Roll-up giant IES, one of the largest electrical contractors on earth, buys a ton of electrical products. Here's what distributors must do to get a piece of the action. The first in a series.
Russ Crawford is a busy man these days. As the V.P. of vendor relations for an electrical contractor that will purchase over $400 million in electrical supplies this year, his calendar is booked with appointments with many of the largest distributors and vendors in the land. They are lining up at his Dallas office to make their pitch for preferred-vendor status with Integrated Electrical Services, Inc. (IES).
The stakes are huge. With $1.2 billion in sales forecasted for this year, a forecast for over $1 billion in electrical-product purchases by 2003 and 129 locations in 41 states so far, the Houston-based company is now the second-largest electrical contractor in the U.S.
IES has grown to this size with a roll-up strategy that has endeared it to Wall Street investors. When the company went public in January 1998 it had 16 electrical contractors that knew each other through their mutual membership in the Independent Electrical Contractors Association, (IEC), Alexandria, Va. Since that time, IES has acquired over 40 other electrical contractors, and at press time had several more acquisitions in the works.
IES uses a decentralized operating strategy that gives the individual contracting firms freedom to run their businesses as they see fit. As can be expected, there are corporate financial parameters that the presidents of the electrical contractors must meet to hit their incentive plans.
However, Tim Cummings, president of Mills Electrical Contractors, Dallas, Texas, and one of the first firms to join IES, says the company offers electrical contractors most all of the advantages of running their own businesses, but with the backing of a well-financed corporation that makes capital available for business expansion and the opportunity to get ideas from other electrical contractors on how to run their businesses more profitably.
Cummings and other electrical contractors also gain mind share within the electricalmanufacturing community, because when they pool their purchasing power, the dollars are astounding. The company negotiates pricing terms at the corporate level directly with manufacturers, but with the exception of several small OEM operations that buy some products directly, each electrical contractor deals directly with electrical distributors, says Crawford.
IES's A-list. While IES's contractors are free to buy any manufacturers' products from the distributors of their choice, managers at the contracting firms have financial incentives to buy from IES's still-developing preferred vendor list.
"The electrical contractor gets incentives to keep operating costs down and use preferred vendors," says Crawford. "He has an opportunity for dollars to go to him personally based on how well he supports preferred vendors." Among the first manufacturers to secure preferred vendor status with IES are 3M Electrical Products, Austin, Texas; Erico, Inc., Solon, Ohio; GE Lighting, Nela Park, Ohio, and several other GE business units; Hubbell/Kellems, Milford, Conn.; Square D Co., Palatine, Ill.; and Simplex Time Recorder Co., Gardner, Mass.
IES has made its selections for many key product categories, but is still searching for vendors who share its partnership and business philosophies. Crawford says other manufacturers would do well to emulate how GE Lighting and 3M analyzed his company's needs before making their proposals. For instance, Crawford says 3M looked at IES through three sets of eyes:
IES as a corporation, and its concern for a higher stock price and drive to attract more acquisitions;
IES's contracting firms, and their need to save money and time on the job, and to get new ideas to acquire more work;
IES's electricians, and their need for easy-to-use products that help them do higher-quality work, better and faster.
"People who get those answers have won our business," he says. "We want more profitable relationships. You can't just have an acceptable product at a competitive price."
The company's strategy of building relationships directly with manufacturers but allowing its contracting firms to purchase independently may be based in part on Crawford's background as an electrical distributor. He owned Crawford Electric Supply Co., Inc., Dallas, until 1990, when he sold it to Craig Levering, now that company's CEO. Some of the IES purchasing personnel also have a distributor background, he says. "A lot of the purchasing guys come from distributors because they feel they know materials," he says. "But a lot come from contractors because they want a job out of the weather."
The purchasing managers get together as a group several times a year in company forums to share ideas on best practices and learn about the company's decentralized purchasing strategy.
When Crawford began talking with Jerry Mills, IES president, about joining IES, they spent a lot of time discussing the role that local distributors would play in the purchasing strategy. Crawford did not want IES to do an end-run around distributors and purchase directly from manufacturers in large-scale national agreements.
"We didn't want distributors that helped us grow to be left out of the package. We wanted to negotiate with the manufacturers so we would be important to them, and then we could purchase through the distributor of our choice."
Power of point-of-sale info. Distributors can enhance their chances immeasurably of being a chosen distributor with an IES contractor if they provide the company with point-of-sale (POS) data. One of IES's key goals is to develop product usage and pricing data, and Crawford insists that all purchase orders contain manufacturer information, the NAED UPC code, catalog number, unit price, extended price and quantity purchased in an electronic format.
"We measure distributors on their ability to provide us with POS data," he says. "We are trying to do that to help the individual contractors evaluate how they do construction. As a by-product of that, we see what they pay for things. "We are trying not to upset market price. It's important that we have a competitive price in the market. There is no need for us to blanket something nationally where all we do is drive down the market price. We don't reveal to the electrical contractors the special pricing that we may negotiate. It's up to all of our partners to negotiate the local price. There is no such thing as the IES price; we allow that to be determined in the market. We want to create advantages for IES partners that translate to our bottom line. We don't want to do something that translates to a lower local market price."
So far, 80% of the distributors the company buys from are doing a good job of providing the data. However some data glitches are coming in. "Some distributors butcher the NAED UPC code and use only seven or nine of the eleven digits. That makes it difficult for me to manage the data."
The company is converting all of its electrical contractors to the same procurement software so that they won't have to rely on distributors to track their purchasing data, but this will take several years to fully implement. Blanket contracts. Another important IES purchasing initiative launched during the past year is its drive to develop blanket-purchasing agreements with electrical distributors in select product areas. Crawford says the concept will save money for IES and distributors.
"One thing that will help us in the future will be blanket agreements where we don't constantly go out for price. We would rather reduce transaction costs for distributors and for us. We want to leverage IES's size to create advantages for our independent operating companies."
Some of the contractors that IES acquired have used blanket agreements for years. Tim Cummings of Mills Electrical Contractors does most of his business with three distributors in the Dallas market: Rexel/Summers, Parrish-Hare Electric Supply Corp., Dallas, Texas, and Crawford Electric Supply. Much of this business is through blanket orders, he says.
"We went some years ago to doing big buying blankets with them. For those folks, there really has been little change. This year we are asking them to provide IES-preferred manufacturers in that blanket, as opposed to whatever products are out there. Generally, we have more than one manufacturer of a product that is a preferred manufacturer."
Crawford wants to parlay this purchasing clout into more direct contact with manufacturers on their product development and marketing. He says that sometimes the messages that manufacturers think they are getting out to the market through their reps and distributors never get to contractors. For instance, he recently visited a major lighting fixture manufacturer and found out that the company had an emergency lighting fixture with a feature that would save his company's electricians $10 to $15 on each installation. However, although that fixture had been on the market for three years, the company hadn't yet gotten the word to IES about this feature, he says.
"We cannot afford not to know that as a contractor, so we want to reduce the manufacturer-contractor gap."
Crawford is always looking for new products with features that will help IES in its prefab construction operations. The company has five regional prefab centers across the U.S. where it builds control panels, temporary power systems and other electrical assemblies. Building these systems in an environment with good lighting, controlled temperatures and on workbenches is much easier than building them in the field under questionable work conditions. Crawford says prefab work saves time, improves the quality of the work that the company does, and allows IES to buy products for prefab systems in bulk.
Prefab work also saves labor--an important issue for the company, with qualified electricians being so hard to find. "If we can save labor, we can do more work," he says.
Despite the huge size of the company, Crawford says the business basics don't change a whole lot. He stresses to electrical distributors the importance of finding out what is really important to an electrical contractor, and not relying on preconceived notions of what that they need.
"On of the biggest things that I have learned while working at IES is that what an electrical distributor might assume is critical to value or quality to the contractor is often really not critical at all. A distributor could do something as simple as changing the way boxes are labeled to reduce the effort of checking in material."
Crawford has also found that IES's best distributor relationships operate with the same simple credo that worked for him when he was a distributor.
"Never approach electrical contractors with other than an attitude of, "I am here to earn your business. People ask me what I would have done differently when I got out of college in 1970. I tell them that I would have become a contractor. It's different from distribution. In some ways it's easier than distribution, and in some ways there's more risk."
Editor's Note: Electrical distributors and manufacturers are now feeling the impact of the roll-up trend sweeping through the electrical contracting industry. This feature on Integrated Electrical Services, Inc. is the first in a series that will give Electrical Wholesaling's readers an update on the growth of the companies responsible for most of the acquisitions and explore how these companies plan to take advantage of their size in their purchasing strategies. In the coming months, we will cover the other large consolidators: BuildingOne Electrical and GroupMAC.
1999 sales forecast: $1.2 billion
Locations: Over 60 electrical contracting firms serve 41 states with 129 locations.
Company background: IES went public in January, 1998 (trading on the New York Stock Exchange under the symbol "IEE") with 16 electrical contracting. firms. Since that time, Integrated Electrical Services has acquired over 40 electrical contractors through acquisitions.
Hot buttons: Working with customers who need a national provider of electrical and voice/data contracting services; developing partnerships with distributors and manufacturers who take the time to analyze IES's needs before presenting proposals; centralizing some MIS and accounting operations for electrical contractors but allowing them to manage their own relationships with distributors and customers; and finding new ways to do prefab-work in the shop.
Challenges: Finding high-quality electrical contractors to acquire in the markets where the company does not yet have coverage; hiring electricians and other employees with solid technical skills in a tight labor market; and finding products and installation methods that allow installers to do jobs better, faster and at less expense.
Senior management: Jim Wise, chief executive officer; Jerry Mills, president; Jon Pollack, vice chairman; Jim Thurman, vice president, national accounts; Russ Crawford, vice president, vendor relations; Bruce Duncan, vice president and acquisitions manager; Ben Mueller, senior vice president and COO; John Wombwell, senior vice president, general counsel and secretary; D. Merril Cummings, vice president, mergers and acquisitions; H. Gale Smith, vice president, mergers and acquisitions; and Paul Withrow, vice president and chief accounting officer.
Vision statement: "To be the leading national provider of electrical and information technology contracting services."
Web site: www.ielectric.com
When Tim Cummings, president of Mills Electrical Contractors, Dallas, Texas, first started discussing the IES concept with Jon Pollack, IES's founder and now the company's vice-chairman, he says it dawned on him that if roll-ups in the electrical contracting business ever became commonplace, it would be better to be with one of the leaders, and not be sitting around saying "Gosh, I wish that I was part of that group."
His company had survived several construction cycles and was a large, self-sufficient contractor. But more of his customers wanted to deal with bigger entities. He also liked the idea that electrical contractors and other managers with electrical-industry experience would play prominent roles on the IES management team.
Two years later, Cummings is glad he made the move. He loves the access to new customers and the networking opportunities that he gets by meeting with presidents of other IES electrical contracting firms at the IES President's Forums. (The company also runs management forums for other personnel on topics such as estimating, purchasing, MIS and accounting.)
But selling a business to a large corporation didn't come without some jitters, particularly for Mills Electrical Contractor employees, he says.
"Employees first want to know, 'What is this going to do to my job?' and, 'What will it mean to my pay?' But if anything, the stability is probably greater being publicly owned. There is less chance of a business failure with huge capitalization.
"We have improved health insurance and improved the 401K some. The companies do operate pretty much decentralized, so there really isn't a whole lot of impact on the employees. It does open up opportunities for people who are in management positions and want to move forward."
Cummings likes to tell other contractors that if they sell their businesses to IES, "You aren't selling out. You are buying in." Cummings says a key advantage that they get is access to national companies looking for a large firm to handle their construction needs in multiple markets.
It's part of the same trend of driving cost out of business by cutting down on the number of vendors that surfaces in the electrical wholesaling industry through integrated-supply contracts. Contractors feel this trend's impact when a big-box retailer uses the contractors preselected by the corporate office. "So many companies are now national or global in scope, and it requires them to have people providing them with services who are national or global," says Cummings.
"Say someone like Circuit City was going to come into Dallas and open six stores. In the past, you probably would have seen four to six different contractors doing that. They would have all bid separately, and a small guy would probably have prevailed on that size project. With customers wanting to do things on a national basis, those guys might never get a look at the jobs because it may be decided before they come to town.
"I think this trend will continue. It's often easier for the customer to do that. It's easier on the architects and engineers and it's easier for us to sell them that way."