Tag Archives: Maintenance

How Do You Create Predictable Costs and Profit? Seven Suggestions

Situation: A company finds that it’s costs and profitability vary greatly by season and during economic fluctuations. Some of this is due to hourly rate fluctuation and payroll costs. They also have excess capacity during slow periods. However, new projects arise quickly, and the company must be prepared. How do you create predictable costs and profit?

Advice from the CEOs:

  • Here’s the grim reality. In volatile markets, forecasts are meaningless. Instead of fretting over forecast accuracy, focus on increasing billable rates and managing expenses.
    • To generate additional revenue per project, add a flat percentage charge for project management on top of time and materials. This is often treated by clients like a sales tax or a gasoline cost adjustment and may not penalize contract negotiations.
  • Is it possible to build a sustainable revenue source to resolve profit lumpiness? There are options:
    • Application maintenance projects. After building a box add a provision for maintenance/upgrades as new capabilities and technologies are developed. This can cost-effectively extend the life of the box and long-term profitability of the product that the box supports, while gaining an annuity revenue stream.
    • Add a maintenance add-on service to leverage the company’s core competence on an ongoing basis. Provide technology upgrades through a maintenance subscription similar to software companies adding optional access to all new releases over the course of a year for a fixed subscription cost. The cost to the company for upgrade downloads is essentially nothing, but it gains an annual annuity revenue stream.
  • Investigate a help desk service to sell via subscription to small companies. Most clients use less than they anticipate; however, they prefer the security of a flat price subscription service.
  • What additional info can be gathered through sales to better drive sales forecasts metrics? Look at the past several years: is there any seasonality in a multi-year analysis. It may not occur every year, but if you there’s a pattern it may enable the company to proactively reduce costs where there’s a predictable dip in project demand.
  • Are sales people responsible for both maintaining client relationships and creating new business?  Most companies split these functions because maintenance is like farming while new business development is hunting – few sales people excel at both.
  • If, in development, the company develops IP, can this be used? When there’s down-time can capacity be leveraged to develop the company’s IP portfolio? Look at IP licensing opportunities. This provides an additional potential source of annuity revenue.
  • While it is important to figure out an annuity revenue stream, the principal lesson from the discussion is that most CEOs say that margins are better on fixed price projects than on time and materials. The key is to control to client requests for add-ins or adjustments and to include provision for these in contracts.

How Do You Cope with a Changing Market? Five Options

Situation: A company’s major competitor is closing shop. When this happens the company will be the sole large local service provider. Municipal and many large projects require multiple bids. The CEO is concerned that out-of-area companies will underbid the company’s union scale operation. How do you maintain your position in a changing local market?

Advice from the CEOs:

  • If your municipality has union scale wage rules, find a way to monitor wage compliance of out-of-area operations. These companies may say that they pay union scale, but the municipalities and others won’t have the staff to monitor them. This will be up to you.
  • Talk to local elected authorities and impress upon them the importance of supporting local businesses. Remind them of wage compliance problems that localities have seen in the past. Suggest that they look at local content requirements to help keep business and business revenue funding in the local economy.
  • Emphasize the maintenance aspect of your jobs. If a local company both builds and later maintains the project, they will know the subtleties of the design and will be able to provide better and more cost-effecting ongoing maintenance.
  • Educate clients with monitoring, measurement and compliance checklists that highlight the benefits of using local contractors and maintenance service.
  • If the other company approaches you about buying his business focus on the ROI produced by the other company’s costs and profits, but under your pay-scale. If this looks promising, have a conversation with the owner and see what he wants. Prompt the owner to talk and listen carefully to what he has to say. If you don’t want to buy the full business, there are other options:
    • Hire his key employees on a $/hour plus commission basis on retained sales.
    • Purchase his customer list, or giving him something for any maintenance contracts that come over to you within a set time period.