Episode 30: Challenges for System Integrators Today

In this episode we talk with Jose Rivera, CEO of Control System Integrators Association (CSIA).  Heading into CSIA 2023 taking place in May,  Bryan and Jose discuss some of the long term drivers businesses are seeing  right now in the integration industry.

Guest Jose Rivera
https://www.linkedin.com/in/joseriveraw/

Host Bryan Powrozek
https://claytonmckervey.com/team/bryan-powrozek/

For more information on Wipfli, please visit our website at:
https://www.wipfli.com/manufacturing. You can also contact us here.

Transcript

Bryan Powrozek: 

What are some of the big long-term drivers that you're seeing right now in the integration industry? 

Jose Rivera: 

So I will start by saying labor shortage. Labor shortage has been a very big issue for the industrial manufacturers, and automation is one way of dealing with that. So we have seen some projects that were on the roster for manufacturers that now have been allowed to go forward just because they help relieve the pressure related to labor shortages. What we have also seeing is that this reshoring or nearshoring of manufacturing has been a great opportunity for the automation community, including our system integrators, because to be able to bring back to our shores or near shores, you require a lot of automation. You cannot just deal with replicating what you have in other local countries. The other part that also has been going on for a while is smart manufacturing. And smart manufacturing is one way of saying all the efforts taking place to leverage existing technology to make your company more resilient, more flexible, more of all these good things. 

And so that has been taking place already, and one part that some people may realize it or not, but it's this whole thing called ESG, which stands for environmental, social and governance. And what it is, it's like very big companies are trying to be good to the environment and good to their communities. And so they have made commitments to be carbon-neutral by a certain date, some of them as early as 2030. And that drives big time changes in the way we manufacture things, in the way we gather in buildings. Lots of changes. And all of these ESG challenges, they know the goal, they know that they have some parts of the solution, but they're still working towards the rest. But I guarantee you there's going to be a big chunk of it that falls on the lap of automation providers to make it a reality and visualize it. 

Speaker 3: 

Welcome to the Sound of Automation, brought to you by Clayton and McKervey, CPAs for growth driven businesses. 

Bryan Powrozek: 

Hello and welcome to the Sound of Automation. I'm Bryan Powrozek with Clayton and McKervey, and joining me today is one of my favorite returning guests, Jose Rivera. Jose, how are you doing? 

Jose Rivera: 

I'm doing great and thank you for having me again at this podcast. 

Bryan Powrozek: 

Excellent. Well I'm definitely looking forward to, in a couple months here, we've got the big Control System Integrators Association annual executive conference. I know you and the team have been working hard on pulling all that together, which is why I thought it would be a good opportunity to have you back on and just to talk about what you and the team there are seeing in the industry and with the business owners there. So starting out at a really high level, as you're starting to put that conference together, I know you look at the landscape, look at the challenges that business owners are seeing and that integrators are seeing. What are some of the big long-term drivers that you're seeing right now in the integration industry? 

Jose Rivera: 

Yes, it's very interesting. We have had some of these drivers already for a while. The pandemic increased or made ones even more important than others. So I will start by saying labor shortage. Labor shortage has been a very big issue for the industrial manufacturers and automation is one way of dealing with that. We have seen some projects that were on the roster for manufacturers that now have been allowed to go forward just because they help relieve the pressure related to labor shortages. What we have also seen is that this reshoring or nearshoring of manufacturing has been a great opportunity for the automation community, including our system integrators, because to be able to bring back to our shores or near shores, you require a lot of automation. You cannot just deal with replicating what you have in other local countries. 

The other part that also has been going on for a while is smart manufacturing. And smart manufacturing is one way of saying all the efforts taking place to leverage existing technology to make your company a more resilient, more flexible, more of all these good things. And so that has been taking place already. And one part that some people may realize it or not, but is this whole thing called ESG, which stands for environmental, social and governance. And what it is, it's like very big companies are trying to be good to the environment and good to the communities. And so they have made commitments to be carbon-neutral by a certain date, some of them as early as 2030. And that drives big time changes in the way we manufacture things, in the way we gather in buildings. Lots of changes. And all of these ESG challenges, they know the goal, they know that they have some parts of the solution, but they're still working towards the rest. 

But I guarantee you there's going to be a big chunk of it that falls on the lap of our mission providers to make it a reality and visualize it. And I will say one last thing that some system integrators may not see that this is related to what they do because they may see it as a project that comes as an MES or a SCADA project, but what this specific MES or SCADA project is doing is providing a component to gather information, to visualize information as such that the manufacturers can drive towards their big commitments. 

Bryan Powrozek: 

It's interesting with a lot of the integrators that I work with, if they're working on an MES project or something like that, they spend a lot of time to learn and understand, for example, how to calculate OEE for a particular process or a particular industry niche. And I see the ESG push as being similar to that. Initially, I know when you start hearing about it, people were, "Well, it's just going to be another one of those things we have to respond to in our quotes," or et cetera. But as you pointed out, really understanding how that is impacting the end-manufacturer's operations then gives them a little bit of a leg up when they're going in and proposing on things because maybe you can can build a visualization in or build in some intelligence in the control system that's feeding out information that they need to show that they're hitting those ESG targets. So I think that's a great point. 

Jose Rivera: 

Let me say one thing. Sometimes we have system integrators saying that they have been delivering smart manufacturing for the past 25 years and I have always struggled with this comment. Now I think I understand what they mean by that. And when you are deploying ESGs, smart manufacturing, all these different things, the first part that you need to do is you need to be able to get the data and the data you access by connecting and extracting the data from devices on the manufacturing floor. Let's say this is the most fundamental part, this is what happens underneath the hood of your car. I'm picking an analogy there, but that is the part that system integrators have been doing for many years. That is totally true. So they have been extracting information, they have been connecting information. 

What is different now is that the quantity of data that you can extract and what you can do with this data, that has changed in a dramatic way. And the people that get involved with this data is not just plant floor people, it is people in charge of planning even at the corporate level, making sure that they're driving towards goals. So sometimes things are acquiring new names, but there are differences too in what has been happening. So it's actually very exciting because all of this leverages the strengths of our system integration community and automation providers. 

Bryan Powrozek: 

As we start peeling back the layers then and get into more of the immediate challenges that integrators are seeing, and you and I were just on a call together yesterday with some of the other CSIA members. Staffing as you mentioned, that's just a permanent fixture on all SWOT analysis now because it's going to be a challenge that the people are going to have to work on. What are some of the other challenges you're hearing from the membership related to supply chain inflation? Those seem to be a couple of hot button items right now. 

Jose Rivera: 

I would say that staffing is at multiple levels. You know have portion that is people are pulling cables, connecting, like the technicians, electricians. That is in short supply, but it's also the talent portion. These are the engineers or either the ones with experience or the ones right out of college because the demand for these resources is so high and everybody's jumping on them that it's making it tough. So that is one challenge. The way some system integrators have been doing it, I would say most of them, is by being very creative. So they're redesigning how they do things, they are trying to create groups such that you don't have to have, "Must be an engineer," requirement. And so you split up the work. Others have been able to leverage global networks, partners that are outside of our country. So in a very creative way. 

And what is also very interesting is that it's the automation of the automation. So tools are being developed to help the implementation and programming of devices in a more efficient way. So not starting from the ground up, but it's really expediting it. So it's fascinating. On the other challenges, and you are right, we heard that yesterday, supply chain is getting better but it's not where it used to be. And this is all the consequence of the pandemic that made a lot of changes and we're still recovering from that. So we heard yesterday from one of our system integrators having this very big panel, ready to go, except they're missing a few analog cards. So everything is in there, they're just missing these cards, they cannot deliver because they need to do a testing on site with their client to be able to ship and they're waiting for these cards. 

So as a businessperson, imagine all the money that you have tied to this panel that you're not able to ship an invoice and from the perspective of the end-user or the manufacturer, they're waiting for this to be able to start pulling cables and all these different things and getting their project going. So that is still a challenge. Some of these things are getting better, but they're still the missing element. I know that at CSIA, system integrators have developed good peer group networks and some of them if they can, help each other out, but that is not always possible. What I've also learned from some of our system integrators, they have said, "Look, we don't want to build inventory at our sites. We are a service provider and that is normally not part of what we provide, but during these weird times realigning after the pandemic, we are going to build up some inventory." 

And so some of them have put inventory and that's created its own challenges because it's real money tied up and now you need to manage it. Everybody knows that an inventory needs to be rotated, you need to be regularly counting to make sure that everything is there. There is expiration of some of the components. And so that is one way that system integrators have been coping. And then what else is inflation? Everybody keeps talking about inflation. It seems to be getting better, but it's still not where we were before the pandemic started. And so this now is forcing us to consider inflation. And some of the projects that system integrators get involved in are long-term projects. They may be on a project for two years. 

So now you cannot just assume that the price is going to stay for the components or for the labor of your engineers. It's going to stay constant. You need to start figuring in how to put an amount for inflation forecasting and part of your price. And it's always a challenge of you want to win the bid so you cannot be overly conservative, and so this is a challenge, but you need to know inflation is here to stay for a while. 

Bryan Powrozek: 

And this reminds me of back in my engineering days when I was in the auto industry, early two thousands, the company I worked for did a lot of stamping and manufacturing of metals. So you can always factor in some profit into your quote. We know we're going to base our steel price on this, but we know we're going to be able to get a better price out there in the market when it comes time to actually deliver the product. But then steel prices went off the rails and so all of those inefficiencies, the operating challenges, bubbled to the surface when you no longer had that cushion in there. And that's the lesson I think that some integrators have learned during the pandemic is as the supply chain shortages came in, they no longer had that buffer of, "Oh we can just order it and we'll get it in a couple of weeks and we can move on." 

So I hope that's one of the pieces that sticks, coming out the other side, and as integrators are adjusting their approaches. Well yes, we don't hold traditional inventory like a manufacturer or what a true manufacturer, but you do have inventory, it turns really fast, you get it in, it goes back out the door and you try to minimize that. So using some of those inventory management philosophies, and the same can be said for employees too. If your backlog is growing or your pipeline is growing, "Okay, we got to start looking out. We're going to need to hire in two to three months," or whatever it might be. And so using those things will just help integrators get a better handle on how the business needs to scale, where they need to, maybe, "Okay, we know that this part's got a six-month lead time, so we're going to order it sooner. So we get here and we don't have this problem where we're just waiting on one part to be able to ship the panel to get everything done." So I hope that sticks because it's definitely helped integrators run their businesses more profitably. 

Jose Rivera: 

Yes. Also say that during these challenging times it really pays to read the small print because some of the small print has changed. And so in the past it used to be that the pricing is what you agreed to and you put your order for, but if you read a lot of the fine print by the suppliers, it may give you this disclaimer, it may change or we will charge what is the current price at the time of delivery for which you don't have control of. So I'm saying it's like everybody's trying to cope with it. So it really forces us to revisit things that we were taking for granted and be smart about it. 

Bryan Powrozek: 

Jose, going to your background and obviously you've been connected with the integration community for a number of years. What are some of the changes that you've seen over that time that you've been involved? 

Jose Rivera: 

I was not here when CSIA was started, but that was in 1994. But we have still members that were there and they're all very happy to share, and so I know a lot of stories. But what is very interesting is that it was a group of 14 or so system integrators that got together to help each other out, especially on the management side of things. But at that time, system integrators, the companies looked very similar in terms of the size, what they were doing. They always have supplied very different verticals and applications, but from a perspective of a company. So how many people and how do you invoice and all these different things, they were very similar Today, this is no longer the case. We have system integrators that share this core about the basics. Most system integrators still do some level of programming for PLCs, SCADA, HMI, but then from there on you have all this opportunity to go. And some of them are totally hardware-less. 

All they provide are services related to software and integration at the software level. You have others that build panels, you have ones that have gotten into the newer things like subscription models, others provide staffing for end users. I know of one case that helps one end user in a very remote area, and so they help through staffing in a very creative arrangement. So it is really very different, very diverse. Also, I was saying from the size of the companies, at the very beginning, they were more or less the same small size companies. Today you have some that are over 200 million in system integration, services, huge, but the majority of system integrators are less than $5 million of revenue. So you can see huge differences because the way to run a 200 plus billion company is definitely not the way you run a $5 million company, but there is always benefit in networking. 

Oftentimes it's the smaller system integrators that are the most creative, are the ones that are more resourceful, and they provide ideas and opportunities for the larger system integrators that are much more bound to follow rigid procedures, et cetera. So there is always benefit to be in a community that is diverse. 

Bryan Powrozek: 

One of the themes I heard in your answer there, and I think echo is something I've seen within my client base is that, well, I'm not going to say you're not going to be successful, but you're not going to be as successful as you could if you go in with this kind of tunnel vision of I do control panels and this is the extent of what I'm going to do and I'm going to focus just in on that, because what I've found within my client base is their customers eventually end up coming saying, "Well, you do this piece of the process? Can you do this next adjacent piece because I like what you're doing here. Can you add this next adjacent piece to it?" And so if you're coming in with this tunnel vision view of, "This is all I'm doing," you're going to miss a lot of opportunities. 

And some of my clients have even found those adjacent pieces that they start getting involved in, turn out to be more profitable, more enjoyable, they really start to drive the business. So that definitely lines up with something that I'm seeing. And I think it actually, it's a nice tie-in then to this year's CSIA executive conference because the theme of the conference is Bold New World and I think that some of what it's going to take to grow and be a successful business in the coming years is some of that bold action. So I know my reasons, but from your side, why do you see bold action as the key to addressing some of these issues? 

Jose Rivera: 

Everybody's tired of hearing about the pandemic, but the pandemic really changed us, changed our economy, changed our companies and changed the way we are being asked to deliver value to our clients. And so this really is forcing everybody to take a look at their companies and adjust. We went at the very beginning, talking about inflation, talking about supply chain, labor shortages. These are big, big things to adjust to. Remember how we were talking about managing inventory, which is something that most system integrators we're not doing, or at least not very professionally because it was also not a big amount. Now it is becoming a bigger amount, it is much more important. So it's not just a matter of we're back to normal. This is a very different normal. So you need to really take a look at how you're operating your company and seeing what you have been doing, where you need to do changes and need to start looking out. 

If in the past you could rely on hiring employees and having them stick around for a long time, this has changed. So you probably need to start thinking about being very proactive or recruiting talent and going to universities. Most system integrators don't have a brand that is recognizable because it's number one, not a consumer brand, but it's also a brand where not a lot of money is been spent on developing that brand. So you need to sell the exciting opportunity that system integrators provide for engineers. I will tell you, that if you work for a manufacturer, you will very often get stuck in a very small niche and then you'll be an expert in that niche until you move to the next role. If you are with a system integrator, and I'm speaking now for the entering workforce, you will have an opportunity to be rotated around a multiple projects, very different industries and that will make you a very, very good engineer because it's a little bit like an athlete, like a runner. 

So the runner does not always run just on flat. They take him out on hills, up and down. That always builds better muscles, even if at the end you're just running flat, that is part of what develops your capability. So I think that now we need to really be proactive and start thinking and review. Does this still hold true for us or not? You were mentioning before about sticking to your [inaudible 00:22:25] and that is a very good argument and that has worked for a while. So expanding all over is probably not a good thing. It's need to be very critical and very selective. But what is important from what you're saying is that end users today, they also suffer from talent shortages. So they need to be able to have providers that deliver a bigger chunk of what they need. So the management of the suppliers ecosystem is more manageable with the resources that they have. 

And then of course if you're a provider, what you need to provide now, is bigger. So how can you deliver this bigger scope? Maybe you partner up with somebody for something where you don't see yourself ever going into, maybe you start developing capabilities for something that you see will become more often in your line of offer that you have for your clients. So this is all very, very much changing. So what they say is, "Stay alert." 

Bryan Powrozek: 

Exactly. That's a great point actually is, even like we talked about the ESG stuff at the outset here, it's really putting yourself in the shoes of your customer and okay, "Yes, I'm coming to you because I need a control system that can manage this mixing line or this palletizing," or whatever it might be. Understand there's other needs out there that they may not be thinking of. And if you can come in and say, "Hey, not only is my system going to be capable of doing this, but we can handle the maintenance side of it, and now you don't need to worry about going out and finding maintenance people because our company is going to be able to handle the maintenance piece for you." And so now you're addressing that recruiting and staffing challenge for the customer, in addition to providing a product, so I think that's a great piece of advice for any company going out and bidding on a job is understanding those challenges that the company's going to be running into. 

Jose Rivera: 

Start with your clients, what are they asking you to do? And you may not be able to deliver on everything that should be providing guidance in terms of what you need to do as a company because at the end they pay the bills. 

Bryan Powrozek: 

Exactly. Jose, if you had to pull out your crystal ball, what do you see as lying ahead for system integrators? 

Jose Rivera: 

I don't think that you need a lot of crystal ball. They have been very, very busy with opportunity and I don't think that this will dry up very quickly. System integrators, they supply a lot of very different industry verticals. So they have ones that go. Imagine the ones in Houston, they supply oil and gas, chemical in a very big way. And then you have other ones that are supplying industry, let's say in the manufacturing areas for automotive. So very different industries and the cycles, they all go together. So this is a beauty in terms of some flexibility to be able to leverage out and write out the cycles because all verticals have their cycles, pulp and paper, they go into huge valleys and then they go into this mega peak. So having some diversification there is good. 

But what I will say is that there will be for this industry, plenty of work ahead, these shortages of labor, these commitments for carbon through ESG and all these different things. These are long-term commitments. So work will be there. I think what is important for those leveraging this is to adjust because this whole story about who moved my cheese, the opportunity is there, it just comes in a slightly different flavor, location, different requirements. So keep that in mind and be flexible and be capable through aligning to the new opportunities. 

Bryan Powrozek: 

Excellent. Well Jose, I'm excited. Looking forward to the conference coming up. I know from personal experience and talking to other attendees, it's always a great event, a good opportunity to learn about what's going on in the industry, what's coming up, but also to talk to your peers and understand what they're seeing and how they're addressing some of these challenges, which I think is really, from what I've seen, is one of the biggest values of CSIA, is that peer-to-peer connecting and sharing and all that stuff. So if someone listening to the podcast has never been before and their interest is peaked in the conference, what's the best way for them to get registered? Knowing the conference is in May of 2023. So if you're listening to this after that conference has already passed, you got to catch next year's. But if somebody's listening to this now in March or April of 2023, what's the best way to find out about the conference? 

Jose Rivera: 

If you go to our website, which is www.controlsys.org, it's our website and we have a big banner there about our conference and then you can go in, get all the details. Conference takes place 15th to the 19th of May, and this year we have two great workshops before the start of the conference. One is going to be delivered around the CSIA best practices, which is a very big value we provide to system integrators. And then we also going to have, first year that we have, it is one on value for system integrators because we have now an industry that has seen a lot of change in terms of some of the owners and founders of system integration companies are now looking either for an exit strategy or looking to grow by acquiring or merging with others. So Bryan's going to be on that value workshop and we really look forward to it. This is perfect timing for our industry. 

Bryan Powrozek: 

Excellent. I'm looking forward to that and getting a chance to connect with some members and I will see you again face-to-face in just a few short months, Jose. 

Jose Rivera: 

I look forward to it. 

Speaker 3: 

Thanks you for tuning in. Don't forget to like us subscribe and share on social. To learn more about Clayton and McKervey, visit us at claytonmckervey.com. That's C-L-A-Y-T-O-N, M-C-K-E-R-V-E-Y dot com. We thrive on finding the solutions for you.