Companies in our industry are headed for a crossroads, and have been for a long time. It’s a crossroads that other industries have come to before ours, and the changes experienced by those other industries hold valuable lessons for us.

Simply put, the future looks rough for the traditional, one-dimensional mechanical contractor. The middle of the road is not a good place to be, and companies that stay there are at risk.

Look at businesses in any of three categories. One is the mega provider. In the retail industry, Wal-Mart and Target are the examples. A second category is the smaller, focused niche provider. Dollar General is a good example of this type of niche provider. The third category are the traditional, mid-range regional and local companies, such as. . . hmmm. Can you name any? Do you have a local hardware store, or are Home Depot and Lowe’s your only option? How about a traditional neighborhood grocery store? Mega stores and niche grocers abound, but the middle-of-the-road neighborhood grocery store is almost extinct.

I propose that over time our industry is going to see the same thing. Our industry — like most industries — is being pushed towards consolidation. The rate of that push is only going to increase as we emerge from the current recession. You might argue that our industry is much more complex and service-oriented than a grocery store and therefore this trend does not apply. However, if you look across any other industry you will see the same trend.

Our industry — like most industries — is being pushed towards consolidation. The rate of that push is only going to increase as we emerge from the current recession.

You might say that this won't occur at your company because you provide great customer service and you have customer loyalty larger companies cannot attain. I ask you, did consumers not forgo the local hardware store owner they knew by name and his great customer service for the many aisles of variety and high level of convenience and value they could get at Home Depot? Home Depot didn’t put the local hardware store out of business, the consumer did. By changing their buying habits, consumers told the traditional store owner that he or she no longer provided the value they were seeking.

Similarly it’s not the “consolidators” that are driving this trend. No, this trend is being driven by the consumers’ need for the value that comes from integration. It’s driven by their need to have a sole source responsible for their complex facilities and growing need for energy solutions, environmental compliance, and building performance. This trend is also driven by purchasing decisions being made at higher levels, group purchasing, and national accounts. And, this trend is being driven faster by the final emergence and integration of technology.

What will the traditional HVAC provider/mechanical contractor do when the consumer tells us we no longer provide the value they need? Simple: we will suffer the same fate as the hardware store.

So what’s the solution? I think we have two choices: focus on becoming a diversified mega provider that provides multiple services to multiple vertical markets, or become a specialized niche provider. I truly believe that if you’re not focused on one of these two courses of action, you will be in for tough times.

The goal is not to be one company with 10 small
companies inside it. Rebrand your company as a
credible service provider within vertical markets.

At Lee Company, we've been a very successful “traditional HVAC” and plumbing company in our market for 66 years, but seeing the trends, we've been working to close the gap between us and the mega providers that already exist. We’ve been working hard to get out of the middle.

Analyze Your Strengths and Abilities
When making the “mega or niche” determination, the first thing you need to do is look at the strengths and abilities of your company, the needs of your market, and the space already taken by your competitors. It’s difficult and can be expensive to decide to become one of the large providers, whereas most companies already have a niche or two that they play in. As a mega provider you must be prepared to add services such as electrical, security, and data communications. These things are all part of an integrated building. Many HVAC companies can reduce the HVAC-related energy use in a building, but as a mega provider you’ll have to be able to address lighting, sustainability, water conservation, security, metering, IT, and other non-traditional areas. Even if you already do controls work, you’ll need to do it at another level.

Slow and Steady Wins the Race
Finances can be a challenge as you gear your company up to compete on the mega level. We’ve staffed up at a time when a lot of companies are going the other direction. But we also haven’t gone full-bore with these services. We take it slow and steady. For example,

  • We hire a key person for security and get the necessary licenses, but we don’t invest in marketing around security and integration right away.
  • We go to our existing client base first and establish our new services with them slowly, so we don’t have to make a large and risky investment up front. We’re also taking it slowly because we don’t want to be perceived as a company, either internally or externally, that's simply adding services. That’s not the end goal. We don’t want to be one company that has 10 different little companies operating under one roof. We want true integration.
  • We’re hiring talent slowly, and integrating key people and capabilities into our organization. This pace also allows us time to earn credibility with our clients in these new service areas.
  • We’ve also totally rebranded our company. For most of our history we were known as mechanical contractors and engineers. Now we’re branded as a facility solutions and home services company. We want people to know that from a facilities standpoint they can come to us for anything and we can handle it for them. We can.
  • We also reorganized internally by reestablishing our sales force into vertical markets. Whereas previously we had a plumbing salesman, an HVAC salesman, and a controls salesman selling their services in horizontal fashion, we now have teams that focus on selling all our services within vertical markets.
  • We're cross-training our sales-force to adapt to this new reality.

Communicate the Change to Employees
As always, with change comes some struggle. But we've been very open with our associates about what we’re doing and why, and the task of bringing everyone on board has gone well. Our people on the ground can see where things are headed and when you help them understand these trends, they get on board. We didn’t go the “niche” route, but if you choose that for your company, there are numerous niche markets that are primed for growth. Energy services is already huge and still growing, and refrigeration is an important niche market. Or, you might decide on a very specific service and market such as data center HVAC systems, and own that space. Maybe you focus on providing regional services to mega providers such as fabrication. You could also choose to establish a vertical market niche, and focus your expertise on one industry.

For example, you might provide HVAC, plumbing, refrigeration, and security, but only for restaurants. The key is to analyze your strengths and market, choose your path, and redefine and reestablish yourself outside the middle-of-the-road box of “traditional HVAC provider.”

Note that niche doesn’t necessarily mean small, it just means “targeted.”

The Bright Side
Some of this may seem gloom-and-doom, but it’s not. In fact, it’s why I think it is important to write this article and promote these ideas. With our background as traditional HVAC providers/mechanical contractors, we in this industry have a tremendous advantage over other service providers.

Our barriers to entry to integrate other services, such as electrical, security, and so on, are far less difficult than the barriers to entry those companies would face trying to get into the HVAC business. Of all the players out there, our industry is best positioned to go after the whole space and create a new industry of facility solutions companies. The one strategy you can’t afford is to stay the same, stay what you are and assume the world will not change around you. Who knows the timeframe, but like the hardware and grocery stores of the past, traditional one-dimensional mechanical contractors are ultimately destined to go by the wayside.

Richard C. Perko, P.E., is the president of Lee Company, Nashville, TN. He can be reached at 615/567-1000 or by e-mail at rperko@leecompany.com.

This article is based on the presentation: Diversify Your Business, which Richard Perko delivered during the 2009 Contracting Business COMMERCIAL HVACR SYMPOSIUM in Nashville, TN.

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