How Job Cost Mentality Accelerated the Live Event Death Spiral
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Tom Stimson
March 21, 2023
A gravestone with the words,

I want to share what I’ve learned about running a consistently profitable organization in the Live Events production space.

In Chapter 1, I recapped the financial history of Live Events in AV. 

TL;DR Live events used to make a lot of money, then they didn’t. 

Now I want to explore the pivotal event that kept us from rediscovering profitability for so long.

Chapter 2 — How Job Cost Mentality Accelerated the Live Event Death Spiral

All businesses do this: Succeed, fail, retool, try again, and on and on. It’s when you quit trying again that failing starts to control the narrative. But Live Events seemed pretty good pre-pandemic. Revenue was strong, and everyone had access to capital. Increasing profit should have been an easy fix. 

Many owners wondered, “We’ve had some good years. What did those look like? Could we copy that?”

As we analyze the most profitable years in any production rental business, most have one thing in common: Those businesses saw huge and unexpected revenue growth from windfall jobs in already busy months. There was no time to add overhead or spend ahead of revenue. Job costs soared, the team was burnt out, and major mistakes slipped through the cracks. 

But, they made more money — that month.

“We didn’t manage the growth well,” said the owners. “The next year we added staff, expanded the warehouse, and bought more gear, but all the shows stacked, so none of that actually helped.”

This is a shared experience amongst all owners: Shows rarely line up nicely so that your equipment and staff can move gracefully from one profitable gig to the next. Sometimes it happens, but that just reinforces the dream.

Except now, there’s more gear to pay for and more employees who need to be booked on to shows.

“We just need to control our costs better,” said the accountants. “Let’s analyze each project and use that information to change behaviors.”

Job cost was easy to rally around. I mean, it just sounds important. Plus, it’s data, and data doesn’t lie. So an entire industry segment embarked on the Holy Grail of effective job cost method only to realize they had no means of measuring the applied cost of rental equipment, which was 60% to 70% of revenue.

Most job costing initiatives finished up in one of two camps. Camp A said the solution was to apply an overhead expense to every job (overhead burden) and declare that any job that couldn’t meet the threshold should be rejected. 

Funny thing is, every job was able to meet the threshold because every job assumed it would get the free equipment from the company inventory and the mostly free technical staff. There was plenty of money left over to cover this so-called burden.

When the real numbers finally came in, some jobs looked wildly profitable and others looked ugly. “Oh well, blended margins look OK, so I guess this works?”

Camp B of the job cost army said that as long as internal resources were used, every job would be fine. Sub-rentals and outside labor were the culprit. “We should always mark up outside direct costs by at least 20%.” Of course, every time that happened, the blended margins dropped even more.

Both camps assumed we had a crystal ball that knew exactly how many resources would be needed so we could stop selling if the margins were too low. If margins dipped (which they did), the solution was to buy more gear and hire more staff. 

Soon it was clear that as long as there was enough revenue in the busy months, the company was profitable. In fact, three or four high-volume months per year proved this theory to be true. Problem solved. “We just need more revenue in the slow months.” Handshakes all around. 

What they didn’t realize was that no one has ever solved the expected seasonality problem in a seasonal industry.

Every solution to the profitability equation required additional overhead, which increased the need for revenue, which drove prices down.  

It’s ironic that the very thing we focused on to improve profit actually helped wipe out profit: Job Cost. The numbers didn’t lie; they were just misinterpreted.

Job Cost said that inside direct costs were less expensive than outside direct costs, which from a job perspective was arguably true. From a macro view, jobs were only utilizing about 60–75% of inside direct costs. The unused portion represented the 10–15% of net profit that had vaporized since the turn of the century.

The rest of the missing net profit was due to price erosion from an over-saturated marketplace. Too many employees and too much rental equipment drove prices down as companies fought for cash flow. 

Buyers were in control. 

What We Should Have Learned Sooner

The pandemic exposed a fundamental flaw in the rental production business model. The typical transaction is a project or job, and the best practice is to track related costs to assess the overall profitability of that project. Three major job cost areas are labor, sub-rentals, and logistics. 

Purchasing more equipment reduces the need for sub-rentals, hence lowering overall job costs. Having a larger staff reduces outside labor costs, assuming full-time staff is less expensive than outsourced talent. Owning more trucks and employing more drivers reduces logistics costs per job. 

Production Rental businesses in a growth phase would often purchase and hire ahead of demand in order to realize the cost savings sooner. This makes perfect sense — until demand drops. When that occurs, over-staffed and over-capitalized companies were forced to sell at reduced margins to maintain cash flow. 

This of course has the tendency to drive prices down across the market, which creates even more urgency to lower costs. Hence, buy more gear and hire more people. The vicious cycle is known as the death spiral

The underlying problem is that none of these job cost indicators take into account the annualized costs of these resources, nor their overall utilization. The job may benefit, but what is the net effect on the business?

Job Cost mentality led to over-saturation of technical staff and equipment across a seasonal industry. 

The lesson from the pandemic downturn in the Live Event world was the realization that a better model might be to dramatically reduce overhead by maintaining a much smaller staff and outsourcing a majority of direct labor. Likewise, owning less rental inventory and relying on wholesale rental suppliers for equipment with lower utilization rates also makes sense.

In fact, we’ve seen huge increases in profitability under the low-overhead / high-outsource models. Was this all just the effect of pandemic pricing and supply chain shortages? Or did we stumble onto something sustainable?

Increased demand does drive prices up, as do constraints in the supply chain. One can view this as inflation, but objectively this is more of a market correction tied primarily to the cost of talent. After years of falling prices (and shrinking margins), the market corrected itself.

If 2020 is remembered for the enormous shock to our systems and the government subsidies that kept companies afloat, then 2021 is marked by crazy fluctuations in demand. Those fluctuations forced us to keep overhead in check, which gave the low-overhead model the true trial run it needed.

After an initial setback caused by a new COVID variant, 2022 delivered fairly steady demand for live events. Unfortunately, as society started to crawl out of isolation, supply chain issues affected cost and availability of just about everything we needed to do a show.  

Now, everyone has learned how to turn down work. If you ever wanted to stress test a system, 2022 pinched every constraint.

The results were pretty awesome.

Now we could clearly see that maintaining lower overhead, applying even more outsourcing, and (gasp) turning down work all combined to make 2022 the most profitable year ever for many of our colleagues. 

Some folks might think it was luck and timing, but I truly believe we’ve finally uncovered the right formula. Plus, we’ve tested it under extreme circumstances, and it works.

What is the way forward? How do you apply this to your unique business situation? I’m glad you asked.

Jumpstart Management Workshop on Intentional Scalability

Jumpstart Workshops are networking, sharing, and learning events for managers and owners of Live Event Production companies on the road to Intentional Scalability. They are produced by Tom Stimson, the foremost expert on the business of corporate event technical production.

 


About Tom Stimson
Tom Stimson MBA, CTS is an authority on business and strategy for small- to medium-sized companies. He is an expert on project-based selling and a thought leader for innovative business processes.
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