By Phill Sexton
SIMA’s State of the Industry survey inspires a few questions I’ve asked myself throughout my career. At this stage of the winter management industry’s maturity, why is it still the number of inches or storms experienced in a given season that typically determines the overall success or failure of so many businesses that perform or hire winter management services? Why is it some winter management companies fail to profit - sometimes to the point of bankruptcy - when there is too much or too little snow? Why should the amount of snow matter?
Winter’s roller coaster
Two years ago, several parts of the country experienced some of the greatest snowfall records in history. Clients who paid for winter management on a per-occurrence, time-and-materials or per-inch basis were overwhelmed by “blowing their budgets” well beyond their “average” annual spend. Yet in that same season, contractors who worked with seasonal agreements without protection for covering costs above the number of average occurrences per season were overwhelmed with direct costs that far exceeded their average estimates, virtually negating all profits that would have been realized in an “average” season. Some of these same contractors who agreed to seasonal contracts without protection thresholds for seasons well above average went out of business.
Conversely, last season several regions of the country experienced some of the lowest snowfall occurrences on record. The same clients who were overwhelmed by the cost two seasons ago were ecstatic to have spent only half or less of their annual budget while their service providers struggled to pay for the most basic fixed overhead costs. You can guess how the seasonal contracts played out. The contractors went to the bank with a windfall of cash flow - at least that is how most of the clients without protection thresholds for seasons well below average perceived it.
When we continue charging and paying for winter management services based solely on the amount of snowfall only Mother Nature can predict, there is almost always a winner and a loser. These types of contract models have proven unsustainable for many if not most contractors because the minute a client feels like they are on the losing end of the deal, it’s time for a new bidding process or someone is asking for a discount.
Win-win model for success
Shouldn’t we ultimately be striving to establish “win-win” relationships and “win-win” agreements? Any reputable business school will tell us the same thing. Successful business models are both predictable and repeatable. This is true for revenue, profits and costs.
Winter management contractors should be offering solutions that help their clients predict and repeat their spending. Clients should be as equally responsible for allowing their service providers a consistent revenue and profit to recover the fixed overhead costs of being prepared to meet their minimum level of service expectations - no matter how much or how little it snows in a season.
If the level of service a client expects on a Monday at 7 a.m. when it’s snowing is always the same, then the capacity of resources required to meet that level of service will always be the same - no matter how many times it snows in a given season. When the variance of costs or revenue are dramatically skewed from the “average” annual spend, someone always loses.
Budget variations are often at the root of improper snow removal operations planning. Facility and property managers in areas that experience inconsistent snowfall, like the Mid-Atlantic region of the United States, normally plan for “average,” typically five to eight 2-in. to 4-in. events that total 10 to 20 inches of snow annually. These facilities are not typically prepared with an average allocation of resources to service the heavier-than-average storms and seasons that have, in fact, occurred in three of the last six years.
During the year of “Snowmageddon” in February 2010, a best practice that provided ideal results was realized by those paying a seasonal readiness fee in exchange for dedicated resources, no matter what the outcome of snow accumulation for the season. Annual readiness fees can be captured in contract terms through a variety of pricing methods including:
- Seasonal contract agreements with “floor/ceiling” terms and conditions. The “floor” is a dollar amount agreed to be credited to the client if a minimum amount of snowfall/ice occurrences is not reached for the season. The “ceiling” is an additional dollar amount agreed to be paid to the service provider if a maximum number of snowfall/ice occurrences is reached for the season. The seasonal base price captures fixed overhead expenses and the estimated costs and profit necessary to service the average number of occurrences for snow and ice events. This is typically calculated using a minimum of five years of weather history.
- T&M, per-event, per-inch and per-occurrence contract agreements with a minimum seasonal readiness fee paid as insurance for providing a minimum allocation of dedicated resources being made available, including equipment, materials, people and insurance.
From a cost standpoint, you benefit when you budget and allocate resources for above-average conditions, even when there’s only a small chance of a heavy storm or years with little to no snow. Over the course of three to seven years, studies have shown the cost of being improperly equipped far exceeds the cost for always being prepared with the proper capacity of equipment, materials and human resources. This is measured by increased liability claims, increased equipment and property damage, lost time and lost business as a result of inadequately equipped for the sake of trying to save money based on average spend per season.
While average storms might only require half the amount of cost and resources, most clients and sites expect service providers to be in a state of readiness for the worst weather. This requires proactive planning for the proper response and allocation of resources. A best practice is to appropriately budget the proper money and to pay annual readiness fees to cover the costs for the level of preparedness and resources that are associated with a minimum state of readiness.
Think about it. Are there insurance policies that allow paying for fire insurance only after your house catches on fire? Would you be satisfied if your local fire department purchased the necessary equipment and materials they need to be prepared for responding to more than one fire call, only after your house and business burn to the ground?
Snow and Ice Management Cost and Capacity curve
State of the Industry insights
- Impact issue: 45%. Respondents who cited lack of snowfall as one of the top 2015-16 challenges.
- Contract structures: The most popular contract types are seasonal, per push (21%), and time & materials (20%). Very few (9%) reported having caps in their seasonal contracts, which puts them at risk in the event of a high snowfall season. At 26%, Seasonal contracts made up the largest percentage of portfolios.
- Snowfall, sales drop: 70%. Respondents who reported less-than-average snowfall in the 2015-16 season. Sales decreased for 45% of respondents last year.
Phill Sexton is Director of Outreach for SIMA. Email him at email@example.com if you’d like to share your experiences.