Understand Your Motives, Research the Pitfalls
Expanding a fire protection business by opening branch offices is a risky undertaking. If critical elements are not in place, branch offices can become costly disasters. However, if the key areas outlined in this article are adequately addressed, opening branch offices can be a successful growth strategy.
In most areas of the country, opportunities are expanding. Most companies have gone through some type of strategic planning effort, and profitable growth is usually atop the list of initiatives to achieve. For some, this growth will come from within their traditional geography – they will capture a larger share of the market or expand into a new line of work. But for many, this expansion will take them into a new region. Whether you are considering opening an office in the next town or across the country, a branch office will completely change the nature of your business. Over the years, we at FMI have seen some of our clients expand through opening branch offices and rapidly increase the value of their business. Unfortunately, we have also seen many lose incredible amounts of money – draining the energy of the organization, tarnishing their reputation, and requiring them to spend years recovering from the endeavor.
This article examines some of the common pitfalls of opening a branch office and the steps successful contractors take to avoid these pitfalls.
First, consider the motives for establishing branch offices.
1. Our customers ask us. Most of us have learned that developing a long-term customer relationship has many advantages. It gives us the ability to learn exactly what the customer expects and how to satisfy those expectations over many projects. It allows our whole organization to feel closely aligned with that customer. Perhaps most importantly, as the level of trust increases, it allows both organizations to move toward achieving multiple long-term goals. Project issues become easier to negotiate because everyone realizes they are going to be working together on many projects.
Unfortunately, after we have worked so hard to develop these relationships, our customers may suggest or even demand that we do their work in other geographies. To refuse may threaten our entire work program with them.
2. We have saturated the market. It is obviously not possible to capture more than a certain percentage of any local market. Some of our market may be controlled by competitors of our customer, and we simply cannot work for both. Some of our market may be priced below our breakeven point. Some potential customers (hopefully a small part) may not want to work with us under any set of circumstances. Entering a new market may be required for our growth.
3. It gives us an opportunity to leverage our expertise. Most companies have capabilities that make them unique. Whether it is a work process, an internal system, the skills of their people, or that they are the only company crazy enough to tackle some projects, all organizations have something that makes them unique. Our uniqueness or expertise takes a long time to develop, and our desire to apply that hard-won uniqueness to another market can be strong.
4. It provides additional opportunities to our key employees. Ask anyone in any business related to the construction industry to name the biggest challenge they face, and finding and retaining key employees is going to be mentioned. We have heard all the speeches and read all of the articles, and whether it is because of lower birth rates, higher paying careers in technology, the image of the industry, or a combination of everything, it is getting harder and harder to find and keep good people.
The construction industry has always had low barriers to entry, and for many of us, if we don’t give our key employees opportunities to grow, they will either join another company or become our competitors. Establishing a branch office can give special employees a way to meet their own goals while helping the company grow.
5. It represents a new challenge. Most construction owners were attracted to this industry because they relish a challenge. But after years in the industry, many find themselves somewhat bored with the day-to-day operation of the business, and the thought of taking on a new challenge is invigorating. There is nothing wrong with this motivation. Indeed, much of what has been accomplished in history is a result of capable people looking for a new challenge.
What are the Pitfalls?
We can learn much from the mistakes of others. The following list presents some of the most common mistakes I have seen over the years when contractors opened a branch office:
1. Underestimating the time, energy, and expense necessary to be successful. Opening a branch office is a long-term investment. It is rare that an office is profitable for the first few years. Indeed, I believe that it should be viewed as a three- to five-year investment. Like most of the things we try to create, it is going to be more expensive, take longer, and be more complicated than we imagined. If it were easy, everyone would do it. Be prepared to make the necessary commitment.
2. Underestimating the strength of local competitors. Former Speaker of the House Thomas P. “Tip” O’Neill Jr. said that all politics are local. He could have been talking about contracting. Years ago a good construction company could enter any market and fill a void. Today there is an oversupply of construction services, and any good market has lots of strong competition. Local contractors control the labor market. While others have come and gone, the homegrown company has had years to convince the labor market of its loyalty. Skilled craftsmen will need a very strong reason to leave an established company.
Local contractors also have close relationships with the subcontractor and supplier community. It is difficult for the new company to get the best price from a subcontractor or supplier that has been working with local companies for many years. Local contractors also have close contacts with local customers. They often know these customers on a social basis, so there are more than just business relationships to consider. Finally, the local contractor has a strong interest in making sure new competitors don’t succeed. Their prices will invariably go down and their marketing efforts will go up when a new competitor comes to town.
3. Hiring the wrong branch manager and not giving him or her incentive to win. I once had a client who had a big sign in his office that read, “No organization is ever going to outgrow its leadership.” You have to understand that the branch will be no more successful than the person leading it. The manager has to be an entrepreneur and has to have the experience and personality for the job and a strong desire to succeed. It is also important to have at least one person in the office with strong local ties who knows the local community and can give credibility to the branch. This person doesn’t have to be the manager, although that helps.
The branch manager also has to have the incentive to win. To be successful, this will not be a 40-hour-a-week job. The manager will have to treat this business as his or her own, and nobody does that unless they own at least a part of it. To open a branch office without a well-conceived incentive compensation plan for the manager is simply a mistake.
4. Trying to implement weak processes and systems. A fire protection company is simply a combination of processes. You have an estimating process, accounting process, marketing process, project management process, and so on. Often, these processes have evolved over generations, and they may have inherent weaknesses. But because that’s the way it’s always been done, we make things work by sheer force of will and don’t bother to change the flawed processes.
That approach won’t work in a remote location. Having several project managers in a branch office individually decide how they are going to set up a job file, buy out a job, identify cost codes to be used, etc., will become very confusing. And without some of the veterans there to monitor the results, your odds of being successful on projects are greatly diminished.
5. Lack of “live” contact between branches and the corporate office. “No one from the corporate office has a clue about the challenges of surviving in a branch office.” I have been in a branch office for the past 35 years, and I know that your branch office employees will echo this sentiment. It is so easy for employees to feel that they are on their own island and nobody from the corporate office knows or particularly cares what happens to them. The problem is that owners of contracting firms have many things to keep them busy. The temptation is to try to communicate through the occasional telephone call or e-mail. But if owners aren’t committed to personally spending time in the branches on a regular basis, the branches will not be successful. If you are an owner and you are convinced that you don’t personally have the time to commit to it, it doesn’t matter how promising the market or how great the opportunity – don’t think about opening a branch office.
Remember that not just you but everyone in the corporate office has a full-time job, so communication isn’t going to just happen. It has to be managed. People in a branch office have to have regular live contact with company
6. Trying to get by with less-capable people. Sometimes there is an unspoken assumption that we need fully qualified people in the corporate office, but because there is less volume and more support from the corporate group, we can get by with less-expensive and less-qualified people in the branches. It is my observation that if anything, just the opposite is true. From the receptionist to the branch manager, these are the people who are representing you. As an old contractor friend used to always say, “If you don’t have the horses, don’t ride.”
Building a Strong Branch Office
A strong, implemented plan will ensure that you avoid these pitfalls and end up with a strong branch office. The following are key areas to consider in your planning efforts:
- Performance plan
- Work acquisition plan
- Financial plan
- Control systems plan
In developing this plan, you need to answer the following questions:
- Who is going to manage the branch, and do they
have the qualifications?
- What organizational structure is going to be used,
and what are the reporting relationships?
- How are we going to compensate everyone?
- How are we going to evaluate performance?
- Is there a well-documented corporate-policy manual,
and are changes necessary for the branch office?
- What type of facility is going to be needed? Office
space? Shop and warehouse space? Yard space?
- What is the capital budget, and who will administer it?
- What is our training plan, and who will pay for it?
- Are our project management processes developed and
ready to implement?
- How will we measure job progress?
- Do we have the systems (e.g., e-mail, voice mail, etc.)
needed to facilitate communication?
- What resources will be shared among offices?
- What contracts can a branch make with vendors and
- Are resumes and applications shared among branches?
- Will information on subcontractors and vendors,
including poor performance, be shared among all branches?
Work Acquisition Plan:
- Have we adequately researched the local market?
- Do we know enough about our competitors?
- Have we set marketing goals?
- What are the sizes and types of projects to be pursued?
- Have we clearly identified our specific target customers?
- Do we have realistic sales goals?
- Have we developed a pricing policy?
- Do we have a local customer to lead us into the market?
- Do we have people in place capable of selling work?
- Is there an incentive to share leads among offices?
- Who controls marketing collateral, resume templates,
business cards, advertising consistency, etc.
- Have we developed department budgets?
- Have we made cash flow projections?
- Do we have an accounting and job cost system that
can be implemented?
- How are we going to train people to use our systems?
- Do we have adequate capital to invest in the branch?
Control Systems Plan:
- What is the format and frequency of financial
- What is the format and frequency of job cost statements?
- What other management reports (accounts receivable
aging statements, equipment utilization reports,
backlog analysis, etc.) will be produced?
- Who will receive the reports?
Establishing a successful branch office is a litmus test for contractors. Do it successfully and your growth potential is almost unlimited. Do it unsuccessfully and much of what has taken years to achieve can evaporate.
If you make the decision to open a branch, you owe it to yourself and your organization to make sure that you have given yourself the best possible chance to succeed. Think through the questions raised in the performance, work acquisition, financial, and control systems plans to ensure a high chance of success.
ABOUT THE AUTHOR: Randy Stutzman is a managing director of FMI Capital Advisors, Inc., FMI Corporation’s Investment Banking subsidiary. As a specialist in corporate mergers, acquisitions, and strategy development, he helps contractors throughout the country develop and implement plans that are uniquely tailored to meet individual needs, including acquire additional business, sell existing business units or ensure that profitable organic growth is achieved. Stutzman is a graduate of Indiana University of Pennsylvania, holding a Master of Business Administration. He can be reached at (813) 636-1247 or via email at email@example.com.
EDITOR’S NOTE: Stutzman will be presenting two management seminars at the AFSA convention in Phoenix this October, Project Management: Identify trends in capital project management; examine strategic project organizing; implement contracting practices; observe project controls; and manage quality and safety; and Turning Your Project Managers Into Business Managers: Understand financial impact of effective project controls, projected cash flow, and getting paid; manage all aspects of the job utilizing innovative tools and leveraging key relationships; establish long-term client relations through an understanding of marketing and business development concepts. Read more details about convention on page 18 of the July issue of Sprinkler Age (view the digital edition) or visit firesprinkler.org/convention.