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Confronting Turnaround Situations
By Terry Kramer
Adapting to Slowing Activity
Far too many contractors have faced revenue shortfalls of
20 percent or greater within the past year or two. Yet in
many cases, they suffer silently as if there were few options
available. The non-residential construction boom peaked in
2000, and for the majority of contractors, times were as good
as they could get. The boom has been followed by three straight
years of declining non-residential activity, but it hasn't
had as broad an impact on contractors as the comprehensive
boom did.
The decreasing non-residential opportunities the past three
years has been selective in its victims. Many contractors focused
on hotel, office, and manufacturing projects took their lumps.
On the other hand, some contractors are still going strong,
and there are some justifiable reasons for that.
The 2003 non-residential activity will generate project volume
on the level of 1998, and that was a boom year. For contractors
that targeted retail, healthcare, educational, public works,
and religious projects, they have all made out. There are some
other contractors that have done well, too, and those are the
ones that sought out condominium and apartment projects, which
are classified as residential, when their non-residential markets
faltered.
Success Can Be Blinding
Past success in the roaring 1990's seemed to cloud a company's
vision and tended to distort the choices they should have
made for the future. Success had a tendency to permit companies
to operate more loosely, therefore spending more dollar-wise
and even percentage-wise to operate at a higher volume level.
In addition, when companies became successful, they tended
to evaluate a variety of strategic options and select alternative
strategies that are different from the original approaches
that made them successful. Those alternatives sometimes turned
out to be custom homes, new branch offices, or new non-residential
market niches. Not that these choices are bad, it's just that
the successful companies performed little research or analysis,
thereby stumbling into what they thought would be more success.
After years of continued success, management tends to become
complacent and begin to think that their business decision-making
is infallible.
Develop Contingency Plans
Owners and top management teams must gear up to identify
shifts in the market and the impact it has on their company,
especially when company success is at its peak. Management
should be developing contingency plans of action for the unexpected.
Some examples of preparedness are:
a $100 million construction firm has already planned to
downsize in anticipation of a market decline in their geographic
region so it can protect previously acquired profits
a $60 million construction firm continues to diversify its
project portfolio and is now working on geographic diversification
to avoid state market declines and heavy reliance on one industry
customer
a $15 million construction firm plans to acquire an upstream
competitor to enhance market share and position the company
for a consistent flow of larger projects
a $40 million construction firm is joint venturing with
a larger company to gain large project experience
Zero Tolerance for Losses
If these strategies work, and there is nothing to suggest
that they will not, these companies positioned themselves
to ride out a down cycle. To remain successful during a
downturn, construction firms need to develop a company-wide
"zero tolerance" attitude for low profits or no
profits. It should be easy to accomplish since these attitudes
already exist with safety and quality. Some situations where
companies need to toughen their outlook and pursue turnaround
tactics are:
company profits are mainly derived from non-construction
activities
after some ups & downs, cumulative net profits total
zero after 5 years
excuses are frequently given when bad projects crop up every
year
Responding to Turnaround Situation
When things do not work out, how should construction firms
respond to declining profitability and decreasing cash flow?
Some key steps to managing a turnaround situation are:
1) diagnose underlying problems and develop long-range strategy
2) ascertain what to cut from current operations
3) establish support from external stakeholders, company Managers,
and in-house employees
4) rebuild morale and redesign the current organization
A lot is lost in the translation when outlining the steps
to turn a company around. It is the equivalent of asking someone
what war was like. Well, you have to be there to absorb the
full impact of that environment. Emotions tend to run high
and time is of the essence. But why wait until then? Construction
firms usually experience operational symptoms long before
turnaround assistance is desperately needed.
Obstacles to Success
Although the proper steps can be taken to save a sinking
ship, not all turnarounds have the same opportunity for
success. If specific key factors do not exist, the likelihood
of survival is slim:
resources cannot be virtually depleted
employees should not be alienated
management must understand the situation & have the
capability to implement the turnaround strategy
the owner is not hostile & is willing to be truthful
Action Steps
Once these pieces of key information are acknowledged,
it is time to move into an on-line turnaround situation:
1) document internal operating habits/problems and develop
plan for change
a) interview lower-level employees to determine underlying
causes
b) every on-going project makes money, period
c) new work acquired has higher profit margins or work is
not taken
d) all job costs are accurately charged to jobs
2) develop cash flow projections
a) accelerate A/R collections to 25 days
b) delay A/P payments to 90 days
c) bill customers on timely basis
d) charge customers for work beyond original scope
e) identify backlog
f) focus sharply on potential work acquisition efforts
g) eliminate any & all unnecessary expenses
h) convert short-term debt to long-term
i) work with bankers to achieve temporary interest-only
(no principal)
loan payments
j) sell or lease underutilized equipment
3) determine organizational level to cut back to &
layoff personnel
a) take time to identify those personnel truly needed; do
not shortcut organizational
analysis with across-the-board cuts
b) put the right people in the right places
c) treat people with respect during a difficult time
d) employee cutbacks should not be focused on lower level
employees
4) conduct company meeting to share turnaround situation
& strategy
5) immediately meet with external stakeholders individually,
including customers, bankers, bonding
companies, suppliers, and any current affiliated companies
on project teams, to inform them of
turnaround strategy
6) meet with Top Management team at least weekly, if not
daily, to implement turnaround strategy
7) develop pro forma financial statements for one year
out
8) collaborate with CFO/Controller on every cent received
and spent
9) conduct monthly company meeting to keep employees informed
10) Owner & managerial behavior must be aligned to
turnaround strategy; actions speak louder than words
a) Owner can take pay cut
b) no bonuses distributed to Managers
c) annual company party still held
d) company social activities increased - e.g., softball
and/or bowling team
11) plan for future employee training
12) transform company culture to be more flexible &
responsive
A Matter of Time
Unfortunately, virtually every construction company can
count on being thrown into a turnaround situation at some
point in its business life. With a good strategy, an ability
to communicate externally & internally, and a sensitivity
to employee needs, construction firms can meet the challenge
and re-invigorate their companies.
Terry Kramer, Kramer Consulting,
480-443-0859 or "tkmgmtinc@aol.com"
Terry has been consulting within the construction industry
since 1987. His experience encompasses turnaround situations
and companies that seek to re-invent themselves. His expertise
has led him to be re-elected to the Board of Directors of
a Top ENR 100 firm for an additional 3-year term. He also
has recently worked with a Top ENR 25 Specialty Contractor
on their annual Strategic Planning sessions.
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