Is There More Myth than Method in Custom Integration?

By Paul Starkey
Published on: September 18, 2020

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For years now, there has been a prevailing conversation about major challenges facing CI’s. You know: that RMR (or the lack thereof), elusive Software Silver Bullets, Required Changes in Your Business Model, IoT and so on and so on; each threatening what we do.

I agree these make for interesting reading and sometimes present facts pertinent to what luxury integrators do.

But, first let’s understand the luxury-serving audience to whom we are speaking…

We’ll define a luxury CI Company as an integrator serving high-end clients; between $2MM and $20MM in annual revenue. These companies typically have less than 300 projects annually, with an average size north of $15K. This distinguishes them from security plays, retail plays and production home integrators.

Given these parameters, less than 65 of the CE PRO 100 qualify and only three of these approach $20MM. Of the 800+ buying group members in CI, we estimate about 400 meet these requirements.

Let’s Look at 5 MYTHS:

RMR is a requisite for value in the CI business model. But RMR is maybe 2 to 3 percent of the luxury CI mix. That is, if they have security accounts. If they were successful adding security, network and service plans at a 50 percent or better clip; they would add 100 to 150 accounts max at a value of $1,200 to $2,000 a year. OK, $120K to $300K is not a bad annual adder. But for a $5MM company that is less than 3 percent added. Yes, it accumulates into something bigger over time – we’ve never seen more than 10 percent. Our problem with this myth… What about the other 97 percent of the project business that typically underperforms by 5 to 10 points a year?

Second, scale is not possible because there is no software platform to make it scale. Myth, the answer is not purely software; it is the business process. Companies can achieve 20 percent to 26% percent net operating profits consistently without advanced software.  We have proven this time and time again.

Third, EGOs will keep businesses from consolidating into something bigger. Maybe, but CI doesn’t have a monopoly on owners with egos. Truth is – and we see this every day – companies can share and collaborate. When the right environment is presented, owners willingly learn from each other. Bad eggs, hard-boiled egos, simply get filtered out.

Fourth myth – you have to change your business model to win.  BS. The luxury CI model is extremely strong but not often understood. Get your margins up, control your compensation, reward productivity, respectfully use your clients’ cash and build value.

Fifth, the Internet of Things will drive integrators out of business. OK, I am waiting for the first article on the 10,000 square foot home that was the biggest DIY project ever. Lick and stick, device friendly, plug and play, seek and attach and everything is fine. Who’s your customer? In large homes, value-added services and labor is here to stay.

But hold on.  If these are myths, doesn’t this mean that CI businesses can scale, that roll-ups will work (if done correctly), that the destiny of better dealers is not to remain fragmented, forever?

How, you might ask? Here is our answer:

  • There must be standards to adopt; standard ways of doing things.
  • Companies must make money – lots of money.
  • They must join to fund things they cannot do at a single local level; a list too plentiful to mention here.
  • They should conform to best practices; not just share ideas.
  • They must become visible and be recognized by potential clients and have a focus on business development.
  • Having an investment mechanism to mitigate owner risk and allow a huge upside would be awesome as well.

Simply stated, roll-ups must do the work first. That’s not how things have been done in the past.

Of course, this means you‘ll have to change a few things in your business. That’s not just OK, it’s smart. You have a great business model, now let’s perfect it.
And, if you choose to join others you can be part of something very special in building a defendable and sustaining business well into the future. That’s not a myth.

Keep it Vital.

Paul Starkey

Paul Starkey

Paul Starkey is a 23 year CI industry veteran who led control manufacturer ELAN from infancy to a 150 person company. He is a visionary, keen on innovation, pioneer of on-line training, and numerous product innovations. He is co-founder of Vital Management.

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