ACHRNEWS

An independent look at consolidation

June 1, 2000
It can be said that independent contractors are like fish swimming in a stream with no apparent purpose or direction, swimming upstream, downstream, or not swimming at all as the fancy strikes them.

Consolidated contractors, on the other hand, are like fish caught and placed in an aquarium. While still free to swim in the direction they choose, they are confined by the sides of the aquarium.

Did the consolidators believe that once these contractors were in the new organization that they would turn and swim in unison like a school of fish? If so, it hasn’t happened.

It may be true that independent contractors make for a fragmented industry, but to what extent has consolidation changed this? As far as I can see, the consolidated contractors still operate as they have always operated, doing what they have always done.

Consolidators said they would bring changes to the market. They were going to bring economies of scale, management, discipline, and access to capital into an industry dominated by inefficient, under-capitalized mom-and-pop shops. But have they?

There is no doubt that consolidators were able to save a substantial amount on group insurance. However, these savings could be offset by the cost of added layers of management. One consolidator claimed it would negotiate with one or two of the primary suppliers (such as Trane, Carrier, or York), disrupting their distribution system in order to accommodate such an agreement. But it hasn’t.

The consolidators touted the advantages of being publicly traded companies. They would be able to attract the most talented people in the industry because they could offer ownership through stock options. However, what kind of incentive is a stock option when the stock value keeps declining?

They also said they would be able to pay higher wages and offer better training because of their access to capital. This hasn’t happened either.

One consolidator claimed that it was going to dominate the national accounts market because companies with large chains were tired of dealing with contractors in different areas and receiving different levels of service. Large companies were suppose to be tired of all the bookkeeping required in order to keep track of all these contractors.

This consolidator was going to solve these problems and still decentralize the method of running the company. It was going to allow each new consolidated company to continue to run its business as usual.

However, standardizing service levels while allowing each contractor to run its own business as usual seems contradictory. Further, those of us who have provided service to large chains know just how difficult it is to service these customers. Most of us wished the consolidators well in this endeavor.

One consolidator, in my opinion at least, had the dynamics correct in what the market needed. It was looking for synergies between companies purchased and envisioned the economy of being able to provide single-source service for a customer.

It also realized that a shortage of qualified people was a real problem for the industry. It set out an ambitious effort to establish training for its members and eventually for all contractors.

It’s too early to determine the results of its training efforts. However, there is little evidence that it was able to harness the synergies among the consolidated contractors and put them to use in the market place.

This consolidator vowed to raise the bar for the level of service, and at the same time offer higher wages and provide cost-effective service to the customer. Saying it was easy, but have they done it? I don’t think so.

The consolidators said many things that sounded, at least to some, like they were on to something. They “talked the talk” and it was appealing to Wall Street. The fact is, they haven’t produced what they said they were going to produce and now Wall Street seems to be down on them. Were they sincere in the first place, or was this all a form of financial engineering equivalent to pulling yourself up by your own bootstraps?

Now that one of the consolidators is gone, absorbed by ServiceMaster, what will happen to the others? Will they rebound and thrive or will a bigger fish — such as a utility or manufacturer like Carrier, Trane, or York — absorb them?

Many of the contractors purchased by consolidators were not small, mom-and-pop businesses. They were well-run, profitable organizations and they still are. There is a lot of value in those companies.

The roll-up game, sustained by using highly priced stock as cheap currency to buy smaller companies, slows considerably when stock prices diminish. When the roll-up ends, I would think these companies must show substantial profit from operations in order to get their stock prices up. This is still a very competitive industry and it’s going to be difficult to increase profit levels above traditional levels.

I know the consolidators claimed they were going to put companies together not to get “one plus one to equal two,” but to get “one plus one to equal four or five.” There is no evidence that this has happened. Operating on-going, multilocation businesses requires skills that are completely different than those required to engineer a roll-up.

Have any of these consolidators added the talent required to operate the new companies? Are they going to attempt to create more profit by just mandating the acquired companies to increase their business? If they drive their employees harder, how long will it take for the employees’ morale to drop and they look elsewhere for jobs?

How are independent contractors going to be affected? I guess we just need to stick around and find out.

-Pat Rucker

Entech Sales and Service

Dallas, TX

Editorial on the mark

I just wanted to say how very much I enjoyed Joanna Turpin’s October 25th editorial (“Let’s respond to need with more courtesy,” page 18).

Even though I am not a contractor, but a salesman for 30 years of components to the electrical and electronic industry, the points you made are “hit home” examples of an easy way to be successful. Thank you for the refresher course.

Hopefully the editorial will get wider attention. I would think that Readers Digest would be interested?

-Carl Lacobie

BC Components

Columbia, SC