This year I’ve been asked about “getting out” of the installation business more than any time in the past. Not surprisingly Covid has affected owners and operators’ perspective on their firm’s financial health. It’s raised a serious concern regarding their current business model moving forward. Some firms haven’t been affected as they had projects in the pipeline or were able to capitalize on existing relationships. Unfortunately, many have seen projects delayed, or cancelled. Almost all are concerned about eroding margins when they’re successful winning jobs. The margin issue is made worse by rising prices from vendors and subcontractors.

The shortage of technical manpower has been a problem for the past few years, but has gotten worse. This is troubling as the fire alarm installation business saw marginal growth. In normal times this would have led to an excess of technicians. It shouldn’t be an issue finding qualified people, but it is. Numerous companies have told me how they’ve lost techs to other firms willing to offer higher wages and bonuses. No question this trend exists in the wider labor market as firms are offering more money and perks to grow their workforce. I believe this adjustment has drawn done technical resources in the Life Safety business. This situation could last for a long time as the workforce adjusts to the current economic environment. I do fear that the Life Safety industry may have a longer-term problem as younger people are migrating to technical fields that offer better compensation, including stock options found in startup and public companies.

Construction forecasts have always been questionable, but dependable. That’s just not the case over the next few years. Almost everyone I speak with feels the office market looks weak, as does hospitality, retail, and in some area’s healthcare. Higher education also looks to be on shaky ground. Sure, endowments grew over the past few years, but enrollments may fall moving forward so colleges and universities are being cautious. “I can’t grow my business on warehouse construction. Too competitive and the systems aren’t very complicated”. It’s not a great environment when demand for the products you sell is so uncertain.

And speaking of competition there’s a growing concern there’s too much supply (fire alarm distributors). That’s caused a continued downward trend on margins. This isn’t a case of too many brands, but manufacturers have added distributors that are competing for the same work with similar equipment. “I’m getting pressured to move more product, but at the same time they’ve added another distributor and raised our prices”. “I’m selling more, but I’m making less.” This situation has been a reality for as long as I’ve been in the industry. What has changed are owners that have run out of patience and see their firms at risk.  This is especially true with those that plan to sell their businesses and either retire or do other things in the coming years.

I’ve assisted firms that have drastically reduced their installation work and some that are currently in transition. The pace of this type of activity has accelerated. I’ve touted the benefits of moving to a service model for years. I’ve overused the analogy “let someone else sell the razors, the money is in the blades”. Let other companies knock themselves out carrying the burden of operating an installation business. Even if construction were to hypothetically go to zero those that have a service model would thrive. The existing building market is what matters. That will never change.

Imagine if all, or the majority of your resources, were focused on providing testing, inspection, repair, and maintenance rather than installation. Suddenly, most buildings you pass by every day are prospects. Yes, there may be challenges as you address manufacturer’s systems you don’t distribute or didn’t install. That’s a reality other firms have addressed. But over time they’ve configured the makeup of their technical staff to offer more services on competitors’ systems. They’ve streamlined their parts acquisition. And they’ve created best practice Service Sales processes and trained their staff on the needed skills to sell service agreements to end users. There’s little debate that service margins are higher than installation margins. There’s also recognition that renewable revenue (RMR) offers the highest profit margins. It’s simply a case of where’s the best ROI on your resources.

I’m not suggesting that everyone should consider stepping back from the installation business. There’s plenty of money to be made if you’re positioned correctly. What I’m strongly suggesting is don’t wait, before it’s too late, to maximize your Service Sales/Renewable Revenue opportunity. It will be the best, and safest, investment you’ve ever made.