Challenges For Service Firms
This month's cover story about the Independent Quality Alliance brings back memories of the consolidation tsunami that hit the industry in the late 1990s. The IQA was formed by a handful of independent contractors worried about surviving the onslaught of roll-ups and utility subsidiaries that supposedly were going to dominate the PHC service business in years to come.
We all know that didn't happen. Without exception, the consolidated companies and utility offshoots ended up flopping around the marketplace without fulfilling their vaunted potential.
This has brought with it a certain smugness among many service contractors in our industry. Their thought process is along the lines of: “We're hot stuff. The MBAs can't figure out this business. Only we who grew up in the trade know what it's all about. Now let's get back to business as usual.”
That is the wrong message to take from the consolidation fiasco. It wasn't the PHC service industry's inherent strength that caused the consolidators to fail as much as it was their own mistakes. The neighborhood shops that form the backbone of the residential service sector still exhibit the same weaknesses that led the consolidators to take a run at this industry in the first place.
Probably 90 percent of the companies delivering residential plumbing services in this country are small, unsophisticated shops trapped in an operational time warp. Calls still get taken by answering machines. Service technicians (still called “plumbers” by the 90-percenters) arrive in dilapidated trucks without receiving a minute of customer service training. Meantime, anxious homeowners cross their fingers wondering if the plumber will show up at all - which is why some feel compelled to call two or three plumbing firms and give the job to the first one that arrives. If you're not the owner, working in the business usually means inferior pay and benefits. The only advancement opportunity is to open your own shop and steal business by offering lower rates than the company you just left, thereby perpetuating backwardness.
The consolidators failed to keep their promise of addressing these shortcomings. Nonetheless, significant changes have taken place in the residential service industry compared with 10 years ago.
Increased CompetitionThe consolidators failed to capitalize on it, but give them credit for recognizing genuine opportunity in the PHC service business. This opportunity has led to a bunch of competitors that didn't exist a decade ago. These include remnants of the roll-ups and utility subsidiaries, big box stores, home warranty providers, home repair franchises, and a handful of progressive powerhouses at the local and regional levels.
This market shift is taking place without a lot of fanfare. That's because there is no bogeyman like a Wal-Mart or Home Depot that can devour competitors virtually overnight. Instead, the PHC service market diminishes a salami slice at a time. A utility cherry-picks some business by giving away water heaters; a big box hires its own installation and repair crews; jobs that used to go to neighborhood plumbing shops now get done by a handyman under a home warranty; a savvy local contractor builds a strong following through TV advertising; more and more people request a plumber via Internet services.
The market for PHC services is so vast, no single one of these rumbles registers much on the industry's seismograph. Yet, during the last few years I've heard more and more service contractors tell me the phones don't ring like they used to. Their Yellow Pages ads aren't working as well. They have to do more and more marketing just to stay even. Business is down a little to a lot, and they can't put a finger on exactly why.
The loss of market share will only get worse for the small independent service firms. That's because most of them are standing still while the world around them is changing faster than ever.
Let's look at some of the factors driving this market shift.
Technicians In Short SupplyOver the last decade and more, this magazine has reported numerous efforts by industry organizations to step up technician recruitment. Dazzling literature and videos have been produced. Women and minorities have been targeted. Recruiters have reached out to college graduates and potential career changers. Yet, although there are pockets of success, there's little sign these efforts have made much progress overall in supplying talent to the industry. PHC service contractors almost unanimously cite a shortage of skilled or trainable technicians as their biggest business problem. Something is lacking that transcends recruiting effort.
The consolidators promised to create companies with the resources to make PHC careers more attractive. They talked of boosting pay and benefits, 401k and profit-sharing plans, lavish training programs and advancement opportunity galore. They fizzled out before any of this came to pass.
However, the organizations that represent independent contractors haven't done much to resolve the problem either. (IQA is a notable “man bites dog” exception, which is why we put them on the cover, but theirs is a local story that doesn't impact the industry at-large.) The shortage of skilled plumbing and HVAC technicians remains the industry's festering wound.
One ramification is a trend for replacement over repairs. Diagnostic and repair skills usually take years of field experience to master. It's easier to teach installation and replacement to novices. Manufacturers are going along with this trend by increasingly designing their products with modular components that are easy to change out.
Diminished trade skill is only partly to blame. It's a continuation of our throwaway society. We live in an era of disposable TVs and other electronic goods that cost more to repair than replace. So it is increasingly with faucets, disposals and many other plumbing products. How can anyone justify spending half a day to track down an ancient faucet stem, when it takes a half-hour to put in a snazzy new faucet that will function for the next 20 years?
Unfortunately, the replacement mentality contributes to a devaluation of trade labor. A handyman of modest experience can replace most faucets and fixtures about as effectively as a veteran journeyman plumber, but at a fraction of the price. Thus, competition intensifies.
Channel BreakdownTraditional plumbing firms also have been hurt by the breakdown of the traditional distribution channel. Nowadays, consumers can buy almost any PHC product from someone other than a contractor. TV commercials for plumbing products were rare a decade ago. Now they are routine in major media markets. Each one erodes the value of the professional plumber in consumer minds.
It's old news that the big boxes have taken merchandise sales away from PHC contractors. The big threat ahead is from their installation and repair services. The big boxes have stumbled around for about a decade subbing out installation and repairs to independent contractors, but have left too many unsatisfied customers along the way. They don't necessarily want the headaches that go along with managing trade labor, but as long as the customers who buy their merchandise are in need of these services, the big boxes feel obligated to provide them. Increasingly, these stores are starting to hire their own crew
The InternetThe Internet has now been accessible to consumers for more than a decade. It's past the novelty stage. More and more PHC goods get purchased over the Internet, and home improvement Web sites like ServiceMagic.com, HouseDoctors.com and MrHandyman.com now book millions of service calls each year over the Internet. Some get funneled to licensed plumbing firms, but handymen get a share of this business as well.
Moreover, the Internet offers a vast array of information about plumbing products and service firms. Internet-based referral services, such as Angie's List, operate in many markets. Some have message boards where consumers can share experiences - mostly bad ones - about service providers.
In the old days, when someone had a plumbing problem, s/he'd automatically call the trusted neighborhood plumber or turn to the Yellow Pages. Today, more and more folks have taken to Googling, and that trend is accelerating.
Consolidation Still TemptsAmid all these challenges, don't be surprised if another round of consolidation occurs before long, although it may look different than last time.
PSI founder Jim Abrams, one of the original consolidators with Service Experts, continues to broadcast his intent to form another national public service company by year's end. If he succeeds, look for copycats to follow. I've also become aware of a few entrepreneurs without trade backgrounds who are buying up plumbing companies on a regional basis. There's nothing romantic about the plumbing industry to them. They simply see plenty of profit potential in the PHC service business.
Instead of being driven by Wall Street flim-flam, the new wave of consolidation likely will be motivated by the business stability and steady profits obtainable by well-managed PHC service businesses. The consolidations may begin at the local and regional levels rather than with a national splash, but eventually I think we'll see larger companies assert themselves in the marketplace.
I say so simply as a starry-eyed believer in our free enterprise system, and its uncanny ability to fill marketplace vacuums. Our modern, fast-paced society requires better delivery of PHC services than the public now endures. Eventually, clever entrepreneurs will figure out how to make good money fulfilling that need.
The Future For Independent ContractorsThis is not to say independent companies will disappear. A small shop can shlep along indefinitely if it sets its goals low enough.
Most plumbing companies do not get started by entrepreneurs per se, but by plumbers fed up with lousy jobs. Their business skills are primitive to nonexistent, yet the market for their services is so vast, almost all can generate enough work via lowball prices to earn a modest living. Keep in mind that plumbing services are in demand by every home and building owner in the country about once a year on average, frequently on an emergency basis. People from most other industries would salivate over such demand.
Yet, small shops are increasingly disadvantaged in competing for all but the most price-sensitive business. Most plumbing customers don't care whether they do business with a neighborhood shop, a franchise, a utility, or a big box. They only want to be serviced by a firm that delivers the best value with the fewest hassles.
Neighborhood shops supposedly have an edge when it comes to friendly, personalized service. That's more myth than reality. Neighborhood shops are where callers are most likely to be greeted by answering machines and grumpy voices returning phone calls days after they are made. If you're looking for homey charm, you're more likely to find it in one of the larger companies with trained CSRs. You'll also get more efficient service thanks to modern dispatch software and trucks crammed full of repair and replacement inventory.
One of the most encouraging developments for PHC service contractors over the last 10 years or so has been the rise of affinity groups that have raised the bar of professionalism - Nexstar, PSI, Service Roundtable, QSC, PCA, Excellence Alliance and others. These organizations offer superb business and marketing tools and best-practice networks. Contractors who belong to these organizations by and large aren't the ones that need to worry about meeting competitive challenges. However, if you add all their memberships together, they comprise less than 5 percent of the estimated 60,000 plumbing service firms doing business in the country. In the public mind's eye, the industry of which we speak includes way too many companies that do way too many things wrong.
Please don't read this lengthy commentary as pessimistic. On the contrary, it's brimming with optimism. The underlying message is that you're in a business so attractive, numerous nontraditional players are anxious to get a piece of the action. That should be encouraging.
Now all you have to do is figure out how to leverage your trade knowledge to give customers the best value for their money.