Andy Wright column: is your business ‘merely existing’?

The equipment rental sector stands at an interesting point in its evolution. Yes, the market is a bit soft currently, but for some players demand and financial performance remains strong, yet other parts of the sector are behaving as if survival is the only name of the game and are taking short term crisis led decisions which will undoubtedly damage the business in the long term. But is the current situation, a problem of their own making?

Existing-only state: focused on survival?

In today’s ‘merely existing’ state, equipment rental businesses remain operational, but with limited capacity to differentiate, innovate or invest. This is driven by a number of important factors.

Andy Wright

Margin compression despite high utilisation
Many operators chase high fleet utilisation, but this doesn’t necessarily translate into higher profitability. The reality can actually be the opposite with the increased level of high-cost activities delivering unsustainably thin margins.

Rising costs for equipment purchase, the cost of finance and operational costs such as fuel, transport, and maintenance all contribute to the inability to turn high levels of utilisation into increased profitability.

Add to that the end user pressure from customers pushing for shorter hire periods and lower rental rates and you have the perfect storm of higher costs meets lower income.

Businesses stay busy, but profitability and reinvestment suffer and once again the rental sector is damaged due to its position in the sector value chain, squeezed between powerful OEMs and powerful customers.

Operational firefighting
In survival mode, businesses reduce the cost of their structures and remove overheads. In practice this often involves reducing lower paid front-line customer facing staff rather than thinning out the higher paid managerial layers of the business.

These staff reductions limit service quality to the customer and impact the business’s ability to maintain revenues as customers become dissatisfied.

Safety and compliance become minimum obligations rather than strengths and differentiators and customers increasingly notice the difference.

Digital systems (telematics, booking platforms, asset tracking) are underused or fragmented - as the number of people who are operating them are reduced - and become a drag on the business rather than an enabler.

The outcome of this self-induced situation is that the business works harder but not smarter and over time revenues often reduce faster than costs, creating a worse position for the business than before.

It’s called the ‘doom loop’ and rental business have been falling into this trap since the industry was created, usually driven by short termism and shareholder pressures.

The ultimate consequence of this vicious circle is long term, structural damage to the business that takes years to recover from. It damages the culture, morale and the critical trust between management and employees, all of which can be catastrophically destructive to the future success of the business.

Thriving state: what does a winning equipment rental organisation need to look like?

Well, first of all, long termism over short termism wins out every time. While it’s important to be clear that there are times when drastic action needs to be taken quickly to keep a business alive, because the reality is that there is no long term without first a short term, there seems very little point in tinkering to secure a short term financial gain if this will ultimately lead to the long term malaise of the organisation.

For me a thriving rental business is fundamentally driven by a long-term purpose, is service-led, data-driven, sustainably positioned and strategically invested.

From existing to thriving: what must change?

The equipment rental sector provides a critical and valuable service to and across a broad spectrum of industries. We fulfil a vital role in the way that things get done, so why do we find it so difficult to do what we do and make a sensible return from doing it?

To move from merely survival to thrive and succeed, there are some things that we need to focus on:

• Buy right – acquire the right assets at the right time and for the right price.
• Instil pricing discipline and processes that reflects total cost of ownership, from cradle to grave.
• Encourage leadership to be brave and do the right thing for the long term and for the delivery of superior service leading to continued customer confidence over the long term.
• Invest in a real focus towards people development as a key activity. Assets are interchangeable, great people are not.
• Start to value profitability over activity – don’t become busy unprofitable fools.

Many rental organisations can continue to operate in this ‘existing’ state and can do so for a long time, but how many can truly hope to flourish? My guess is that the answer to that question is ‘not that many’ and another cycle around the ‘doom loop’ is probably the next course of action.

Yes, the market is a bit soft currently but there are businesses out there that are flourishing and they are doing that because they are doing things differently and better than most. There is much for all to learn from those thriving organisations.