfinancial reporting. Tracking the bidirectional sharing of leads between construction and service groups falls squarely in this category. Like everything else, you have to measure it if you want to manage it.
Many large contractors focused on major new construction projects are satisfied to leave service and maintenance to others. Conversely, some smaller firms that thrive on a regular diet of service and maintenance work are often challenged by the project-management demands of larger jobs.
These commonly accepted characterizations only fortify our conclusion that contractors, regardless of size, should take the important step of separating new construction and service activities into individual profit centers.
Further, we believe that an electrical contractor should strive for a 60/40 revenue mix between new construction and service work. It is a ratio that we have observed in successful organizations. To achieve it, however, many electrical contractors will have to markedly ramp up the service-related component of their revenues.
A multitude of benefits will flow from achieving such a balance between new construction at 60% and service work at 40%: higher average profitability, lower aggregate risk, a broadened customer base and more predictable revenues, to name a few.
There are two cardinal reasons to embrace a one-company, two-businesses model.
Today, electrical contractors are not merely in competition with other ECs, they are in competition with everybody.
Some of those competitors are other players in the construction industry that will not hesitate to take on work that in another era would have been immediately thought of as electrical. An even greater source of competition comes from those delivering products and services in a manner that makes many ECs’ operational models seem well beyond their “use-by” date. That scenario poses an imminent threat to the viability of the average electrical contractor.
Stepping up their service-related business will enable electrical contractors to protect their customer base with a power of retention that cannot be equaled. It hearkens back to the adage that the best defense is a strong offense.
Electrification did not end in the 20th century; it continues and will continue on in ways not yet imaginable.
But that encouraging vision does not guarantee ECs will necessarily gain from the expansion of all things electrical. Mass production of automobiles, for example, did nothing for the wheelwright trade.
ECs that progressively develop and grow a professionally-managed service business will have the best crack at any future success. Through direct access to end-users and understanding their customers’ wants and needs, they will gain the clearest insight into emerging opportunities.
Far from entering a “new normal,” they will be stepping across the threshold of a “new better.”