Tuesday, February 13, 2018

2018 Restoration Trends

I did not create a list of trends in 2017 however I did in 2016. Prior to starting the current years predictions, it is appropriate to assess my past predictions to provide credibility for my look into the future.  In many ways it is good to offer a 2-year review because it provides more time for things to play out but it also lacks perspective of the year prior.  Overall, I think that I was very timely on big issues that impacted your business and our industry over the past 2 years. 

Top 2016 trends – published in January 2016.
1.     Continued outside influence in industry.  My prediction was that we would find more and more businesses entering the industry.  The example was Roto Rooter.  I think that this has been happening however not necessarily at the speed I anticipated.  Some might be surprised the size and relevance of Roto Rooter on a national basis however most local markets are not seeing much of an impact.  There are many carpet cleaners, plumbers and service providers that are developing a substantial restoration footprint and I think that this is still playing out – especially because most of their core business are also expanding – making diversification challenging and in some cases unnecessary.    
Grade for this prediction -                                               B

2.     Continued margin pressures – given the influence of TPA’s and nuances of Xactimate – this was a significant challenge and my prediction was right on with this item.
Grade for this prediction -                                               A

3.     Weather trends – if you recall back in 2015 the US had not been hit by a hurricane in over 10 years.  I predicted would play a big role and that the US would be hit by the first hurricane in over a decade.  Turns out that this prediction was very timely and relevant.  The East  Coast was hit with a hurricane – not major – but North Florida and the Carolina’s were hit.  Then in 2017 there were fires, floods, ice, wind, and 2 very major hurricanes. 
Grade for this prediction -                                               A+

4.     Race for FNOL.  – If you can control the first notice of loss then you have a significant advantage.  This is true from new entrants in the restoration market and also insurance.  This is still playing out but has had a strong impact – especially over the 2 years. This will continue to develop.
Grade for this prediction -                                               B (or incomplete.)

5.     Continued growth in TPA programs – over the past several years TPA’s have increased in size, quantity and significance.  If you take a 2 year look at this trend this is one of the major influences in the industry.
Grade for this prediction                                                 A

6.     Labor shortages:  The need for quality employees continues to increase and the available pool is shrinking.  Look for an update in the 2018 trends.
Grade for this prediction                                                 A

7.     Technology – When I made this prediction I did so with a qualifier that it may take a while for technology to make a big change.  That was true as the process of creative destruction takes a while.  I think that this still may be several years out.  That being said there are many changes that are in the works right now that are laying a foundation for the next iteration of radical changes.
Grade for his prediction                                                               B - or incomplete.

2018 Trends
Now time to look into my crystal ball for the 2018 Restoration trends.  It is my intention to visit this subject again next year so I am looking at the top ideas that you need to be prepared for this year.

·      Labor shortages and wage increases.  This is my top tend for this year.  There are many big changes happening in the industry but perhaps the biggest limitation to growth is the availability of labor resources to complete the work. This is true of front line technicians, managers and subcontractors. 
One development that has helped and also created a challenge is the number of people that specialize in recruiting specialists in restoration.  This has increased the demand for people with restoration skills – especially management positions.  I am certain that people are often contacted by recruiters looking for people with skill and experience in restoration.  Also, websites such as Indeed, Zip Recruiter and the like, allow job-seekers to increase the demand or their services by searching for restoration jobs in other markets.  People that are successful in restoration have transferrable skills and getting out of the 24/7 grind has quite and appeal as well.
A more substantial issue is the lack of people with construction skills. I have had first-hand experience with this issue as I am trying to get work completed at my home and am having to increase my budgets and wait longer to get quality workers.  This has been created for several reasons.  The first is a lack of the next generation of workers – looking for technical jobs, fewer trade schools, retiring workers, a spotlight on immigrant workers, and the strong economy leading to more construction work with the same or even fewer workers. 
In some markets I suspect that filling positions will be much more difficult than others.  I also expect this shortage of the right kind of staff will increase overhead, which is not addressed in unit cost pricing updates. 
in order to properly address this situation here are my recommendations:
o   Continually be on the lookout for talent.  If unemployment is below 3% in your market, you will have to be a talent scout for people that are already working.  If you see someone that is showing the kind effort you would like to see on your team then drop a card and ask them to take a look at your business.
o   Develop a comprehensive orientation program that allows you to effectively and efficiently on-board new staff.  Give them the tools they need to feel a part of the team and also be productive right away.
o   Don’t tolerate poor performance. In some ways this may sound counterproductive, but you should get rid of people that are not showing the kind of effort that you expect.  This will show the top performers that they do not need to pull extra weight for people not participating and will also help you attract top performers.
o   Implement a solid review process so you let existing staff know how they are doing as well as how they can improve.
o   Create a system where you provide upward mobility and a career path for your staff. 
o   Focus on mission and culture.  Create an environment that makes work fun. Recognize great employees and form a connection and belonging.  Your mission will create engagement as well as a higher purpose for the work you do.
o   Develop a strong incentive program that allows you to reward great performance and pay very competitively – while protecting cash and the bottom line.
o   Develop lean practices that promote efficiencies and maximize profits.  Have a robust information management system and financial tools and know how to use them to track and maximize performance.
o   Develop a dynamic marketing and business development program that allow you to focus on the most profitable types of work and clients.

·      Industry pricing challenges.  The way our industry prices jobs is creating a stagnant pricing structure and often the feedback program used by many restorers creates downward pricing.  At a time where labor and material costs are increasing, the feedback component of the unit cost pricing fails to accurately capture true costs. Some of the feedback challenges are user based due to lack of understanding on how to update retail jobs or a lack of ownership of these processes. The current pricing structure is making it very difficult to achieve or maintain margins.  Even if you are effectively updating pricing, this model is reactive and a lagging indicator of costs. 
o   Understand how to use the pricing feedback mechanisms within your estimating software and teach others in your market the same.  This is a tricky situation since discussing pricing is a violation of federal law.  That being said, working with others in your market to accurately reflect market pricing is a function of the pricing feedback models.
o   Consider moving some unit cost projects to T&M as this will allow you to accurately reflect job costs and pricing.
o   Use your marketing strategy to increase the most profitable portions of your business and look to decrease the less profitable types for work and consider getting rid of your least profitable clients.
o   Set and manage budgets. Make sure you maximize the profit potential in your company by reducing leakage that comes from lack of focus on costs.

·      TPA Influence.  There has been a lot of influence on this subject over the past year for several reasons.  The first is the substantial increase in the amount of work handled by these programs.  The next is the influence of these programs on the job scope.  Although the top managers at these programs have an apparent intention to make sure the job is completed with the right scope and for a fair price, this is not always the case.  There are many that believe the role of these programs is to minimize the scope at all costs.  Others realize that it takes additional administrative, management and frontline resources to meet the program expectations.  Regardless of your thoughts on the programs, you can expect them to continue to affect the insurance restoration market.  I also expect these programs to continue to consolidate and also push for stronger compliance.  I am aware of at least one new TPA program that will be entering the market most likely in 2018 and there may be others.  Looking at the acquisitions by Vericlaim in 2017, I would expect to see more in 2018 as well.  I suspect that as these programs try to differentiate in the market they will come up with new and better ways to measure and control the contractors – expect more and faster. I also would expect these programs to extend their reach outside of the Insurance market and into self-insurance, hospitality, medical and property management work.  
The following are my thoughts on reducing the impact of TPA’s on your business.
o   Proactively create and manage your marketing program.  If you increase your TPA work, then my recommendation is that you have a greater impact on other sources of work.  Consider the following
§  Property management programs
§  Develop a board up program and work to get to the jobs before the preferred vendor
§  Become really good at the sales process – don’t hire order takers.
§  Commercial direct.
§  Medical facilities including hospitals, clinics and specialized care.
§  Municipalities
§  Education including: School districts; daycare, colleges and universities.
§  Service providers including: carpet cleaners, plumbers, janitorial companies, fire sprinkler companies and more.
§  Community involvement
§  Online – social media, SEO and referral sources.
§  Be creative and strategic – and measure results as not all will work in your market.

·      Continuing movement of outside groups.  Given the influence of the TPA programs and manipulation of claims by some insurance companies, I see an increased influence of the “outsider” groups that are standing up for the independent company.  The programs are gaining traction through social media.  I am not certain of their impact or influence in the industry because they are swimming upstream.  I don’t want to minimize their potential impact, but I am also uncertain of how long any influence will take.  I don’t necessarily see a change coming from these groups in 2018, but I also see more and more contractors publicly or even quietly joining their ranks. I don’t think they will have an immediate or strong impact in the industry – but they do have a place.  You can see the influence of these types of groups of overthrowing governments around the world – so I would keep an eye on their influence.  I also think that at the least they will help the independent companies improve their businesses and process.
o   Join the discussion.  Look for these groups on LinkedIn, Facebook and other
o   Consider attending industry events that increase your awareness of the influence and areas of impact on your business. These might be group specific – or just other industry events that help you to network with professionals from other areas of the country. 
o   Make sure the mission of these groups aligns with your personal or company mission.  It might take a meeting or following the group for a while to assure alignment. 

·      Weather.  The top story of 2017 was the spike in weather events.  There were events in nearly every quarter of the year and in nearly every corner of the country in 2017.  This was great news if this was in your backyard.  Some of the events were so significant that many companies hit the road to help for the first time in their history.  One challenge was that the every-day claims appeared to be down in many markets.  This was quite a dichotomy because peak work was followed by slow times. 
I expect the trend of weather events to continue in 2018 which is already happening
throughout the East Coast and Midwest with record setting cold weather and snow.  I would guess that the ice dams in the Midwest to be substantial as soon as it starts to thaw. In past years where we had dry weather in the West Coast in the winter and artic air in the Midwest, the hurricane season was very mild.  I wonder if we are setting up for that again.  The situations that lead to fires in Canada and the West appear to be setting up for a similar situation this year.  I would expect large fires to be a factor again along with typical spring rains and windstorms.  I am not a meteorologist – but my unprofessional opinion is that we will not see a repeat of the 2017 hurricane season. 
            Again – not a professional or educated opinion but It is starting to look more likely that the earthquake potential is picking up throughout the ring of fire and also in other regions of the country.  I would not be surprised to see a major – 6.5 or greater earthquake somewhere in the US this year. 
o   Develop a comprehensive catastrophe plan that will prepare your company and your response in the event of a CAT event.  This plan should layout your response, job triage, equipment plan, client and employee communication, billing systems, partners, as well as roles and responsibilities. 
o   Do not plan on a CAT event.  Create a plan where you are successful and profitable with everyday work volume.

·      Consolidation and M&A activity.  Over the past decade both the restoration and insurance industry has seen a major wave of consolidation.  This is coming from outside groups, private equity, growing restoration enterprises, and even publicly traded companies.  This is not unique to our industry or even insurance, it is the nature of business. These trends appear to be accelerating as people with money are looking for yield.  Acquiring companies and then driving value through efficiencies or increasing earnings multiples through larger EBITA numbers is an effective strategy.  Given the strong economy, low yields for bonds or savings, as well as the large influx of cash due to the new tax plan, I expect 2018 to be a strong year for M&A activity – both in our industry and from our client groups.
o   If you are looking to sell your business, now is a good time.  Make the steps today (should have been yesterday) to create a salable company. 
o   Have balance in your work sources.
o   Invest in your financial systems and reporting.  Buyers are looking for fit – and a financial return – make sure you have both.
o   Create a strong team – buyers need good people to drive their investment.
o   Make sure that you have diversification in your clients as any of them could sell tomorrow.  I recommend that no single client is responsible for no more than 20% of your work – the smaller that number the better.
o   Continue to expand your client base and grow our business as this minimizes risk.  One of your top clients could sell – or one of your competitors could sell to a great operator.
o   Continue to maximize cash and profits as this provides sustainability. 
o   Manage your capital – which provides opportunity and risk avoidance.  You may be the one that has the opportunity to acquire another company – but you need to have access to capital.  This will also offer risk avoidance.

The restoration industry is in a real time of change.  There are many influences from in our industry and outside our industry as well as items that are in our control and others outside our control.  It is more important than ever to be in control of your business and your strategy. The decisions you make today will allow you to be a victim or a great success. Now it is more important than ever to be a leader in your business and your industry. 

Wishing you the best in 2018 and if you need assistance in developing a plan to meet these changes head on and assure your success contact Business Mentors – we have been helping create successful teams in restoration since 1997.

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