Mike Lysecki, chief technical officer for LMN, a landscape estimating and timekeeping software company, spoke in January at Landscape Congress in Toronto about strategies to overcome inefficiencies and build a profitable company.
“In this industry, as in many small business industries, it’s often started and run by people who did the trade before they found themselves running a business,” he said. “They’re really good at doing the trades part of the business yet the running a business part of it is a learning experience.”
Being a good landscaper, excavator, stonemason or carpenter has nothing to do with being good at hiring, managing or making financial decisions, Lysecki said.
“A lot of owners tend to be cost focused or short-term focused when they make decisions. Instead of seeing the big picture, we look at how much something costs and then the way to make the most profit at the end of the year, and it is one valid way. But the way to make the most profit at the end of the year is to minimize our costs.”
Lysecki said there are two types of business people: those who save money to make money, and those who spend money to make money. The latter tend to be more successful, he said.
Ideas that lead to good cost management decisions aren’t necessarily good profit management decisions, he added.
While previously employed as the director of operations for TBG Landscape in Whitevale, Ont., Lysecki said a key strategy the company adopted was to employ more expensive yet more responsible foremen who were provided with good salaries, benefits and incentive packages, and a bonus system. An incentive system was initiated based on revenue versus labour costs and not necessarily net profit or gross profit.
“Those things would take care of themselves if the foreman drove enough revenue per labour hour or enough revenue by the end of the season based on a goal.”
The idea, he said, is to set up the foreman to be his own “business owner” within the business.
Another strategy of TBG Landscape was to go with larger and more expensive equipment. When he first began with the company, it had one skid steer and three or four crews. By the time he left the company nine years later, each crew had its own skid steer, its own mini excavator and every necessary attachment.
“Going to the larger, expensive equipment and having equipment dedicated to each crew was a big deal at the time, but in the long run it paid itself back,” Lysecki said, acknowledging it was an expensive investment by the company.
The lone skid steer that was shared among the different crews was about eight years old at the time. Each time it was transferred between crews, something would invariably go wrong with it and crews lost a couple of hours of work while the unit was repaired, often by a jury-rigged solution.
Advances in technology also helped TBG Landscape with its operations. Lysecki said LMN was never intended to be a software company, but merely a tool devised strictly for TBG.
Being able to identify “bottlenecks” within a company will help that business to deal with them accordingly and steer itself toward a goal of profitability.
“Labour for most of us is the biggest bottleneck.”
Lysecki pointed to a business book he read that promoted the identification of bottlenecks and constraints while “ignoring the rest of the noise” and figuring out what is holding a business back and then fixing the problem.
“The other fixes may not even be effective if you’re still stuck with your bottleneck.”
If a company has three good crews, spending a lot of money to improve sales if they have already reached capacity isn’t a great idea because there are only three crews to do the work, he said. The bottleneck in such an instance is the crews. Before concerning itself with additional sales, a way must be found to train and build a fourth crew to match the three already in place.
“To identify that bottleneck is really critical because any money or time spent fixing anything else is just going to cause problems, waste and inefficiency because you’re trying to stick more stuff in that your bottleneck can handle.”
Typical bottlenecks for landscape companies start at the top, he said, adding materials subcontractors are usually not a bottleneck for most.
“It’s relatively easy to secure materials as long as you’ve got a bit of money or credit. That’s not usually a bottleneck at all for companies.”
Companies that outgrow their shop may experience a small bottleneck they can overcome through leasing or financing equipment and getting out of a lease for their smaller shop in favour of a larger one.
Cash flow might be another bottleneck for some, especially seasonal companies, but the biggest bottleneck for almost everyone is labour, Lysecki said.
“If everyone had 10 amazing foremen, most people would find a way to sell their work for us. It’s just, how do I get 10 amazing foremen?”
There is a value for every labour dollar and what that dollar entails. Lysecki said a contractor might bid on an installation job with three people for 10 days, only to find the job actually took 12 days to complete. Or he might bid 30 visits for a maintenance service at an average of two hours and 40 minutes per visit, yet each visit actually averaged three hours and 12 minutes.
The cost of two days of wages plus payroll taxes at an average of $20 an hour will cost the company $1,000 for the additional days, he said. When factoring in fuel and equipment depreciation that wasn’t recovered because the two-day overrun wasn’t estimated, it is a further loss of $500. Lysecki said factoring in two days of working for free because they weren’t estimated means no overhead was recovered during that time frame, amounting to about $1,000.
Additionally, in the design/build company example, two days were lost that could have earned revenue, and both of those days should have been spent on the next job. In the maintenance example, the half-hour overrun could have resulted in a sale to a neighbouring property.
As much as $10,000 was potentially lost to the company in the design/build example and upwards of $5,000 in the maintenance scenario, Lysecki said.
“That’s why it’s so important to capture every labour hour or try to minimize every labour hour. That’s why every idea to capture labour hours is so important.”
Although common thinking might be to save as much money as possible on payroll, new thinking might be to maximize profit.
“What type of staff will help me with the most amount of revenue? If your staff are a little more expensive but generating more revenue, what do you care what the wage is as long as you make more in profit?”
Most landscape companies would ideally like to pay their employees more money, but don’t have the profit to do so, he said. Assuming a foreman earning $20 an hour does an average amount of design/build sales in a month and has two labourers beneath him earning $15 a hour apiece and the crew works 240 hours in a month, sales would be about $24,000 while wages and taxes come to about $7,200.
“But what if you pay that foreman $4 an hour more, which is a 20 per cent raise, but they did five per cent more work? Your sales would be $25,200 and your wages would go up to $7,800. Or what if the foreman was paid $28 an hour and that foreman could generate 10 per cent more work?“
The company would continue to use the same equipment, but material costs will increase as the foreman becomes more expensive.
“Why? Because he’s getting more work done. Overhead costs don’t change at all. You could maybe argue your overhead costs will be less.”
As long as the expensive foreman generates more work, the company will make more profit, Lysecki said. As long as the foreman – who is earning almost 40 per cent more than an average foreman – gets 10 per cent more work done, he is not only worth it, “but is really worth it.” The company makes more money and the foreman is happier.
If the foreman is doing 10 per cent more work and the overhead is the same, the contractor doesn’t have to bid as much overhead in every job, enabling him to be more competitive with a more expensive foreman. The company can be more efficient with jobs requiring fewer hours. If the foreman is getting 10 per cent more work done, jobs are taking less time and fewer mistakes are being made. Not as many hours need to be bid into every job.
“I can bid work more competitively twofold: one, because we’re faster and, two, because we have less overhead.”
Better foremen train the people around them better which helps with the bottleneck, he said.
“A really good foreman is going to train really good people. A bozo foreman is just going to take his good employees and they’re going to end up quitting probably because nobody wants to work for somebody who doesn’t take their job seriously or isn’t good at the job.”
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Dealing with overtime
A goal of reducing payroll is big for companies needing to deal with overtime. As overtime becomes more prevalent in the industry and contractors crack down on it harder, companies claim they can’t compete if they had to pay overtime.
“Overtime in advanced thinking can be more profitable if we can maintain a certain level of productivity.”
Lysecki posed the question: assuming a crew is paid time and a half for overtime and assuming the overtime work is productive by either working ahead on another job or getting another job in, how productive would the staff have to be in order to justify the time and a half they are to be paid in wages without sacrificing the company’s profit?
If crews worked 150 per cent, they would have to get 1½ times more work done in overtime to justify their higher wage, he said.
Lysecki recalled doing some work for a company in Chicago that decided it would cut all overtime because the business didn’t make much money in one year. The company’s employees were accustomed to getting five to 10 hours a week in overtime pay, and the decision to slash overtime payments presented a concern that employees might quit.
No overtime in a 15-person company might generate about $54,000 a month in revenue. If working five hours of productive overtime, another $6,000 (five hours per week times 15 people) would be generated. Customers aren’t being charged any more than usual. Lysecki said in such a scenario labour costs would increase significantly, equipment costs would remain unchanged, materials costs would increase because more materials would need to be installed with more work, overhead costs wouldn’t change, and net profit would go up.
“How could it possibly go up? Wages and payroll are going up, but your overhead and equipment costs as a percentage are falling faster. You’re recovering overhead in all those hours, and that actually happens faster than your payroll goes up.”
The result is a happier and better-paid staff, and the company is able to attract better employees.
Lost revenue is also realized from smoke breaks, texting or making personal phone calls. Lysecki said if 15 minutes a day is lost to such disruptions with a crew of three people with an average labour rate of $50 an hour, about $7,125 a year in potential revenue would be lost.
He challenged his audience to come up with ideas that might make a difference for their companies to improve themselves. Among the suggestions made were advanced ordering of materials, setting up pre-job packages for every job, profit sharing, ordering portable toilets for job sites, having coffee readily available, holding weekly feedback meetings, standardizing trucks and materials, having better labeled shelving for materials, and offering incentives for workers to quit smoking.
When it comes to equipment, the traditional thinking is that once there are no further payments, that money can instead go into the contractor’s “pocket.” The equipment no longer costs him anything so he stops estimating for it. The equipment eventually gets old and the contractor considers replacing it, but since he hasn’t been factoring in equipment costs the past several years, he decides to repair it and keep it going and repeats the cycle of repairs and putting it back into service. Eventually, the equipment has completely broken down while thousands of dollars have been spent on its repair over the years. Not only is it costing the contractor more money to repair the equipment than to lease it, but each time it breaks down crews in the field aren’t working productively. The cost per hour in lost productivity while a machine isn’t working properly adds to the burden.
Lysecki said the equipment payment amount doesn’t mater as long as more work can be done to justify the cost. A mini excavator, for example, might carry a 60-month payment of $950 with fuel and operating time costing another $300. If the mini excavator made the crew five per cent more productive, about five per cent more sales would be generated, equating to about a morning’s worth of work. Wages and taxes would stay the same, equipment costs would go up, material costs would increase because more work is being done, and overhead would remain the same.
“You break even on the machine if it saves you half a day a month. You double your profit, almost, if it can save you a day a month. On a mini ex, a day saves you one excavation job.”
Many companies, however, are hesitant to want to spend upwards of $1,000 a month on equipment payments, he said.
“The payment is not as important as what it ultimately gives us in revenue. The more revenue we do, the smaller our overhead becomes. The job gets done faster so I bid less hours and my overhead drops so I’m not quite as expensive per hour. There are a lot of other advantages to this kind of efficiency.”
Companies that use open trailers stand to experience more in lost revenue than those using enclosed trailers. Lysecki estimated it costs a company about $8,000 annually in revenue per crew when an open trailer must be loaded and unloaded each day. Open trailers also increase the risk of something being forgotten which adds to lost revenue.
Contractors who operate track skid steers have an advantage over those who prefer wheel skid steers, he said, noting track units contribute to a longer season because they can be used when conditions are wet and will leave less damage on work sites than wheel skid steers. The time spent making job site repairs and being unable to work with the right tool significantly contribute to lost revenue, he said.
Timesaving tools that contribute to higher efficiency include stone vacuum lifters that enable one person to do a job instead of two, covered trailers, zero-turn mowers and power wheelbarrows.