2019 Trends in disaster restoration and 2018 review
2019 Restoration Trends
Welcome to my mostly annual restoration trends update. I have spent over 30 years working in the restoration industry which gives me a relevant perspective on the business of restoration. You mauy use the following list to assess strategy for your business or just as an interesting read. It is my belief that these issues will be the top drivers of change, not only this year. but into the future.
Prior to starting the current years predictions, it is appropriate to assess my past predictions to provide credibility for my look into the future. Overall, I think that I was very timely on big issues that impacted your business, and our industry in 2018.
Review - 2018 Trends
Labor shortages and wage increases. This is my top tend for this year. There are many big changes happening in the industry but perhaps the biggest limitation to growth is the availability of labor resources to complete the work. This is true of front-line technicians, managers and subcontractors. There are more people working today according to The Bureau of Labor Statistics than any other time in the history or our country.
Unemployment was under 4% for most of the year which according to many economist is statistically 0. This factor has driven up costs for many companies and limited growth in others.
Grade for this prediction: A
Industry pricing challenges. The way our industry prices jobs is creating a stagnant pricing structure and often the feedback program used by many restorers creates downward pricing. At a time where labor and material costs are increasing, the feedback component of the unit cost pricing fails to accurately capture true costs. Some of the feedback challenges are user based due to lack of understanding on how to update retail jobs or a lack of ownership of these processes. The current pricing structure is making it very difficult to achieve or maintain margins. Even if you are effectively updating pricing, this model is reactive and a lagging indicator of costs.
Grade for this prediction: A
TPA Influence. There has been a lot of influence on this subject over the past year for several reasons. The first is the substantial increase in the amount of work handled by these programs. The next is the influence of these programs on the job scope. Although the top managers at these programs have an apparent intention to make sure the job is completed with the right scope and for a fair price, this is not always the case. There are many that believe the role of these programs is to minimize the scope at all costs. Others realize that it takes additional administrative, management and frontline resources to meet the program expectations. Regardless of your thoughts on the programs, you can expect them to continue to affect the insurance restoration market. I also expect these programs to continue to consolidate and also push for stronger compliance. I am aware of at least one new TPA program that will be entering the market most likely in 2018 and there may be others. Looking at the acquisitions by Vericlaim in 2017, I would expect to see more in 2018 as well. I suspect that as these programs try to differentiate in the market they will come up with new and better ways to measure and control the contractors – expect more and faster. I also would expect these programs to extend their reach outside of the Insurance market and into self-insurance, hospitality, medical and property management work.
Grade for this prediction: A
Continuing movement of outside groups. Given the influence of the TPA programs and manipulation of claims by some insurance companies, I see an increased influence of the “outsider” groups that are standing up for the independent company. The programs are gaining traction through social media. I am not certain of their impact or influence in the industry because they are swimming upstream. I don’t want to minimize their potential impact, but I am also uncertain of how long any influence will take. I don’t necessarily see a change coming from these groups in 2018, but I also see more and more contractors publicly or even quietly joining their ranks. I don’t think they will have an immediate or strong impact in the industry – but they do have a place. You can see the influence of these types of groups of overthrowing governments around the world – so I would keep an eye on their influence. I also think that at the least they will help the independent companies improve their businesses and process.
Grade for this prediction: B
I see movement in this area, but I don't think it had a big impact on the industry or individual companies. In fairness I did state that they would likely have a limited immediate impact. I wonder if change will more likely occur from inside the industry, rather than the outside groups?
Weather. The top story of 2017 was the spike in weather events. There were events in nearly every quarter of the year and in nearly every corner of the country in 2017. This was great news if this was in your backyard. Some of the events were so significant that many companies hit the road to help for the first time in their history. One challenge was that the every-day claims appeared to be down in many markets. This was quite a dichotomy because peak work was followed by slow times.
I expect the trend of weather events to continue in 2018 which is already happening
throughout the East Coast and Midwest with record setting cold weather and snow. I would guess that the ice dams in the Midwest to be substantial as soon as it starts to thaw. In past years where we had dry weather in the West Coast in the winter and artic air in the Midwest, the hurricane season was very mild. I wonder if we are setting up for that again. The situations that lead to fires in Canada and the West appear to be setting up for a similar situation this year. I would expect large fires to be a factor again along with typical spring rains and windstorms. I am not a meteorologist – but my unprofessional opinion is that we will not see a repeat of the 2017 hurricane season.
Again – not a professional or educated opinion but It is starting to look more likely that the earthquake potential is picking up throughout the ring of fire and also in other regions of the country. I would not be surprised to see a major – 6.5 or greater earthquake somewhere in the US this year.
Grade for this prediction: A or F
This was an interesting one to grade. I failed in my prediction of limited hurricane activity. I was feeling fairly smart until September when we were hit by Florence and then Michael shortly after. I did feel vindicated when the earthquake hit Alaska in December (not that it was a good thing – just accurate.) The A part of this grade comes from the entire prediction other than the hurricane activity.
Consolidation and M&A activity. Over the past decade both the restoration and insurance industry has seen a major wave of consolidation. This is coming from outside groups, private equity, growing restoration enterprises, and even publicly traded companies. This is not unique to our industry or even insurance, it is the nature of business. These trends appear to be accelerating as people with money are looking for yield. Acquiring companies and then driving value through efficiencies or increasing earnings multiples through larger EBITA numbers is an effective strategy. Given the strong economy, low yields for bonds or savings, as well as the large influx of cash due to the new tax plan, I expect 2018 to be a strong year for M&A activity – both in our industry and from our client groups.
Grade for this prediction: A
M&A was active and alive in the TPA groups, property managers, brokers and restoration groups.
2019 Trends and Predictions
My number one prediction for this year remains unchanged – Labor shortages. Labor shortages continue to be a big issue in most restoration companies today. If unemployment goes from 4 to 4.5% this will have little impact on your business. Looking through postings on various LinkedIn pages shows, literally hundreds of open positions at various restoration companies. One company that I am familiar with, stated they currently have 100’s of open positions in their company alone! I would expect some pressure to be relieved near the end of 2019 yet, I don’t think that will impact the pool of talent available in your company. This shortage covers all positions in restoration from frontline technicians to all management positions. In addition, it is very difficult to find skilled construction workers in most markets. The laws of economics tell me that this will lead to increased cost of labor. There are some companies that are severely limited in their growth because they cannot find needed people to fill the available positions in their company.
The following are my recommendations to address this challenge in your business
§ Create a culture that drives candidates to your company. Although there are many job openings, there are many people that would make a change if they felt they could find a company with an engaging and challenging culture – one that celebrates success, creates a sense of belonging and has a compelling vision.
§ Take a look at your compensation plans and make sure you are paying at or above market wages. Define and implement an effective compensation plan that allows you to reward great performance and pay top dollar while assuring the company makes money first. Our rules to compensation are that the company must win first, must win more and after that the employees can win – and potentially win a lot. A competitive compensation plan coupled with a great culture will help not only attract great people but it will also help retain your top performers. The cost of turnover is very high so make sure you take care of what you have.
§ Be a talent scout – always be on the lookout for great workers because they are already working. You will not likely get them to reply to an ad since they are likely not looking where you are posting your ads. Make sure the entire company knows that they will be rewarded when they refer great new team members. As a leader in your company this is a very important role – some would argue that the top role in the company is to locate great people.
§ Purchase the book Who – Solve your company’s #1 problem by Geoff Smart and Randy Street
§ Make sure your jobs are properly prepared for subcontractors when they arrive. Realize that time is money and if they have to spend hours getting ready to work or understanding the scope then they will likely find other companies to work with. Make sure jobs and clients are properly prepped and when the work is successfully complete – make sure they are paid quickly. All of these items will not only help keep great subs, it will also help improve your margins.
Catastrophe and large losses are one of their biggest challenges for major client groups – TPA, property managers, insurance companies. This will start to drive claims decisions. These groups will start to make vendor decisions based on their ability to respond to local and regional events more than everyday claims decisions. In most areas it is easy to solve claims needs in a normal environment – it is during peak periods where companies are feeling exposed. I expect weather events to continue to be a challenge in 2019 and the foreseeable future. This includes cold weather, spring rains, summer storms, tornado events, wild fires and hurricanes. I am not brave enough to predict hurricane activity this year, I will leave that up to the scientists at Colorado State University. I do expect wild fires to continue to be a challenge. The forests in the West have such a high fuel load and forest management practices have led to a dangerous environment, especially when combined with low rainfall and mountain snowpack. I find it interesting however that the everyday restoration market is slow in many areas of North America, but catastrophe events are driving record insured losses. I am seeing companies outside the CAT zone struggling to maintain revenue and those inside struggling to keep up with the onslaught of work.
Recommendations:
Make sure you have a diversified marketing started and create a marketing plan many different sources. Work to keep your top lead sources to less than 30% of your overall business – the lower and more diversified the better. This will help keep the phone ringing and also help in the even that any of your work sources is slow or cuts you off.
Define a catastrophe response plan for your market and if you want to travel then plan prior to hitting the road. I recommend holding a management retreat at your office or offsite to plan for the day when you get 100’s of phone calls followed by a second or third. Break down the entire process from intake to fulfillment and collection. If you are traveling for losses this is even more important. You need to plan for all the travel and marketing logistics as well as how you will maintain operations back home. Although it appears there is more than enough work in catastrophe zones, it is often hard to get on the paying jobsites that you want.
Know your numbers and have a responsive overhead. If you are clear on how and where you are making money and also see the signs when things are slowing, then you can create a plan for proactively managing this process. Being financially aware will help you manage peak work and proactively address the slow periods between.
If you are always marketing, then you may find that you rarely slow down. Create a marketing and sales culture that is understood and owned by everyone. Make sure that your entire staff is aware of how they can impact sales in your company and there is a plan to reward this activity.
Technology. This has been a slow-moving trend but it is starting to become a reality for today’s restoration and insurance companies. I have been watching the insurance claims industry as they assess new technology to streamline operations and provide better and more accurate service. This year many of these treads are becoming actionable. I know that franchise groups have specialists that are studying the technology options, so their companies are aware of the coming trends but are you? If you are not looking at technology for your business, then you will be left behind. Here are some things you should be aware of because they are becoming a reality in the claims world and the technology is affordable and available.
There are several companies that are using Machine learning and artificial intelligence to help you provide better estimates. You can upload your estimates and they will be able to recommend scope items that you may have missed based on the other items that are present. This will be a great help in estimating accuracy for restorers and hopefully will be accepted by the insurance industry.
Better underwriting, claim communication and documentation into a seamless package. Companies like Encircle and Matterport lead with the technology to drive this trend. Both of these products/services help bring efficiency in estimating to your business and greater documentation and accuracy. In most companies the estimator group is among the highest paid in the company – this technology will likely change the way that data is gathered and estimates created. I expect that in 5 years or less the camera will document, measure and scope many jobs – at least where there is little structural damage. Right now, 3D images are being used for underwriting and can be connected to the claims process to properly follow the property through the claim. Images taken during the first notice of loss will help verify damages, assist in setting reserves and prevent fraud. I am not sure the role of the contractor in this process but it will be helpful to utilize the same platform.
Internet of things will be used to identify risks and potentially limit damages. Now that many people have so many smart enabled devises in their homes and businesses insurance companies are better able to identify risk factors and potential damages before they happen or immediately. This technology may limit the overall damage - for example a broken waterline or water heater that shuts off the water and notifies individuals of the damage. I don’t see this impacting restorers much but it will eventually diminish damages.
Cost inflation – This is not a new trend however it is a continuation of issues that have been building over the past couple of years. Input costs are increasing due to labor issues throughout the supply chain as well as pricing for many construction products and services. Your pricing database is measuring this, however I have not seen a commensurate pricelist increase. Contractors are in some-ways responsible for this situation as well, as they are not updating retail pricing. Every uploaded estimate is sent through pricing feedback which affirms the prices used in that estimate. It is my expectation that the construction industry will see continued price escalation throughout the year. If we experience another wildfire or strong hurricane season, then I would expect that to impact prices as well. Construction continues to be strong and the available pool of skilled trades and available employees are not growing with the demand.
Response to higher prices:
§ Be price-aware and work to lower your acquisition costs for materials.
§ Have a plan for updating your price lists and proactively reporting price increases. Take time this year to learn more about impacting the pricelists in your local market. The software programs you use have the ability to properly affect your pricing. If you need resources for this then send me an email and I will appropriately direct you in this endeavor.
§ Have really good metrics that allow you to understand your costs and profitability in all areas of your business. Just thinking or feeling that your costs are increasing or profits decreasing is not enough. You need to have information to properly manage your changing business.
§ Budget your projects and all major purchases. Too many companies overlook the need for managing all of your expenses. You should be in control of how you spend all of your money in your business – talking a look at your job cost sheets after the job is complete or the financial statements after the month is complete makes you an unnecessary victim. If you know your costs are changing, then take charge of where and how you are spending money.
§ Look to use time and materials rates where possible. This should help you properly reflect the cost of doing business regardless of the changes in your costs.
§ Take a look at your indirect costs. This includes the administrative team, your estimators, vehicles and other items that are not often job costed. If you do not have budgets or targets for these items then they can quickly and quietly inflate.
Cyber-crime – This is not a big deal; until it is. The attacks are targeted and will not hit companies at once or the the industry as a whole. It is not an industry trend, but it is a reality that your business needs to have a plan to address. Being hit with a cyber-crime can destroy your business – or at least be an unnecessary distraction that will keep you from properly serving your clients and may have a substantial financial consequence.
Recommendations
§ This should go without saying but your business needs a cyber Insurance policy. This is to cover not only having your information hacked, but also in case that your client’s information is stolen through your company. There are many different types of policies therefore make sure you have a conversation about the options and risks to your business.
§ Training
Cyber insurance may only cover your business if you take steps to prevent and mitigate the risk. You should be aware of your policy, and your responsibilities. You should work hand in glove with your IT department to understand your policy and your responsibilities.
I have worked with companies that have a several tier plan of ways that the company can prepare and prevent attacks – or respond in the event of an attack. There will always be more you can do, so you should have a plan and a budget for various options and then make an appropriate action plan based on your company, resources and potential risk.
§ Contingency planning – prepare a contingency plan to determine how long you can work without your network and various options for restoring your network in the event that you are held hostage. This is a very fast-moving world and I recommend that you think you consult with and work with specialists in this field. I am sure that Marriott, Target and Experian thought they had a good plan – until they didn’t.
TPA – I am not sure if this is a prediction or just wishful thinking, but I expect to see some more flexibility for management of contractors in these programs. I am hearing developments right now that are very detrimental to contractors from previously strong insurance companies. In the current work environment – labor shortages, increasing costs, increasing customer expectations and a strong economy – I think that the contractors have some leverage. The TPA’s are not able to fill the demand for services in some key markets. Many of their best contractors are reducing zip code coverage. Right now, the claims examiners and adjusters are aggressively managing the claim and the contractor – I am hopeful that this will change. Perhaps a TPA will emerge that is friendlier to the contractors. This is not evident at the beginning of the year – but maybe it will start to change in Quarter 3 or 4 this year. Consider this a bonus prediction – because my confidence is low.
Recommendations:
§ Make sure that you limit your work from any one client to less than 20%. This way you are in control of your business and not beholden to the demands of any client.
§ Do what is right – you are the restoration professional. Make sure that you work to preserve the property and protect the occupants of any damaged property.
§ Look for ways to streamline and reduce the cost for repetitive items in your company.
You may have estimators and project managers that focus on the relatively simple program jobs – estimating, reporting, job management
§ It is OK to be a ‘program’ contractor. There are a lot of great companies doing good work and making money while working as a part of programs – just make sure you have balance. Some things that I have seen from companies doing this type of work
Lower margins.
Smaller average job size.
Being asked to do less than is required to restore the property.
Having increased overhead due to the additional administrative responsibilities.
Being overly dependent on a single work source that disappears overnight.
“Take it or leave it” settlements.
The restoration industry is in a real time of change. There are many influences from in our industry, and outside our industry, as well as items that are in our control, and others outside our control. It is more important than ever that you are in control of your business and your strategy. The decisions you make today will allow you to be a victim or a great success. Now it is more important than ever to be a leader in your business and your industry.
Wishing you the best in 2019 and if you need assistance in developing a plan to meet these changes head-on and assure your success - contact Business Mentors – we have been helping create successful restoration companies since 1997.