News
Scratching the Surface
January 10, 2022 | 7 minute read
My first day “on the job” at HARDI was, of all days, the first day of the HARDI Annual Conference. For me, this was perfect timing as I was able to meet so many members, sit in on expert presentations, and learn about the current headwinds and tailwinds in the industry. Previously to HARDI, (literally until the day before the conference), I worked for Deloitte consulting in the M&A Division. Part of the mission I have been tasked with at HARDI is to share a firsthand perspective on what makes companies in all industries thrive. Though our industry is unique, many of the issues it currently faces are universal. Coming out of the conference, I wanted to share a few thoughts as I begin to scratch the surface of what the HVACR industry is facing.
Labor
Obviously, this a pain point for every industry in every part of the country. However, there are a few unique inflection points that I feel the HVACR industry businesses should think through:
Understand the talent pool. In 2021 male enrollment in college fell 9%. African American male enrollment fell nearly 15%. With trepidation over student loans and an uncertain job market post-graduation, HVACR jobs are a fantastic alternative. Is your recruitment, messaging, and training program set up to attract these types of candidates? Jobs in our industry are stable with good pay. Is your messaging simply reflecting that?
You are competing with every industry for talent. White collar, blue collar, experienced technical professional, someone that does not know what HVACR stands for, etc. If you are only benchmarking against competitors and the industry overall, you should expand your view. Understand the demographics of your area, monitor regional players you are competing with for talent, and define what unique benefits you can offer. And yes, benchmarking against Amazon is important, but it cannot be the only business you are stacking yourself against. (The article below is great ammunition to combat Amazon). The 2022 HARDI Cross-Industry Compensation Survey will be an invaluable resource for perspective.
Take a hard look at your policies. Are you offering hybrid work for office employees? Are benefits being extended to technical employees? Do you have the same employee handbook as you did a decade ago? Are you collecting data from your employees regarding what’s important to them? As I said earlier, you are competing for talent in industries outside the industry and if you are only benchmarking against traditional HVACR businesses, you may be at a disadvantage.
M&A
M&A is a focal point of not only our industry, but nearly every other in country. Drawing from my previous experience, I wanted to share a few current thoughts on the subject.
M&A rules and metrics are rapidly changing. Quick story: after going through the million interviews, personality tests, and case studies during the Deloitte process I was offered a job…….in the M&A division, something I had limited knowledge of. I bought three books on the subject and read them cover to cover over four days prior to starting. Each was written in 2019 or earlier. They were all mostly worthless by 2020. Rules of EBIDTA and revenue multiples are evolving, traditional periods of due diligence are rapidly expedited, and the roles of PE firms, consulting shops, and investment banks are becoming blurred. If you are involved in M&A as a buyer, seller, or both, ensure that you are armed with an up-to-date approach. The HARDI 2021 Distributor Performance Dashboard is a readily available resource to great asset for self-valuation. Feel free to schedule time for a consultation on the tool and approach.
Be aware that any transaction will take time away from the core business of you and your staff. Another quick story: I worked on an acquisition of two leading semi-conductor companies. My main touchpoint on the integration was an ultra-talented Marketing VP. We developed the integration plan and timing of IT, Global Real Estate, Engineering, Employee Experience, Marketing, Legal, Sales, and several more divisions. We had meetings to start and end every day, IMed on Teams in between and emailed throughout the night. All the M&A focus took an enormous amount of time away from their main roles, which was how the company became the titan that it is. I am not trying to dissuade M&A activity, far from it. The truth is between 70-90% of them fail and so often it’s not because of financials or go to market strategy, it’s because there was not enough planning beforehand, and it was a drain on the main business. (I am more than happy to make myself available as a resource for any M&A planning).
Culture cannot be overstated for any integration. Even if the acquisition fully intends to only acquire a company’s financials and customer list and operate totally separately, the blend of culture does matter. Be very honest about the true nature of your culture and have open conversations with all key external stakeholders about theirs. It’s harder to fix a culture mismatch than to fix P&Ls that don’t align.
Cost
By most metrics, 2021 was a year of growth within our industry. Unprecedented demand led to top line expansion for most. However, wages and most overall SG&A costs are on the rise across all industries. In the event that demand and volume fall while SG&A costs maintain or rise, P&Ls can quickly suffer. There are many cost reduction initiatives that are worth implementing or at least planning for, even during good times.
Reevaluate your real estate footprint. Can you renegotiate the terms of your leases with property management companies? Do you need the same office footprint as before? Can you reinvest any profits into buying vs renting a property? Are you shopping around energy providers? Countless organizations big and small are taking advantage of a golden opportunity to reduce cost via real estate. Current REIT contracts can be a barrier, but real estate footprint must be thought of as all things that are a cost line item relating to physical workspace.
Spend to save is scary but necessary. While short term P&L hits like ERP and systems upgrades, AI investment, and employee training on embracing an ROI culture may seem counterintuitive to cost reduction, the savings will be perpetual. An ERP investment is a perfect example of something that can cause sticker shock, but creates ongoing multiples of improved savings.
Reassign staff in every function from transactional to more value-added work, such as planning, decision support and business performance management. Tasking only HR and finance with SG&A improvement is too siloed to make a broad impact. Focusing only middle management with SG&A will not transform an organization to ROI culture as every level from top to bottom must be committed. Please reach out and set up time with me if you are interested in defining ROI culture at your organization.
Small goals fail. This seems counterintuitive but SG&A cost reductions of 10% are more likely to fail than those of 30%. Why? Because larger goals command more commitment and attention. There is massive ROI on reduction of T&E, office supplies, outdated marketing tactics, lingering projects that haven’t delivered results and unneeded IT licenses. These are great places to start that nearly all companies can execute within a year. Sometimes the single hardest part of any cost reduction project is simply getting started. Assigning goals and tying cost reduction into employee performance is essential.
With all these measures, we are here to support you and partner with you to navigate the future. Please leverage all our assets and personnel to achieve your businesses short, medium, and long-term goals.
Sources:
Zachary Perge
Chief Strategy Officer
Zachary Perge is Chief Strategy Office at HARDI, joining in 2021. Prior to HARDI, Zachary worked for Deloitte Consulting in the Mergers and Acquisitions Division and has over a decade of marketing, sales, and finance experience with global consumer companies. He has an undergraduate degree in Management from Miami University and an MBA from Indiana University.
