Big Idea of the Month: Understand Your True Labor Costs

The timing was somewhere in the late 90s. There we were, walking down one of the main streets in Tel Aviv. I was with an old acquaintance who was rapidly becoming a good friend. His name is David Carter, an SSI Industry Hall of Famer who’s the managing director of NetOne, an alarm dealer cooperative with a combined valuation of all member companies of in excess of $1 billion.

These are some of the largest alarm companies in the industry, and NetOne provides buying power, training, support and executive symposiums for the member companies. It is highly regarded, and I had just received an invitation to conduct an M&A symposium for its members. However, back to walking on the streets of Tel Aviv.

Israel was, as often the case, under attack. It was not at all unusual to hear a warning siren, followed by a sound that sounded like a whoosh, and ending with an explosion somewhere close to where we were. Carter and I were at the invitation of a technology company in Israel, which was looking to expand operations into the United States.

We were the consultants, but on that day, I sure felt that I was in the middle of a war. It showed on my face. And while I busily scanned the surrounding rooftops for enemy snipers, I glanced over at Carter who was trying to figure out how to dial a telephone number back in the U.S.

Frankly, I felt like I was walking with somebody who had come out of the James Bond genre, and was at the height of being “Mr. Cool.” For just a moment, I felt a little safer, until reality grabbed me and I realized that Carter was probably undergoing the same anxieties that I was.

We got out of Israel a few days later … I don’t remember what happened immediately, but the deal we had put together seemed pretty good at the time and frankly, when I wasn’t busy watching for rockets overhead, I spent a lot of time studying the kind of deal we were working on, and found that I was enjoying the process.

After we got back to the states, I started what is now Davis Mergers and Acquisitions Group, and Carter became the head of the predecessor group that became NetOne. Over the succeeding years we saw each other at industry events and at financial symposiums.

I got around to asking David one of my signature questions, “Let’s assume you were giving a seminar to just your member companies, but that included all of the alarm companies in the industry. What would you tell them were the most important lessons you learned when you stepped into your present position?”

He thought for a few seconds, and then in rapid-fire said, “First, use resources that are available to you. Second, identify all the people you know who are experts in what it is you’re doing, i.e. bankers, lawyers, accountants, etc. And finally, listen to the experts when they tell you something about what is important.”

It seems to me that is a pretty good education in and of itself. And then, he topped it off with, “Surround yourself with people who use the common denominator of success. That is, simply, you do the things that failures don’t like to do.”

And then, seemingly on a roll, Carter said, “I have a few more ideas. First, understand your true labor costs, loaded. Don’t think of one of your installers costing you $18 an hour, but rather know what the real costs are, i.e. training, uniforms, vehicle costs, etc. And second, know what your creative costs are in acquiring new sales. For example, if I say to you, ‘what is your creative costs to create a new customer?’ Your answer, should be all of the costs associated with bringing that customer on board. Advertising, sales costs, cost of goods sold, and whatever other costs you could find that would apply to your creative costs.”

We wrapped up the interview with me asking Carter his view of the industry as it appeared that we were starting to come out of the COVID crisis. He felt that demand for security products and services remains strong and that attrition for traditional alarm systems has remained relatively constant in spite of the crisis we have just gone through.

He felt that residential alarm companies will have some learning curves in getting back to business, but that the real uptick in valuations would be for commercial companies, and particularly commercial integrators. My feelings are pretty much the same, particularly with regard to the commercial sector.

I do remember watching a James Bond movie shortly after I got back from Israel. And while some of the experiences Carter and I had there might have been considered a little bit hairy, I was sure glad to be home, and back to the world that I knew and loved.

That changed the day Congress was asked to confirm the amount of votes Joe Biden received was enough to propel him into the presidency. Some demonstrators in Washington changed the whole concept of an orderly transition of presidents. I’m not sure what the consequences of that will be, however, I am sure there will be some.

Unfortunately, that means I have a whole new set of questions I can be asking future interviewees.

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