Slaying the Dragon
Thomas G. Dolan
April 2005Sometimes you can work so hard and do everything you possibly can to make your business prosper, but still be overrun by obstacles outside your control.
Intense price competition, litigation and insurance are three such obstacles that face many wall and ceiling contractors around the nation. A few years back this triple-headed dragon turned its fiery breath upon the Peoria, Ill.–based Mid-Illinois Companies with a special ferocity. This is the story of how the company met the threat.
But first, a bit of background.
The company was founded in 1971 by Dan Higdon as a strictly residential painting company. In the early 1980s, the company shifted toward commercial work, expanding into drywall, metal framing and acoustical ceilings, gradually adding access flooring, case work, door framing and doors, acoustical wall panels, exterior insulation and finish systems and plastering. Higdon’s son, Dennis Higdon, and daughter, Debra Young, went to work for the company, gradually became involved in the ownership, and became full owners about seven years ago when their dad retired, though he still works part time as safety director. Dennis is president and Debra, who is secretary-treasurer, started out as estimator, and still runs that three-person department.
"We have quite a few competitors,” says Dennis Higglon. "It’s always been highly competitive, especially in our region. When we go out for bids, we’ll have five to 10 competitors for the wall and ceiling work, and up to 17 competitors for painting on any particular job.”
The company has been used to hard price competition, but what began to really tip the scales is the court system in Illinois "Litigation here is out of control,” says Young. "It’s not just for our industry, but all of them. Even doctors are fleeing the state. The court system is awarding huge settlements, yet the people punished are not necessarily the ones who have done any wrong.”
Illinois is a lawyer’s paradise, Higdon says. And one unfortunate byproduct is that general contractors are not putting provisions into their contracts, which make it difficult and expensive for the subcontractors. Language such as "waver of subrogation” is designed to be confusing—until court, when opposing lawyers will sort it out.
The main impact, Higdon explains, is that "if someone is hurt on the job, the general contractor, owner, architect and others are protected. Everybody is sued, but they’re allowed to dump their suits on the subcontractor. Also, if you’re not careful, you’ll find you are paying for their lawyers.” And there are multiple claims. If one is taken care of by workers’ compensation, the same company can still be sued again and again on a general liability or other suit. In many instances, if the worker has more than one source of insurance, as many do, if it is paid for by, say, workers’ comp, then another insurance company will provide that person with lawyers to get whatever he can.
As has been often reported in the media, there is often an infrastructure for ongoing fraud built and maintained by so-called upstanding citizens, doctors, therapists, lawyers and so on, who keep dollars circulating around minor or even bogus injuries. "We’re involved in a claim right now filed by another subcontractor in which someone got hurt and we were not notified. They went after the general contractor, but the liability landed on us,” Higdon says. "The worker tripped and fell on our studs, so we became liable.”
This increased liability, of course, only adds to the already onerous insurance rates. "If you have an umbrella insurance policy—whether it’s for $1 million, $2 million or $5 million, it can get broken into two or three or more pieces very quickly,” Higdon says. "This makes you raise the limits of the umbrella, and then you have all the time and effort required to go through the paperwork.”
Higdon says that many subcontractors tend to just look at the specs and overlook the small print, not realizing the liability they have taken upon themselves until there is litigation and it’s too late. But even if you do know what to look for, "it’s a fight to get it out, and if you can’t get it out, you have to install costs to insure against it, which puts your bid higher than it might be otherwise. What it really does is take you away from your primary focus. If you have to spend much of your time dealing with attorneys and insurance companies, you’re not dealing with your core business. You get bogged down in all this extraneous paperwork, and it takes a lot of the fun out of what you’re doing.”
Add to all this Higdon says, is that many general contractors, who often have their own carpenters, deal with their competitive pressures by doing work usually reserved for the wall and ceiling contractor.
How to Cope?
A couple ways of dealing with this are more or less standard. One, says Young, "is we’ve really worked hard on our safety program. Everybody works as a team to implement the right procedures. We squeaked out 89,000 hours without an accident.” Higdon says, "We’re fairly selective in the general contractors we work with, so we get contracts that are much more reasonable.”
Still, the safety of the Mid-Illinois crews does not protect for the liability from other crews, and even when the company is able to work with the more reasonable general contractors, not all of the obnoxious contract language can be necessarily removed.
So deeper solutions were needed. Over the years, the company has grown to its present 45 employees and $5 million of annual income. But about six years ago, Higdon recalls, "I was sitting at my desk looking at a pile of papers, and I began looking at the financial statements of our early years. We didn’t have the volume, but I noticed we were working directly with the customers. So I asked myself, ‘What are we missing here?’ There are a lot of commercial failures. You have to wait 60 to 90 days to get your money, and sometimes it’s retained for a year. So out of that came the question, How can we get back to dealing directly with the customer?”
The answer Higdon came up with was through networking. "I realized that since it was my idea, I was the point man,” Higdon says. "I had to put it into practice.”
The Definition of Networking
Networking means a number of different things to Higdon. The key source was Business Network International, a global network. Typically, any group will have representation from an industry—a lawyer, accountant, insurance representative, and so on. If there’s not a chapter in your area, you can go online and start your own.
Higdon also joined the Chamber of Commerce, and he became active in a number of other organizations, such as the Rotary Club, Good Will and Boy Scouts. Here the intent was to contribute to the community, with the networking, though a secondary aspect, flowing naturally.
In this same context, Higdon speaks of the importance of belonging to associations. His company has been a long time member of the Association of the Wall and Ceiling Industry as well and the Painting and Decorating Contractors of America. Here, in addition to the information gained from the publications, trade shows and seminars, the networking takes a different form. "You learn from your peers who are in different parts of the country, so they are not your competitors,” Higdon says.
But progress in getting leads to jobs from the local networking was slow, Higdon reports.
He went to weekly meetings of BNI for six months before getting a lead, and it was two years before they really started flowing. But Higdon says he was not discouraged. "You realize it will take a lot of time, effort and commitment, so you need patience,” he says. "But what started paying off right away was expert advice from so many sources, and their turning to you for advice. You have to go into something like this not looking for a sale, but planting seeds. If you nurture them, they will eventually grow into sales.”
What this has led to is negotiated as opposed to bid commercial renovation. However, when he started to become successful in this arena, Higdon realized he had to push service up several notches. Higdon will figure out spaces, such as not having the president’s office next to the mechanical room, and directing traffic flow. He’ll ask questions and do a line drawing, asking questions, so the client has been able to answer questions he hadn’t thought of. If the drawing needs to go to an architect for finish, the main dynamics are already there.
One estimator, and, in fact, an entire team is devoted to this segment. The workers are multi-taskers, so they can get the work done quickly; they are chosen and trained based on personality and their ability to get work done as quietly and with as least disruption as possible. This often includes evening or weekend work. At the same time, since most of the time work is being done in these spaces, the housekeeping, down to dusting walls and cleaning up any mess quickly so the invasive imprint of construction is kept to a minimum, is a priority.
At the start of this effort, about 7 to 9 percent of the company’s volume consisted of this type of work. It grew 4 to 5 percent a year until its current 39 percent of the volume. Higdon expects it to hit 45 percent by the end of this year.
By developing this niche, with its highly value-added service, Higdon is able to command a good price, by passing the cutthroat price competition of bidding. Since he is acting here as a general contractor, bringing in a specially trained set of subs as needed, he’s bypassing all the litigation and insurance nightmares.
Another opportunity that has always been more or less there but that Higdon only in recent years has capitalized on, is offering free advice to design/build teams. "Instead of just looking at the specs, we get involved in the planning and say something like, ‘Hey, there’s a new product that does this aspect more effectively and at a better cost.’”
The downside, of course, is that the other party can take all the free advice and give the job to someone else. That does happen. But, more often than not, the effort results in more work coming to Mid-Illinois, whether Higdon has first approached the design/build team, or, as is happening more and more, the latter approaches him first. "We develop a rapport, become a part of the team, and design/build has a better profit ration than hard bid,” Higdon says. "We average 15 to 20 percent of this type of work a year.”
When asked why he didn’t return to residential, where direct customer contact exists naturally, Higdon responds, "We’re a union shop, and residential is primarily nonunion. The quality of that market has eroded. Still, we saw an opportunity to get back into it by becoming a certified repair company for EIF systems that were put in by people without the necessary skills. So we can go in and clean up the industry a little bit as well as get some added business.”
The main advice Higdon has to offer is, "Many contractors develop the habit of running around and putting out fires. Sometimes you can let the business run you rather than you running the business. I enjoy sitting back and taking time to analyze things. One day a year all of the principals sit down and take a full day asking ourselves, What are we doing and why are we doing it? Once we identify something that should be done differently, we figure out how to make it happen.”
Higdon sums up his philosophy by saying, "The funny thing is that all these problems created new business for us.” In other words, with imagination and effort, even the three-headed fire-spewing dragon can be defeated.