However, When the Tide Goes Out, We See Who is Skinny Dipping
By Gregg Schoppman, FMI
When most business leaders are asked about their perspective on the current market conditions, there is a “double edged” answer. On one hand, leaders are enjoying prosperity and in many cases see record high margins. Conversely, leaders also seem to have their skepticism at the ready when asked about how long they think this series of market conditions will last. These are good assessments and a healthy dose of realism probably does a firm good. However, strong market conditions also tend to mask many sins. For instance, profitability can be confused for productivity. Additionally, there are many bad behaviors that get lost in the shuffle such as disciplined cash management, risk management relating to client and vendor selection and the ever present issue related to staff complacency. Everybody looks good right now, but what happens when market conditions shift – will a firm’s “nakedness” be exposed and on display for all to see?
The Bad Behaviors
Many firms accept the bad behaviors during the bright times because it is simple to discount them when they are making money despite their shortcomings. Short of life safety, many processes get discounted because team members are “too busy” and “too stressed” to follow through. For instance, below is a list that often become left by the wayside simply because teams are too busy:
- Collections – It is not uncommon to see average collection times (without retention) creep from 45 days to over 60-70 days.
- Change Order Management – Unsigned or unapproved change orders slip because customers may be dangling future opportunities and using that as leverage.
- Hiring Practices – When firms have robust backlogs, hiring a warm body that can fog a mirror is a distinctly better option than having no body.
- Performance Development – Training and developing when everyone is working 40-, 50-, 60- hour work weeks is impossible, right?
- Performance Reviews – Evaluating current talent and culling out under-performers is difficult. It is often better to work with mediocre talent than no talent (See #3).
- Close-out – With projects coming online quicker than they finish, the close-out activities tend to get relegated to the back burner. However, collection of retention is also on that back burner (See #1)
- Inability to Focus on Productivity – Everyone is working as hard as they can, but are they working as efficiently as possible?
The issue is this – there is no single “smoking gun.” In totality, each item above contributes to the delinquency of the firm. However, it is not uncommon to see a firm bidding projects at 35-40% and bring them in at 15-20%. Assuming their overhead is “normal”, the argument that can be made is “Well, we are still making money aren’t we?” What if the market shifted – could this same contractor be competitive and profitable at the same time?
The common thread that connects the aforementioned items is a lack of discipline and lack of control. Obviously, hiring missteps and process hiccups are often viewed as a lack of control but does the lack of control begin at the top? Volume obsession or simply lacking a governor switch to provide control is a leading contributor to contractor failure when times are strong. Notice the choice of words – strong markets contribute to more contractor failures than down markets. The extra risk that a contractor will take during a strong market gets exposed when the market recedes – uncollected funds that can’t be paid because of owner default, subcontractors that are overextended and fail to meet these obligations, etc. Put another way, when the music stops and there is no chair to sit on, many firms will fall flat on their face.
The Bad Strategies and Bad Tactics
Managing risk is an everyday component to all businesses. Risk in construction is often viewed through the lens of life safety and surety. However, risk management should be extended to the proper selection of trade partners, customers, associates, etc. In fact, all decisions should require some level of vetting. In the world of finance, the terms internal rate of return, net present value, and weighted cost of capital are used to measure and compare investment decisions. It is easy to look at two potential projects – one that could yield 10% and one that could yield 15% – and make that binary decision. However, the world of construction is hardly a vacuum and projects often have many other variables to compare against. The best decision making comes from using a combination of objective and subjective data to support a hypothesis for any decision. Often, “gut decisions” lead to poor project selection, weak customer vetting, award to an unqualified low bidder, or hiring decision simply to fill a seat. This is certainly not an “anti-growth” message but rather a cautionary tale for leaders to get back to the basics and revisit their strategic plan and stick with it.
Lastly, it is important to also use the rising tide to send the ships out on an exploration voyage. It is easy to look at the profitability of a current market or niche and ride the market, similar to ship riding a wide from crest to trough. However, is the firm better served by deploying a small portion of their time, energy and resources to find the “next big thing” and avoid the trough entirely? Similar to squirreling away a portion of a paycheck for the rainy day, this investment in a new venture allows for critical firm-wide diversification. From there, the same discipline and control applies to governing and managing the business to ensure there is a firm-wide consistency to process, tools and metrics to avoid misalignment.
There is not doubt that sometimes the tide may even feel like a tsunami, wreaking havoc on all aspects of a business. Discipline and controls are essential to avoid over saturation and over tax a team’s resources. Thinking about and working on the business is imperative for all leaders, regardless of a good or lackluster economy. In the end, no one wants to see our tan lines when the tide goes out.
About the Author
As a principal with FMI, Gregg specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. He has completed complex and sophisticated construction projects in the several different niches and geographic markets. He has also worked as a construction manager and managed direct labor. FMI is a unique and fast-growing firm of professionals passionate about creating a better future for engineering and construction, infrastructure and the built environment throughout North America and around the world. For more information on FMI, please visit www.fminet.com or contact Schoppman by email at gschoppman@fminet.com.
