Mark Jewell's Blog: Selling Energy, page 279

We're Just Too Busy

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In keeping with yesterday’s blog, today we’ll go over another common objection and how to overcome it.

It can be hard to predict your prospect’s current situation, even if you’ve done thorough research on the company, decision-makers, and so forth. In some cases, you’ll approach a prospective organization that seems to be a great fit for your product or service, and they’ll simply tell you that they’re “too busy with other improvements right now.” Rather than accepting this as the final answer, consider responding with something like:

“It’s funny you should say that, because that’s exactly the best time to be thinking about energy. Are you doing any capital improvements that either consume or generate energy?”

If you ask this question and happen to catch the project early enough, you may be able to improve the efficiency of the design (perhaps tremendously) at little or no marginal cost, particularly if you make certain aspects of the project rebate-eligible by tweaking the specs.

Additionally, you might even be able to leverage the existing project to reduce the level of inconvenience that your project would otherwise cause. For example, the existing project may require building modifications, and if contractors are already opening up walls and moving things around, you might be able to jump in there and make your own modifications without causing additional hassle for the tenants of the building.

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Myth of the Old Building

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Have you ever tried selling an efficiency product or service to a prospect with an older building, only to hear your prospect say something like, “Our building is older, so you’d expect it to be less energy-efficient.”? This is a very common myth and you should be prepared ahead of time to overcome your prospect’s objection. Today, we’ll discuss a couple of responses that you might use to dispel this myth and move the discussion forward.

Response #1: “John, it’s funny you should say that because a lot of people are under that misconception (with all due respect). Did you know that the oldest building to get an ENERGY STAR® label in this country was built in 1820? How old is your building?”

Chances are, John’s building was built well after 1820 and you can continue the discussion with the response below.

Response #2: “In our research, we found that older buildings actually score better as long as they have been retrofitted and are being operated properly. Older buildings are often made with better quality materials, thicker walls, and smaller windows, all of which is great for thermal insulation. Additionally, older buildings are more likely to have had retrofits done than newer buildings, since the chillers, boilers, motors and drives on newer buildings are less likely to have totally worn out and needed replacement.”

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The Unreimbursed Operating Expense

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In order to give you a more complete picture of how an efficiency maneuver might benefit the landlord, we’ll continue with some more bonus content on this topic today.  

In the wake of an efficiency project, a landlord may see a reduction in unreimbursed operating expenses. If you’re unfamiliar with unreimbursed operating expenses, here’s a simple explanation to help you wrap your mind around the concept:

If the tenant is paying for operating expenses based on his or her share of the rentable square feet of that building, and if any portion of the building is vacant, the landlord doesn’t have anybody to bill for that portion of the operating expenses. As a result, the landlord puts that bill in his pocket and that becomes part of the unreimbursed operating expenses. [Please note that there is a concept called “gross-up” that helps landlords reduce their exposure to such unreimbursed expenses, and that’s a topic worth researching further if you’re committing to understanding the business dynamics that drive decision-making in landlord/tenant settings.]

So what does this mean? If you did a project that reduced energy spend on a property, then the percentage of vacancy would be the percentage that the landlord would enjoy as a result of doing the project. If you’re working with a building that has vacancy (or is expecting vacancy), and the landlord has not somewhat insulated his exposure with a “gross-up clause” in the model lease, this is definitely a point that you want to drive home.

A couple of other benefits that you should keep in mind when preparing a compelling value proposition: 

Lower operating expenses often result in higher base rents and/or better tenant retention and attraction.
Higher Net Operating Income supports higher asset value upon refinancing or sale.

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Now, Discover Your Strengths

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As humans, we have a natural tendency to fight against our weaknesses and to attempt to develop them into strengths. While it’s important to strive to improve our weaknesses, this focus on self-improvement can lead us to ignore our existing talents and strengths. One person’s weakness is another person’s strength, so from a business perspective, tasks should be assigned based on the existing strengths of each team member.

According to Marcus Buckingham and Donald O. Clifton in their best-selling book, Now, Discover Your Strengths, it is more productive to put time and effort into developing existing talents and strengths than it is to focus on correcting weaknesses. This implies that we are self-aware enough to recognize our own strengths. Fortunately, Buckingham and Clifton provide a tool for exactly this purpose – the “StrengthsFinder.” This tool helps you recognize your five dominant strengths so that you can make a conscious effort to develop them further. If this topic intrigues you, I highly recommend picking up a copy of their book.

Here’s a summary from Amazon Books:
“Unfortunately, most of us have little sense of our talents and strengths, much less the ability to build our lives around them. Instead, guided by our parents, by our teachers, by our managers, and by psychology's fascination with pathology, we become experts in our weaknesses and spend our lives trying to repair these flaws, while our strengths lie dormant and neglected.

“Marcus Buckingham, coauthor of the national bestseller First, Break All the Rules, and Donald O. Clifton, Chair of the Gallup International Research & Education Center, have created a revolutionary program to help readers identify their talents, build them into strengths, and enjoy consistent, near-perfect performance. At the heart of the book is the Internet-based StrengthsFinder® Profile, the product of a 25-year, multimillion-dollar effort to identify the most prevalent human strengths. The program introduces 34 dominant "themes" with thousands of possible combinations, and reveals how they can best be translated into personal and career success. In developing this program, Gallup has conducted psychological profiles with more than two million individuals to help readers learn how to focus and perfect these themes.

“So how does it work? This book contains a unique identification number that allows you access to the StrengthsFinder Profile on the Internet. This Web-based interview analyzes your instinctive reactions and immediately presents you with your five most powerful signature themes. Once you know which of the 34 themes -- such as Achiever, Activator, Empathy, Futuristic, or Strategic -- you lead with, the book will show you how to leverage them for powerful results at three levels: for your own development, for your success as a manager, and for the success of your organization.

 "With accessible and profound insights on how to turn talents into strengths, and with the immediate on-line feedback of StrengthsFinder at its core, Now, Discover Your Strengths is one of the most groundbreaking and useful business books ever written.”

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Weekly Recap, March 27, 2016

 
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Monday: Read in Steven D. Levitt and Stephen J. Dubner’s best-selling book, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything' to easily (and enjoyably) digest lessons in economics. 




Tuesday: How to replace myth with math and motivation by reframing the situation for your prospect. 




Wednesday: When it comes to return of investment, leave behind this rule of thumb. 




Thursday: Looking to gain access to influencers and decision-makers for your efficiency project? Try "The Power of 12". 
 

Friday: How to wield the "capital expense cost recovery" clause to improve the efficiency of a building. 




Saturday: Read this Entrepreneur article on, "4 Tips to Create a Productive and Healthy Culture."

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4 Tips to Create a Productive and Healthy Culture

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It’s the goal of every business owner or manager to create a company that is as productive as possible. While it’s always great to keep up with the latest productivity trends and incorporate them into your organization's productivity strategy, the best companies create a culture of productivity from the start.

So what does a “culture of productivity” entail? It’s a combination of the people you choose to hire, how you foster communication with your employees, and being vulnerable with your team. An article published on Entrepreneur further delves into 4 tips of how to create a healthy company culture.

Is it ideal to implement these strategies when you first open up shop? Of course. However, these tips can still be applied to existing businesses to boost the productivity of the team. If you’re an owner or manager, I highly recommend reading this article:
http://www.entrepreneur.com/article/243722

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The Cap-Ex Loophole

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Last week, we discussed the landlord/tenant dynamic and the metric to focus on when presenting an expense-reducing capital project to a landlord. Today, I’d like to delve into a bit of bonus landlord/tenant content that I cover in the weeklong Efficiency Sales Professional™ Certificate Boot Camp.

Here’s the question: Could the landlord use a “capital expense cost recovery” clause and have the tenants repurpose wasted utility dollars to help improve the building? The short answer is “in many cases, yes,” and in the next several paragraphs I’ll review this often-overlooked lease provision and how you might leverage it in your future efficiency projects.

The cap-ex cost recovery clause is something that most experienced real estate operators will know about. Many of them, however, are really financial engineers who authorize the capital to buy buildings. They may not have really read many of their leases cover to cover. They may not know that the ability to claw back savings that you generate for your tenant by investing in expense-reducing capital projects is actually hidden in a definition of operating expenses. It’s a provision that's not often called out in a separate section of the lease.

The lease will describe various categories of operating expenses that are customarily passed through: roads and grounds, housekeeping, security, administration, utilities, etc. The description of operating expenses will typically prohibit the landlord from passing through capital expenses.

However, you may very well see that certain capital expenses CAN be passed through as long as they meet one of the following criteria:

Mandated by government regulation
Necessary for life safety reasons
There is a reasonable expectation that a capital improvement will generate operating expense savings for all tenants, in which case you could pass the capital costs through using a reasonable amortization schedule. 

The lease usually has some language as to whether or not they can charge carrying cost while the debt is being amortized. In some cases, the lease may also mention that the pace and magnitude of the savings that the capital expenditure(s) produces will determine the pace and magnitude of the tenant assessments.

If you don’t already sell to non-owner occupied properties, I recommend you consider adding them to your list of potential targets. The last time I looked, the Department of Energy's Commercial Buildings Energy Consumption Survey (CBECS) estimated that 38 to 40 percent of the built environment in the office and retail sectors is non-owner-occupied real estate. That's a big slice of the market pie that certainly merits getting smart on how to best position your efficiency solutions in landlord/tenant settings.

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The Power of 12

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How do you gain access to the influencers and decision-makers when approaching a new organization with an efficiency project? I like to say, “Use the power of 12.” Why 12? Because 12 is the biggest number I can think of that's a single syllable. It could be the power of 37 for all I know, but bottom line is, it’s not power of one.

When someone invites you into the organization or you encounter someone in the organization and you ask that person what he or she needs in terms of energy efficiency, that individual’s response is not necessarily the best barometer of what the entire organization needs.

When you’re doing a project with a large organization, you’re going to be working with many different people. They’ll have different personalities, different organizational imperatives, and different challenges they need to face everyday. How your project impacts those goals, wishes, dreams, and desires may be totally different depending on who in the organization is making the decisions and who will be giving you direction to provide a solution that will alleviate their pain.

In the context of large organizations, forget the “Power of One” and think bigger. Zoom out and look at the organization as a whole. Determine who the different players might be, how they fit into the decision-making chain, and then map their relationships to determine the path to project approval.

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A Broken Rule of Thumb

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I talk a lot about “broken” financial metrics on this blog and in my online and in-person workshops. Many of the metrics by which prospects evaluate efficiency projects fail to take into consideration the complexity of the investment at hand. One of the “rules of thumb” that is commonly used by decision-makers is the “maximum 2-year simple payback” rule. For whatever reason, people have gotten it in their head that an investment that takes more than two years to pay for itself is a waste of time.

When I started in business back in 1980 in California, prime was at 18.75%. In fact, in 1981 prime went to 21%. I distinctly remember walking into a federally insured Savings and Loan in Brentwood, Los Angeles and getting a 6-month CD for over 16% (and I was still shopping for a better rate). Interest rates were crazy back then. Fast-forward thirty years to 2010, and prime is at 3.25%. I went to a local bank recently, asked them for a 6-month CD, and the percentage was ridiculous. It was closer to 0.6%.

So, why in the world would you be clinging to a mandatory 50% return on investment per year (which is essentially what two-year payback means) in both 1980 and 2010? It makes no sense at all because the backdrop of alternative investment vehicles is totally different in those two time periods.

If someone says that they’re wed to this idea of 50% return on investment (which is essentially the reciprocal of Simple Payback Period), you might ask a couple of simple questions (pun intended): 

In what other area of your core business are you currently enjoying 50% return per year?
What risk do you have to exercise to get that return? 
You might also say something like, “It’s interesting. I’ve done a little research on your industry, and the average return on equity or assets is X or Y…nowhere near 50%. I’m wondering why, when it comes to energy efficiency projects, your management thinks it’s appropriate to require 50% returns. If they didn’t invest in that energy project, they might invest it back in the core business and get maybe 12%.”

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Motivate Action

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“Value is created by the compression of time.”

The quote above comes from Peter Drucker, an acclaimed management consultant who wrote nearly 40 books during his career and who is widely recognized as a sort of “Einstein” of American management theory. In the context of energy efficiency, this quote means that if you know that there is something valuable that you should be doing to enhance energy efficiency, the faster you do it, the more value you will create for your shareholders or other stakeholders.

Conveying the cost of delay with calculations using hypothetical scenarios can be very effective in motivating your prospect to take action immediately. Below, you’ll find a pair of scenarios that uses five four-year simple payback period projects and five two-and-a-half-year simple payback period projects (not that I embrace simple payback period as a metric… this just gives you some layman’s terms that allow you to get your arms around how quickly these projects provide financial returns).

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In Scenario A, you do all ten projects this year. In Scenario B, you do two projects per year over the course of five consecutive years.

If you do Scenario A, you will invest approximately $1.7 million, and over a five-year investment horizon, you'll wind up with a net present value of $1,016,071.

If you do Scenario B, it will cost you slightly more to fund the projects (because inflation raises the price of labor and materials over the course of five years), and when you add up the savings that you are getting from all of these projects, your decision to phase in the projects costs you over $400,000 in net present value.

So why is there such a big difference in net present value? If you only do two projects in year one, you have eight other projects that have not yet begun producing savings. In the second year, you have two more projects feathered in; however, you still have six projects that have not yet started their savings streams. Ultimately, you have this delta of missing savings, and that is what constitutes the $437,000 in lower net present value.

Keep in mind what this means. You can get a 75% higher net present value if you did all 10 projects this year as opposed to phasing them in over a five-year period.

Now, your prospect may see this information and express concern about having the manpower to do all 10 projects in one year. When this kind of objection comes up, I would say something like, “Well, $437,000 of additional net present value buys a heck of a lot of performance bonuses, not to mention Chinese food and pizza in late night conference settings to make sure these projects are done.”

Then they may say, “Well, I don’t have the money.” How do you respond to this? Ask them a question like, “If I offer to give you a 25% discount on any of the projects that you manage to get done this year, how many of these 10 projects will you get done?” Most people say, “Wow, 25% off?! For a discount like that, I would probably do all of them.” Then you respond, “Okay, well let’s take a closer look at the numbers. The $437,000 of net present value is very close to 25% of the $1.681 million of first cost. So if you’re telling me that you are going to jump through hoops to find the money, find the staff, and find the resources, even if you have to outsource and borrow some money to get these projects done at a 25% discount, essentially that is what you are getting without an additional discount – assuming you do all ten projects this year.”

Finally, they may express concerns about the debt service, assuming they need to borrow money to do all the projects in one year. You can simply emphasize the fact that $437,000 pays for a lot of debt service, especially at the low interest rates that are now available for energy efficiency projects.

So what’s the moral of the story? Replace myth with math and motivation. Reframe the situation so that there is a compelling reason to move forward immediately.

If you were confused by any of the calculations used in this example, check out my three-part Financial Analysis of Efficiency Projects online training series. If you really understand how the math works, you’ll be better positioned to use it as a motivator in your next meeting.

Love one of our blogs? Feel free to use an excerpt on your own site, newsletter, blog, etc. Just be sure to send us a copy or link, and include the following at the end of the excerpt: “By Mark Jewell, Wall Street Journal best-selling author of Selling Energy: Inspiring Ideas That Get More Projects Approved! This content is excerpted from the Sales Ninja blog, Mark Jewell's daily blog on ideas and inspiration for advancing efficiency. Sign up at SellingEnergy.com.”

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