BOCA RATON, FL — Before getting into his topic of discussion at the recent Sheet Metal and Air Condi-tioning Contractors’ National Association (SMACNA) convention, Tom Mikulina referenced a popular book from the 1970s, Future Shock. The vice president of industry relations for The Trane Company, Worldwide Applied Systems Group, couldn’t help but introduce to his audience of service contractors what author Alvin Toffler predicted in his book more than 20 years ago.

“He [Toffler] said that the rate of change is going to be exponential in the future,” said Mikulina. “I think he’d be boggled by the rate of change right now, the acceleration of change.”

Mikulina sure was, yet the aim of his talk — “The Challenge of the Future: Service Contracting in the First Decade of the 21st Century” — was to help contractors see what’s ahead and prepare accordingly. In his jam-packed 45-minute talk, Mikulina produced an overview of the current driving forces and tried to point out the most significant trends impacting contractors.

In Mikulina’s estimation, the four driving forces that are dictating industry changes today are shifting markets, the environment, technology, and competition.



CONSTRUCTION SHIFTS

In regard to market shifts in construction, he noted there’s a major shift from new construction to retrofitting existing buildings. He also noted there’s a shift from standard construction to producing technology-equipped buildings.

“When I joined this industry back in the early 1960s, it was literally a new construction industry,” said Mikulina. “Ninety percent of our market, as a manufacturer, was basically new construction and we were construction-driven. The crossover point occurred somewhere in the middle of the 1980s.

“Today almost 70% of the market, as we see it as a manufacturer, is actually on existing buildings — whether it be renovation, replacement of equipment, or a retrofit.…Consequently, the existing building market is one that we have to pay attention to.”

Mikulina noted if a contractor approaches the existing building market in the same manner as new construction “this whole thing would be academic and we wouldn’t talk about it.

“The fact of the matter is, on new construction, the building owner — these are the customers of our industry — is interested in adding square footage. They could care less about the details of construction. They delegate those decisions to an architect or contractor.

“In the existing building market, however, that owner has lived with the building and he’s lived with all the problems of the building. The investment is maybe 100% related to the hvac system — and you bet he is going to get involved in that decision. And quite oftentimes it’s a failure in a piece of equipment he hasn’t budgeted for, so he’s interested in solutions as opposed to interested in building a building.”

According to Mikulina, another hot item that needs to be addressed is equipping existing buildings with high-speed Internet access.

“About 3% of today’s buildings are really wired technologically,” he said. “If you spread that out to the year 2010, we are estimating that almost half — about 43% of all buildings — will be high-tech buildings.”



CUSTOMER SHIFTS

Mikulina stated today’s customers are more sophisticated than ever before, more “value-focused” (as opposed to “first-cost driven”).

“It’s not about the building,” he stressed. “It’s about the business inside the building.”

In his estimation, what service contractors should keep in mind is that facility owners are now focusing more on efficiencies and operations, the flexibility of systems inside their building, and the impact of comfort in terms of productivity and tenant occupancy.

“As service contractors, this is big news,” he said. “This is certainly an opportunity for you.”

Mikulina expounded on the impact of discomfort, referencing two studies. According to a recent Building Owners and Managers Association (BOMA) study, lack of comfort is the biggest reason why tenants move. The study noted that if a tenant complains about comfort three times in a year, there is a greater than 50% chance that the tenant will move out at the end of the lease. Meanwhile, an International Facilities Managers Association (IFMA) study stated that the number-one complaint from tenants is that the building is “too hot or too cold.”

“It’s a big, big cost to lose a tenant,” he said. “We need to understand the importance of productivity and be able to market this capability. If we can show value, the owner will listen.”



ENVIRONMENT ALERT

Another driving force sparking change is concern over the environment, he said. After pointing out some studies on global warming and decisions made at the Kyoto Protocol, Mikulina could not help but note the following: “The jury kind of leans toward the fact we’re causing some of it [global warming], but the jury is still out. It really doesn’t matter. As long as the perception is there, we are going to be reacting to something much bigger than our industry.”

Mikulina produced two important facts: 1) 35% of all energy consumed in the United States is consumed by buildings, and 2) 48% of building energy is consumed by the hvac system.“If we could wave a magic wand and replace that old stuff [hvac equipment] that’s out there in buildings today with what the industry is producing today, we could literally cut total energy consumption in the United States by somewhere between 5% and 7%,” he said. “We could have a big impact on this whole thing. We’ve done a lousy job letting the world know how important we are in this whole issue.”

In the near future, Mikulina expects more pressure on legislative efficiencies and possible tax incentives for replacing old equipment.

“You have a lot of opportunities. Again, this is a service forum. Your service techs are the ones who really know the building owner — or, they should get to know them,” he said. “I am sure there are building owners that would be concerned if they’d realize how much CO2 they could prevent from going into the atmosphere by putting in more efficient systems.”

He quickly added, “This is also shifting, since energy cost is going up a lot faster than inflation. That is going to drive people to think more and more about overall operating costs as opposed to first cost.”

Mikulina also touched upon refrigerants, noting that several European nations are pushing hydrocarbons as refrigerants and steering away from man-made refrigerants. He said that rather than get caught up in the controversy, contractors should concern themselves more with system efficiencies.

In his estimation, service contractors should definitely zero in on indoor air quality concerns. According to Mikulina, some of the current driving forces include occupant health and productivity, regulations (codes and standards), general disregard for humidity control, and pressure to reduce building operating and maintenance costs.

He asked contractors to get familiar with ASHRAE Standard 62, which is now split into commercial (62.1) and residential (62.2) documents. At the recent ASHRAE Summer Meeting, he noted that the standard committee is now looking into balancing energy consumption with indoor air quality.

In regard to indoor air quality (IAQ), four directions he expects the industry to take include:

1. Turning to hvac systems that actively control indoor relative humidity levels;

2. Systems that continuously measure and control outdoor air for ventilation and pressurization;

3. Building automation systems that will control hvac systems to maximize IAQ and energy; and

4. Increased use of energy recovery to reduce building operating energy costs.



TECHNOLOGY EQUATION

Not to be overlooked is the technology equation, he said. Based on a multitude of reports, Mikulina said the Internet will only increase in importance. Consumers may be purchasing billions of dollars on the Internet today, but that should explode to nearly $1 trillion by 2010.

“And here’s the bottom line on that: Unless you are adding value — value that can be seen, felt, and internalized by your customer — unless you know how to communicate that, you will be commoditized. I don’t think any one of you want that to happen to your business.”

Generally speaking, he did criticize the hvacr industry for being too slow to introduce changes. For example, he noted that wireless thermostats have been around for five years, but they are not necessarily used.

“Stay alert to things that can really help you differentiate,” he said. “We are not in an old, mature, stock industry any more. We really have some interesting things in the hopper. Again, that’s another appeal: Stay tuned to what manufacturers are introducing to you.”



DON’T FORGET THE COMPETITION

The final influencing factor ahead is competition, said Mikulina. Included under that umbrella is consolidation, process improvement, strategic alliances and outsourcing, utility deregulation, and the competition for talent.

“Our industry is in competition with other industries for raw talent from high schools and colleges, which is a major concern,” he said.

Mikulina believes that consolidation will continue in all facets of the industry, including contractors, engineers, manufacturers, and utilities.

Will consolidation survive? “When it makes good business sense, it will,” he said simply. “When it doesn’t make good business sense, it won’t.”

Other considerations are strategic alliances and partnering.

“Rather than try to be all things to all people, you have to figure on what your core competencies are and find other firms that have a like mindset in complementary core competencies,” he said.

Yet another competition issue is the deregulation of the electric and gas industries, which Mikulina said will be larger than the deregulation of telecommunications, trucking, and airlines put together. The good in all of this, he said, is that there will be a choice in the supplier selection and the infusion of competition. The bad, though, is the confusion it is causing and the development of energy service companies (ESCOs) galore. To describe the ugly, all Mikulina had to do was point to the state of California.

“Everyone has a solution, have you noticed?” he asked.

In regard to energy trends, Mikulina predicted that rebates and other incentives will re-emerge, but that volatility will exist in the energy arena for at least the next 18 months to two years. To sidestep this volatility, he expected distributed generation (for example, fuel cells and microturbines) to become increasingly popular.

SMACNA’s service contractor’s forum also featured a presentation from industry consultant Ruth King titled “Trends and Innovation in Commercial Service From the Contractor’s Perspective.” Visit our website, www.achrnews.com, for coverage of this seminar.

Sidebar: Issues Impacting Contractors

In a nutshell, here’s what service contractors should know in regard to future business, according to Tom Mikulina, vice president of industry relations for The Trane Company, Worldwide Applied Systems Group:

  • “Existing buildings” is a growth market. This is an opportunity to create a market, he said. Are your service techs trained — and do they have incentive — to look for opportunities?

  • Owners are becoming more sophisticated. Mikulina encouraged contractors to recognize the increasing impact of energy costs, that hvac equipment has doubled in efficiency, and to teach sales personnel the value of hvac systems in the building owner’s business. Bottom line: Learn to speak in the building owner’s language.

  • Energy costs are increasing at a greater rate than that of inflation.

  • IAQ is becoming increasingly important. Learn all about ASHRAE Standard 62 and local codes, learn and sell building automation systems that track and document, and learn and sell ventilation and/or energy optimization.

  • The Internet is becoming increasingly important for purchasing. Keep abreast of its evolution as a purchasing tool for parts and equipment, use it as an information source, and use it remotely to monitor your service contract jobs, he said.

  • Service technician shortage will become critical. Proactively sell the service technician career opportunity in your community and initiate an hvac training/education track in your community if one doesn’t exist, he suggested.

  • Business is becoming more complicated. One solution is to create a complementary strategic business alliance.



    Sidebar: Facing Future Financial, Operational, And Marketing Issues

    BOCA RATON, FL — In the second leg of this SMACNA service contractors forum, industry consultant Ruth King discussed “Trends and Innovations in Commercial Service, From the Contractor’s Perspective.” She focused in on technical trends, such as controls and indoor air quality, noting that these trends could be considered the future bread-and-butter for service contractors. According to King, some of the operational issues contractors should be aware of that are coming around the corner include:
  • Wireless technology. “Wireless technology will end up being exactly like the fax machines were. When people stop fighting over the protocols and the exact technological ways people can talk wirelessly, that’s when it will probably take off.”
  • Data transfer. King believes the technology is already here to help improve data transfer to the field and from the field, including inventory, billing, customer history, and technician tracking.
  • The technician crisis. King stressed that contractors must create a good working environment, supply motivating factors (“Compensation is only a part,” she said), and provide continuous training.
  • Costs. With the economy slowing, King said a contractor should zero in on labor productivity, overhead, and sales — and purchase productive software packages to help the business grow.
  • Service contracts. In King’s estimation, having these in place is critical to survival and success. “The more you have in agreements, the more opportunities you’ll have,” she said.
    • In the area of marketing, issues around the corner, according to King, include:
  • Customer sophistication. “They are not afraid to ask questions and challenge you,” she said. “They are going to ask for referrals. You have to be prepared to answer.”
  • “Drip” marketing. This means continuing to market to customers and potential customers. However, because of the current anthrax scare, King encouraged direct mail to be accomplished via postcards, whereby a customer is not required to open an envelope.
  • E-mail. This is a non-intrusive way to send a marketing message, she concluded.
  • The Internet. “Websites are absolutely critical at this time. Put your latest projects there. Put pictures on there. People like to see what you’ve done.” According to King, some of the financial issues contractors will have to deal with in the near future include:
  • Overhead costs. Technology can definitely help here, she said, including improving training.
  • Inventory control. Have standard inventory on everyone’s truck, she encouraged, plus have an “on call box,” which contains parts which might be needed on the weekends because many parts houses are closed on the weekends.
  • Productivity (or, real-time analysis). She wanted every contractor to look at every facet of the business, from service technicians, to sales, to office personnel.

    • Publication date: 11/26/2001