It’s difficult enough, though, for many AV integration firms to play defense. Increasingly, according to Apter, Avitecture competes with IT firms to install AV-centric solutions. Meanwhile, he adds, those IT firms can afford to enhance their AV expertise by luring away top AV technicians and paying them more.
It’s a reality that IT firms are “moving in our direction,” Landrum says. “So we have no choice except to add many of their skills into our solution sets just to talk very comfortably about the broad network environment.”
Labuskes advises integration firms to evaluate their IT resources during 2014.
“Do they have the expertise to integrate their AV solutions with the IT network? Do they understand the IT network? Can they communicate with the people that are managing the IT network?” he suggests asking. “Really, we shouldn’t even talk about it as an ‘IT network’ versus an ‘AV network.’ We need to talk about it as technology to support the strategy of your client.”
Debate: Plunging Profit Margins
It’s news to nobody that profit margins on products are dwindling and that it’s increasingly important for integration firms to profit from selling service. What’s new is the concept of integrators embracing that shift.
During CI Summit in November, Jay McArdle, CIO of Normal, Ill.-based Zdi, elicited some gasps when he said his firm intentionally drives down product margins.
Related: View Results of the 2014 Business Outlook Survey
“ The reason we do that is to sell our services, to sell our true value — which is our people — to our clients, to be totally transparent to them so they know what the cost is and what they’re getting when they get Zdi,” he said during the event in San Diego.
CI articles about McArdle’s comments spurred spirited debate online. “I understand the attempt is to show that your people are the best in the business by stating that your above-average labor rates are due to the high wages you must pay to keep the very best employees,” posted Bill McIntosh, president of Pittsburgh-based Synergy Media Group. “But, if the revenue, costs and profits are exactly the same as they were before, and there is no actual change to your bottom line, isn’t this just business as it were, but with a new twist on presenting proposals to customers?”
Many other commenters’ counterpoints were less polite. Zdi’s approach, however, isn’t intended to slap down traditional business models; rather, it’s what it feels is a proper reaction to the IT industry’s influence on AV integration firms, as McArdle explained in a November 2013 CI Profile.
It’s tough for integrators reliant on 20 or 30 percent product margins, he said. “You’re going to have to change the dynamic of where you place your value.” Zdi emphasizes the value of its personnel to clients. “Traditional AV companies say they want to make 30, 40 points on material and my labor is not that valuable — $60 or $70 per hour.” An IT sales structure, meanwhile, “is five points, if that, on material, and maybe $150, $200 or $300 on labor. That’s where we’re going as an industry.”
If the industry is indeed heading toward those rates, integration firms remain a long way off. About 50 percent of integrators say their typical technician labor per-hour rate is $75 or less, according to our survey. Only eight percent charge more than $100 per hour and zero report charging over $200. The largest group, 42 percent, cites between $76 and $100. Most integrators aren’t ready to walk away from product-related profits, and, frankly, they shouldn’t, says USAV’s Schwartz. “You’ve got to understand your business model and execute profitably within it. A model in which there are zero product margins is really a consulting company. I don’t think we’re [integrators] at that point where that is a valid business model.”
Most integrators do sell products and while “there’s certainly pressure on margins,” says Landrum of Technical Innovation and PSNI, customers generally understand that they need to make money on them. “I’m not going to throw in the towel on margins, and I don’t think my customers are going to ask me to.”
Of course, neither is Zdi. The fundamental debate is from where most of the profit should stem. According to NSCA’s Wilson, integrators should consider “a sliding scale” when it comes to margins. “If your margins decrease by a percentage point, how much do you need to add for service? It’s not a one-to-one analysis. Everybody needs to know what that scale is when they find that their margin has been pushed downward by the fact that their end user knows where that product can be purchased and for how much.”
