BE Radio November/December 1996 Contract Engineering Growing Your Business By William Fawcett ------------------------------------------------------------------------ William Fawcett is president of Mountain Valley Broadcast Service, Inc., a broadcast engineering firm in Harrisonburg, VA. ------------------------------------------------------------------------ >NOTICE: This is raw, pre-edit version. >Changes may have occurred before publication. Good engineers don't always make good businessmen. A recurrent theme of this column has been to look at the "how-to" aspects of business organization and structure. Should one incorporate, what types of insurance are needed, and so on. Still, with all this advice, some find out the hard way that they are better off working for somebody else. Organizational basics are fine, but the successful contract engineering firm must make decisions beyond that point; decisions that affect profitability and longevity. These decisions require more than structure, they require analysis and action. The business mix. Determining your business mix, and maintaining a flexible, open mind about the components of the mix, may very well determine if you sink or swim. The business mix may include which industries you will serve (the "macro-mix") and what your products and services will be (the "micro-mix"). The concept of a business mix is based on the time-tested principle of "not placing all your eggs in one basket". Broadcasting has always followed cycles, and the field service industry is directly affected by these cycles. For instance, in the years between the Docket 80-90 boom and the current mega-duopoly phase there was a lull in new construction. Coupled with a time of recession which brought a dip in advertising revenue, broadcasters were not spending a lot of money on engineering. To span this time, some contract engineering firms branched out into related fields such as telephone interconnect, computer and network installation, or contract work with the cellular industry. This is the basis for a "macro-mix". Focusing in on each component of your macro-mix we must make even more decisions. For instance, in the broadcast related field some firms offer service only, others attempt to make additional money on equipment sales. Additional micro-components may include consulting engineering (applications), turn-key construction, tower service, and specialties such as audio or RF. What makes this hard is the fact the "proper mix" is a moving target. What worked two years ago might not work today. A successful business person must constantly analyze the current situation, look at future trends and make decisions. To really make this work, you must be willing to eliminate personal preference or gut instinct; look for those areas that the money "comes easy". To sell or not to sell To understand some of the practical situations needing analysis lets look at one of the more basic micro-mix decisions. Some contract engineers serve as purchasing consultants to their clients. Others prefer to maintain more control, and hopefully more profit, by channeling all sales through their firm. Both paradigms have merit. Not selling equipment allows the engineer to better present the perception of impartiality. Which is to say your client doesn't think you are making a recommendation based solely on your profit potential. This isn't always the case; some engineers are known to gain certain benefits from certain vendors for sending business their way. Those practices are not recommended. To overcome this perception, a full-service contractor can offer several equipment options to the customer, or allow the customer to price equipment separately (with competing bids) or simply operate in a "transparent mode". Operating transparently means establishing beforehand the profit margin that you will make, furnishing original invoices where necessary. This might function as a "cost- plus-ten" type arrangement. To the customer, having a contractor "turn-key" the installation means they have one "point-of-blame" established. This eliminates the blame-shifting frequently encountered when dealing with multiple vendors. It also allows the customer to maintain better control over completion dates; again, one point-of-blame. And it simplifies the purchasing process. The difficult client will want the benefits of a sole source with the flexibility of shopping. Unfortunately, it doesn't work that way. A well-intentioned engineer may not met a critical deadline because someone (the client) forgot to order a single 1-5/8 EIA bullet. Worse yet, an entire tower crew may have to be scheduled again because of material shortages. The sole-source contractor also faces a much higher implied liability. If the customer buys from an equipment supply house, a warranty problem usually means replacement. The sole-source contractor will probably have to absorb the air freight charges, and labor for re-installation. And they are expected to absorb these costs while being competitive with non-servicing vendors. It is next to impossible to write a contract which will absolve you from implied liability, and if you could, your customer would still be unhappy. The contractor must also expend time and energy setting up accounts with vendors. Often these sources will not be the manufacturer, but another non-servicing vendor who will exchange a better discount for a higher volume of sales. This is known in the industry as "two-stepping". With a little work, you can locate sources that will two-step small quantities at a better prices than going direct. This occurs because you help them get their quantity level up to a lower priced bracket. Furthermore, your credit rating may be better than many of the potential end-users, and the vendors are very aware of this. In many cases you may have to borrow money on short-term notes to finance a major equipment buy. Conversely, you will then need to make good decisions regarding extension of credit to your customers. Up-front money may be required; often your supplier will the allow an additional cash discount to you. Is it possible to provide competitive pricing to your customer while absorbing a giant implied-warranty liability? That is the crucial element of this puzzle. This is where a dispassionate analysis is required. As a contractor, you may enjoy the control over a project that you gain in a turn-key situation. You might even stand to make a few bucks in the process. However, you must look at where you make your easy money. If you are selling at competitive prices, profits on equipment sales (counting warranty costs) may likely be in the 5- 10% range. On the other hand, once fixed costs are met, every additional dollar you earn on labor charges might yield a profit of 33% after payroll is deducted. Knowing where to concentrate your efforts brings profitablitiy and longevity. This is not to say that selling equipment is a bust. What works here is a "mix"; in some cases (state contracts) it is the only way to go. It could even be counter-productive to only turn-key on certain projects, as your buying power (quantity discount) decreases with a lesser volume. With many customers you are ahead of the game to let them supply the major equipment, and have a great time billing them twice to reinstall an item that was dead- on-arrival. Don't forget that supplies (as opposed to equipment) often have a tremendous profit margin, and can be tacked on to a time-and materials billing. Each situation is unique, there is no "correct" answer. Equipment sales was used as an example to show just how much thought must go into determining the proper mix. Look for a mix that emphasizes profitability while still maintaining enough diversity or flexibility to adapt to changing conditions. Broadcast engineers, of all persons, should be able to look at hard data measurements (your financial books) and make logical decisions. We do it everyday. Key Quotations: "These decisions require more than structure, they require analysis and action." "Determining your business mix, and maintaining a flexible, open mind about the components of the mix, may very well determine if you sink or swim." Sidebars: The Macro-Mix (Industrial Electronics) Radio Broadcasting Television Broadcasting Cable Broadcasting ITFS / MDS Cellular/PCS/Paging Industry Two-way radio Industry Public Address Systems Computer sales and services Telephone interconnect The Micro-Mix (Radio Broadcasting) Field-Service engineering Turn-Key installations Equipment Sales Tower Services Consulting (applications) engineering Audio / Studio / Processing specialties Automation and Digital specialties Transmitter Specialties Antenna and DA tuning Building trades - design/build 