Scope Leak: The New Profitability Black Hole

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If you are an AV integrator reading this post, you are most likely very familiar with the term “Scope Creep”.  It is a term that typically describes what happens when a contracted project starts to grow incrementally at the end-user or client’s request.  “Scope Creep” has been a traditional sieve for project profits, because in most cases, the additions to the project are not major pieces of hardware, but instead changes to the functionality of the system.

Major hardware changes are typically easy for an integrator and a client to agree that a change order is due, and the integrator can then be properly compensated for the change.  Functionality changes however present a problem as many times these requested changes are framed as what the client “expected to get” when they contracted the project.  Many times the written scope of work can be up to interpretation when it comes to these requests and integrators typically end up spending additional time and adding small pieces of intermediary hardware to satisfy the client, all on their dime, hemorrhaging profits.

In today’s online and discount superstore world of commoditized AV equipment, “Scope Leak”, or the reduction in the AV scope of work, has become the integrator’s new profitability black hole.

Even in 2002, when I started in residential AV, Scope Leak was a potential problem.  The Best Buys, Circuit Cities and Ultimate Electronics of the world presented a new, easy, and cheaper way for consumers to access large format displays (LFDs).  As an integrator, I would spend my time determining needs and making recommendations only to have my scope of work taken down to the know-nothings in blue shirts to cross shop.  I don’t blame the consumer for wanting to assure they are not being taken for a ride by an overzealous sales person, but it became an issue none the less.  In the beginning, I just started reducing margins on large electronics to help assure that this portion of the scope stayed in tact, but as the online world of pricing became more aggressive, I could no longer compete, so many times I would concede the piece of equipment altogether, and just charge to install it.  It really seemed like the best thing to do, considering I was fighting over 5% margin on a $3000 product, or about $150.  But was that the true loss?  We’ll revisit that in a minute.

Fast forward 13 years to 2015.  Today, Scope Leak is no longer just the LFD, but now the touch panel has been replaced by an iPad, the hardware codec has been replaced by the software codec, the source devices have been replaced by the cloud, and soon many of our matrix switchers will be replaced by ethernet switches and our control system processors replaced by virtualization.  This is why the traditional integrator business model of making high margins(40-50%) on proprietary equipment has been and will continue to be in jeopardy.

This Scope Leak is even more of an issue to profitability, because we are no longer talking about losing scope for equipment with relatively low margins, but also losing scope for equipment that has traditionally added a lot of profit to our projects.  The client is now handing us more and more Owner Furnished Equipment, OFE, (Oh how I hated seeing that acronym in an RFP), and asking us to integrate it into our system designs while also figuring out how to make them work cohesively with their chosen software platforms and within their network security protocols.

It would seem that the successful integrator of today is the one that has learned to realign their business to operate on a service based revenue model.  These integrators are the ones who understand the true cost of a truck rolling 15 miles down the road, accounting for everything from administration, to overhead, to loaded labor costs.  In these cases an integrator should be able to bid a job to be profitable based on services alone and any hardware margins should just be an added bonus at that point.

I propose however that Scope Leak, despite the fact that it decreases the amount of equipment included in the scope, actually increases the cost of doing that project successfully.

When looking at a project with OFE in the scope or one that uses software codecs, etc, the integrator needs to ask themselves a lot of questions first in order to properly bid the job.

How familiar is our firm with the OFE?

What is the risk of damaging or breaking the OFE?

How available is the OFE if it needs to be replaced?

What software platforms are they using?

How new is their PC equipment?

Is all equipment on the same platform?

Will IT be available to help troubleshoot PC and software issues?

Have we executed a similar project with all the same parameters including the OFE, software, and network security protocols?

What does the access in and out of the site look like?

How much time will a return trip take?

If we had to bring in outside help, who would that be, and how much will it cost?

How much money does the business need to make on this project to make it profitable given the resources dedicated to it?

Of course there are a few others as well that I’m sure you may have already thought of or written down, but hopefully the point is clear.

Based on all of the above, I have 2 suggestions on how to help alleviate the potential profit sinkhole that Scope Leak presents to our businesses.

1) Charge a handling fee on all OFE.  

There is a real risk to handling equipment provided by someone else as well as a potential learning curve to installing it and setting it up for the first time if it is not your preferred solution.  Manufacturers of products build in a warranty contingent to the “cost” of producing their products.  Those funds sit in a separate warranty bucket for the off occasion that their product fails, they have funds allocated for its replacement.  Integrators should be doing the same with OFE and charging for the risk involved in handling the product and for the potential time suck that may occur when it does not perform as expected initially.

2) Eliminate line item pricing.

Calm down!  As a former integrator I know that many times you are REQUIRED to provide a line item bid to the end user per their RFP process.  I am NOT suggesting that you refuse and forgo needed work.  What I am suggesting is that you implement some verbiage in your bids that states that “line item pricing is for comparative and illustrative purposes only” and that “the project is bid as a whole”, and “any deductions from the scope of work may not necessarily reflect a discount of the full line item amount.”  This way, if the client starts to dissect out items from your scope of work, you have the opportunity to revise the price to one that is still profitable given the revised scope, and not lose all your profits to Scope Leak.

At the end of the day, you need to make sure that you are pricing your projects not only based on the items and services that you are providing, but also based on the proposed risks and liabilities you are accepting in taking on a scope of work with OFE hardware, software, and security considerations.

Some of you may argue that you will lose projects to lower bidders that do not understand their true costs of doing business.

I counter by saying it is always best to enter a responsible bid.  If you bid to win the project and are expecting to issue several change orders along the way to maintain profitability, you are setting yourself up for failure.  Even if you get the client to agree to pay the change orders (which is a gamble at best), the end result will most likely be a client who feels like they were “nickel and dimed” along the way, resulting in a poor future relationship and a low chance of a repeat customer.

The low bidder who does not know his true costs will not be in business long in this new world of integration.  It is best to let them fail and take the jobs that will allow your firm to be profitable in the mean time, so when that day comes, you are still in business to pick up the pieces and perform the job successfully.