Improve Your Operations
Originally published: 03.01.18 by Mike Moore
Develop the operational side of your business, for financial success.
When we talk about business operations, we’re talking about how you set up your company. Operational excellence is making sure your organization functions at the full capacity to accomplish your business goals.
It encompasses sales excellence, technical excellence and marketing strategy. Whether your focus is growth, profitability, or both, operational excellence is what will get you there.
You might be wondering why we’re not talking more about sales. After all, sales enerate revenue. However, it’s the operational side of the business that delivers gross profit dollars. Gross profit is what pays the overhead and adds to the bottom line.
For a company focused on residential service and replacement, Operating Profit needs to be at least 10 percent of sales, especially if the company wants to grow. The Operating Profit retained in the business provides the Working Capital needed for growth.
Many pieces go into creating a business model that delivers consistent revenue and profit. For instance, a good company culture is essential, but is not the focus of this article.
Here, we’ll touch on five key areas that we teach at Lennox Learning Solutions, in our Operations Accountability course.
1. Maximize gross profit dollars per man-day
When you think about it from a productivity standpoint, one of management’s main roles is maximizing the gross profit dollars per the manpower used. For example, your sales team may make the sale for replacement equipment, but it takes the installation crew to do the work in order for the company to get paid. As mentioned before, it’s the gross profit dollars that are left after all direct costs are subtracted, that pay the overhead and put money toward the bottom line.
When you look at a residential service and replacement-focused company, residential replacement is the big dog in terms of generating gross profit. On replacement work, the gross profit dollars that are created per crew-day are much more important than a gross margin percentage. The reason for this is fairly simple. Most overhead expenses are fixed. For instance, you have to pay the rent in dollars, not by percentages of revenue.
Your crew has to recover a set amount of gross profit dollars in order to recover the overhead for the day. On multi-day jobs, and when installing lower-end product, you need to price at a higher gross margin, to generate sufficient gross profit dollars to pay for the overhead. On one-day system replacements using higher-end product, this isn’t necessary. This is one major reason to pay attention to your product mix. The more high-end product you sell, the easier it is to generate the gross profit you need.
For residential replacement, you can use positioningand bundling strategies to maximize gross profit. Whether you’re looking at residential replacement or demand service, be disciplined in your pricing. Use cookbook pricing (treating pricing as though it’s a standardized recipe) for residential replacement, and make sure your sales team prices jobs correctly. Cookbook pricing should work for approximately 80 percent of all replacement applications.
For service, use flat-rate pricing, and make sure technicians price service tickets correctly. Educating your technicians about the business overhead helps, because it allows them to take more ownership and understand why pricing accurately is important.
2. Build a Vibrant Maintenance Agreement Program
Develop a business model based on acquiring and keeping customers for life. In terms of both revenue and profit, it’s much more sustainable than a business model based solely on marketing and advertising.
Most people think of maintenance agreements as a way to keep technicians busy during the shoulder months, when weather isn’t creating a demand. This is one very good use for a maintenance agreement program, but there’s more to it. The best marketing strategy is getting your people in front of customers where they can build trust and make recommendations that are in the customer’s best interest. Regardless of the economy or the weather, maintenance agreements get your people in front of customers.
3. Invest in Technology
Invest in a good computer operating system. Managing information is critical to the efficiency of field labor, inventory replenishment and vehicle upkeep. You also need a good dispatch system that can easily accommodate future maintenance agreements and the precision tune-ups they entail.
Many business software packages utilize dashboard reports, to help manage company day-to-day operations. With this functionality, companies no longer have to wait until the end of the month when the Income Statement comes in, to know how they are doing.
Your customer records should include marketing fields, such as equipment age, which allow your company to mine your customer base. That way, you can target promotions directly to the customers who need them, during shoulder months when the company needs revenue.
Streamline administration with a mobile app that allows technicians to fill out and submit tickets electronically, rather than putting it all on paper. That way, your office only has to audit the tickets, instead of wasting time entering it into the system. The same technology should also bridge directly to the accounting system, facilitating timelier transactions.
Mobile apps designed for HVACRR allow technicians to quickly access the technical information they may need in the field, such as wiring diagrams, installation instructions and service notes.
4. Control all Moments of Truth
A moment of truth is whenever employees are in contact with customers. According to the 2018 Customer Service Benchmark Report published by SuperOffice, “97 percent of companies did not follow up with customers.” They analyzed 1,000 companies across the globe for their report, and came up with several statistics worth considering.
- 62 percent of the companies they contacted did not respond at all to their customer service request.
- 90 percent didn’t acknowledge that they’d received an email, and a mere 20 percent answered the questions in the email, the first time.
- “…the average response time to handle a customer service request was 12 hours.”
In 2015, NewVoiceMedia published a survey of customers who had switched service providers. Their survey, Serial Switchers Strike Again, found that U.S. businesses were “losing $62 billion per year through poor customer service…” and those results were “…more than $20 billion” higher than their 2013 findings. They also found that 67 percent of the customers had switched once in the prior year. 33 percent changed providers multiple times in the same period. Overall, 70 percent of the Serial Switchers Strike Again survey respondents “…would be more loyal…if provided with better customer service.”
You put so much work into acquiring new business, but one slip-up can instantly cost you a customer. That’s why it’s imperative to develop processes and procedures to control those moments of truth. As Michael Gerber states in his book, The E-Myth Revisited, companies need to be process driven, and these processes need to be documented. That includes customer service training.
Everyone in the company must strive for excellence. That’s got to be a core value of the company culture. You need a technician procedures manual to control the customer experience. Some of the top companies have orientation classes focused on customer service. Use scripting for customer service people who answer the phone, to make the customer experience consistent (and good). You also need installation procedures, processes and standards to control the customer experience, the quality and the productivity of an installation. Keep in mind, all processes will break down over time unless they are constantly reinforced.
5. Invest in Your People
If hiring technicians were a football draft, and a number-one draft pick was defined as someone who had all the skillsets required in your marketplace, how many number-one picks would be out there? Most companies realize there are very, very few. HVACR equipment is always changing, so training is another core value you should want in your organization. Training is a way to improve productivity, and it reduces callbacks and warranty issues. Training in the right skills improves customer communications, and is very important in earning the right to make customer recommendations.
At the same time, remember that training isn’t a magic bullet. To be effective, you have to constantly reinforce the training your employees receive.
When it comes to investing in your employees, hiring the right people is vital. Look for talented employees, and then further develop that talent. One way to make sure you’re hiring the right people is to look for attitude, communication skills and work ethic, first. If they have a willingness to learn, you can teach people the technical side of the business. This flows right into providing a career path for your people. If you want to retain talented employees, it’s important to help them grow and advance their careers. One aspect of this is setting individual expectations for employees, and working on them together during performance reviews. Throughout the year, provide coaching so employees can achieve those goals.
It should go without saying that it’s necessary to offer a competitive wage. This goes back to setting up your pricing system so it more than covers those costs. You could also consider implementing a pay-for-performance compensation system that rewards productive workers. Remember to recognize and reward desirable conduct. This includes paying incentives for selling maintenance agreements and turning over leads for equipment replacement that result in a sale.
If all of that seems like a lot to think about, it’s all right. Many HVACR business owners find it difficult to work on their businesses because they are so busy working in them. Perhaps especially if you’ve worked your way from HVACR beginner to business owner, the hands-on aspects of the industry are probably more interesting and more familiar to you. But, to make your company financially successful, and/or to achieve growth, improving the operations side of the business is essential. Use these tips to help you, and keep aiming for the success you envision.