Jim Abramsis the co-founder, along with partners John Youngand Southern California PHC contractorMike Diamond, of Plumbers' Success International. PSI was patterned after Contractor's Success Group (CSG), a similar organization from whose members sprang the PHC industry's first roll-up consolidation effort, Service Experts.
During Abrams' association with Service Experts in 1996-97, the company's stock price had ballooned from an IPO of $13 to as high as $38. It was at $32 when he departed in a dispute over a change of business direction that took Service Experts away from its residential HVAC specialty into new construction, other trades and commercial work.
PSI's founders have announced their intent to launch another roll-up consolidation of residential plumbing service firms within three years, drawing initially from PSI member firms. By then they hope to grow to more than 500 companies, representing approximately 1 percent of the residential service market in the United States and Canada. As of this writing their membership stood at 201.
PSI is a subsidiary of St. Louis-based VenVest Inc., a venture capital firm started by Abrams and Young to launch that group and others in different service trades. Late last year they formed Clean Indoor Air as a PSI-type group focused on companies in the indoor air quality field. That group had approximately 100 members at last report.
At PSI's recent "Success Summit," Abrams said that his noncompete agreement had run its course and announced the imminent launch of AirTimeTM Inc., a new organization of HVAC contractors hinged to a proprietary device that monitors home HVAC systems via the Internet. Their game plan for PSI includes a gradual phasing in of a common management system. Central to this plan is a series of nine "Success Summit" meetings over a three-year period. I attended the most recent one, held in Phoenix during mid-January, where I sat down with Abrams for the following interview.
PM: Please summarize what PSI is all about.
Abrams: PSI has two major goals. One is to teach a contractor who has the desire to remain independent how to fully manage his business so that he can serve his customer well, provide well for his employees and generate a substantial amount of profitability for himself. For that contractor who's looking to gain wealth, we hope to be able to put together a consolidation of the industry, create a value for his business that doesn't currently exist and give him the opportunity to exit, should he so choose to.
PM: At the PSI recruitment meeting in St. Louis last June, you told me your goal was to recruit four batches of PSI members of approximately 150 each. PSI's first group started with 154 contractors, although quite a few dropped out. Your second recruitment effort fell substantially short of 150, and total membership now stands at 201. This is about two-thirds of where you had hoped to be at this point. Are you disappointed with these numbers?
Abrams: This is the first time we've ever tried this. John (Young) and I came to the conclusion that we would be better off having four separate groups and taking them through the nine lessons, rather than continually recruit as we did with CSG.
We picked the number 150 as a size we could accommodate well for meetings, based on our past experience. There's really no magic to it, other than the fact that we hope to be able to serve this many contractors over the course of a week at these trimester meetings. We may end up with five groups of a little smaller size instead.
The pace is probably a little slower than where we expected to be. We had 154 sign up for the first group, and we stopped recruiting. Some of them did not choose to follow up and attend. So we got caught in a little Catch-22 there.
PM: What are some of the mistakes you learned from with CSG that you've changed with PSI?
Abrams: With CSG, no matter when a member came in, he got a tremendous wealth of information. Really it was up to him as to where to start and put things in place in his business. Also, I think the number one thing a CSG contractor was after were marketing materials on how to make the phone ring.
In some cases our contractor members were so successful in that, they didn't have the operation in place to handle the increased volume of business. So as we sat back and thought things through, we determined that there are some things operationally that every business has to put into place first.
Now we've had an opportunity to review the performance of literally hundreds of contractors over a 10-year period. Regardless of size, be they very small or very large, we found that the profitable, successful ones who are well thought of in their community all have some common weaves to them, which we hope to bring to PSI.
PM: In one of your "Summit" sessions, you impressed upon members the need to adequately compensate service technicians, citing $35 an hour as what you think they are worth. You also expressed some misgivings about incentive compensation. Please explain.
Abrams: Incentive compensation - and I've been guilty of it early in my career - is an attractive program where you can pay a technician a percentage of his invoice. So your control of labor cost is always right on target. But it is really, in my opinion, an abdication of management responsibility. The difficulty with this, and I'm sure almost all that have had this type of compensation program would find, is that perhaps this is not the best thing in the world for the customer.
I prefer paying a technician an hourly rate and offering increased compensatory opportunity, based not only on his financial performance for the company, but also on his attitude toward supervisors and fellow employees, the happy letters he gets from customers, the ability to retain a customer, his interest in continuing to learn new skills and become more competent. In my opinion, that would be a better way to compensate an individual.
PM: You have some members of PSI who have incentive compensation programs. Will they be able to keep those systems in place and still be able to successfully use PSI programs?
Abrams: Yes, except should we be successful with consolidation, I would not be involved with an organization, nor would PSI, that would compensate its technicians on an incentive basis.
PM: You have announced the introduction of AirTime for the HVAC field, which will be tied to the Internet. Tell us what this is about.
Abrams: AirTime is based on a concept that's been about 10 years in development. It has two key components to it.
One is being able to have a monitor on a customer's furnace and air conditioner that tells us when there's a problem with a customer's system even before the customer is aware of it. Second is a business system that allows us to bring customer service at a time they want it, and at a price they'll be very happy with.
This is a total conceptual difference from the present marketing system. We are moving ourselves on the side of a customer, where it will be in our best interest to make sure that customer's machine stays well maintained and experiences very little difficulty. We have a software package, proprietary rights to the monitor, business systems and procedures, marketing, and a total business plan for the contractor who shares our vision in that area.
PM: Commercial HVAC contractors who are involved with energy management have been remotedly monitoring systems for years. What's different about your system?
Abrams: To my knowledge the only people who have something comparable right now is Sears, and the only thing they have available to them as I know it is a method that actually calls and tells the service company when something is not working. Our device monitors 12 different parameters - temperatures, air flows, pressures, many different facets of the heating and air conditioning system. So not only does it identify what is at fault, but what is causing the problem.
PM: Do you plan to take AirTime public?
Abrams: That's not in our plans. Hopefully it will stay a privately owned company.
PM: You told PSI members that you see six main areas of home service - plumbing, HVAC, appliances, electrical, IAQ and water purification. Can we expect to see you involved with PSI-type organizations in all of those areas?
Abrams: I don't think I or John will be involved personally, except from a capital standpoint. Hopefully we will identify people such as Mike Diamond and financially back such organizations in all those areas.
PM: You have said from the beginning that PSI is designed to last three years, followed by a consolidation. In the HVAC field stock prices have plunged and acquisitions slowed down significantly. It looks like consolidation isn't working. Give us your assessment.
Abrams: I think what the stock market has done is voted its dissatisfaction with the management and also the plans of the current consolidators. All of the consolidators who have gone public have tried to amass very quickly large amounts of volume in unlike disciplines. They are trying to bring electrical, plumbing, etc., under the same roof as an air conditioning company, and in some cases new construction as well as service and replacement business. Anyone who's been involved in the day-to-day operations of these businesses understands that they are not the same. They are very difficult to manage in that fashion.
When we took Service Experts public, the reason the market rewarded us so well - we were still trading at $38 a share when ARS diminished to $5 a share - we were telling the market we had a group of contractors that had similar systems and procedures. Indeed, in the early going we did. Unfortunately, Alan Sielbeck, the CEO, decided to take the company in a different direction. That taught two lessons: one is that it's a very difficult type of company to manage; second, that Wall Street doesn't like deviation from a very focused plan.
PM: What do you think of Lennox's prospects to make a go of it with Service Experts?
Abrams: In my personal opinion, I don't think they really have a good opportunity to succeed. They have some built-in challenges.
John [Young] and I were involved with Trane Co. in the 1980s, and Trane has tried the same concept of manufacturing and owning company outlets. Manufacturing and retail are two very different beasts.
PM: Many utility companies are buying up mechanical contractors. Where do they fit into the picture in this changing marketplace?
Abrams: Utilities are looking to compete in a deregulated world. In the 1980s, I had a number of utilities as consulting clients. Today with deregulation, they are looking at fitting into one of three categories. One is as a producer of the cheapest kind of electricity or gas available. Or they will be a wholesaler of it, in that they have the lines in place. Or, they will become a retailer and actually have a relationship with the consumer. In the past they had all three.
A lot of utility companies are trying to figure out how they can differentiate the commodity sale of electricity or gas so it doesn't become just a price issue. So they are looking at building contractual relationships with consumers so they can deliver services that historically have been brought by plumbers and HVAC contractors.
PM: Comfort Systems and GroupMAC (now Encompass Services Corp.) seemed to be doing okay for a time with a diversified strategy in the commercial-industrial sector. Then their stocks followed ARS toward the basement. Many analysts are now saying investors have soured on the HVAC industry in general. What do you say about this?
Abrams: I think that's true to some extent. However, in 1996 when we became public, the same things were said at that time. No one had ever done it before, yet in 1996 and 1997 the industry had attracted a few billion dollars of investment capital to it.
One of the biggest lessons I've learned in my dealings with Wall Street is it's all in the story. If the story plan is something they can envision and believe in, and you can execute it, they will reward you for it. If you deviate from it, do not get the earnings they expect and do not deliver what they're looking for, they'll punish you. This is not an industry that has the sex appeal of the Internet or these other types of high tech stocks. You have to deliver what you promised. PM: It seems the industry consolidators have sorted themselves into two main categories. One is the commercial facilities management firms with Comfort Systems, Encompass Services, the utilities and even a real estate investment trust playing roles. In the residential category are Lennox/Service Experts, Blue Dot., ServiceMaster and PSI when you go public. Is this how you see it?
Abrams: Pretty much so. The difference I see is that most of these groups absorbed a tremendous amount of cost and pain after they went public. Our plan is to go through the cost and pain prior to going public, so that everybody will already have the software in place, the compensation program in place, a management system in place.
This will allow us the opportunity so that if a guy takes a few million dollars off the table and decides to retire, we know that business and will be able to slide somebody over who can manage that business.
PM: What are your views on ServiceMaster's acquisition of Rescue Rooter and ARS?
Abrams: I think historically ServiceMaster has been a super company in the service business. They had two excellent things going for it before these acquisitions: they only entered a marketplace when they bought a brand name that was already out there and known, and where the systems and procedures were known.
I'm not sure they really understood everything they got with ARS, but the price was pretty darned cheap for buying half a billion dollars in sales. They can probably weed out things they don't want to keep. I don't understand what they'd be looking for on the new construction side of the business with ARS, but perhaps they have a plan there.
PM: What about Blue Dot.?
Abrams: In my opinion, I don't think they are specifically focused enough to succeed in the long run.
PM: The one consolidator that falls outside of these categories is AMPAM, which is focused strictly on new construction. What do you make of them?
Abrams: Times are good right now. When economic times are good, everybody pays their bills, interest rates are low, so building is booming. If you're in a historical time where this is going to continue for 20 years, this will be a great business. I've been in the new construction side of the industry before when times weren't so good, and it wasn't so pleasurable a business to be in then.