How to Use Lean Startup Methods in Renewable Energy to Increase Profits

In the last few posts I’ve written about the process of expanding an existing construction company into renewable energy business and the single thing our marketing planwill focus on. If you’re new to the solar industry, go to the Solar 101 Reading list. It has free tools and articles on solar design and installation, sales and marketing, policy, finance and best practices.

The main metric I’m using is “profit per time invested”. I’m not as interested in increasing top line growth rather then profitability, especially as we get stared. My goal is to reach a profitability of 20% pre-tax. This seems very “doable” given the general construction industry has a profit margin of around 10%. How does this number impact the scale of the business? I can live well with a business that sells $500k a year in revenue providing me with $100k in profit. That is not a lot. This is a little under $48k revenue per month. That is 2 solar pv or geothermal jobs per month, equally 24 jobs a year. Or 4 to 5 solar thermal jobs per month or a combination of solar pv, geothermal and solar thermal. Very “doable”, especially if you look at the number of jobs that companies are doing and the small profit they’re making. From a marketing perspective, the key will be to understand what really is the cause of these jobs so that we can make sure the revenue will be stable and predictable. Most companies take jobs as they come and think its because of something they’ve done. When revenue decline they’re end up in the dark.

Many people  like to think big, going after larger and larger projects and getting into commercial work. Often times, they do this by suffering through slimmer and slimmer margins while having to deal with more and more headaches. I’m into thinking big, but by big, I think of net profit. Basically, I’d like to focus more on efficiency then growth of absolutely numbers. A company making 20% margin on $500k in revenue makes the same money as a company with a 5% margin and $2 MILLION in revenue. I’d argue it’s easier to increase efficiency then to grow revenue because you have more control over your own operations then the decisions of clients.

I’m a huge believe in the “crawl –> walk –> run” philosophy of business development and that’s why I spent the last two posts discussing my entire marketing strategy, the goals and metrics of each business task. Now I’m going to outline the operational strategy.

In order to run a super efficient service based business (all construction companies are service based) there are two critical components that need to be optimized. First, your marketing and sales and second the design and installation. On the marketing and sales side this mean decreasing the number of leads you’re getting but making sure that more of them close. Again, you’re goal should to be getting 5 to 10 leads month and have a 50% close rate, rather then sifting through and doing site visits on 50 leads, only to have 3% close. Remember this, dealing with leads takes time and is expensive.

Enough about marketing, for this article let’s focus on operation of running the business.

Many people have been looking for a connection between clean energy and technology for some time now and there aren’t many, other then the goal of “world-changing” technology. However, I believe I’ve found a similarity that can be used to increase operational profitability of small clean energy companies. In tech startups, there tends to be two teams of people. One group is focused on the customer and the other on developing the product. Here’s the reason for this. In most new tech companies, not only does the team not know exactly what the product will be, but they don’t know who the exact customer will be either. So, the customer development team is always performing tests with the product to determine who the customer is and what they will pay for the product. While the product development team is tweaking the product to see if a certain customer will pay for it. I’m not a tech guy, so I might have missed a few things. But to my understand these are called Lean Startup principles.

We can apply a similar model to the sales/marketing and operations activities within a small clean energy company. NOT that the sales/marketing team don’t know who the customer is and the operations team doesn’t know what the product should be. In clean energy both of these variables are known. The logic applies to how the teams are organized so that it a has a huge impact on their effectiveness and the profitability of the company. To display this, let’s review how the “traditional” organization structure of most construction companies is focused.

 

When I look at this diagram and being the young, inexperienced, naive, and silly person that I am the Socrates in me goes crazy. Here are some questions that comes to mind when looking at process and having it experienced it in many companies I’ve worked with.

Basic Questions About the Old Process

• Is the marketing department paid more for creating more leads? Are they paid more if they create more high quality leads? Why or why not?
• Do they know which leads close more and faster? If not, why? Shouldn’t they be paid to get better leads that lead to more money?
• Are sales peoples jobs profitable? Many sales people get paid on revenue of the job, but the job might loss money. This is useless.
• Are project managers paid more if a client loves them or the job is completely very quickly or under cost? A solar job could be quoted at $4.90 per watt. If the project manager is super efficient and completes the job at $4.70, does he get paid more? Why not?
• How many process improvements are implemented each year?

Problems with the Traditional System. 

The main problem I’ve seen with the old process is the need for managers, that manage the managers. You need managers in the traditional process because it so disorganized, and often not incentivized and structured to optimize itself. Thus, you need a manager to spend all his time trying to optimize.

Here’s what I’d suggest about the new, cyclical system, for small clean energy companies. 

Rules in the system

• A whole team is paid based on profitability. This encourages everyone in the team to increase communication and also the two will always be searching for ways to optimize the processes. Each team is allowed to optimize as they see fit.
• Only hire in teams. Each pair (customer managers and product managers) is in control of the support team they hire (assistants, etches) , but they’re only allowed to work on the same projects. For example, a customer manager can only send jobs to his partner and product managers can only accept jobs from one customer manager. This also relates to referral business created from the work of a product manager.
• The team is not forced to work with one another, they do it voluntarily. The team is not selected by managers who assign people to each other and force them to work with one another, they select each other. This has a few benefits. Mainly people will only work with others that they want to but it also increases trust, communication and comradery.

Advantages

Simply put, it’s more profitable. This model is more profitable for a few resources. First, you need less manpower and they get more done because you’re hiring rockstars and not plug and play “sales managers” or “marketing managers” that need their own managers to make sure they’re working. Only people who want to kick butt and take names will work in this system.  Also, you don’t need managers that manage other managers because the whole structure optimizes itself. This decreases overhead and increases the speed that decisions can be made.

Small batches are more efficient then large batches where each processes are broken up. It seems counter-intuitive with what we’ve all learn from the specialization of labor, Henry Ford and the like, but its true. If you still don’t believe me, read about the “The Power of Small Batches”. If you have to fold, stamp, insert, and lick 100 newsletters going into envelopes. It’s faster to do each envelope one at a time, rather then do each processes separately.

Build – Measure – Learn. 

I’ve already describe what we’re going to build and the philosophy behind doing this. So, what am I going to test and measure?

1. As I’m setting this structure up, the main item I’d like to test is how many customers can a team handle? I’d structure the question this way; will a 2 person team be able to handle the 2 solar pv/geothermal jobs per month or the 4 to 5 solar thermal jobs? I’d think yes.You’d want to test this number to see when to hire new teams. If you know a 2 person team can typically handle 8 jobs per month then if you start getting 16 jobs you’ll need 2 teams. The hard part will be if the team can handle 8 but you’re getting 11 jobs. They’re working a lot but it’s not enough to hire a new full team.
2. I’d also be interested to see the difference between teams in companies that have more then 1 teams. Which team is most profitable? Why? What are they doing that makes them more profitable? This is another benefit of the team structure is that it creates an easier way of analyzing why one is performing better then or different from another team. In the waterfall process, this is almost impossible to figure out.
3. Lastly, I’ll test how many process improvements each time implements, why they implemented them and if it works. In this case, I’ll be one person in the team so it won’t be very hard. If you’re not in the team, have a conversation with each team every month and ask them what is working amazingly. Ask them what they’ve stared doing differently that has worked or not worked.

First round of FAQs on the question. 

I’ve run this idea by a few people already and here’s some of the questions/feedback I receive with my responses.

• Question: As an owner of the company, I like the advantages of this process but I’m afraid of losing control. How do I know what’s going on a day to basis? Answer: “Keeping tabs” as I like to call it. Honestly, why do you need to know? Do you not trust the people you’ve hired. If you do trust them, and they’re trained accordingly, they should be able to handle everything. If you need to watch them, hire other people. It’s blunt but true.
• Question: Aren’t these employees more expensive? Answer: Yes, absolutely, because they’re ROCKSTARS and you need to pay them individually and based on performance. So yes, you may end up paying each customer or product manager $70k a year and up depending on how much money they make. That may seem more expensive then the old system where you could plug in recent college graduates and pay them $50k a year, but remember, then you also need to hire managers to watch these guys. All in all, I’d rather take 2 rockstars and pay them well into the 6 figures to create an extremely profitable process rather then hire 4 average people 50k a year and a manager that’s constantly trying to get them to “work harder”.

 

What other questions do you have about this that I did not address? I’m very interested to learn how you’re business is structured and if you’ve done any problems or successes. No need to share specific cash data like I did.