Friday, October 13, 2017

White paper - TPA's

Below is a very long read.  This is the details to the keynote speech I will be delivering at the RIA - strictly content event in November 2017.  If you take time to review then I would also love your feedback.  

In this paper I will review the history, current state and make some projections for the disaster restoration third party administration programs (TPA).  These programs have grown over the years and as you will find in my conclusion, they will continue to increase in market share.

Before I dig too deeply into the subject I think it is important to announce my bias on the subject.  Some may find my bias to be a cop-out but I think it is a realistic approach.  My bias is to create successful businesses.  There is not a correct path to success – other than to operate with integrity.  Given this bias, I believe that TPA’s are both good and bad.  I will explain the various positive and negative factors later in this paper.  It is important that restoration companies create a strategic plan and then make deliberate decisions based on this plan.  I see many companies that jump onto programs and then find that they become too large a portion of their business or find that their business was not set to work well in the TPA environment.  Either of these situations can set your business for failure.  Paul Gross the founder of Code Blue stated once that no source should account for more than about 20% of your overall business.  If you limited the influence of any work source then you remain in control of your business and your strategy.  When this gets out of balance, you run the risk of being manipulated in that relationship.

There are many in the industry that would state that if you pursue relationships with TPA’s, are akin to lemmings jumping off a cliff and then swimming to their death.  They would say that restoration companies jumping on these vendor programs lack creativity in their marketing approach and are setting their business up for failure.  This failure is due to the vendor influence on scoping, price and claim treatment. 

The other side of this dialog will state that you cannot change reality and the TPA’s wil control the vast majority of claims.  Their argument is that if you are not participating in these programs then you are continually getting a smaller piece of the pie.  How can you argue with the outward success of so many restoration companies?  A visit to the Crawford Contractor Connections event every year will show that thousands of restoration companies are operating in this environment and achieving success.

Let’s take a look at the contributing factors to the emergency of TPA’s.  Back in the early 1990’s – maybe late 80’s, Mr. Paul Davis (founder of the franchise bearing his name) started Prism.  This program was created out of an apparent need for better claims control and management in the industry.  The program was sold and then later purchased by Crawford Companies.  It took time to change the process for managing claims but there were many contributing factors that drove the need for changes.  Prior to the 1990’s restoration was very fractionized.  There were few large or nationally recognized names.  Franchises existed but they did not have good control over work quality from location to location and the standardization of process was loosely defined.  The industry had no standards and work quality and scope varied widely from contractor to contractor and market to market.  Pricing was inconsistent and was largely dependent on the relationship between the restoration company and the adjuster.  This situation of lead to opportunistic pricing as well as relatively arbitrary approvals by the adjuster.  These realities created a comfortable situation where to a degree, all business was local.

The restoration environment was tainted by some faulty assumptions.  The first thought was that insurance companies used competence as the top judge of contractor selection.  The reality was that the company offering the strongest incentive often was selected as the approved contractor.  Often the incentive was simply that they job would be done well and the customer would not constantly complain to the adjuster.  Other selection criteria may not have been as innocent. Another misconception is that the customer can tell the difference between the quality of work completed by various companies.  In reality most property owners judge the quality of the work based on the relationship with the people completing the work rather than the work itself.   Another misconception was that restoration companies operated out of a desire to create value to the insurance company and property owner.  Too often this was not the case and the main motivating factor was how much profit could be squeezed from each job.

In the 1990’s thins started to change which set up and allowed the realities that you see today.  When I first learned to estimate, I would look at a job and then determine the cost of materials and then required labor to install the products. A realistic and defendable price would be applied and broke into units for estimating purposes.  It might have been 1991 or so when we purchased and estimating program called Project and shortly after that we picked up our first copy of Xactimate.  It turns out that standardized pricing was essential to any vendor programs and Xactimate became the vehicle to make that happen.  About this time electronic and digital communication was becoming a reality.  I recall coming into the office to find a 30 page adjuster estimate rolled up on the floor in front of the facsimile machine.  We networked our computers and found that this was becoming a means for immediate (although very slow compared to today’s standard) communication.  I recall meeting with the Allstate claims manager in 1993 and was very excited to find out that they were putting together their first mitigation (at that time they called it drying) program.  I knew we were a shoe in because we were hands down the best drying company in our area – we had made investments in drying equipment and training for years.  I was very surprised when the claims manager, who was disappointed, told me that ServiceMaster would be handling the claims and it was out of her hands.  I figured that it was only a matter of time for them to come back and include us on their program – it never happened.  The insurance world started to change in the 1990’s as well – Gieco was purchased by Berkshire Hathaway.  They quickly proved that you had a competitive advantage when you could make money on the claims loss ratio and have a negative cost of investing.  This reality has continued to impact the industry because previously it was assumed that in most years insurance would lose money on claims but make it up from investing activities.  There was a confluence of factors in the 1990’s that transformed our industry and made today’s claims programs possible. 

Insurance companies have been working in managed repair programs for some time in other verticals of their business.  HMO’s were started in the 1930’s to help manage health care coverage and costs.  Auto glass and auto repair programs have not been around that long but have ben in existence for decades.  Property restoration is more complex that many other areas that insurance is covering however these companies are familiar with programs and working through the restoration process is natural.

I recall reading an article in Claims magazine about two decades ago about the success of an auto vendor program.  It was interesting to me to find the claim that clients were much happier when utilizing the managed repair program.  For many reasons I believe this to be true in the restoration industry as well.  As it turns out the insurance companies desire for their clients to be happy with the insurance they purchased.  If people are happier on claims where the insurance company uses a preferred vendor in a managed environment then it makes sense that you will experience this more often.  It also make sense that insurance companies are looking for big solutions to managing claims – not individual project solutions.  In the past companies looked to the franchise group for claims solutions.  It was about ten years ago when I attended my first Crawford Contractor Connections event.  I encountered what I call a color blind environment.  Every color was represented: ServiceMaster yellow; ServPro green, Paul Davis Black; First General blue; and more.  It became apparent to me that insurance companies that allowed them to choose the best available contractor regardless of affiliation in each market – CCC took care of vetting and managing the contractors.

The current insurance industry trends are favorable for the TPA claim environment. The industry is in a quick and potentially radically changing situation. If this first statement is true then it makes sense to engage a claims specialist to manage this change.  One of the biggest influences in claims focuses on reduction of cycle time.  Managing dates and times appear to be a core competency for most TPA’s.  Insurance companies and TPA’s by their relationship have a large focus on reduction in cycle time.  This focus is beginning with the first notice of loss through payment and file closure.  Many of the other trends are connected to this focus.  Integrated communications systems will be used quickly identify damages, verify coverage, improve subrogation and limit fraud. These will also be utilized for improved client communications throughout the process.  New insurance products and companies are being created.  Often these are virtual companies without claims resources.  Video communication may be utilized to create a virtual adjusting environment where much of the adjusting functions are completed from an office or even utilizing artificial intelligence.  A race to be the point of first notice of loss assures control of the claim.  I expect this to be a robust area of competition and innovation as it is the key to the other portions of the claim management.

The hurricanes that hit in the summer of 2017 left a lasting impact on many insurance agents, companies, property managers and corporations.  They may have felt they had an adequate catastrophe management program only to find that their dependable solutions were maxed out and service was lacking.  TPA programs will offer a solution that make a lot of sense to many of these stakeholders.

For a contactor TPA’s offer many advantages. The first one became apparent when working with a client in South Florida.  The insurance market there is different than most other areas in North America.  There is an unusual amount of animosity between the insurance companies and contractors.  There are many contributing factors, which I will not get into in this paper.  One result of the challenges is that the approved insurance scope and prices vary widely with no apparent rationale.  One benefit with TPA programs is that they establish ground rules for claims handling.  I am not certain if this is going to make the situation better but one of the most challenging companies to work with has formed a recent relationship with one of the major TPA programs.  Time will tell how this will work out but it is my hope that they will become a reasonable arbitrator and establish predictable claims handling procedures that are fair to all – especially the property owner. 

There are many other benefits.  One thing that has always been a challenge in the restoration market is the lack of barriers to entry.  It takes very little to start a restoration company, establish several insurance relationships and you are in business. TPA’s have stronger entry requirements and provide some barriers to entry. A positive and negative to the program is the ability to get on a list and then not need to continue to manage a marketing route to continue to get work from that source.  Most programs will provide a consistent level of work on a routine basis so it keeps your equipment utilized and staff busy.  I have found several companies that have utilized programs as an effective resource to opening new locations. In the event they are successfully performing work for a program and want to expand the restorer asks the program administrator where they need additional contractors and a new office is established at that location with a built in volume of work.  One challenge in restoration is the payment terms for insurance companies.  The TPA’s usually have very established and predictable policies that provide a reasonably quick payment.  One additional benefit is that this is a growing area of the industry.  There are not more claims but the TPA’s are handling more of the existing claims.  There are many benefits of participating in claims programs and deserve a close look for most restoration providers.

While there are many benefits to working on programs, there are also many challenges to consider as well.  One of the top challenges that I have seen is that the insurance  industry has shifted a lot of administrative reponsiblitlies to the contractors without compensation.  Companies performing program work often need to increase the administrative staff just to handle the additional requirements and they often need to be updated every day when work is occurring – including weekends.  Due to the urgent nature of the projects it is difficult to prioritize projects – since they are all top priority and you are being measured on every project.  If you have a hundred thousand dollar job next door and a two thousand dollar job across town, they both need to be addressed immediately.  The emergent nature of the calls that are frequently smaller in nature may require different management staff to oversee and manage these projects.  I have found that TPA programs result in a high volume of smaller jobs that all require same day attention.  The pricing for claims programs is highly structured and is very inelastic.  The contactor does not have flexibility in scoping and pricing decisions. The price guideline is often treated as a price standard that cannot be adjusted.  The programs all have estimate reviews that assure you were complying with the program limitations and that you followed the rules. This often is perceived by the contractor as micromanagement of the jobs – (which it may be.)   An additional problem results from the program work as well due to the required uploads of the estimate. My understanding of Xacatimate tells me that when a job is uploaded it is used to verify market prices.  If this true then it results in stagnant or downward pricing.  Job margins are also influenced by the percentages paid to the program.  Some make the case that you don’t have to market to get the work once you are on a program.  That is true however it also leads to lazy marketing practices.  Companies on vendor programs tend to cut back on their marketing activities since you cannot market to the companies that are using the TPA.  When companies stop marketing then it is my opinion that you have lost control of that part of your business.  The more work you receive through vendor programs then I think that you need to market harder on the other segments of your business.  Some contractors are frustrated with the fact that claims administrators that often do not visit the jobsites make decisions.  These administrators may have a rudimentary education in restoration practices however they often lack any real world experience.  As restoration professionals know that jobs are rarely the same as the scripted hands on drying houses that are used for the ASD classes.  The structured nature of the TPA programs removes a lot of flexibility on jobs.  The program is designed to allow flexibility but in reality exceptions are hard to achieve.  When I first entered the restoration industry we were introduced to the claim triangle with the client, contractor and insurance company on each point of the triangle.  Managed programs often bring a fourth point into the equation.  This brings in more complexity in job communication and allows for more conflict.  As you can see the TPA programs have many advantages as well as disadvantages.

It is not be expectation that I am going to influence any company one way or another regarding managed programs after all as I expressed earlier I think they are both good and bad.  My hope is that I encourage restoration companies to take a strategic approach, not accidental, to working with these programs and then determine if they are an important element of their business. I feel that it is irresponsible to get so deep into program work that you cannot get out and equally irresponsible for contractors to be on the outside of the program and throw stones without an understanding of whether they might work for your business.  The restoration world is much more complex than ever. Contractors need to be nimble, educated, aware and strategic.  With all the changes in the industry, claims will be substantially different in ten years and quite reasonably much sooner.  Regardless of the direction for our business, it is essential for the health of your business that no individual source is responsible for more than 20% of your business.  If you maintain balance then you will continue to be in control of your business and not be at the mercy of any client, adjuster or company.  In the end, having a great customer service program and learning to exceed your customer’s expectations is a winning strategy. 

Thursday, September 21, 2017

Where there is profit, there is loss nearby

It has been a banner year for restoration professionals across Canada and the United States.  Is this good or bad for your business?  If your region has been impacted by disaster then it most likely has added to your bottom line. Bottom line results don’t tell the entire story and often can be masking much larger issues in your business.  Please consider my thoughts below as you assess your business and your strategy moving forward. 

A friend of mine used to quote an ancient proverb that states Where there is profit, there is loss nearby.  This is a statement that refers to the challenge that profits will hide inefficiencies and loss.  The bigger the profits, then potentially you may be covering bigger hidden losses.  Over the years I have found that many outwardly successful companies were simply riding a great wave only to find that when that went away, they were left with a struggling business. 

The first time that I encountered this situation was when mold remediation first became a focus for many restoration companies.  The jobs were complicated, large and very profitable.  I recall asking one of the restoration industry pioneers, Martin King his thoughts on the direction for the mold remediation industry.  He stated that in his opinion, many thought there were a number of requirements for mold growth but there was only one.  As I ran across the contributing factors to mold growth I was thinking that you needed several elements for growth and they were all equally important (darkness, food source, moisture, lack of air movement. etc.)  He could see my confusion and then he smiled and said, “money.”  When you remove the money, it will cease to be an issue.  In many ways he was right.  Mold did not cease to be an issue but it diminished substantially when the money diminished.  There were companies performing millions of dollars in mold remediation and related work only to find that it went away virtually overnight. Some of these companies found that they were losing money in the other parts of their business, which ultimately lead to their failure. 

The second time that I encountered this situation was after several years of hurricanes in the Southeast in the early 2000’s.  Companies were buying equipment, hiring people, paying large salaries and bonuses and even selling their business for large amounts based on the thought that we would encounter storms every year.  Until last year it had been over ten years since a hurricane hit the United States.  Many large and outwardly successful companies found that without the large losses, the rest of their business was not viable due to inefficiencies and much higher overhead.  Many of these businesses are not around any longer, including several publicly traded companies.  The profits from the large losses and events were substantial and allowed these companies to grow despite the fact that the rest of their business was losing money. 

2017 if not already, should be the largest year for insured losses ever.  Hurricanes Harvey, Irma and Maria along with wildfires; hail; rain; freezing temperatures; and wind have impacted nearly every part of North America.  These events have lead to a much-needed relief for restoration contractors that have been struggling with margin pressure, over-supply of contractors, consolidation from insurance companies and other major client groups, increased competition, and increasing costs. 

The challenge for you and your business is to pay attention to the underlying trends that are impacting our industry and your business.  Don’t let the profits from catastrophe events cover the inefficiencies and loss in other areas of your business.  If you are sitting on a large backlog of work or profits from completed work, now is the time to look at your business and assure that you are positioned for long-term success, not just short-term profits.  Use your resources to invest in a winning strategy. 

Thursday, July 20, 2017

What is happening with margins in disaster restoration?

I have been asked recently if margins in reconstruction are changing and if it is still possible to achieve the same margins as they were several years ago.  Below is my response: 

Here are some differences of the influences: (The companies that I work with are not combining costs and revenue from water/fire and construction - they are separated into different ‘jobs')
  1. Is the program work typically from Third Party Administrators?  These jobs are smaller and managed much more strictly - they are doing there best to limit margins and cut areas that are more profitable than others.  Many of the typical TPA projects are under $10,000 so this may not influence your discussion.  Some other vendor programs are tight as well and it depends on which company you are working for. 
  2. States and regions impact margin.  Some are easier than others.  I have a client in Florida that has been averaging over 50% margins. They are not on any vendor programs and all is self directed - that being said they are typically working in the Xactimate environment.  Not being on vendor programs will allow a small bit of pricing flexibility. Some states have higher costs of labor and limited subcontractors that drive costs higher and Xactimate does not keep up with changing costs since the TPA and vendor Xactanalysis feedback confirms the lower pricing causing downward pricing pressure. 
  3. Managing a group of in-house staff requires a lot of management - getting labor and materials to the job site with low costs is difficult.  If you are running in-house labor then managing the staff is one of the most important elements in maintaining margin. 
  4. It is much harder to maintain a 45% margin than ever.  Some companies are able to squeeze subcontractors and suppliers but that only goes so far and ultimately has an impact on quality. 
  5. Changing margin expectations is consequential for restorers.  Accepting that margins are going to be 5 points lower has a huge impact on cash and profits.  Managing the process and having coaching and accountability tied to the numbers helps companies hit expected targets.  I think that 50% used to be achievable but difficult.  Now 45% is achievable but difficult.  I do think that 40% is more common.  Companies that start to accept 35% need to be very focused on their overhead because there are many companies that are running a 32-35% overhead.  The expectation of a 3% net margin is way too low - it should still be 10-15% depending on the revenue numbers (which impact the overhead %).  

The reality is that the cost of labor is way up and materials appear to be stable or increasing and the Xactimate unit costs rarely increase.  There is truth that margins are much more difficult to maintain.  British Columbia was one of the most difficult pricing/cost markets that I have ever worked in.  I worked with a company thad 14 project managers - each was able to maintain a minimum of 34% margins and some were able to hit 40%.  This required focus on proper estimates, proper and consistent change orders, appropriate supplements and limiting the amount of customer credits and discounts.  Too often companies write off deductibles, throw costs at jobs when they miss completion dates, don’t get signed change orders or ask the customer to pay for upgrades, don’t create a budget and then buy out the job before starting, etc.  Making margins requires focus and discipline. 

Thursday, May 25, 2017

Margins in diaster restoration

The following information has been compiled through over twenty-eight years of direct involvement and empirical evidence in the industry. Business Mentors serves as a consulting firm specializing in restoration.  We help restoration companies analyze and improve gross and net margins in addition to working in many other areas.  Our background is in the restoration industry and we are business consultants and restoration business advisors.  

For purposes of this paper we will examine margin by types of work and will also discuss the various deviations.  There are many ways to figure job costs and this paper does not necessarily endorse any methodology.  Individuals need to manage costs and have a plan to meet profitability expectations.  The key in measuring margin is to be consistent in your approach. 

For purposes of this paper the items included in job costs will include: direct labor plus direct labor burden, direct materials, subcontracted labor, and equipment rental.  Some companies apply greater detail to their job costs.  There is not a right and wrong way to manage your job costs.  The material issue is that you are consistent when figuring job costs.  The more information that you apply to the costs, the more information you will have for managing performance and understanding your operation.  That being said, you want to measure information that you have the ability to manage.  Most companies can measure and manage direct costs for jobs and for that reason that is the information that will be reviewed in this report. 

Construction gross margins range from 35-50%.  This means that the direct cost are 50-65%.  The margins can be achieved through direct labor or subcontractors.  If you manage a large in house staff then you have the potential for higher margins. That being said it is very difficult to apply and manage staff labor in a manner that allows you to maximize job profitability.  The challenge with staff labor involves facilitating labor and materials to the jobs as well as managing non-reimbursed time.  When utilizing subcontractor labor either your company or the subcontractor can provide the job materials.  It is strongly recommended to apply some indirect costs to the jobs, which includes shop materials, supplies, dumpsters and other unapplied indirect costs.  In the event that you utilize a superintendent the costs for your job manager should be applied to the job either through direct labor costs or through an allocated percentage. 

Water Damage
Water damage margins are perhaps the most misleading and hard to measure gross profit item in a restoration company.  A restoration company prepares and staffs to respond to jobsites in a marketplace twenty-four hours a day, three hundred sixty five days a year.  Each company needs to provide training and equipment for each job and they are rarely costed to the job.  There are formulas that a company can use that will figure an exact cost.  Previous analysis has shown equipment costs to be approximately ten percent of the rental rate.  Direct costs range between 75% to over 85%.  Margins on water damage work have been decreasing due to the tracking and control of the claims management programs.  Margins in the water damage industry are still strong and compensate for the specialized equipment, capital spending, training and staffing required in order to meet the needs of our clients.  Companies need to look at the cost of being prepared to respond 24/365 and the substantial training and capital costs involved in mitigation services.  The overhead involved with a mitigation service is substantially higher than for construction. 

Restoration Cleaning
This category of work includes contents and structural cleaning in order to remove contaminates and odor.  The work consists of specialty techniques and cleaning solutions in order to remove the contaminate.  Contents cleaning can take place on location or in the restoration facility.  Companies measuring job profitability rarely take into consideration the substantial facility costs and equipment required to produce the work.  Gross profit for this work ranges from 45-60% meaning the direct costs are 40-55%. The costs consist of labor and cleaning supplies, packing material and any other moving related costs.  The capital costs for cleaning are substantial when you take into consideration vehicles, training, cleaning equipment - especially for in-house cleaning and storage facilities.  A cleaning company will have a substantially higher overhead than a construction - or even mitigation company.  

Mold remediation
Mold remediation consists of the work to remove mold from contaminated items and also remedial demolition of items than cannot be properly decontaminated.  This work does not include the actual replacement and repair.  Job profitability ranges from 40-55% that means the job costs range from 45-60%.   There are a variety of services that can be completed in house and others subcontracted.  These services require a substantial capital commitment.  If subcontracted the contractor may be limited to ten percent overhead and ten percent profit that relates to a 17 percent gross margin.  These services range from laundry and soft contents to furniture refinishing.

The above information is a guideline and not a reflection of the margins that will be achieved on any given job.  There is a dynamic that has changed the industry in the past decade or so.  Previously contractors could assemble their costs and then apply a price that allowed the target margin to be hit.  Today, in most cases, contractors will need to assemble the price and then put the costs in line to meet the margin expectations. Hitting job profitability numbers requires a concerted effort on the part of all participants involved in managing and producing a job.

Groundhog Day?

One major difference between successful contractors and ones that continually struggle is the presence of a strategic plan.  Does it appear that your weeks are driven by crisis and your days filled with busy activities – running to get nowhere?  I am not saying that you are not getting things done, but is it what you want to be working on? 

When you are working on your business, rather than in your business, then you can change your opportunities and your future.  I know of many business owners that know that things need to change in their business, yet cannot make it happen.  In the movie Groundhog Day, Bill Murray’s character was stuck reliving the same day until apprently he got it right.  Although it is not known for sure, some people say that it took ten years and others (people with too much time on their hands) say that it was more like 30 or 40 years, to break the cycle. 

Are you stuck in the same endless cycle even though you know that it should be different?  The process of getting out of your rut starts by acknowledging the realities of your situation and then crafting a plan for change.  This process should start with the following:
  • What are the big picture goals for the future? Does this align with our mission and vision?
  • What items are currently limiting your business?
  •  Do you have quantifiable metrics that objectively tell the story of how your business is performing?
  • Have you properly identified the roles, responsibilities and expectations of your team members?
  • Are you key managers performing at least to industry standards?
  • Do you have needed capital to finance your growth?
  • Do you have the right people, in the right positions in your business?
  • Are you paying too much or too little?
  • Do you have a marketing plan and regularly look at the return on investment for your various programs or do you just perform the same activities each year – and if you want to grow then just do more?
  • Do you have the correct short term goals that will put you on track to achieving your long term expectations?

Your strategic plan should answer the questions above and more.  Growing companies think that if they are going to double the size of their business then all that is needed is to replicate and grow the current structure of the business.  In reality a five million company is rarely built by doubling the staff of a 2.5 million company.  Building a growing company requires establishing a foundation that will support the desired growth.

If you would like to discuss the steps you are taking to grow your business or learn more about the strategic planning services offered by Business Mentors please reply to this email – or call 541 359 4117.  We have programs that range from virtual strategic planning through 3-day on location