Alternatives To Consolidation
The Role Of Affinity Groups
The total size of the PHC contracting market, when you add up residential through industrial, construction plus service work, has been guesstimated at around $100 billion. Nobody knows for sure. When you get into those kinds of numbers, you're like an astronomer trying to count stars in the galaxy. Billions of units get tossed around like confetti.
Suffice to say, there's enough business out there for everyone. Even the giant consolidators with their billion-dollar revenues will never "own" the PHC contracting industry. Plenty of business will be left for independent companies. Bet on it.
Bet on something else as well - many independent contractors who try to fly solo will crash. This is still the early stage of industry consolidation. So far it's all been about accumulating assets. As time passes, American business ingenuity will assert itself, and some of the consolidators will learn how to utilize those assets productively. They will adopt best practices systemwide. Economies of scale will come into play, along with brand name recognition. The most talented people will gravitate toward the best companies, the way they do in the rest of the economy.
All of this still won't be enough for the big PHC empires to eat everyone's lunch, but they will snatch the tastiest morsels. The profitable work will go to those contracting organizations that ooze professionalism. Everyone else will be bidding against one another for the leftovers.
Yet there's a way for the independent contractor to compete for the good stuff. The PHC industry teems with affinity groups that represent a middle ground between selling your business to a consolidator and going it alone. Traditional trade associations still play an important role in representing the industry at-large, but they are not well suited for servicing narrower business interests among the membership. That's why PHCC-NA and MCAA have spawned affinity groups of their own in recent years.
Here are capsule summaries of some of the most prominent affinity groups touching the PHC industry today.
The Franchise OptionA franchise is the ultimate affinity group. The dominant plumbing franchise operating today is Mr. Rooter, part of the successful Dwyer Group franchise organization, which also operates Mr. Electric and Aire Serv franchises for electrical and HVAC service firms, respectively.
What about Roto-Rooter? Although still technically a franchiser, it doesn't belong in the affinity category. Roto-Rooter's territories are basically sold out and the company is steadily buying up its franchises and turning them into corporate branches. Roto-Rooter resembles a consolidator more than a franchise operation.
That leaves only Mr. Rooter and a couple of would-be franchisers unable to get off the ground. Specialty franchises also exist for tub and shower relining and leak detection, but this review is only concerned with full-service plumbing business alternatives.
Mr. Rooter, which focuses on residential service, has 320 franchise operations, as of this writing, in the United States, owned by 215 franchisees. According to franchise director Ed Young, 85 percent to 90 percent of them operated plumbing or drain cleaning businesses before signing up with Mr. Rooter. Most came with adequate technical skills and licensing where required but were deficient in marketing and business management skills, which is where a franchise earns its keep.
Mr. Rooter's buy-in fee varies according to territorial population and demographic characteristics and is discounted for companies with an existing customer base. According to Young, the initial franchise fee merely covers training and start-up expenses. Mr. Rooter makes its money on royalties - 3 percent to 6 percent of revenues, with the percentage declining as volume grows. It'll take on tiny firms as franchises, but only where there's a commitment to grow in accordance with Mr. Rooter's business systems.
Franchising isn't for everyone, but it does solve a lot of problems for contractors who don't know or much enjoy the nuts and bolts of business administration. For more information, contact Mr. Rooter at 800/583-8003 or www.mrrooter.com.
Contractors 2000Rags to riches stories abound among past and present C-2000 members. Since it formed in the early 1990s, this organization has lifted hundreds of PHC residential service firms to success through its programs, peer groups and networks.
Membership is restricted by exclusive territories. A single territory may be represented by as many as three contractors specializing in, respectively, plumbing, HVAC and electrical. (In some cases, members have waived their rights and allowed other PHC firms from the same territory to join.) Membership at last count was at an all-time high of 280. Numerous C-2000 firms have been bought out by consolidators, which forfeits their C-2000 membership in accordance with the group's bylaws. But the group's attraction is such that it almost always manages to replace the consolidated firm with another company waiting for the territory to open up.
C-2000 dues entail an initiation fee of almost $20,000, with descending annual dues of $7,000 for the first year, $6,000 for the second and $5,000 a year thereafter. That may seem steep to many PM readers. Yet I can honestly say that in hundreds of conversations with C-2000 members over the years, I can't remember a single one complaining about the cost of membership. To the contrary, I know of several C-2000 members who have bought up adjacent territories simply to protect them for future expansion.
Think of it. These folks pay thousands of dollars a year for which they receive nothing except deferred gratification. That's how much value they perceive in this organization, which in any case offers an unconditional money-back guarantee.
For more information, call C-2000 at 651/426-2000, or visit www.contractors2000.com.
Plumbers' Success InternationalPSI resembles C-2000 in the excellence of its business management systems and programs but is like no other industry organization in that it embodies planned obsolescence. PSI has been formed for the express purpose of consolidation within the next couple of years. Only top performing member firms will be made offers to join the consolidated entity. It's an open question whether PSI will exist beyond that point. If enough nonconsolidated members wish to sustain it as an ongoing affinity group, they may keep it going, as was the case with PSI's predecessor on the HVAC side, Contractors' Success Group (CSG).
If not, PSI members will have invested some $40,000 over a three-year period for some of the best marketing and business management systems the industry has ever seen. PSI offers a conditional money-back guarantee, contingent on adopting certain aspects of PSI's business systems.
PSI also differs from other affinity groups in that members get recruited in batches and undergo different phases of instruction to implement PSI systems. Membership currently stands at around 300. Eventually, PSI expects to grow to more than 500 in four or five groups. Like C-2000, it offers restricted territories.
Contact PSI at 800/524-1954.
Quality Service ContractorsQSC is a subgroup within PHCC-National Association. It is patterned after C-2000 but without membership restrictions, except you must be a member of PHCC-NA to join. QSC is aimed at residential service members and entails its own separate dues of $3,000 annually, money-back guaranteed. They had 118 members as of this writing.
QSC is a viable option for many service contractors excluded from C-2000 or PSI by occupied territories. Although QSC isn't as far along as those groups in developing a cohesive business management system, it has produced some worthwhile materials in the areas of customer service training, service agreements, safety training and various other business management tools.
As with C-2000, one of the most important member benefits comes from the chance to belong to internal peer groups of similar companies. Most important, QSC members benefit from the opportunity to interact with companies around the country facing similar challenges. PM staff who have attended QSC meetings have come back impressed with the experience and the camaraderie among members.
Contact QSC executive director Charlie Wallace at 800/533-7694 or email@example.com. Visit QSC on the Web at www.qsc-phcc.org.
Construction Contractors AllianceCCA is another PHCC-NA subgroup aimed at serving the interests of PHC construction contractors, residential through industrial. A little over one year old, CCA has 26 members as of this writing - many of them sizable firms - and is steadily growing. It meets twice a year, as well as in smaller peer group sessions that are a major focus of CCA. Annual dues are $5,000. Many other programs and projects are in the formation stage.
Contact PHCC-NA at 800/533-7694, or e-mail firstname.lastname@example.org.
Plumbing Contractors Of AmericaPCA is a subsidiary of the Mechanical Contractors Association of America. There is no separate membership. MCAA members automatically receive PCA benefits if they choose to avail themselves.
MCAA represents most of the industry's largest unionized commercial-industrial PHC contractors, and PCA arose about a year ago out of the old National Plumbing Bureau, which had been in existence for a long time to address specific interests of MCAA's plumbing company members.
PCA has grown substantially because of collective bargaining groups leaving the PHCC network in recent years in favor of union-only MCAA affiliates. The association has set a goal of becoming the dominant organization representing union-affiliated plumbing firms. It held its first annual gathering in St. Louis from Sept. 22-23.
Contact executive director Pat Fink at 301/990-2219, email@example.com.
In addition to the groups cited, several organizations exist solely or mainly to serve the interests of HVAC contractors.
Excellence Alliance Inc.Excellence Alliance (EAI) consists primarily of HVAC contractors but is planning an offshoot for plumbing contractors to launch this fall. At last report, it had 237 members in 40 states. It is divided into residential/light commercial and commercial-industrial groups. Territories are not exclusive, although if a contractor wants to join, he requires approval by existing members in the region.
EAI prefers to recruit companies that do at least $2 million in revenues. Executive director Jeff Wilmink explains, "We have over 90 programs that are part of their membership. If they are still working in the field, they will not be able to implement those programs and therefore, will not get the benefit of membership."
Dues are $8,100 per year, payable quarterly. EAI can be checked out at www.eainet.net. For information, call 877/439-2462 or 513/412-7004.