2016 Commercial Integrator State of the Industry Report

Commercial Integrator's State of the Industry Reports gives valuable insight into the AV Integration industry that technology decision makers should know.

January 4, 2016 Tom LeBlanc Leave a Comment

CI Research and NSCA surveyed 140 integrators and consultants for the 2016 State of the Industry report.

While respondents aren’t wildly optimistic, they’re feeling positive and perhaps more realistic than last year. Only 8 percent said there’s room for improvement in 2015 while 35 percent feel that way about 2016. NSCA’s Chuck Wilson “feels good” about these numbers.

Anything from “little changed” on up is good news, says NSCA’s Chuck Wilson. That’s at least about 5 percent growth and that’s where the construction industry is looking in terms of growth, too. In the construction world, that’s a big number. “There is nothing wrong with slow, steady growth,” he says.

By now, it should surprise nobody that an IT director or professional is the most common decision maker within clients’ organizations, according to one-third of survey respondents, far outpacing all traditional point persons. In fact, as the role of IT increases, those other parties’ purchasing influence is going down dramatically, NSCA’s Chuck Wilson says.

All markets are looking relatively positive this year.

Corporate — by far the industry’s largest vertical — is looking the most positive.

This question tends to generate a lot of optimism. This year it’s more measured than in the past, but a whopping 68 percent expect to grow more than 5 percent in 2016.

It’s no surprise that video-related projects are highly anticipated. AVI-SPL saw two consecutive record-breaking months in the second half of 2015. The driver of the growth, according to VP of marketing Kelly Bousman, was AVI-SPL’s ability to win a cluster of very big and very video-centric projects.

The vast majority of the industry remains stuck in the mud when it comes to generating managed services revenue. Only one in five surveyed integrators earn more than 10 percent of their revenue through service contracts and 27 percent earn zero. It’s noteworthy that some firms find that as a result of service contracts customers end up being happier with their systems and noticing full utilization in their investments.

“It inspires more use of the system, so they build more systems,” Verrex’s Bill Chamberlin says. “So you see the percentages kind of level out.”

This is perhaps the most accurate indicator of how 2016 will begin and the good news is that respondents are slightly more optimistic than they were in 2015.

The highest percentage of companies are pretty flat while a good chunk is seeing growth year-over-year — another example of the industry’s slow and steady incline.

A snapshot of how surveyed integrators anticipated their billings and orders will look like end of year.

It remains a troubling stat that only 29 percent of surveyed integrators say more than 20 points on a project is typical in terms of hardware margin, while a staggering 21 percent say they typically get less than 10 points.

No surprises here with AV-centric integration firms making up the majority of the responding group.

We’re still seeing AV hold its place as the most prevalent category, with automation and control coming in second.

It’s easy to point out that most integrators are dramatically under-charging their clients, but it’s much harder to overcome the challenge since firms are often dealing with competitors that may be on an equal plane when it comes to qualifications and certifications “but they’re just not valuing their services high enough,” says Human Circuit’s Bruce Kaufmann.

“What I’m seeing is a level of sophistication that is going to rapidly be upon on us and the expectation is that channel partners or system integrators be ready to be a value-added piece of that transition,” Wilson says. “If we’re not, we have to do some soul searching. If we’re not relevant in the new technology economy, what the hell will we be left doing? If we’re not ready to sell to IT managers, IT professionals, if we are simple contractors hoping that the architect, or construction will have stuff relevant to us, that can be a pretty limiting factor.”

Same Problems, Different Year

The idea behind CI’s Integrator of the Year is to choose a firm that is doing something well that other integration firms ought to also try to do and do well. Pretty simple.

A couple of factors made selecting Eatontown, N.J.-based Yorktel as the 2015 CI Integrator of the Year an easy choice. One is that 91 percent of surveyed integration firms say that they have less than a third of their annual revenue under contract. Another is that Yorktel, with nearly half its revenue stemming from managed services, is completely and culturally committed to selling service. It rarely will bid on a project that doesn’t include service.

The major takeaway is that selling managed services required Yorktel to make a major shift in approach that started 20 years ago. Founder Dr. York Wang hired Ron Gaboury as CFO, now CEO, and to develop within the company what’s now known as managed services.

“There’s an investment that goes along with providing these services, both in terms of infrastructure and the talent pool,” Gaboury says.

Seeing that investment pay off can take time, of course. AV integrators have been pounded over the head with the importance of generating service revenue amid dwindling margins for years. That the numbers aren’t shifting percentage-wise is perplexing.

Part of the problem might be that non-behemoth integration firms, while they can improve their ability to sell service, still struggle to implement service programs particularly for projects outside of their geographic comfort zone, says Chris Bianchet, president of Herman Integrated Services, which is launching a nationwide service network to support its dealers service contracts. “Service business is still one of the most profitable margins left in our industry so don’t be scared,” he advises.

Meanwhile, the fact that the percentage of revenue stemming from service isn’t growing may be a sign that other parts of the business are growing more quickly. Mountainside, N.J.-based Verrex, for instance, has been focusing on developing its managed service revenue for several years. It traditionally earns 15 to 20 percent of its revenue on global managed services, which include service contracts, preventive maintenance contracts and staffing services for large customers.

“We want to continue to grow those percentages,” says VP of global sales Bill Chamberlin. However, Verrex finds that as a result of service contracts customers end up being happier with their systems and realizing full utilization in their investments.

“It inspires more use of the system, so they build more systems,” Chamberlin says. “So you see the percentages kind of level out.”

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Tom LeBlanc

Tom has been covering B2B technology since 2010. He’s editorial director for MyTechDecisions and its sister brand Commercial Integrator. Before that, he covered the residential technology market for CE Pro and wrote for sports department of the Boston Herald.