Efficiency Is Not Effectiveness: How the Cost Reduction Race Hurts the Value of Solar

Australia boasts solar installations on at least 1.2 million homes and has on of the highest amount of installed residential solar per-capita in the world. According to recent figures, a new household PV system was installed every 2.8 minutes in 2014.

Part of what has driven success in Australia, aside from streamlined, though severely threatened, policies and incentives has been economies of scale backed by software business tools and labor specialization. 

“Margins here so low that [driving] volume is the only way to make any money. Administrative and logistics burdens are so huge, these sort of [logistics management] tools are critical to making a more streamlined business,” said Jeremy Tranter, a professional engineer with Australian design-build firm Solari Energy.

“You’ve got to have logistics correct, processes in place, racking systems pre-fabbed as much as possible and proper planning so that everyone knows what they’re doing,” Jeremy continued. “It’s very much about driving efficiencies.”

Driving efficiency will not be enough to scale the U.S. solar market. While many installers may be tempted to reduce costs through downward wage pressures, cutting corners on design and installation quality, or sales scams, these tactics will only backfire. They erode customer value and destroy consumer confidence in the solar industry. In Australia, Australian state consumer protection agencies have levied several high-profile cases against solar installers or solar sales organizations for misleading marketing claims or failure to deliver product. The US solar industry must learn from these mistakes as installers work to find ways to scale and maintain profitability.

Efficiency vs. Effectiveness

Efficiency is the ratio of the effective output to the total input in any system. A Key Predictive Indicator (KPI) is a metric used to measure individual or group progress against a goal. Choosing the right KPIs will ensure that your managers, employees, and you stay focused on achieving the right goals. You should align KPIs to support the ultimate creation of customer value. Efficiency is about doing things right within the framework of KPIs.

Effectiveness, however, is about doing the right things. Be careful: It’s easy to be fooled by your own numbers if your KPIs do not support actually creating customer value. Your operation can be efficient while being completely ineffective. Consider how you measure success in your organization through KPIs. Are you rewarding the right behaviors or subtly pitting employees against each other?

Consider this example:

A solar designer has a KPI of completing two plan sets per day. Seems like a reasonable goal. However, consider how rewarding the quick completion of two sub-par or error-prone plan sets affects downstream operations. Taking up the time of project managers and foremen, causing customer delays, and/or potential equipment changes are all potential results of focusing on the wrong aspect of this KPI. While the spirit of this goal is right, it does not consider the downstream customers and their needs, therefore eroding customer value. 

A more holistic KPI for a designer in this case would be also measuring their effectiveness – what is their first pass yield? First pass yield is a measure of quality. If a design moves through without redlines from an AHJ or other error, the designer earns their first pass yield on the project. Measuring this alongside their efficiency (number of plan sets completed) will yield a fuller understanding of the performance of the designer.

One word of caution, this combination is a trailing indicator of designer performance. Be sure to also look at leading indicators of designer performance in qualitative measures: How long does it take them to resolve plan set rejections? Is the party submitting the request satisfied with the results? Internal customer satisfaction is also crucial. It leads to organizational excellence, trust, and keeps everyone focused on satisfying the end customer.

So should your organization to pursue efficiency or effectiveness? If growth and scale is your goal and you have resources to spare, optimizing for effectiveness might be your best bet. However, smaller companies generally have more limited resources and therefore may be more interested in pursuing efficient operations, instead choosing to maximize on current capabilities rather than stretch themselves too thin.

Ideally, the ultimate goal is the space between efficiency and effectiveness.

Focus Overall on Effectiveness

Installers should take a holistic look at their business as they plan improvements and review their KPIs. Myopic focus on driving costs down in a single area- like design, for example- may result in more costs incurred during installation due to likely field engineering. Therefore, installers exploring cost reductions should always consider first how a change would impact customer value.

Focusing on service and streamlining delivery in order to provide excellent customer experience will also empower small installers to get out of the race to the bottom on pricing which has captivated the solar industry. While lowering soft costs is crucial, it should be implemented in a strategic manner considering the entire project fulfillment operation and customer impacts. Field labor should still have a safe working environment, designers should still create code compliant systems, and friendly and knowledgeable staff should support customers and intervene to move the project forward when obstacles arise.

Any software tools, process changes, new equipment, or other potential soft cost reductions should always be framed within the scope of customer value. Will this new innovation result in an improved product that a prospective customer would value? Will it reduce internal project delivery friction, thus freeing up more resources for value-added activity that the customer values? Considering how the entire value chain is affected by KPIs will help you enact better quality process improvement that will add value to your customer experience while reducing soft costs.

Lead image: Solar panels via Shutterstock

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Pamela Cargill is Principal of Chaolysti, a consulting firm developing strategies that help residential solar installers operate effectively and lower soft costs. She has brokered operational effectiveness programs at some of the largest national brands in residential solar and scaled a small installer into the Northeast's market leader in the late-2000s. Follow her on Twitter @chaolyst

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