Tuesday, January 12, 2016

Top Restoration trends for 2016

2016 Industry trends

It is that time of the year when companies review progress in the past year and also look into their crystal ball to assess the offerings of the upcoming year.  Before I get into 2016 I would like to review my thoughts on last year and offer a report card for my predictions for 2015.   If you would like to read about these trends and also action items associated with each you can link on an my blog from December 2014. 
                                                                                                                      (Grade)
1.     Increase in wages                                                                                            (A)                 
2.     Continued weather events – (not as big a story as 2014)                               (C)
3.     Ongoing development of the cleaning department as a viable profit center  (B)                                                                                                                         
4.     Increased influence of TPA programs                                                             (A)
5.     Pricing pressures and margin pressures                                                          (A)
6.     Increased competition for large losses –  (developing)                                   (B)

In retrospect I think these top 6 items were major influences on the industry last year.  Some were factors but did not have much influence.  Please read the article as most of these ideas were relevant and the action items are still important to assist you company in 2016.  


 Here are my predictions for 2016 
1.     Continued outside influence in industry. 

In Florida you will find insurance companies that are vertically integrating to the restoration industry.  This trend has been on the horizon for years since Allstate started Sterling Auto repair back in the early 1990s.  I know this has been challenged in various courts but believe that they have maintained the right to run their own shops.  That being said, restoration is a different animal and it will be very interesting to watch this trend play out.  The one thing that I will watch with anticipation is if they can create a company with a 10% overhead (tongue in cheek) – It will be interesting if they operate similar to other restoration companies and have the same challenges in working with the 10 & 10 model.

I am not yet certain how the Alacrity purchase will play out for Lowes.  Perhaps it will be similar to what State Farm did with Home Depot in their PSP program.  If they do I hope that they are able to manage this better than State Farm did since they disbanded this program several years ago.

Recommendations:
·      Have a diversified marketing approach. Make sure that no more than 20% of your work comes from any individual source.  Consider internet leads as a source because this can change overnight as the rules are always changing.
·      Consider increasing your marketing to continue to locate new partners and clients.  New competitors can appear overnight.
·      Realize that new competitors may have different margin expectations and can have instant impact on pricing and margins.  Watch your overhead and job costs to assure you are able to compete in a changing environment.

2.     Continued margin pressures

There are several currents that are influencing prices. 
·      As new companies continue to enter the industry it increases the supply of contractors, which naturally reduces prices if you follow the laws of economics. 
·      Program work reduces prices and estimate flexibility.  An increasing volume of work is being managed by vendor programs and TPA’s every year.  This year will be no exception to this advancing trend. 
·      The investing market appears to be turbulent and very uncertain.  Many markets (stock market, bonds, real estate) have grown without the usual market corrections, which is creating uncertainty and expectation for a correction.  2016 has started out with a lot of volatility in many markets and I expect more to come – or at least to continue through the year. 
This volatility may lead to “main street” this year – but in an election year, who knows. The greater macro economic environment has a big influence on the insurance industry – as their financial returns suffer, they will look to their claims ratio for margin. This could lead to pricing pressure.
·      Industry pricing database not consistent with market realities and downward self-fulfilling vendor program price feedback. In many markets the cost of materials has increased and labor is up sharply.  In one case I found where the price of flooring is actually lower today than in 2008!  I do not expect to see much if any change in pricing this year – especially if your give an credibility to the above pricing items.

Recommendations:
·      Focus on your project budgets and manage your projects. Maintaining a strong net profit will require that you are disciplined about every job. 
·      Review your clients and corresponding profit margins. If your margins are lower for some of your clients then look to reduce dependency on these companies or attempt to change their prices.
·      Look at your marketing mix and look for ways to increase your higher profit job types. 
·      Reduce your overhead – either as a % of your total revenue or real overhead costs.
·      Protect your capital and build a cash reserve.

3.     Weather trends – While weather had a large impact in regions of North America last year, it will go down as a very average year.  The first six moths started out above average according to Munic Re.  The numbers are not available for the second half of the year but my guess is that it will be lower than average.  I am not a meteorologist or weather expert but I will venture a prognosis for this year.  Some of this is based on the start to the year and also a change to the ocean currents and current year weather trends.  The rest is based on part gut feeling and part W.A.G.
·      The winter will continue to bring cold weather to the Northeast and rain to the West.  Many have been talking about record flooding in California due to a very strong El Nino – I am wondering if the flooding last week is all that will occur? 
·      As I write this I am hearing of heavy snow and cold weather across the upper Midwest and Northeast.  This of course followed a very mild holiday season.  It looks like this might last for more than a couple of weeks.  A quick trip to South Florida sounds nice.  By the way if you are looking to relocate there – let me know I have clients looking for good people.
·      Here is my big weather prediction: for the first time in over a decade  - actually the longest period of time without a major hurricane making landfall since records began in 1851 – a hurricane will hit somewhere in the US.  Now don't go and buy equipment right now since I don’t have inside information.  You can check back next year and complement or criticize this prediction. Keep in mind that if you watch a roulette wheel red can come up 20 times in a row – the next spin the odds are still 50:50.

4.     Race for FNOL.  If you do not understand this acronym then you are missing one of the big current trends in the insurance industry.  This stands for First Notice of Loss.  If you get to the job first then you can control the direction of the claim.  This trend is being manifest and impacted by the following:
·      TPA’s taking the initial claim through the 800 phone numbers.  Try turning in an auto glass claim – there is a good chance that Safelite call center answers the call.  This is currently happening in the property repair business with some providers.
·      Agents being removed from the claim intake business.  I called my agent years ago to turn in a property loss and my agent told me they could not turn in the claim – I had to.  (I dropped my agent and save money by working directly with a company since that.)
·      800 Board up – if you get to the fire before the agent is contacted you get the opportunity for a first impression.
·      Plumbers starting in the restoration business.  This was immanent since restoration companies were pursuing plumbers so aggressively and the finder’s fees kept increasing.  
·      Some restoration companies are opening 24 hour call enters and acting as a call center and dispatch service for property managers and insurance agents.

Recommendations:
·      Look at your marketing program and make sure that you are getting a solid return on current expenses.
·      Reduce dependence on any work source to no more than 20% of your overall work volume.
·      You may consider increasing your overall marketing budget.  Restoration companies that are performing consistently high quality work should be able to find new clients and even new verticals or new markets.  It will take getting the word out – these opportunities will not likely come knocking on your door.


5.     Continued growth in TPA programs.  While this is not news to most restoration contractors I expect to see a new trend here. Many companies that are handling a large volume of program work are finding it to be a real double-edged sword. Here are the issues:
·      High volume and relatively low dollar jobs.
·      Little ability to prioritize jobs – the same clock is running on every job – get the inspection done and estimate out in less than a day!  High profile clients, large jobs, regional catastrophes all have the same metrics.
·      Each job has a relatively large administrative burden.
·      Cumbersome reporting requirements.

Recommendations:
Given the above thoughts you might think that I am against programs.  I actually think that they are a very viable option for many restoration companies.  That being said, I also see many companies blindly pursuing program work.  When they get on the lists there is little thought about how big of a part of their business this should represent. 
·      Take a look at your business and then a critical look at the programs.  Not all will be a fit for your business. If there is an alignment then consider pursuing these programs.
·      Have an active marketing program to offer many different work sources.
·      Consider having individuals or teams that specialize in program work. That way the program jobs will not have as strong an impact on the other areas of your business.

6.     Labor shortages:  This is probably the biggest influence on the industry in 2016.  I have not talked to a contractor in the past 6 months that does not have the following challenges:
·      Cannot locate good people for any positions in the company from admin staff to field technicians.
·      Lack of good subcontractors due to the boom in construction as well as a lower supply after the last recession combined with fewer young people entering the trades.
·      Wage inflation – especially for those with restoration skills. There is actually getting to be a disconnect between wages paid and commensurate value.  This could become acute with the current margin pressures. 
·      With many different restoration headhunters, employees understand their value in the market due to the many attempts to find restoration skills.

Recommendations:
·      Resist the temptation to chase the labor market.  It will be difficult to lower compensation once you start an employee.  Your decision may be to let them go in the future or reduce profits.
·      Have a strong incentive plan that lets the employee earn more once they make money for the company.  This strategy offers the most flexibility and protects your business.
·      Have a solid search, hiring, onboarding and mentoring program.  Make sure that your processes allow you to grow your own talent.
·      Make sure you create a company where employees love working – this will reduce turn-over and the need to replace existing staff – your hiring can focus on growth-based need.
·      Work to improve capacity from existing staff.
·      Provide incentives for locating new employees.
·      Make finding new talent a business activity – just like marketing for new work.

7.     Technology continues to develop and new training, systems, process all start to emerge in real cost effective ways.  I am going to be very vague in this because I am not as tuned into the new technology as other areas of business. That being said, I know that affordable and effective technology will change the restoration world – from training to process and systems. 
·      I might be early with this since it takes a while for this to filter down to a relatively small industry and into usable products.

Recommendations:       
·      Attend tradeshows inside and  outside of the restoration industry and become aware of new trends and technology.
·      Network with other restorers to see what is working for them.
·      Be aware and also make sure that new technology is more than a toy – it needs to make business sense.
o   Look for developments in the following areas:
§  Training
§  Communication
§  Tracking
§  Marketing
§  Employee management
§  Remote monitoring
§  Employee health care, safety and health management.  



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