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Contributing EditorWho does a remodeler turn to when he runs into problems that keep the company from growing? It could be a CPA, attorney or therapist, or it could be a professional peer group that offers many resources and valuable expertise from fellow remodelers.Tom: Today's topic is the value of peer groups. Leon, define peer group.
Leon: In our case, I actually call it a group because I belong to Business Networks. It's a bunch of remodelers who are all in the same kind of business who are non-competitive and are able to help one another to get where they need to be.
Tom: OK, Brad, define what you would call a peer group.Brad: I'm a member of the Remodelers Advantage peer group. For me, it's really my personal board of directors. They help me with running my business. We can share information; I can bounce ideas off of them, share in their knowledge and support. Again, my personal board of directors.
Tom: Brad, how does Remodelers Advantage work?Brad: There are about 10 other companies in my group from various parts of the country. All are full-service design/build remodelers. We meet twice a year, in the fall and spring, off-site for the meetings. Typically every fall we have a case study where we go and study one of the member's companies. You kind of go in as his board of directors and see how you can help his business run better and how you can make improvements. We also have a monthly phone group. Your big group breaks down into individual phone groups. That way, you can touch base every month to make sure how you're doing in terms of commitments that you've made for your next meeting and what you're going to be working on. That's how our group works.
Tom: Leon, how does your peer group Business Networks work?Leon Noel, OwnerYour Kitchen & Bath Design/RemodelLeon: In our case, it's pretty similar. I have one advantage, and that's the fact that I did belong to RER before I became a member of Business Networks.Tom: And RER is?
Leon: Remodelers Executive Roundtable is what it was called then.
Tom: Now that's the same thing as Remodelers Advantage.Leon: That's correct. And we, likewise, meet twice a year. Every month we have an hour or two hour conference call amongst all of us. We share our numbers. We help each other in directions they need, whether it be marketing, margins, all sorts of things. One of the advantages in what we do: we have 11 people in our group — all of them have agreed that they will turn their numbers in every single month. There is something there to look at and be able to review and give some recommendations to them in the conference calls. Or it might even be individually that we can talk to one another.
Tom: Leon, where did you hear about either the Remodelers Advantage or Business Networks?Leon: I actually heard about RER back in 1998. I thought to myself, "I'm not doing so well and need a peer group to help me." I can remember the very first meeting I went to. They looked at me and my gross margins and said "Leon, if you want to put a cross out in front of your building, then go do so, because right now you're just doing this for a hobby." That was an eye opener, and I have never forgotten that statement. Fortunately, as Brad would probably attest to, in the remodeling business we have what we call the "10 and 10" rule. That's what we try to achieve. The only way to do that is by having some good operating skills, standard operating procedures, employee manuals, etc. That's what we all try to achieve.
Tom: Explain the "10 and 10" rule.Leon: The "10 and 10" rule is 10 percent compensation for the owner and 10 percent on the bottom line pre-tax. The issue of why I dropped out of RER wasn't anything personal. I thought I got the message, and I was there from 1998 to 1999. In 2000 we went through a major reconstruction here. The street in front of us was torn up for a year, and wow, that hurt! Then, I went to a Les Cunningham seminar. I struck up this conversation and have been a member of Business Networks for four years now. It's been a Godsend for me. My board of directors has helped me. I'm in agreement with Brad on that.
Tom: That's very good. Brad, where did you hear about the peer group?Brad Hinkson, OwnerHinkson ConstructionBrad: Actually, I was playing golf with a fellow remodeler here whose company is very similar to mine in terms of how they operate, their ethics and everything. I just asked him, "What's the best thing you've done? What's helped your business the most?" He said he'd joined Remodelers Advantage. The next thing I knew, a day later Victoria Downing (current president of Remodelers Advantage) called me and invited me to join a group. I thought about it for a week and decided I would come on board.Tom: And, Brad, to follow up, why did you join?
Brad: I really knew that when you're a small business owner you've got to have a certain amount of ego to go to war every day. I really knew that there were some things I didn't know and didn't quite know how to figure those things out. Listening to this guy whom I respected tell me that for him it was probably the best decision he ever made, I thought, "It's worth trying out." It was a completely different environment than I'd experienced before.
Tom: Brad, what goals were you trying to achieve by joining this peer group, and did you achieve them?Brad: Well, it's always a work in progress. For me, as Leon said, I was running the business by the seat of my pants. We were a smaller company, and I could run it out of my head. But, as we kept growing, it became harder to do. As we added employees — at one time we had 10 or 11 employees — it was almost impossible. I knew that financially we weren't doing well in terms of any kind of benchmarks; we weren't meeting those benchmarks. We weren't from a compensation standpoint. There were a lot of things that were wrong. We did a lot of things great in terms of customer service. But from the backside, what the clients didn't see — the inner workings of the company — was frankly kind of limping along. We needed to get systems in place. I thought I understood our financials, but once I got in the group, I realized that I didn't really honestly have much of a clue about what was going on. In terms of my goals, it was to become a financially sound company, and basically, from a benchmark standpoint, to be one of the top companies in terms of performance. In terms of how we've done, I joined RER in the fall of 2004. We started to see things turn around almost immediately in terms of our job costing and percentage of completion accounting and all of that. Our first full fiscal year with them, which ended in the spring of 2006, was our best year ever since 1991. We saw immediate results.
Tom: Leon, when you set out to do this, it got kind of interesting. Were your goals different than Brad's, and were they different when you joined the first time versus when you joined the second one? Did you achieve goals?Leon: Ironically, back to the old "10 and 10" rule, it's the first time in my life that I was completely out of the bank and debt-free. I did achieve "10 and 10," but this year has been a little bit different, and that's the control of labor. I was listening to Brad about his 10 or 11 employees, and the labor is where we got a little off skew. This year, again, the revenue is $1.5 million. I started this company in 1990 and we were only doing $183,000. We have grown exponentially, but we are in a very small area. Roseburg has a trading area of less than 80,000, and that's going 60 miles in each direction. It's a very small community, but it's a very close community. Fortunately, we're recognized as being the elite remodeling contractor for kitchens and bathrooms. We're pleased with that.
Tom: Are you having a harder year?Leon: We're having a harder year on the profit because we changed our systems. I've gone through quite a change this whole year. One was changing my CPA firm after 15 years. I changed my bank, our accounting system — we're on Quickbooks Pro. I hired a lady to help. I am in agreement with Brad that many of us contractors do not know how to read financials. We know how to read an operating expense but don't understand a balance sheet and where things are. One of mine happened to be WIP. At one time, I had $420,000 in WIP and it kept accumulating and accumulating until finally we got over to Quickbooks Pro. Now that is all straightened out but I took a pretty substantial bath on it. Our WIP now is in the area of $125,000. So you can see, $125,000 compared to $425,000 — where did that $300,000 go?
Tom: WIP. You're talking about your Work In Progress?Leon: Yes.
Tom: Leon, what benefits did you obtain that you didn't anticipate?Leon: One of the real benefits is the friendship. We are an extremely close group. I don't want you to get the wrong impression, but there is really love out there. We want to help each person in our group succeed and not to fail. That's probably been the biggest benefit. I'm nearly 70 years old, and I'm looked at as being the "cement" of the group as we all work together.
Tom: Good. Brad, is there any benefit that you have received that you really didn't anticipate? You went in thinking, "they're going to help me and talk to me about my books." And, you got some good recommendations. Were there any benefits that you obtained that you didn't anticipate?Brad: Absolutely. I didn't honestly realize before I went how out of balance my life was, my personal life. I was primarily work-oriented. I'm married and have five children. They ask some questions about your personal core values, because they tie into your business. It really kind of shook me up. I didn't realize I was an emotional mess when I went in there, frankly. So, that was probably the biggest thing, it made me sit down and identify what was really important to me and to prioritize. I went in, I feel, a person that lived a very reactive life, I just kind of reacted to what was going on around me. I consider myself now a more proactive person. I'm not just letting life run me in circles. I'm now managing my life much better than I ever have.
Tom: Brad, you've had the best year your company's had in 15 years. What is the ongoing benefit of remaining with this peer group?Brad: I think it's the support on both the personal and the business sides. It bridges both. There are some things in our company we do extremely well. Our customer service is outstanding. We're known for customer service and producing great work. There are some other things that, frankly, I've been terrible at, such as marketing. I've always relied on word of mouth and that's worked OK. Right now in Michigan, which I think is second in the nation from the bottom in terms of the economy, I can see now where not having a good marketing program in place has hurt me. So, they have been very helpful in terms of sharing brochures, ideas and all of that so I'm not starting from scratch.
Tom: Leon, why do you stay with it?Leon: One of the things that has helped me immensely is that we've always had employee manuals and job descriptions, but we've never had a standard operating procedure. That got implemented last year. All employees have their own employee manual and their own job descriptions. Beginning this year, we're doing reviews, which have never been done before. The employees don't really know how well they're doing and if there's upward mobility.
Tom: With all due respect, now you have that. You've got the employee manual and job descriptions and are reviewing them. So why do you stay with the group?Leon: Again, I'll go back to the friendship. I wouldn't want to let my peer group down by dropping out. I think there's a great value to it; maybe it's the coaching, maybe it's the mentoring. I think, too, that if you don't stay in tune with it every single day, you have a chance of slipping back. I don't want to slip back. I want to stay proactive, just as Brad said. In our case, we get 115 leads a year. Our close ratio is 75 percent. But, my job size is very small compared to others. All of those things must be taken into consideration. We've done pretty well with marketing; we do advertising and we're standardized. I just don't want to drop out because I might have a tendency to slip back.
Tom: Leon, let's talk about what I call the true cost of a peer group. These things don't come cheap. By that, I mean you pay something to Mr. Cunningham, I'm sure, and costs as far as traveling and things like that. Can you share that with us?Leon: Yes, I don't have a problem with that. Also, you have to keep in mind there are opportunity losses because you're away from the operation. Depending on what part of the country you go to, but I'll tell you that, on average, between $4,000 and $5,000 for each trip.
Tom: Each trip. So, at two trips a year, you're looking at an $8,000 to $10,000 commitment.Leon: That's correct.
Tom: Plus your time.Leon: Plus my time. Although that total number is including my time as well.
Tom: So in other words you're not putting a dollar amount to your time. Do you do a lot of your own sales?Leon: I'm getting more and more because I used to micromanage. I'm the senior citizen here. I do get involved in sales. My group wants me to spend more time out on the golf links because there's more to gain there than there is for me sitting here in this office. So I'm in agreement with them.
Tom: Brad, what's your true cost?Brad: Between dues and travel, two trips a year, dues will be $4,100 for the year and travel for the two trips will total about $3,000. That's a little over $7,000 for the two trips, not counting my time or anything like that. I actually went through and broke down for all the years I've been in RER, Remodelers Advantage and the Remodelers 20 group. The Remodelers 20 group was much more expensive, because I was in a group where some of the companies were doing volume of $6 million to $7 million and I was a $1.5 million company. We were going to places like the Grand Cayman. It was more of a social deal, and it was a fortune.
Tom: That leads me to my next question. You both have a unique take on this subject. Brad, in your case, you had a bad experience, as did I. I had a very poor experience with a peer group and have been real skeptical and have not gone back because it was that bad. You went back and joined one of them. In your case, Leon, you've been a member of two of them. Brad, are they for everyone, and specifically, are peer groups only for the small, less established companies? What can be gained by larger more established companies from the specific peer groups? Are all peer groups the same?Brad: The first peer group I was in, Remodelers 20, was more of a social group, more about ego. There were some benefits but the benefits did not outweigh the negatives. One of the benefits is networking with the different companies, whether it's being with peer groups or a remodelers' show or other functions around the country. I've never found a company, regardless of size, that has it nailed yet. Every company, I find, struggles with something. They might have the production down pat but they struggle with sales. Or the marketing might be great but they struggle with financial results. I think there's value for anybody. What I'm finding with me, which is kind of interesting, even though I've been with Remodelers Advantage only since the fall of 2004, I'm finding with my local remodelers council is that some of the less-established smaller members are now coming to me for mentoring. Asking me, "How should I handle this?" or "How do you do your financials?" I moderated a roundtable discussion on percentage and completion accounting and the WIP report for the local Remodelers Council. As a result, I worked with probably three or four companies in more of a mentoring basis. As you stay in there, you can still gain knowledge and information. If you get to the point where you've reached your volume or expertise you can always move on, at least in Remodelers Advantage, to a professional mentoring group. A higher lever group that will suit where you are now in terms of your company's status.
Tom: When I ask if they are just for the not-so-organized or struggling small companies, the answer is yes. But are they also for larger ones? You're also saying yes. Your comment, and it's a very good one, is that every company struggles with something. You're saying that in this particular peer group you can move from one group, smaller than maybe a $1 million, but when you get to $2 million and problems differ, it sounds like you can actually move groups to another set of another ten or eleven companies?
Brad: Correct. In fact, in my own peer group, there is a company that has been in my group for quite a while. I just received an e-mail from them a couple weeks ago saying that they are moving at the next meeting from our group to one of the professional groups. They do more volume and are one of the largest volume in our group. They're well-established in their benchmarks and in terms of how they perform. They're a company that everybody aspires to be. For them, as a mentoring group, they want to still grow, they still have their issues in certain areas so now they're going to move to a different group which has companies that are in the same position they're in.
Tom: Leon, are they for everyone? Are they only for the small? Can larger companies get something out of them? The real question is, are peer groups for everyone in the remodeling business?Leon: I'm not going to say that they are, but they should be. Some people just refuse to get into a peer group because they don't really understand it. They're the ones who are floundering. In our particular case, we have in our bylaws for our group that $1 million is the bottom and can go up to $3 million. We don't have anyone that's at the $3 million. We have a couple that are getting close to that and they do have a choice of moving on to another one. Or, we can change our bylaws to say $2 million is the bottom, which might be grandfathered in. There are people in Business Networks that are $25 million-plus. There are people in Business Networks that are at $600,000. I don't know that there's anyone that is less than that. Typically, you'll find in the group that a remodeling contractor is more open to go into an organization when they at least get close to that half-million dollars. At least that's been my observation. I'm sort of like what Brad just said, even though he didn't say it in these words, it's a lot more fun giving than it is receiving. Helping other people has been really good. One of the things that we do is make requirements for us in Business Networks to have a business plan; a marketing plan; a cash flow forecast; sales forecast; an organizational chart; job descriptions; board of advisors and orientation; training; evaluation; coaching; managing; team meetings; meeting agendas; culture of empowerment; and a lot of things that are involved in our group. It's very helpful.
Tom: Leon, we talked about groups. I just want to be clear. Business Networks isn't just one group of 10 companies. It's how many groups?Leon: I'm not sure of this, but I think there are close to 19 groups.
Tom: Brad, same with you?Brad: I believe that Remodelers Advantage has 21 groups.
Tom: When we talked about these peer groups and about these two particular sets of peer groups, it's not just the 10 companies that you have, but it's many, many companies of different back-grounds and different natures. I'd like to be clear on that.Brad: Yes.
Tom: Brad, who at your company participates at these meetings? Just you?Brad: Right now, it's just me.
Tom: OK. Same with you, Leon?Leon: Yes.
Tom: Are there other people who have key people from their company come with them?Leon: Yes.
Tom: Some of the other companies in your group will bring a production manager or partner or some key person in their company to participate in the meetings?Leon: That is true. It could be an office manager, bookkeeper or project manager.
Tom: Brad, do you ever have any of that?Brad: Correct, the same thing. In my group, out of the 10 companies there's only three where only the owner comes. Everyone else does bring a production manager, sales manager, controller or other key people.
Tom: Brad, I want to talk about the other seven or eight companies. If you're open to share financial information with the other people — and both of you are saying you do — I assume you share that financial information with the whole group. If you openly share that financial information, Brad, does that ever get sticky with the people who are there who are not owners?Brad: No, it doesn't. Everybody is completely open. I think the initial reaction by the owner is, "Gee I don't want my employee to know how much I'm being compensated." Really, I haven't found that to be an issue with any of the companies that have their key people there. Everything is in strict confidence. As Leon said, you become so tight as a group and really form a great bond with these people. Everybody becomes very protective of the information and is very respectful of the information as well. I don't see it as an issue.
Tom: You don't see it as a problem. Leon, address that about your group. You have other people who show up, as you said. When you share your open information — I'm talking about owner's compensation and I'm talking about "10 and 10" and what that means — does that ever get sticky with the people they bring?Leon: No, not in my observation. The people who do attend are pretty well connected to this company. They're involved in many ways. I know that we did have one young man who was there, and he was sort of shocked. After it was explained to him, he totally understood it. One of the things that I have done is that I have two business plans. One is a forecasting business plan that goes out from one year to five years. I have one that is a one-page business plan. That one-page business plan is shared with every employee. They know what I want for revenue; they know what I want for gross margin; they know what I want for gross profit dollars. We don't go beyond that.
Tom: Do you tell them what your compensation is on that one-page business plan?Leon: No.
Tom: I would, as open book as I am, I would probably agree with that. It's kind of like taking something out of context. I don't know if they understand totally what it all means. The reason for my question is that that was one of the biggest problems I had. I was invited to a peer group. The person who invited me was another remodeling contractor, not the leader of the peer group. When we got there, it was then told that we were going to share information. I brought our sales manager, and he knew everything and that didn't bother me. But the guy who got me there said "Wait a minute, I'm going to share my information of my major production process? He wasn't a partner but he had been there a long time. The guy freaked out and actually left. Leon, I do a fair amount of things at the remodelers show and seminars and things. I think a lot of remodelers "talk the talk." They say they have a business plan, they say they make good gross margins, they say they do "10 and 10." In this particular case and in a lot of cases, there's no way to refute them. They "talk the talk" but they don't "walk the talk." They say they do lead man concept when they really don't. Let's talk about it. Can they fool the coaches and the players?Leon: They can't in our group. One of the things, as I'm hearing Brad, is our cultures are very, very similar. I think we both get out of this exactly what we want to get out of it. It's because of that culture.
Tom: You can sometimes fool the coaches but you can't fool the players.Leon: No, you can't fool the players.
Tom: Brad, what is your response to that? Some "talk the talk" when you get into this thing. Have you ever experienced anybody getting in there and trying to "talk the talk" and not "walk the talk." They say, "I am what I am," but you sometimes see through that.Brad: No, I really haven't. I'm chuckling here because when I went in, as you mentioned, you kind of think you know what you're doing. When I went in to my first meeting and they started going through each individual company's focus packet, every company had their "turn in the barrel" if you will. When it came to my time, I was like a deer in the headlights and threw myself on the mercy of the court and said, "I am lost. Don't kill me but I need serious help!" They kind of chuckled and they took it easy on me. The next meeting, they expect you to be pretty close to towing the line and by the third meeting if you're not there, as you said, you have to be able to "talk the talk" and also be able to "walk the walk." Your financials and all your reporting have to show that. I agree with Leon. That's the thing I found here at least locally with other people I talked to at shows. Everybody talks this great story. When I've had the opportunity to look at other people's financials, especially profit and loss and the balance sheet and I don't see any accounting for over-billings or under-billings. They sit there and think that, "I made this much profit." And I say, "Wait a minute. What about your under-billings and your over-billings?" They really don't understand, and don't have a clue. They're kind of living in a little fantasy land, if you will. No, I don't think you can fake your way through it.
Leon: I'd just like to comment. You just hit a nerve there for me that I think now I understand why I dropped out of RER. It's because I wasn't able to "walk the talk." Because of the second year I wasn't making any changes and I wasn't doing anything. I had a partner at that time. I think that's the reason I dropped out. You just hit a nerve right there; I think that's the reason why I didn't stay with the group.
Tom: You've got to be willing to change. You've got to be willing to admit your weaknesses and be willing to sit there and say, "There's a better way, and I'm willing to give it a crack."Leon: Absolutely.
Tom: We can even have a Remodelers' Exchange where you can go into therapy if you wanted to!Leon, let's hear from you. What's the last summary or last thing you would have for a remodeling contractor on the subject of the value of peer groups?Leon: It's interesting now that I've been a member for four years going on five. There are competitors of mine here in town that I'm very close to because we have a very unique organization in that we sell cabinetry to these builders. There are three builders here in my region that are now members of Business Networks. But, they're not in my group. When I started out, there were slightly over 200 in Business Networks, and I was the bottom of the line. I was No. 202. After those four years, I am now ranked number 42. That's not based on revenue; it's based on profitability. I would not have been able to achieve that without being in a peer group. I could have probably even done that with Remodelers, but it was an eye opener for me and I would suggest it to anyone. From an accountability standpoint, I'm not sure whether Brad has the same thing. We set ourselves goals that are four goals that have to be reached every six months. If we don't reach those goals, it costs us $500 per goal that we don't reach. Now, that's accountability! And it's measurable and there's nobody that could hoodwink you, because we'll look at all the numbers and they have to put it on the Web site as well. Last year was the very first time that I didn't reach one of my goals. It was 500 smackers. And that $500 does not come out of company funds. It comes out of your pocket. That's accountability — one of the rules we put in our bylaws. If we need to make this of value, we need to make this come out of the person's pocket, not the company. I'm in total agreement with a peer group. I will remain in there and, hopefully, when I have people come in here, they will stay in this group because it's worth it for them to be a part of it so that they don't slip backwards.
Tom: Thank you very much, Leon. Brad, what are your last words of advice to a remodeling guy out there?Brad: Again, I agree with Leon. I think that peer groups are for everybody. Everyone out there who isn't a member of a peer group, it's so easy to put up a front and have a façade that you are something that you really aren't. Once you get into a peer group, frankly, I think the thing that keeps people out of it is that it's a scary decision; now you know you can't fake it anymore, and you've got to get real. It becomes a very humbling experience. The thing that is wonderful, though, about the peer group was, yes, while there is the accountability side in terms of the financial, ethics both on personal and business side, your leadership in the business from the standpoint of not working so much in your business but really becoming more in a position where you're working on your business. And as Leon said, your commitment. We have to do the same thing every six months. What's great about it though is while yes that can all be scary, it is a very compassionate group. I've found that even after — I think I've had six or seven meetings now — the compassion, frankly, has only gotten stronger. Yes, there are tears; there's never a meeting that goes by where somebody isn't in tears about something either business related or personal. That group is there to put arms around them. For me, I guess I can sum it up best this way. I look and think that for basically the first 14 years or so of our business I just kind of struggled along. We had a great reputation, great customer service and a fabulous profit to net. But, on the operating side of it, we really struggled. Within four meetings or two years of my experience with Remodelers Advantage, we were able to fast track to a point that we were never able to achieve in those first 14 or 15 years of doing business kind of on our own. Through the peer group you get to share your experiences, your knowledge, your systems. You can give advice and receive advice. As I mentioned before, that peer group becomes your personal board of directors. I can call up any one of those guys on the phone or by e-mail and say "I'm struggling with this" at any time, and they're there to offer whatever support or advice or help that they can. The other thing that we really didn't touch on is that it's not just 10 or 11 companies sitting in a group or room by themselves. At least in the terms of Remodelers Advantage, there is a facilitator. In our case, it can be a nationally known remodeler. We've had Paul Winans, we've had Jim Strait, we've had Judith Miller, who is a great financial person. They are there also to keep things on track, and they do a great job of that as well. For anybody who is willing to basically humble themselves and say, "I can do better; there are things that I don't know" and are willing to lay their soul bare if you will, I think a peer group is a great opportunity. For me, it's the single greatest business decision I've ever made for our company.
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