October 2010
Volume 11 Issue 10

 Legacy investments and channel tension
by Ted Konnerth

The city of Los Angeles has embarked on a project to convert every street light on their system to LED technology. LA has 210,000 street lights on its system (City of LA is a municipal provider of energy). The project is in its first year and so far, they've replaced about 20,000 units, at a fully loaded cost of $493/change-out. The project was budgeted at $57M, spread over 5 years. LA opened the selection process to all takers and 110 companies submitted preliminary bid submissions for their equipment. LA tested 25 of those 110 in a live installation beta site and ultimately selected 10 vendors who could supply the equipment. The system has the capability of integrating smart technology to allow wireless control of the system for unique applications; dimming, high brightness, strobing, etc.).

 A $57M lighting project (based on the math so far, that may exceed $100M). In this economy, or in ANY economy, who gets to play in a $57M project? This is a project of incredible proportions and begs the question of how was it 'sold'? Let’s look at the traditional methods of electrical sales in the US and determine whom, if anyone was the determining agent of 'writing this order'.

Lighting equipment is sold through multiple channels or rep organizations, but pertinent to outdoor lighting there are 3-4 likely channels this could have gone through:

1. Lighting reps. They are the bastion of new construction expertise and largely considered the most technically capable of promoting lighting equipment.
   

2. Utility reps. Typically focused on power equipment for investor owned utilities and muni's, these reps typically are experts in selling electrical equipment for utility applications: transformers, rubber goods, reclosers, etc. Many utility reps also represent some lighting equipment.
   

3. Direct factory reps. There are relatively few companies who use a direct sales organization for lighting; but of those that do, they tend to be outdoor companies, such as: Holophane, Ruud/Beta, Musco etc.
   

4. ESCO's. These companies focus on financial justifications to convert older electrical systems into more energy efficient equipment.

Now, who exactly was the 'proximate cause' for this project? If you answered none of the above, you’re correct. The earliest rumblings of this project were tied to the Clinton Global Initiative; which worked with the city to develop the plan, address the capital requirements for it and assist in preparing the RFQ's for equipment (LA is providing the labor through their street maintenance department). So what’s my point?

The electrical industry has functioned (reasonably well) in a narrowly defined structure of channel partners, with their assumed roles and responsibilities. The industry, in general is very good at servicing customers for their needs. Where the system breaks down is when a new technology is so disruptive, that the channel is either poorly trained in the technology application, or is reluctant to embrace the new technologies. LED is such a technology, but so are wind and solar generation, electronic control systems, building automation, etc.

New technologies challenge and stress the partnerships in the industry. Electrical distributors are very efficient enablers of providing goods and services to their customers. But it generally starts with their customers requesting those goods and services. As such, distributors are poorly equipped to be the purveyors of new technologies; especially if that involves premium prices and requisite financial justification to enable the sale. This analogy holds true for lighting reps since they are accustomed and trained to promote goods for new construction, not to develop business where it doesn't exist. Lighting reps do not call on, nor hold relationships with end-users who may be receptive to a presentation on reducing operating expenses over a life-cycle of ownership. Power reps are also generally limited in promoting disruptive technologies because they are narrowly trained to convert and retain blanket orders with their IOU customers; not present expensive solutions that would inevitably disrupt the security of the current blanket.

I call these relationships 'legacy investments'. It’s been 20 years since the federal government enacted legislation effectively deregulating the country’s transmission and distribution of utility power. That process involved exhausting studies of the legacy investments of IOU's in their infrastructure and how those capital investments would be treated on their balance sheets going forward, to allow them the ability to compete without being saddled by their own legacy investments.

The electrical industry is facing a new wave of legacy investments; distributor partnerships with extensive rebates, terms of sale, co-op dollars and buying group commitments, coupled with rep agreements that stipulate commissionable events solely by geography, and pricing structures that are tied to quotation processes that are directly influenced by independent rep control. Those legacy costs have served the industry well for decades, but the new 'players' won't play by the rules of the past. Already, major players in the industry (Eaton, Schneider, Cooper, e.g.) have developed alternative sales channels that are designed to play in the new economy; direct, end-user salespeople presenting alternative financial solutions for the rapidly growing energy efficiency markets.

The electrical industry is at an inflection point; with major electronics firms readying themselves for entry into the US market, it will become incumbent on the US manufacturers to address their legacy investments in the channel. The energy market for renovation or retrofit is at a minimum 4-5X the size of the current new construction market. For lighting alone, that could represent a $100B market over the next 2-3 years. And that is a $100B market that is woefully underserved by the traditional channels.

The City of LA is simply an early adopter of technology. A $57M 'adopter'; with little direct involvement of the traditional channel partners. The new world is already here.

Ted Konnerth and Prudence Thompson were quoted in October's issue of TED Magazine, here is the link to that article by Carolyn Heinze:

Rise to the recruiting challenge

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