Strong management control is key to success
The dire state of the world economy and swingeing public spending cuts have had a crushing impact on the hvac industry, but there are ways to fight back according to Michael Ball, chief executive of chimney systems supplier Schiedel. Ian Vallely reportsSchiedel started in Germany in 1947 and now is market leader in Europe for chimney systems.
Despite a series of economic hammer blows suffered by the building services industry over the past five years, Michael Ball, chief executive of Tyne & Wear-based Schiedel Chimney Systems, remains resolutely upbeat. He says: 'Historically, we have been very successful in winning PFI work. That has stopped as the Government holds back on spending on new schools, for example.
'However, although we have lost out on the newbuild sector, we have gained on the renovation side so it's by no means all bad news.'
Cancellation of the lucrative Building Schools for the Future (BSF) Programme was a huge blow to many in the HVAC sector, but there is an upside even here, says Mr Ball: 'Many educational buildings have been neglected because local authorities thought they were going to be building new schools. Consequently, a lot of schools are rundown and are in dire need of refurbishment. I believe the work coming out of that is a real opportunity for the building services sector.
'Besides, I still think the private sector is relatively strong. I've certainly not seen any sign of real cutbacks.'
On the commercial side of its business, Schiedel traditionally placed a heavy reliance on the public sector for its income. However, two years ago, the company commissioned a survey which suggested that spending would move away from public work and more towards privately funded projects. As a result, it has looked more to the private sector for work and this strategy has really paid off, according to Michael: 'On a rolling 12 month basis, we have met all our objectives and hit all our targets in the commercial sector and our margins have improved,' he says.
However, revenue generation is only one half of the commercial equation; cost control is the other. For Michael, this is vital to business success, especially in the we currently operate: 'Certainly on project work, which is borderline in terms of margin, one thing can go wrong and you can lose a lot of money so we have introduced systems and processes that allow us to keep much tighter control on projects.
'It's nothing spectacular, but it is focusing on cost management in individual projects - we analyse project costs a quarter of the way through the job, half way through the job and in closing on practical completion.
'We also took a business decision that we would walk away from borderline margin projects. If the margin isn't in the project you have to ask what the point is of doing it. We are not just about covering overheads; we are about making money.'
But making money isn't easy, especially in today's ferociously competitive business environment. And, Michael believes things are set to get even tougher: 'I don't think we have seen the true depth of the trough yet. I think we will reach the low in the next six to 12 months. There's not that much money floating around the industry and when the work gets tighter everybody finds themselves fighting for a bigger slice of a smaller pie. In practical terms, if you're not strong enough in your business management, what you ultimately have to do is reduce your margin.'
Schiedel has stepped back from that. Michael again: 'We have concluded that we can ride the storm in the economy because of the size of our organisation, but that does not mean we will be tempted to do foolish things in the short term in order to pick up work. We examine every project from a risk management point of view, even at tender stage.'
And that means building a realistic strategy when it comes to bad debts and developing a crystal clear vision of where the business is going.
So, says Michael, progressive businesses are not afraid to walk away from projects. 'You have to have the courage of your convictions. It is also important that I run the business as if it was my own money. I am passionate about running this business as if every penny is my own.'
As for his vision of the future, Michael believes the industry has a clear focus on being greener 'so I believe there will be an influx in energy efficient appliances, including biomass boilers, which will impact on my business'.
However, the commercial heating sector, he says, is behind the domestic sector. 'In the domestic sector wood burning stoves already have quite a strong foothold in the secondary heating market whereas in commercial, there are early signs that there is movement in the marketplace towards biomass and wood pellet boilers.
Biomass set to grow
'I think biomass will grow, but I would say that the Government have got to put their hands in their pockets and start funding some of these schemes. They don't have a great track record on subsidies - they tend to introduce them, let them run for a couple of years and then abandon them...
'Governments generally think over a relatively short time horizon - their five-year term in office and that can impact negatively on business planning. I believe a way must be found to develop longer term macro-economic policies that benefit business as a whole.
'If this happens, I think the market will come back and, in any event, those who are strong and have leading brand names will see themselves through the tough times.'
Shiedel in a nutshell
The company's founder, Friedrich Schiedel, was the first to produce prefabricated components for chimneys.
The stimulus that decided the company's expansion was the introduction in 1973 of the SI, Schiedel's three-component insulated chimney model which revolutionised the chimney market.
The development of the three-component system led, in 1984, to the Schiedel SIH insulated chimney with air-cavity ventilation, said to be the first moisture resistant chimney system.
With a staff of more than 1,500 globally, Schiedel generates an annual turnover of around Euro 200 million in 26 countries.
Four companies came together to form Schiedel Chimney Systems in the UK which now employs around 100 people. They were Rite-Vent in Washington, Tyne & Wear (acquired six years ago); Irish Stoneware in Carrickmacross, County Monaghan; Ulster Fire Clay in Coalisland, and Isokern (UK) in Wimborne, Dorset. Chief executive Michael Ball says: 'We are UK based, employ UK people and over 90 per cent of what we manufacture is sold in the UK.'
The UK company operates in five business areas - non-residential (commercial); residential (domestic); export; original equipment manufacture (OEM) and inter company - selling to other Schiedel companies around the world (1 per cent).
Michael says: 'A fifth of our overall turnover is commercial business. That is growing and this fits our long-term strategy.'
Why cost control is critical
The single biggest issue occupying Schiedel ceo Michael Ball's time is cost control. 'It's critical to our success. We are a very lean business, but there are other ways you control costs - project managing jobs correctly. Increasing prices is a way of controlling costs because you can make more money by obtaining true value from the products.
'There is also a cost control issue in terms of customers. If they are not generating enough margin for you as a business to recover your overhead costs and cost of manufacture you have to consider whether you want to continue trading with those accounts.
'Any fool can sell a Rolls Royce for the price of a Ford Mondeo. It is not about chasing turnover, it's about increasing our business turnover as well as our contribution margin. The last thing we want to be is busy fools.'
Suppliers also need to convince their customers of the quality of the product, he adds. 'Quality comes in many different guises - it's not just the quality of the product, it is also the quality of the service and after sales support, and technical knowledge.
'Anyone can chase turnover, but the most important thing is to chase turnover with profit.'
6 August 2012