“I don't need training, I don't have time for that! Get me a job and then I can show them what I can do!”
I hear this all the time when I recruit small and minority contractors to sign up for leadership/management training. After spurning my invitation, the contractor eventually wins a job, fails to perform, and is either struggling to keep the business afloat, or has quit altogether and moved into a different industry.
I've seen this happen many times and had to bail out many a contractor in my career as a consultant to the construction industry. The question we must ask is, “What can we learn from other people's mistakes?”
Actually, everyone needs strategic training and planning, and here's why.
I recently read an interesting Construction Lending News article entitled, Why Do Contractors Really Go Under? by Dev Strischek and Kevin McLaughlin that provides insight to this issue. Strischek and McLaughlin indicated that a study identified 80 construction firms with revenues over $300 million annually that went out of business or experienced significant financial distress in the past 25 years. They analyzed the reasons given for the failures and came up with a long list that they whittled down to 10.
- Unrealistic growth, overexpansion, unfamiliar new markets, or entry into a new type of construction
- Volume obsession
- Unrealistic promises, bad contracts, or poor project selection
- Insufficient capital or products
- Lack of business knowledge, poor financial management, poor sales skills, or inadequate marketing
- Poor leadership or poor field performance
- Owner court battles or owner bankruptcy
- Industry or economic weakness
- Banking or surety changes
The result of the analysis was the Failure Chain Reaction Model (Figure 1) which classifies causes of failure according to four large groupings. Two of these groupings are macro (general economic conditions and nature of the construction industry) and two of them micro (mind of the contractor and culture and systems of the organization). According to the model, the four factors considered together shed light on company performance. Poor company performance can lead to loss of financial capacity and ultimately to what researchers call the Bankruptcy Loop of Doom.
The Primary Role Played By Micro Conditions
Researchers discovered that the two micro categories – mind of the contractor and culture and systems of the organization – played the largest role in construction company meltdowns. Among the factors of in the culture and systems category are succession planning, strategic planning, and capital reserves. The mind of the contractor category includes personality traits such as desire to grow, hyper optimistic, and overconfidence. These personality traits can cut both ways for businesses - they are necessary for a company to grow, but can be destructive when carried too far.
The construction company is full of entrepreneurial personalities and big egos, and you've got to be an optimist to be a contractor or you will never succeed.
The skill set and the mindset that it takes to create a business are usually very different from the ability it takes to maintain and operate one.
Ultimately, everything comes back to executive leadership.
Instant gratification does not work in construction management. If you've got to pick something that causes these companies to fail, it is the failure of strategic leadership. In the sense of making good decisions and positioning the company appropriately it's all about having the right person in the leadership seat. If not, it doesn't work.
Jim Collins discusses this concept in his book entitled, Good to Great. Getting the right people, on the right seat, on the right bus, going in the right direction.
After interviewing a number of senior executives who worked for failed construction firms, researchers identified poor strategic leadership as a major factor in 76% of failures. Excessive ego in a company's leader played a part in 62% of failures and often led to poor leadership (Figure 2)
Poor strategic leadership can lead to three other company killers: too much change (found in 90% of failures); loss of discipline (45%), and inadequate capitalization (58%).
Below is a rate of change graphic to show the relationship between the amounts of simultaneous change occurring in an organization, and the resources needed and available within the company to deal with it (Figure 3). As change accelerates, more resources are dedicated to it, meaning fewer resources are available to deal with further changes or with day to day work.
As you add more things that are new and different- new people, new markets, new customers, new growth, new systems- it takes away from people doing their day-to-day jobs. You see a decline in the amount of human-resource time that's available to run the basic business because it's being absorbed by the extraneous stuff.
Poor strategic leadership can cause another problem: loss of discipline, which is sited as playing a role in 45% of company collapses.
Discipline is defined as not changing from proven practices regarding solid hiring, training, employee retention, accepted project risk level, or proper job estimating and cost controls.
Companies that lack a good growth strategy or are inattentive in deploying their strategy end up with more infrastructure than the company can support. The result is a lack of focus, a drain on resources, and in order to keep people busy, the urge to chase projects that don't fit the business.
Finally, inadequate capitalization makes it difficult for a company to ride out hard times was a contributor to 58% of closures, according to construction executives interviewed.
Bad things happen to good contractors. So my question is, "Do you have an adequate capital base to make sure that when the inevitable hit comes you will live to fight another day?"
You've got to manage the business in anticipation that something bad will happen. While you can't have an unlimited amount of capital, you need to have more than you think you need. And if you choose not to do that and roll the dice, you make one mistake and you're done. That is why a lot of companies go out of business; they don't have adequate margins for error.
The Secondary Role of Micro Economics
The researchers concluded, at least for large construction firms, the macro conditions – nature of the construction industry and general economic conditions – can accelerate the decline of poorly run firms, but they don't actually cause the decline.
At the end of the day, everyone interviewed stated they did not fail because of the economy, nor did they run out of work. They failed because they made bad executive decisions.
This situation is not limited to big business, all construction business owners can learn from the following:
- Specialize in a particular trade that you have proven expertise in
- Focus on processes rather than winging it
- Implement and share with others what you have learned in your company
Remember, it doesn't matter if your company is big or small. Continual education, active communication, and implementation prevents the Bankruptcy Loop of Doom.