Building service contractors seem to be optimistic about the state of the industry, after posting an average of 19 percent revenue growth in 2000. And 75 percent of that expansion came, in large part, from newly outsourced facilities, according to respondents of Contracting Profits’ exclusive reader survey.

More than half of respondents said they plan to invest heavily in cleaning equipment and additional office staff, while 25 percent of BSCs are even prepared to increase financial borrowing. That’s in spite of deepening concerns about the economy; only a quarter of all survey respondents were confident that the overall economy will continue to strengthen.

Industry consultants are divided when analyzing those numbers, saying that while it might have been possible to increase by almost 20 percent last year, contractors who expect to grow that much in 2001 could be taking too much of a risk.

“A more realistic growth expectation for cleaning accounts might be about 10 percent to 12 percent,” says Bill Shaw, of Netcon, a Carrollton, Texas consulting business. “I think more prudent companies are expecting an economic slowdown, and while our business should be recession-resistant, and some sales will grow, contractors are going to have to get much more creative to come out on top.”

That creativity is manifesting itself as branching out into hot new markets, especially governmental, industrial and educational facilities.

Many contractors still may have a bad taste in their mouths from past experiences with penny-pinching government facilities, but Vince Elliott, president of Elliott Affiliates, a Maryland outsourcing consultant, says BSCs should look again. In the last few years, there have been many directives from the highest levels of government to focus on performance-based, not cost-based, contracting.

“I think what you’re seeing is a whole different way to do business and I think one that is compatible with the service industry,” he says. “It’s a sure bet that if you haven’t called on government accounts in your area, that you’ll get a different perspective if you try calling on them again in 2001.”

While some contractors are starting to recognize the profitability of government accounts, others make no bones about going after obvious cash cows — when asked which markets tend to be easier to win at a higher bid, survey respondents pointed to industrial and high-tech facilities, which have benefited from a strong economy and have more money to spend for higher quality services. Both markets also usually have specific challenges, such as working around 24-hour operations or the need to be very careful or use special tools around computer or manufacturing equipment crucial to their business and recognize the value of paying more for better service.

Low unemployment is another reason both high-tech and industrial facilities are turning to outsourcing, often for the first time. Image-conscious high-tech companies are touting cleaner environments as a recruitment benefit when trying to attract scarce technical employees.

Industrial markets, on the other hand, used to have production workers double as cleaning staff, but with a shortage of workers, now focus most of their attention on keeping their lines fully staffed, turning to BSCs to fill in the labor for cleaning duties.

External growth up in 2000
An increase in acquisition activity also has lead some contractors to be more confident about continued growth. Twenty-three percent more contractors increased research for potential acquisitions in 2000 than in 1999, and 16 percent of survey respondents purchased one or more new companies, which was up from only 4 percent.

While activity in 2000 was up from 1999 and is expected to increase in 2001, the quantity of acquisitions isn’t as interesting as the quality of such purchases, says Shaw.

Those contractors who are looking to acquire additional companies, according to survey results, tend to be companies making an average of between $1 million and $12 million in revenues; the full range is from $120,000 to $40 million. The majority are primary contractors looking to expand geographically and pursue larger accounts. Some also are interested in expanding into new markets. Their revenues increased by about 11 percent on average in 2000, and they are projecting growth of about 13 percent this next year, for an average of about $1 million in additional sales.

Companies contacted by interested buyers were remarkably similar to their purchase-seeking counterparts. They were primary contractors with an average staff of 300 employees. Their average revenues were $10 million, but some were as small as $24,000 and as large as $44 million.

While most companies contacted by interested buyers were located in major metropolitan areas across the U.S., there were more companies contacted in the Midwest and South Central regions than on the coasts. This suggests that companies with operations on one or both coasts are now working into the central states to provide a more national service base.

Companies targeted for acquisition also were trying to expand their own geographic reach and go after larger size accounts, just as their interested buyers, and about 25 percent of these companies even had made their own inquiries about purchasing other businesses.

This shows contractors are becoming a bit more nontraditional in their acquisition strategies, as some contractors look to purchase companies as big and ambitious as themselves, rather than the more common tactic of buying up smaller companies in strategic locations. While there still might be a few more traditional acquisitions in the industry contractors also will see small companies bidding to buy businesses much larger than themselves or BSCs choosing to ally with service providers in completely different industries.

Contractors also are much more specific about who they want to buy these days, taking their time to make sure they’ve got the right fit.

“I think the buyer has become a lot more selective and they’re not making acquisitions for acquisitions’ sake anymore,” says Paul Reamer of Executive Sounding Board, a Maryland merger and acquisition consultant. “Banking has gotten tougher on these size deals as well, so the money is not as readily available as it was a year ago.”

Another trend affecting BSC acquisition strategies is the general health of the economy.

“We think that the fall of many dot-coms and high-tech companies in the fourth quarter of 2000 is a sign that the market in general has taken a real nose dive,” says Reamer. “And we think that is going to result in lower multiples being paid in 2001.” He says contractors should reasonably expect three to five times earnings, rather than higher amounts they’ve seen in the past.

Avalon Building Maintenance, Anaheim, Calif., received three offers to purchase the business before executives chose to research their own acquisitions, says CEO Steve Healis. While the company, which recently made the Inc. magazine 500 list of fastest-growing U.S. companies, has looked at about 30 potential acquisitions in the last two to three years, it only purchased two.

Avalon was looking for operations that complimented its existing accounts, turning down some that looked good on the surface but might have had major accounts in markets Healis was not willing to enter.

He also began to realize that Avalon didn’t always have to acquire, when independent alliances could be just as beneficial. Avalon has allied with a major security firm in the area, as well as speciality window and carpet- care companies to provide ancillary services to their own customers and tap into those people’s existing accounts for new business.

And Avalon isn’t alone; 40 percent of survey respondents said they currently ally with other contractors to pursue accounts, most doing so on an informal referral basis.

Customer satisfaction
One startling discovery: many survey respondents report high levels of customer dissatisfaction. On one hand, contractors reported high retention rates, with more than 70 percent of current accounts renewed more than twice, but the reasons for customer attrition were surprising.

Most contractors who lost accounts in 2000 picked up new accounts to stabilize revenues, but some consultants say that myopic strategy gives many BSCs a false sense of security.

“There’s a segment of the industry that just isn’t oriented toward long-term relationship building and many companies get into the mode of creating gross revenue, based on new business and it takes precedence over maintaining that business,” says Elliott. “Many contractors also accept this ‘churn’ as a part of the business, satisfied with losing accounts because they know they’ll be able to pick up someone else’s lost accounts anyway.”

Even more disturbing, more than 40 percent of contractors said they lost accounts because customers just weren’t satisfied with their services.

It's no secret that after the first few months in a new job, service tends to taper off, says Healis, but contractors who have quality checks in place to catch that slide and correct it, will benefit from longer lasting relationships than the industry average.

In addition, 39 percent of BSCs, most large primary contractors, said they lost business when customers decided to go in-house with their cleaning. This figure might seem to contradict trends toward increased outsourcing, but what really seems to be the problem is that customers are so frustrated after going through multiple contractors who don’t seem to provide good enough service, that they pull operations in-house, figuring they can’t get any worse than what they’ve already experienced, says Elliott.

Many companies he has worked with have come to him asking for suggestions regarding good contractors, because they feel that they’ve gone through all the major companies in their area and still aren’t satisfied with what’s out there, he says.

Contractors should conduct exit interviews with their former customers to better understand the reasons for their dissatisfaction, suggests Elliott and Shaw. Too many times, contractors walk away from accounts and never look back, but if they try to maintain contact after losing business, they have a better chance of getting that contract back the next time it’s bid out, he says.

Another reason for cancelling contracts was customer attempts to consolidate vendor lists, essentially trimming the number of overall contractors a company works with to streamline paperwork and reduce costs.

While only 19 percent of respondents reported experiences with this latest customer trend, industry experts warn that this number will increase in 2001 and that small contractors will be as affected as larger contractors as their customers start outsourcing batches of buildings, rather than location by location as they have in the past.

Costs and concerns
The biggest problem many contractors face heading into 2001 is the delicate balance between higher costs for labor, as well as essential items such as paper products, cleaning chemicals and equipment, and heightened pressure to lower costs due to customer budget cuts or fierce competition in their areas.

The most common reason respondents gave for increasing their prices was to offset increased wages, coinciding with the fact that worker shortages and employee retention were their top two concerns in the new year.

Another cost concern for BSCs was the price of screening their front-line workers. Contractors have to be sure they’ve hired solid individuals who they can trust, says Shaw. With today’s slim picking for employees, it has become even more important to prequalify applicants with drug tests and background checks just to be safe — and that cost adds up quickly.

Insurance was another major cost concern for the new year, with about 80 percent of all respondents ranking it the No. 1 problem. Insurance companies have seen a rise in claims for some time, and are finally starting to pass that cost on to their customers. In fact, some BSCs received additional bills at the end of 2000 because their carriers were losing too much money on costly settlements.

There is a silver lining for some contractors — 13 percent said they were able to raise their cleaning rates because their markets were allowing for higher prices .

In some parts of the country, with businesses that have done well in the strong economy, you can get away with higher prices, says Healis, but he warns contractors not to count on this trend sticking around too long, pointing to the fact that some affluent dot-com companies he once serviced have gone out of business, leaving their vendors in a lurch.

Overall, this year’s survey results point to a chance for many contractors to continue to grow their businesses, but only if they pay close attention to the needs of their customers and start getting creative with how they handle rising costs and stiffer competition.

When facing an economic downturn, the contractor who is most prepared to weather the storm, and help customers do the same, is the one who reaps the rewards.

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POSTED ON: 1/1/2001