The high-stakes games played in the commercial lighting market raise ethical and legal questions.
At first glance, commercial lighting seems to be the pretty side of the electrical business. It's all about color and brightness, and the dream of making everyone's surroundings more attractive, more inviting, more productive. The high-profile jobs create dramatically lit public spaces that become local landmarks, and even in anonymous back offices, a well-lit space can raise the spirits of overworked drones.
It's ironic that lighting, which can add so much aesthetically to a building, should also add so much grief to the process of getting it built. A peek beneath the bright surface of this market exposes all sorts of conflicts, ranging from fierce-but-healthy competition to boldly unethical manipulation.
The processes a job goes through during the selection, specification and procurement of lighting fixtures involves many players, each seeking to maximize his or her share of the project budget. The way the commercial construction market has evolved over the past decade has established pressure points at which some players can manipulate a project for personal gain. Of course, it's the desire for personal gain that makes markets work in the first place, yet many in the industry are concerned about practices that enrich a few participants while compromising the integrity of the end product.
The ultimate objective of the marketing channel in commercial lighting may be to serve the customer-to get the best lighting value for the building owner. But the objective for each of the players in the channel is to get the order and maximize profits. Sometimes these objectives are directly opposed to one another, especially when the people involved are willing to venture into ethical gray areas.
Consider this hypothetical scenario for example:
A lighting rep walks into a distributor purchasing agent's office and closes the door. He has a project bid in the works, and after endless months of educating and cultivating the architect, engineer and lighting designer, he managed to get an exclusive specification on one of his product lines. He was able to lock in a price of $4,000 on the fixtures, which at distributor net cost go for $1,000. The $3,000 difference is overage, and that's what the rep wants to discuss. As part of his contract, the rep gets to keep 50% of any overages he returns to this manufacturer, so if the distributor issues a purchase order for the $4,000 quoted in the bid, the rep can expect his usual 5% commission on the $1,000 net cost, plus 50% of the extra $3,000, or a total commission check of $1,550.
The rep says he will support the distributor on the order by dropping his price to $3,500-$500 below what he quotes other distributors-if the distributor will issue the purchase order to the manufacturer for the $1,000 net cost instead of the $4,000 actual price, and then pay the remaining $2,500 back to the rep as special fees for "bid preparation" or other vaguely described services. It's clear to the purchasing agent that if he declines, the rep will give competitors opportunities to be more cooperative.
You're the purchasing agent, what do you do? The deal doesn't raise prices to the end user a cent above the quote he has already accepted, and the manufacturer receives his established net pricing; your company gets the order and the rep walks away with $3,000 (his 5% commission on the $1,000 order plus $2,500 in special-service charges) instead of the $1,550 commission he would have gotten otherwise. Is there anything wrong here? Is anybody hurt? Paying fees for services never rendered is certainly a questionable move, but hardly an uncommon one.
The commercial lighting market is dappled with ethical gray areas such as this. For some, this is just the way business is done. Others believe this activity is more than unethical; they call it criminal. In fact, it was allegations of a deal similar to this that put six lighting reps in Minnesota on trial under charges of criminal price fixing and bid rigging last year. A Minnesota District Court judge earlier this year dismissed those charges on the grounds that the arrangements between distributor and rep were common lighting-industry practice and constituted vertical agreements between companies at different levels in the distribution channel (between rep and distributor) as opposed to horizontal constraints among direct competitors (among reps or among distributors).
Therefore, the judge ruled, the circumstances didn't fit the definition of price fixing and bid rigging under Minnesota law. The case is being appealed by the Minnesota attorney general. Many believe that while such a deal may be strictly legal, it is ethically suspect, and is an example of the kind of mess the lighting market has become.
"I grew up in this business. I've lived with this kind of thing all my life, and personally I hate it," says Larry Powers, president of Genlyte Thomas Group, Louisville, Ky. "The end user often doesn't get the best job. It's not illegal, but I think it is immoral."
Upon close inspection, it appears that the patterns of light and shadow in commercial lighting are defined by one central issue: the integrity of lighting specifications.
Specifications are the key to commercial lighting sales. Much of the sales work lighting manufacturers and their independent agents do is focused on establishing or influencing specifications on jobs before they're settled and the job is put out to bid.
The factories get directly involved in influencing specifications, primarily through education. Lithonia Lighting, for example, uses three basic approaches to get its message to the specification community, says William Astary, the company's vice president of marketing services. The Lighting Center at Lithonia's Conyers, Ga., headquarters includes classrooms and demonstration rooms where architects, engineers and lighting designers study lighting-fixture application. The company also has market managers for each of its product groups whose primary job is to train reps and specifiers in a local market, and it offers specifiers a software package to help them develop lighting specifications for construction projects.
A key player who determines any lighting manufacturer's fortunes in a given market is its rep. Most manufacturers use reps to cultivate the local market. "The key thing is local relationships," Astary says. "We have to rely on our agencies to maintain that local trust."
Reps cultivate long-term relationships with their local lighting specifiers, a group that includes architects, engineers, lighting designers, lighting consultants, design-build contractors and anyone else who has the final say on the fixtures installed on a project. They teach specifiers about new products and provide product samples, engineering and design support.
The reps work especially hard on big jobs, first by going all out to get their products included in the job specifications, then providing endless support in getting the products from the manufacturer to the job site and installed properly. When they do all this work, there's a lot at stake--if they don't get the order, they don't get paid, so all the presale preparations are funded out of their own pockets. A given market area has a limited number of major construction jobs in a season; a rep can afford to miss out on a few, but not many. Therefore, competition among the reps is fierce. "The phrase, 'plays well, shares with others,' that's not the lighting rep," says Henry Bergson, president of the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y. NEMRA has tried to attract more lighting reps as members, but Bergson says their approach to the construction market is very different from that of other electrical reps.
"Their business takes a lot of effort to shepherd a job through the process," Bergson says. "Lighting reps are very competitive and often don't like each other. That's because the reward is big, but so is the risk. These reps must withstand the efforts of everyone else to break his spec."
Each rep's ultimate goal on any construction project is to get an exclusive specification for his products written into the job plans. If he can't get an exclusive, he tries to get his products put on as "named equals." If he fails in this, countless opportunities exist on many jobs to break the specification and get his products substituted for the specified lines. This was not always the case.
In the past, specifications for commercial lighting fixtures were practically inviolable. Owners, architects, engineers and lighting designers had ultimate control over the market. They knew the products, designed the lighting layouts and bought the fixtures they chose.
That control began to slip away in the mid-1970s and was all but gone by the end of the 1980s as a flurry of mergers and acquisitions among fixture manufacturers shifted the balance of power in the market. Before that point, the lighting fixture market was pretty diverse, and most of the manufacturers specialized in certain types of lighting. With mergers and acquisitions came the ascendancy of today's lighting conglomerates-Lithonia Lighting, Conyers, Ga.; Cooper Lighting, Elk Grove Village, Ill.; Genlyte Thomas Group, Louisville, Ky.; Lighting Corp. of America, Birmingham, Ala.; and Hubbell Lighting, Christianburg, Va., being the five largest--and the character of this market changed almost overnight.
With the formation of the conglomerates, specifiers found it harder to write one-name specifications. Reps handling the conglomerates suddenly gained more leverage in price discussions, because they could present their manufacturers' product offerings as a package deal: "If you want our state-of-the-art, architectural downlight, you have to spec our fluorescent and outdoor lines as well." Or maybe a bit more subtle: "You can buy our downlight alone, but I can't do as much for you on the price as I could if you specified our other lines as well." The conglomerate reps--"super-reps" as some call them--began offering package pricing, in which they would quote a single lump-sum price for their manufacturer to provide a total package for the job.
Some reps who have continued handling independent manufacturers put together their own packages of independent lines to compete with the conglomerates, taking on a full complement of lines to be able to quote all the lighting on a job. They may use their packages for leverage in the same way, and often have an advantage in the specification end of the game because the independent lines are predominantly specification-grade products with their own following among the specification community. But a rep-based package is hard-pressed to match some of the benefits of a conglomerate package. Conglomerates can coordinate shipping and delivery times more easily than a rep who's dealing with several different companies, for example, and often decorative fixtures of different types from a conglomerate will share components and therefore match more closely.
The rise of the packages and package pricing--with their greater risk of a rep being totally shut out of a job--led to the proliferation of multi-name specifications, where a specifier will list similar fixtures from a number of manufacturers as acceptable products for a particular application; three-name specifications are standard in many markets and in the work of certain builders or specifiers.
Requirements for multi-name specifications multiply the work load of the specifiers, who must evaluate many manufacturers' product lines and determine which competing products are equal, at the same time enduring reps' constant pleas of, "I can get it cheaper. Put me on the list and I'll cut my price."
Under time and billing pressure, some specifiers solve this problem by specifying one set of fixtures, then giving the list to package reps and inviting them to fill in their equals, usually in exchange for having their lines named on the specifications. This practice raises ethical questions for Jim Fowler, principal of Kelley Moran, Inc., a lighting rep firm in Vermillion, Ohio.
"It's a quid pro quo, exchanging (inclusion in) a restricted specification for services that save the specifier time and money. Engineers and architects could jeopardize their licenses to practice in many states for this, and many of them have no idea. They're completely naive about the tactics used in the lighting market," says Fowler, who has written and published a book titled Spex that educates specifiers about abuses he sees in the lighting market. Fowler says he participated in the same kind of quid-pro-quo work as a rep until he hired an attorney specializing in construction law to research the practice; then he turned to educating specifiers in his market about the risks they run by letting reps control specifications.
It is unrealistic for specifiers to expect a rep to list actual equals when he's working on commission and gets all or a share of the premium he can charge on a fixture, Fowler adds. "The rep could list a fixture as equal that is actually a commodity fixture instead of a spec-grade fixture," allowing him to quote a lower price, he says. "This may get the owner a lower price, but may also be a lower value. Now instead of paying $1,000 and getting a $1,000 fixture, he's paying $750 and getting a $500 fixture."
Many specifiers list their fixture choices and simply put "or equal" in the specification. These open specs, done to save the specifier time and work, often end up taking even more of the specifier's time in the end, because they open the door to endless attempts to pass through substitutions, each of which must be evaluated by the specifier.
Multi-name specs are certainly hard on independent manufacturers whose products fall on the specification-grade end of the technical spectrum, says Chuck Edds, marketing strategist for H.E. Williams Co., Carthage, Mo., a manufacturer of spec-grade fluorescent fixtures. "Prior to multi-name specs, a specifier could say, 'This is an innovative product that should be on this job. It performs a certain way, and it looks a certain way.' When multi-name specs became the big craze, specifiers say, 'I really like this product, who else makes it so I can put it on the spec?' That's when you start seeing the rope slip a little bit."
Lamp manufacturers trying to get an innovative new product specified may have an even harder time with the three-name rule, since it means all three major lighting manufacturers get listed for every lamp, even a design that is unique, says Dwight Kitchen, manager of commercial engineering for Osram Sylvania, Danvers, Mass. Kitchen leads Osram's team of commercial field engineers whose job it is to get new lamps specified in construction jobs.
Kitchen estimates that when his team succeeds in getting a new lamp type specified, the chance of it actually getting installed on the job is still about 50%. "So many people have a way of changing that spec--the contractor, the distributor, the fixture manufacturer, the rep," he says.
Weak specifications open the door to further abuses in the market, particularly by encouraging other players to attempt substitutions. Substitutions mostly happen after the contract for the electrical work on the project has been awarded to a contractor. At this stage, projects typically will go through what some refer to as a "reverse-auction" process where, with the project budget set, all the players go back and renegotiate pricing to maximize their share of the pot. Distributors push for further price reductions from manufacturers. Anyone involved in the job can request to change the specifications to allow a substitution. Reps, distributors and contractors all have financial incentives to change specs, if they can substitute a less-costly fixture and split the difference. Companies not listed on the spec and in danger of being left out of the job have an opportunity, and in some ways an obligation, to try and break the spec. On some jobs, contractors can approve substitutions without approval from the specifiers.
"You end up with a situation where the designer is on one side of the equation and everybody else is on the other side," Fowler of Kelley Moran says. "Design integrity isn't even a consideration."
An additional, golden opportunity to change the specifications comes once the project is underway, at the point where the building owner tells the contractor that the job is over budget, and costs must be taken out. The various involved parties then engage in an exercise called "value engineering," in which they look for additional substitutions as a way to lower cost s. The architect or specifying engineer may or may not be involved in the value engineering ritual, where he would have an opportunity to defend the design interests.
Even when specifiers are in the loop, approving changes to their specifications is a questionable practice, says Jim O'Hargan, president of Summers/Rexel, Houston, Texas, who spent years with Hubbell Lighting before moving into distribution. "Ultimately, the substitution process responsibility lies with the specifier," he says. "Any time a specifier allows a substitution, he abdicates his responsibility to the owner. Engineers and architects on these jobs are professionals, and most of them want to do the right thing. But if you allow the substitution, you're saying, 'You're smarter than I am, you've chosen a better product.' You chose the fixture for a reason in the first place. What makes you think it's wrong now?"
The opportunity to submit substitutions is especially enticing to a rep looking for ways to maximize his overages. Reps have the power to manipulate the package to maximize profits. Lump-sum package pricing gives the rep maximum flexibility in setting prices within the package, giving the reps de facto control over all pricing on the job. As mentioned earlier, many manufacturers let reps keep a percentage, or in some cases all of the overages they can make on an order--an overage being the difference between distributor net pricing and the price the customer actually pays for the fixture. Reps can do all sorts of work within their package offering to maximize their overage share, from substituting commodity products for specification-grade products, to shifting their overages from lines that only let the rep keep a small percentage to lines where the manufacturer allows closer to 100%.
The practice of paying reps overages is a controversial subject in itself. Some say it provides an incentive to gouge the building owner who's ultimately paying the tab. Others say the desire to maximize overage can lead to abuses, such as substitutes used expressly to maximize overages or in a more corrupt case, falsifying technical literature to get an inferior product approved as a substitute.
The overage gets an unnecessarily bad rap, say many in the industry. There are some very strong reasons for reps to take overages. Because reps get paid commission on sales, not on specifications, any time a rep invests the months of preparation work needed to secure a spec and then ends up being unseated by a competitor (or by one of his channel partners) he eats all the cost of all the work and time he invested in that job. Reps also provide a growing number of other non-sales services.
"I think the complaints about overages are over-used," says Steve Clarke, president of Thomas Harris Agency, a lighting rep firm in Richmond, Va. "People don't see the underages. They don't see the eight fixtures we bought to do a mock-up for a client, or when the specifier leaves something off a job, we supply it for them and the money comes out of our pocket. Agencies can't survive on 3%."
Some manufacturers have moved away from offering overages. Lithonia, for example, doesn't pay commission on overages, but instead pays its reps a higher commission on projects that involve more specification work or involve product types that require more support from the rep, says Lithonia's Astary.
In the end, the problems with overages center on potential abuses of the pricing and substitution process to maximize overages, more than on overages per se. That problem can be alleviated by limiting specifications and defending them more vigorously.
The outlook for hardline specifications is not at all sunny from some manufacturers' perspective. Edds of H.E. Williams sees a trend toward open specifications. "Some of them openly take a cookie-cutter approach, where it doesn't matter what goes in as long as it puts out light," he says. It can make a difference whether the project is a speculative office building or afacility that will be occupied by the owner, he says. Designers of office buildings that will be gutted and retrofitted every five years when tenants change tend not to be rigid in the fixtures they specify, while owners who are going to live and work in the offices are much more aware of the quality of the lighting. Some specifiers are stronger than others and their specifications are rarely challenged. This is particularly true in the major cities, especially New York, Chicago, San Francisco and Dallas, where specifiers still hold sway, Edds adds.
In Richmond, Clarke of Thomas Harris sees a two-tier market developing among specifiers, in which one side will write specifications with "five names or equal" while another group of specifiers is tending toward one-name specs with no substitutions unless the substituted fixture is demonstrably a better solution.
Some manufacturers and reps in the spec-grade end of the business have started educating specifiers about this. Fowler originally wrote his book Spex to hand out to specifiers in his own northern Ohio market, but after selling out his first printing and having many requests for the book from his manufacturers and other spec-oriented reps, he recently finished a second edition of the book.
The International Association of Lighting Designers (IALD), Chicago, Ill., has long been interested in specification integrity, says executive director Morag Fullilove, but because the association is restricted to lighting designers, it wasn't able to address the subject in the whole-industry environment it wanted. The IALD, therefore, recently established an affiliate organization, the Lighting Industry Resource Council (LIRC), made up of lighting-fixture and lamp manufacturers and reps. One of the LIRC's first orders of business has been to develop a white paper and an educational campaign to promote specification integrity among lighting designers. The group plans to introduce its paper at this year's Lightfair convention.
Some specifiers have begun to fight back. One tactic some use is to break the package-pricing practice by requiring on all bids that all fixtures be priced by unit rather than as a package. A number of specifiers also have begun charging for their time and costs to evaluate substitution submittals that do not turn out to be equal products.
Distributors can help clean up some of the problems by getting more involved in the specification of the products and helping to defend the specifications once written. Some say they contributed to the problem by dropping their loyalty to individual manufacturers to take on multiple competing lines in an effort to improve their chances of getting the business. "It's difficult for a distributor to argue that one line is better than another when he's carrying its competitor as well," says Fowler.
Some distributors have a policy not to issue payments directly to the rep firms, says O'Hargan of Rexel/Summers.
While everybody seems to dislike how this market works, few have the power to do anything about it, other than the building owners, who could demand that the architect or engineer stick with the products they think are best. "Unfortunately, the only people who can force it are the owners," says Powers of Genlyte Thomas Group. "I would love for it to change, but I don't see it happening."