The Fall of a Titan and What I Hope We Learn From It.

If you work in the solar industry or follow solar industry news for any reason, you'll have heard by now about the demise of one of the largest solar installers in the nation. Titan Solar officially announced its closure about a week ago and the announcement has left an indelible impact on the industry. We’ve quickly learned that ‘too big to fail’ does not apply to us.

I don't have inside information on what ultimately led to Titan’s downfall but as an outsider looking in, I have observed their growth, their decline and ultimately their failure over the years and these observations have led me to certain speculations about ‘where they went wrong’. ?I believe there are lessons here that I hope we, as an industry, will learn from.

I have been in the solar industry for 10 years. During that time, I have founded two companies both being (what we in the industry refer to as) vertically integrated companies. For anyone not familiar with industry vernacular, this means that we handle the project all the way from the sale through installation, and post install service with in-house employees. One of those companies I sold after one year to my business partners because I could see all the red flags that would ultimately lead to its demise a few short years later, given the way that my partners chose to run it. I'm the sole owner of the other company, Firefly Solar, which is alive and well and has been operational now for eight years.

Again, I don't have inside information on what went on behind the scenes with Titan, but this is an opinion piece based on my observations as an experienced business owner in this field. The issues and the business practices that I’ll write about here were not invented or originated by Titan leadership, but they were scaled by Titan to a level never before seen in this industry. Given Titan’s size and influence they have taken what I consider to be poor business practices and made it a part of the industry culture and ultimately a systemic condition. This is a culture that I now hope responsible industry leaders will work to reverse and correct so that we are able to build a better future for this industry and for all those who depend on it.

The Brokerage Model

I'll start with what I believe is the most egregious business practice that Titan perpetuated, that has created a culture of chaos within our industry. It is what is typically referred to as the EPC/Sales Dealer model. In construction an EPC is the contractor who carries out the Engineering, the Procurement of materials, and the Construction of the project. They will have a written construction agreement with the customer and may perform the site work directly or subcontract the site work to other specialty contractors. In residential solar the term EPC has evolved somewhat to mean a licensed installer/contractor who will install a job that a sales dealer has brokered. In reality, an unlicensed sales dealer cannot sell or sign a construction agreement with a homeowner, so they are merely procuring a sale and having the homeowner sign the contract with the EPC.

This model has allowed the rapid and vast expansion of the residential solar market across the country because it allows organizations to focus on what they do best without getting bogged down in what they do not do so well. A sales organization is good at recruiting salespeople and selling [insert product here]. With sales and marketing out of the way, the EPC can focus on project management and construction. In theory this sounds great which is why I can't fault Titan for giving it a great shot. But in practice this leads to many problems. Uneducated salespeople with minimal knowledge of their product are selling not only home improvement projects into the tens of thousands of dollars but also financial products that they don't understand. This unregulated brokerage model allows opportunistic salespeople, often with questionable ethics, the opportunity to enter an industry with zero barrier and there is often no one willing to hold them accountable (so long as they are generating sales).

The contractor is then expected to take this sale that has been poorly represented, install it and produce a happy customer. When there are problems, it results in finger pointing. The sales representative says they didn't install it so it's not their problem the installer says they didn't sell it so it's not their problem. The result is an unhappy customer and a poor reputation for an entire industry given the scale that this has happened on.?

The installer is often not an innocent bystander in the problems that arise from this model. Due to the speed at which a company can grow with this model, it is all too easy for an installer to spend more time on growth than on preparing for that growth. When sales volume outpaces a company’s ability to manage that volume, problems are inevitable. (Heck, it’s construction. Problems are always inevitable, even when you do everything right!) The biggest issue I see regularly (and this was very much the case with Titan) is letting cash flow dictate your schedule rather than having your schedule dictate your cash flow. If a job is installed, but still in need of some punch list items to finish it up so that it can be inspected, commissioned and turned on, but the installer cannot spare the time because they are on to the next job that hasn’t yet been funded, the result is a lot of unfinished jobs that have been paid for. The installer can’t make time to tie up any loose ends because to do so would mean not completing work they need to complete to be paid to keep up with cash flow. The pattern perpetuates until negative cash flow sinks the business. And post install service? Forget it. No time, no budget.?

I mentioned earlier the vertical model which is where both sales, installation, and post install service is kept in house under one umbrella. This model tends to produce much slower and more difficult growth because the leadership of such companies are taking on more responsibilities and spreading themselves more thinly. But the end result of making those sacrifices is a better customer experience and a more robust and reputable industry. We have all seen the short-term benefits of building a business using the EPC/Sales Dealer model but now it's time to accept that the long-term drawbacks outweigh any benefits tenfold.

Low Redlines.

Redline is another unique industry term that essentially means base cost. This is the figure that the EPC is willing to install the system for, and the sales dealer will keep any amount over this redline that the system is sold for. It is broken down into a cost per watt price i.e. $2.00 per watt. If you get a 10 kilowatt system which is 10,000 watts, a $2.00 redline multiplied by 10,000 watts equals $20,000. This is what the EPC is saying will cover their expenses, overhead and profit. If the sales rep sells the system for $3.00 a watt, you do the math, they make a $10,000 Commission. The issue is not the redline, as this tends to keep things fairly simple. Installers will make a little more on some jobs and make a little less on others but if they've calculated their costs accurately they can work on the law of averages and be profitable. The issue arises when installers are now competing for sales organizations by coming up with the lowest possible redline. Titan was a huge company and as such had significant buying power and leverage with manufacturers and vendors. They could afford lower redlines than your average mom and pop installer. However, mom and pop installer would think heck, if Titan can give this red line surely I can too, and they would match it or beat it not realizing that they're headed for a cliff. This is just capitalism 101 and no different from big box stores chewing up the market and putting mom and pop stores under. But the result on an industry wide level is that nobody, including Titan, is keeping enough money aside to do the job correctly, to do it excellently, and then to service it if and when things go wrong. I mentioned earlier that Titan had an issue with finishing jobs. This is a sure sign of cash flow problems, which tells me that they were flying too close to the sun with their redline. Given their size and the example that they set within the industry, many companies followed suit and had the same problems for the same reasons. The practice of offering a low redline to win over more business from sales organizations is only sustainable with consistently high volume. The problem is that no one can guarantee consistently high volume. Titan would recruit large sales organizations that might generate 100 sales a month but when that sales organization gets upset with Titan for any number of reasons, warranted or not, they take their hundred jobs per month elsewhere and there is an enormous dip in business overnight and with no notice. With low margins that is dangerous and unsustainable.

The culture this has created within the industry is an entire generation of sales representatives that have highly unrealistic opinions of what it costs to install solar and run a solar installation company. And sadly, it's not just the sales reps. It's also the unsavvy business owner who runs an installation company but doesn't understand the numbers. Being a good electrician does not make you a good accountant. What needs to happen for the industry to thrive is for sales reps and installers alike to understand solar costs more than Titan has led us to believe. Running a solar installation company is far more expensive than just the cost of goods and the direct (installation) labor. Many people in this industry think that's all there is to it.

M1 Commission.

Milestone One payment. When I started in solar sales 10 years ago the commission would be paid after the installation was done because that's when the money was dispersed from the bank or the customer. The process of going solar can take a few weeks to a few months depending on many variables including where you live. For a salesperson to begin working in a new job and making sales but not receiving paychecks for a few weeks to a few months can be difficult. When I started in sales, I worked another job with a small, but regular, income until my commissions started coming in. Then, I let that other job go and focused full time on solar. Some bright person at some point decided it would be a good idea to help new salespeople with cash flow by paying them an M1 payment. This could be any amount, but common practice is 50% of the full commission paid within a week or two of the sale being made (the actual ‘milestone’ could be anything you want it to be). This is long before the contractor has made any money which means they are pulling cash from their cash reserves to fund the cash flow of the sales dealer. Again, this sounds great in theory but in reality, it is a reckless and dangerous business practice that destroys cash flow and tanks many businesses. Considering Titan’s size, it is conceivable that at any given moment in time that they had millions of dollars of advanced commissions paid out on jobs that had not been funded. I would speculate that they had a line of credit to cover this which they will have been paying interest on. This line of credit would have been better used to get them through lean times when a sales organization suddenly pulls 100 deals a month out from under them. Cash is king. Any business practice that jeopardizes positive cash flow is reckless.

25 year workmanship warranty.

Ten years ago, a workmanship warranty would be anywhere from one to five years. Given the work that we do and how long it might take for an issue to rear its ugly head, five years is far more than enough to cover workmanship issues. I remember when a competitor in my area (ironically being my former business partner from the company I sold out of) started offering a ten year workmanship warranty. It was obvious to me that that business wouldn't last five years, let alone ten, but being a competitor in my market he was gaining an edge over potential customers that I had to step up and meet if I was going to win business over him. Fast forward to now he's been out of business for years and any customers he won over me are now calling me to fix his mistakes. I wish homeowners were a little savvier when making some decisions and had the ability to see through disingenuous contractual garbage but, sadly many are not. Along comes Titan a couple of years later with the most egregious claim of a 25 year workmanship warranty. I don't believe that any company would ever intent to honor a problem with the system 10/15/20 years after it was installed. But given that Titan is gaining huge amounts of market share over their competitors, their competitors are forced to do whatever they can to take the edge back and many others started offering a disingenuous 25 year workmanship warranty. What needs to happen to maintain a reputable and sustainable model within the industry is to either offer a realistic workmanship warranty (five years max) or have a third party backed and paid for insurance policy on installs. There are a few options out there today and we offer one. It costs money on every job which is baked into our pricing so that we can take care of the customer for as long as they have solar, even if Firefly Solar was to one day be out of business. Titan Solar claimed to have installed about 100,000 residential installs across the country. that is 100,000 customers with that completely useless workmanship warranty now and a bad taste in the public’s mouth over solar.

As I mentioned earlier, Titan didn’t invent these poor practices and I can’t fault them for implementing them. They seem to have merit on the surface. But they have now demonstrated, very publicly, that these business practices are not sustainable. This results in lost jobs, ‘orphaned’ customers, lawsuits, and a terrible reputation for an industry that deserves better. I hope we learn from this and do better moving forward.

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