by Gregg M. Schoppman, FMI
Revenues are blooming, and times are swell for many construction organizations. What could possibly go wrong? Many leaders believe that the most challenging aspect that many firms face is the availability of personnel. However, this movie has played several times before and the conclusion is always the same. Undisciplined management and a complete lack of good strategy leads to failure. In 2007, FMI released a ground-breaking study titled “Why Contractors Fail.” The study was the deep examination of over 30-plus large E&C firms that failed to search for the root causes. While each of the participants had their own reasoning for failure, the major “buckets” could be summarized in three key areas:
- Strategic—Unrealistic growth, volume obsession, etc.
- Organizational—Poor cash flow, operational inefficiencies, legal, etc.
- Uncontrollable—Banking/bonding issues, economic conditions, etc.
The fixation with the last item remains a curiosity. For example, many leaders view this item as the primary cause for failure when in fact the first two items—strategy and organizational performance—were the leading cause of failure and these supposed “uncontrollable” were simple exacerbating factors. Put another way, it is always easier to blame the economy than it is poor leadership.
Yet, here we go again. Contractors are once again seeing record highs in many categories, both good and bad. With strong revenue comes increased risk due to higher receivables, demand for cash and time. Firms should take stock in their current position and use this internal inventory to benchmark against not only the superior firms but also reference their own risk profile.
How often have leaders said, “If we only had more people, we could do X percent more …” In fact, the talent crunch has served as a de facto governor for some firms, allowing them to live within their means. However, it often becomes hard to say no when saying yes to customers feels so good. And thus, the cycle begins. Firms acquire more work and end up shelving their strategic plan on growth and people development in favor of engaging new talent and unproven entities. For instance, Figure 1 is a snapshot of what happens during this process:
Revenue growth is not a bad thing. In fact, this engine for growth—when done correctly—is a good thing for the firm and helps the business to growth. As the study indicated, it is the lack of discipline that leads to very reactionary behavior. Of course, the contrarian argument is “How do you say no to a customer?” There is no easy way to say no—whether it is providing a “healthy price tag” or simply being honest with a customer on —but the corollary of failing to execute will often have graver consequences.
Leaders talk about training and development, but this is less about sitting in classroom and more about having a script that the team utilizes to execute. The aforementioned free agents are great in many cases because they bring a new breath of air to the organization. However, they also bring in a new set of behaviors and they can also be challenging to break. In the absence of an operational model, free agents will default to their old ways, good or bad. More importantly, without accountability to a firmwide standard, it is easy to rack up losses through poor efficiencies, weak change order management and an overall lack of proactiveness.
This does not mean that firms shouldn’t train. Rather, it means training should be focused to reinforce the right behaviors within the firm. Training and development should never stop, even when firms are busy. In fact, waiting for slow times sounds counterproductive and once again, reactionary.
It’s All About the Money
Cash specifically. Cash is king—that is usually a mantra that is pounded into leaders from surety, banks, financiers, experts, consultants, etc. The drum beat is loud and should resonate clearly but the influx of volume often distorts the view. Working capital should be an element to every leaders’ dashboard but it is often relegated to the margins as the obsession with volume and profitability dominates the landscape. Profitability is extremely vital but without cash the building becomes a house of cards sitting on quicksand. Firms find themselves sideways as they overextend into their line of credit, loosely manage collections and also see write-downs resulting from poor operational performance. The downward spiral begins to look like the degenerate gambler sitting at the roulette table hoping to see that little ball land on their number.
There will also way be economic cycles that will cull out the wheat from the chaff. However, it is ignorant and misguided to blame everything on the external environment. There were countless firms that defied conventional wisdom and thrived during the years of recession. Whether they became lean, mean and efficient or simply had a better strategy, many firms were more profitable during these times of posterity than when volume flowed like a fine wine. Strategy and operational performance should be married and most importantly, there should exist a discipline and commitment to avoid the disaster trap. More importantly, it is no fun being a statistic in a case study.
As a principal with FMI, Tampa, Fla., Gregg Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 636-1259 or email@example.com.