Host:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Gavin McGrath:
Every year, there's this ritual. Thousands of families pack up, head out and seek adventure or relaxation, but what happens when they return home? You'd expect the biggest post-vacation challenge would be, I don't know, adjusting back to the daily grind or dealing with jet lag, but sometimes life has other plans. Take the Soriano family. Their return wasn't just about unpacking suitcases. As they walked back up the drive, it was as if their home had taken its own unexpected journey. The scene, fallen trees and branches littered the yard. Behind the front door, a water-logged living room. The suspect, not the recent storm as one might first guess, but a rebellious pipe under the kitchen sink.
Now, if you're sitting there thinking this kind of thing, it doesn't happen all that often. Well, you'd be surprised. But it's not just homes. Business owners with commercial real estate are just as vulnerable. A burst pipe or a fallen tree doesn't discriminate between cozy family living rooms and a bustling office space. When disaster strikes, how do you pick up the pieces? This is where the world of restoration and remediation comes into play.
Claim to Know the Restoration and Remediation Industry? Not So Fast. That's the title of a recent piece put out by LEK Consulting on the topic. On this episode of LEK's Insight Exchange, hosted by me, Gavin McGrath, managing director and partner at L.E.K. Consulting and co-lead of our Building Insight Services practice, we'll endeavor to give you the answers. We'll uncover key insights about the multifaceted world of restoration and remediation.
For context, this is an industry valued at up to $200 billion. It's a labyrinth of complexity, often misconstrued. Contrary to common belief, extreme weather isn't the sole driving force. Recurring events like burst pipes take the lead in revenue generation. Despite its vastness, the industry remains fragmented, marked by specialization and various niches in service types.
Coming up, we'll navigate the intricacies of this dynamic sector, debunking misconceptions along the way. Let's embark on this journey to unravel the restoration and remediation industry's true essence.
To provide insights on these topics, let's welcome our experts. Jonathan Ward from Kohlberg & Company and chairman of BluSky Restoration, and Paul Bromfield, managing director and partner with L.E.K. Consulting, who co-leads the Building and Site Services practice. Would you each take a moment to introduce yourself?
Jonathan Ward:
Paul, why don't you go first?
Paul Bromfield:
I'm Paul Bromfield. I'm a partner and managing director here at L.E.K., and I co-lead our services practice and spend a good deal of time in the restoration and remediation industry.
Jonathan Ward:
John Ward, an operating partner with Kohlberg & Co, chairman of BluSky Restoration, an investment we made about two years ago. Prior to that, I was chairman and CEO of ServiceMaster. In that business, we had a residential restoration business, ServiceMaster Clean, that was the leader in the industry at the time.
Gavin McGrath:
Thank you both. Paul, let's start with this. How does the restoration and remediation industry's revenue stability relate to recurring events and environmental concerns?
Paul Bromfield:
It's a great question, Gavin, and you hit on some really important points in your opening remarks. The largest proportion of the restoration and remediation industry is recurring events. It's those routine events like burst pipes, kitchen fires, water being left on in the faucet and in the bathroom, et cetera. And those occur pretty regularly because they're driven by human behavior.
As the population grows, which it is steadily in the United States, more of these events occur. Now, at the same time, there is, which is the more well-known, cats-driven, the events where extreme weather is creating storms or hurricanes and hail, which could also destroy the fabric of the building, create leaks, and create damage. That is, as I say, the smaller part of the industry, but that also has some increasing trends that we'll talk about in a moment.
Gavin McGrath:
John, how does the predictability of extreme weather and the rise of catastrophic or cat events impact the restoration and remediation industry, especially concerning insurance coverage?
Jonathan Ward:
Good question and a couple of things. First of all, as Paul said, the industry is much more about a pipe that gets broken in a bathroom, a kid who leaves the water running in a tub, a chicken left in the oven. The highlight of this industry is always a hurricane or a tornado. Quite honestly, I think the industry actually bifurcates itself two ways. One that we call kind of storm chasers, which is they really ramp up. They have a lot of extra equipment for these storms and they kind of run in there, try and get as much work as they can and work off that work over a six to eight-month period of time. I think the more appropriate approach to the industry is to be consistent with your clients, build out a national footprint, be there to serve them, and when storms come, be ready to assist your current clients.
I also think the challenge for the remediation and restoration industry has been the insurance company really putting both the remediation and restoration into one relationship. Back years in this industry, someone would come in and get the water out, get the smoke out. They'd make the home or business secure. They'd leave, and then you'd hire a general contractor to rebuild. I think the insurance company felt there was some finger pointing, not full accountability. So these two industries, quite honestly, have merged into get the water out, make the building and the home secure, and then be responsible for the rebuild.
Gavin McGrath:
And Paul, how do the insurance relationships influence the renovation and remediation industry? What are the key factors for restoration players in dealing with insurers?
Paul Bromfield:
Well, John hit on what's a obviously really important point that insurance is critical right throughout this industry and the ties and relationships to it from the various providers are very important. At the end of the day, the insurance company is writing the check.
Although these relationships are critical, there are different ways that providers can work with insurance companies and how business gets generated in this industry. So in some circumstances, the insurance companies are really trying to direct the whole job, and that might lead to all sorts of arrangements such as preferred vendor agreements where the insurer might pick and have a list or stable of, let's say, roofers that are going to perform the work for the insurance company working closely with the loss adjuster. And if that's a part of the go-to-market approach for a roofer or any player or any restoration provider more generally, then having those relationships is very, very critical.
Now, it's critical through another avenue, but in a sort of a different way. It is also possible for providers, restoration providers, remediation providers, to build a relationship more directly with property owners. Those could be homeowners, those could be commercial property owners. But at the time an event occurs, it's really getting to that property owner very quickly and helping to navigate them through the process and helping to take action as soon as possible, whether it's having an arrangement such as a master service agreement between a commercial facility manager and a restoration provider.
That would be one example of that where the facility manager really wants things to be taken care of quickly, let's say at a multifamily property. Or it could be around quickly getting to a homeowner who's very confused, they need some help, they don't know what to do, and the restoration provider helps them. Or it could be that being a trusted party, maybe the homeowner is called a plumber. The plumber isn't necessarily the best person to deal with water damage, even though they're very familiar with water in a different way, but they can connect to a valuable and reliable restoration services provider.
So a long way of saying insurance is important, it's always important, but there are other critical ways to market and other critical relationships that restoration providers can leverage.
Gavin McGrath:
John, you mentioned a couple of different experiences in your career with some of the, what I would think of as larger or larger-scale restoration, remediation businesses. What are the advantages of scale in this market compared to locally based businesses and how do those navigate variability specifically around cat events?
Jonathan Ward:
I think the key for a national footprint like BluSky is to act small, but be big. And what do I mean by that? You can have an event that can occur, say it's a tornado in the mid-South, and you have a branch in Memphis that could be overwhelmed with demand. But if you have 60, 70 other locations that can bring in resources that you've set aside supplies. You've got plywood, you've got blue tarp paper, you've got [inaudible 00:10:30] may need, you've got dryers, you've got water extractors. You can literally put together an army to get into the situation.
And first and foremost, both on the residential side and the commercial side, remediation, getting a business back into business or a homeowner saving their treasures is job number one. I think everything after that pales in comparison to stabilizing the environment, making sure that the business is up and running or the homeowner hasn't lost too much treasures. People don't want to rebuild. They don't want the aggravation. They want things saved and the quicker you can get a team in there. So the ability to have scale, one, local response, but then resources that on a moment's notice, you can be mobilizing and getting towards either a large event in a local area or a large regional event such as a hurricane, clearly has its advantages over a small, well-run family business that may have five or six crews they can get out there, and that's all they have.
Gavin McGrath:
Thanks, John. Why is it essential to pay attention to the subtleties and details within the remediation and restoration industry, and what are the factors to consider when evaluating companies in this sector? John, I'll go to you first. You've looked at a number.
Jonathan Ward:
Yeah. I think it's pretty interesting. Reputation, reputation, reputation. Paul said it earlier, a homeowner comes back and sees an event, they're frozen with indecision. "What do I do? Do I call my insurance broker?" If there's an event and it's been on the radio, meaning through a fire scan or something like that, you will get those businesses that will chase that type of work.
We had a lot of this last year with Hurricane Ian where people came in looking for a tremendous amount of money upfront with no guarantee of work. So whether it's a business or a homeowner, the ability to take a deep breath, yes, get someone on site right away, but quickly while you're trying to do that, look at references, look at credibility. If it's your home, call the insurance broker say, "Do you know this company?" If it's an industry business and an industry situation, it's clearly easy to talk to either peers, your home office and find out what's going on.
So job number one here is to make sure that who's doing the work is going to do quality work, not cut any corners, make sure again and again that the water, smoke, whatever the event is is fully remediated before you try and undertake any reconstruction.
Gavin McGrath:
Paul, what do you think?
Paul Bromfield:
Well, Joan said it correctly. There are some just fundamental principles of things you have to do right. And those relationships and taking care of the property owner are really critical. A business like John's has many different services and can serve a big range of different-sized customers and folks needing restoration and remediation help.
Do want to emphasize though, since you asked about subtleties, Gavin, there are lots of parts of this industry and many specific services in the way that John was talking about, you want to make sure you've got the right person doing the work. But that could be a specific furniture restorer in some cases. It could be temporary emergency services, resident relocation, or water containment or whatever it might be. Some of these services are done by the same providers, some are done by very different providers. I think the reason I would make that point is for anyone wishing to invest in the industry or trying to understand the industry better, it's important to understand these macro themes that we've been talking about, but also to really sort of think about, well, which specific services do I want to be part of or not.
Gavin McGrath:
John, as we think about growing these businesses, what are avenues for growth as we look to expansion through some of these types of services that Paul just mentioned?
Jonathan Ward:
Yeah, I think it's a good question. Number one, the ability to handle national accounts, whether it's hospitality, warehousing, commercial real estate, HOAs, property owners, the ability to say, "We can take care of your need not only in Austin, Texas, but we can take care of your need in Denver, we can take care of your need in Chicago," is critically important as the world continues to consolidate supply relationships as we go forward.
We talked about insurance companies. Equally important on big glosses are the consultants and the actuaries and folks who get in there and actually are the administrators of the work. So the insurance companies are now more and more sitting off to the side saying, "I've got to underwrite this." They have consultants, they have actuaries and administrators who come in and say, "This seems like a fair price." There's more belts and suspenders to make sure that those prices are checked and double-checked and bid.
So again, I think there's a lot of discipline here that has come to the industry that, quite honestly, has slowed down response time and some other things as people make sure they've got all their ducks in a row, but probably avoids a bad outcome for either a homeowner or a business owner where they do, as you said earlier, have the wrong people who don't have the services.
We've had to expand from just getting the water, smoke out to reconstruction. We now have roofing capabilities, we have environmental capabilities. We've got a subsection that is really terrific in hospitals. So knowing all the needs and requirements to work in a hospital environment for cleanliness and infection is critically important. So again, there's a horse for a course and not all horses for a course.
But I think as you continue to grow, even as we grow and through acquisitions, we have found that we pick up a company that's really good at asbestos removal. We pick up a company that's great at hospitals. We pick up someone who's got a great roofing capability. Then we can take that and literally teach those skills or bring those skills to 50 to 60 other locations to give us a more complete suite of services as we serve local markets and national markets.
Gavin McGrath:
That's really insightful. And Paul, as you think about geographic expansion in this market, are there highlights you'd consider?
Paul Bromfield:
I think translating what John was saying, that notion of how do you act big and act local or think big and think local? How do you get, but the benefits of both? And obviously, local restoration businesses, this is a fundamentally local business. You have to have those local relationships. You have to understand the local markets, like hospitals, whatever it might be that you're dealing with that John was talking to.
But there are so many benefits of scale, right? You can create these centers of excellence and get some real sort of concentrated expertise in one place that you share more broadly. You can serve national accounts. You can expand and redeploy across territories as different events or different needs arise. Those are all the benefits of scale.
So to answer your question, when you're expanding geographically, you really want to be able to try and do both. Now, does that mean do M&A? Does that mean do greenfield? I think either could work, different models would have different preferences. But either way, the nirvana that I think everyone's trying to get to, not just in restoration and remediation, but in other service industries that we work for, is what John is saying, how do you get that benefits of scale without being bureaucratic, and how do you get that local entrepreneur to keep being a local entrepreneur but in a bigger organization? And I think it's a difficult cat to skin to use a phrase. I do think it often comes down to culture, which John could talk much better about than I could, and there are other ways to do it as well. But that really is the ultimate goal here as you expand geographically. So you really want to get both, being national and being local.
Gavin McGrath:
That's great. Culture is an interesting point, Paul. John, when you've built these businesses, how do you retain that culture, again that local feel and that local presence and the culture that's been built up at the local level and be able to multiply that across the footprint that you build?
Jonathan Ward:
I think the most important thing, I've been in this industry now two times, is pride in making sure a job is well done. And as we embarked on our journey with BluSky two years ago, one thing struck me really deeply is that as the base business and then as we've added new acquisitions, every one of those owners cared about the local customers. And so our most important criteria on acquisition is cultural fit. Do they have this servant approach to the need? Are they servant leadership? Are they there to serve the client? Are they there to make sure the technician is able to show up on time, get it right the first time, and be easy to do business with?
So if you have the right culture, then you just multiply it. Take an example of we bought a company down in Orlando last year, about a year before the storm, that basically was residential and some hospitals and things like that. Well, when Ian came in, they were willing to take all the resources from around the country that we could possibly provide. We have a branch in Tampa. But again, the whole middle of the United States where there wasn't a lot of activity going on really came down there and did a remarkable job in serving clients. And that's from a servant leadership, we're here to serve our clients mentality. We'll figure out later how the billing's going to work. We'll figure out later what's going on. But we're going to get onsite, take away these challenges, horrific situations, and really work with the clients.
So again, whether you're going to Paul's point organically or through acquisition, what's the heart of your local leader? And it's kind of interesting, when we look to start a new branch, if we're going to do it organically, we won't build it or open it until we find the right leader to run it. Everything after that can be worked out. But it is about leadership. It's about local leadership, willing to not only serve their local market, but willing to work with their peers around the country.
Gavin McGrath:
As we conclude today, I'm brought back to the Soriano family who came home expecting the aftermath of a storm, but instead found a burst pipe. Their situation, though fictional, mirrors countless real scenarios that highlight the restoration and remediation industry's significance.
Our deep dive today led by experts, John Ward and Paul Bromfield, provided insights into the complexities and dynamics of this industry. For those of you who've listened and find yourself keen on learning more, know that L.E.K. Consulting is here equipped with data, analysis, and experience. We cover everything from navigating the unpredictability of events like these, understanding insurance intricacies, the pros and cons of different business scales in this industry, and more. The restoration and remediation industry is multifaceted, and there's always more to uncover. If you're ever inclined to delve deeper, we're here for those discussions. Until we meet again, this is Gavin McGrath signing off.
Host:
Thank you, our listeners for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
