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FMI Quarterly/June 2013/June 1, 2013

Deconstructing Chaos

chaos_imageStrategy is about identifying which priorities to focus on and make trade-offs to support. Contractors need to do fewer things — better.

Over the past several years, many clients have expressed concern regarding how to react to the uncertain and volatile market. Our business landscape has fundamentally changed. Company leaders must wrestle with forces within and outside of their control. Some recognize that even when markets return to their same level of strength as 2007, things will not be the same.

Take, for instance, the residential market. Contractors involved in building multifamily complexes in 2007 had too much work and an abundance of profit margins available on jobs. As the multifamily market begins its return, even if we return to a similar amount of work put in place as in 2007, profit margins will not be the same. The “good old days” are gone.

Leaders are challenged to see value in taking action today, as they prefer to wait until the market calms down. They are faced with external stimuli (outside of their control) that include changes to Federal Acquisition Regulations, EEOC enforcement, health insurance changes, new entrants to the market (sometimes global companies) and new technology requirements by owners. As if these were not challenging enough, internal changes have taken place, creating a maelstrom of complexity. Internal changes are not completely isolated from external changes and may include change in company structure, shifted roles and responsibilities, new systems and enterprise resource planning tools and more. Some of these are deliberate decisions resulting from external stimuli (reductions in workforce followed a decrease in capital spending for key clients).

Multiple external and internal changes can lead to a feeling of being caught up in some chaotic maelstrom. Perhaps some lessons learned in Chaos Theory can be applied in times of rapid, discordant and unexpected change. Chaos Theory is a mathematical field of study with application in various disciplines. Chaos Theory holds that deterministic dynamic systems, which are considered otherwise predictable, will produce wild or unpredictable results when even small changes in random elements are introduced into initial conditions. Another way of describing this chaos is that small changes in the initial conditions result in long-term results that are impossible to predict (i.e., “the butterfly effect”).

Does this theory have application in a construction environment? Consider a construction project, which at the point of estimating is considered a deterministic (predictable) dynamic system. In order for a system to fit Chaos Theory1, it must satisfy the three conditions listed on the left side of the table in Exhibit 1. On the right side are similar conditions of construction projects.

The table in Exhibit 1 justifies the anxieties of many superintendents and project managers. One foreman from a large general contractor mentioned, “I’ve always enjoyed the excitement and change in our line of work, but lately, we feel like we’re caught in a tornado of challenges and there is no way out!” Each position in the company senses chaos differently.

2013q2_chaos_ex1

Consider that at a higher level, the construction industry itself fits a similar set of chaos attributes. Note the table in Exhibit 2 comparing Chaos Theory to the construction market.

2013q2_chaos_ex2

As Exhibit 2 describes, leadership teams direct their employees through a chaotic construction market. As the top executives of the company face chaos and uncertainty in this market, middle management fights the chaos described above on  construction projects. These two evolving spheres often lead to misalignment between strategy and operations. These two dimensions of chaos faced by contractors, coupled with the difficult market environment, lead to employee and morale attrition, project losses and troubled companies, as shown in Exhibit 3.

2013q2_chaos_ex3Being decisive in the midst of chaos is good. Chaotic times call for strong leaders. The answers are not all silver bullets and simple recipes. A CEO of a national specialty contractor recently mentioned, “The election, the fiscal cliff, tax code changes, health care requirements … when will the uncertainty end? I’m not sure that we can continue to wait to make crucial decisions.” His point makes great sense and his sentiment is shared by many. Fortunately, there are methods to develop effective strategic decisions in this volatile market. We will look at those in a moment.

Unfortunately, we often see another highly ineffective approach to todays’ market. The opposite, and just as ineffective, approach to ‘sitting and waiting’ for the end of uncertainty is rapid-fire initiative proliferation. Many executives are trying disjointed initiatives in an effort to see what sticks. Employees in these organizations refer to this syndrome as flavor-of-the-month leadership. Rather than leading with a set of prioritized actions and focus, leaders shift company initiatives every time they read a new success story. In some cases, the ideas applied are survival-based and reactionary.

As the economy continues to muddle through challenges, sputter through political decisions and show varying signs of improvement, some leaders are stuck in the harsh reduction mentality adopted during the downturn. The maniacal search for areas to “cut back” in order to survive now conflicts with effective preparation for the future. Across the industry, companies have appropriately analyzed the general ledger and reduced the fat. At some point, the constant drumbeating to cut costs becomes an overused motif, like crying wolf. In some extreme cases, cutting the coffee budget can only get us so far, and nothing depresses morale quite like a missing that stout cup of Joe in the morning. Strategies developed two or three years ago to cut costs must be re-evaluated.
2013q2_chaos_ex4In the effort to get the most from every employee, tasking managers with multiple responsibilities is common. Previous reductions in force and new strategies improperly resourced in the name of lower cost have destroyed clarity across the company. As a result, corporate structures are unclear in some companies, and in others they are nonexistent or exist only on paper. FMI often asks managers what they are responsible for and how they know they are successful in those roles. Due to the changes over the past three years, most middle managers remain unclear about what is expected of them. Adding to the challenge of motivating our middle managers is today’s multigenerational workforce (see Exhibit 4.) Generation Y employees (in their early 20s), Generation X employees (30- to 50-year-olds) and baby boomers each have unique perspectives, training, leadership and developmental needs. Unfortunately, many of the programs addressing these needs have disappeared in the name of cost cutting.

Other companies have attempted to push organizational improvement and efficiencies through lower estimates. The rationale seems, “If we tell the field they have to do it cheaper, it will happen.” In most cases, projects are bid based upon only what the market price will bear instead of based on the cost to build the project. Bidding work ‘tight’ (a misnomer for underbidding work), includes hand-over meetings that do not have detailed explanations of how projects were bid because there was not any clear rationale in how the job was estimated to begin with. The sales team lacks rigorous discussions with field management on the front end of jobs. No longer do they use war-game means and methods to refine estimates moving forward. Any hand off that occurs between sales and execution is really hand-waving and vague discussion. We command the field to “hit these new project costs and productions.” The misperception that simply handing off a lower number to the field after award of bid will create field efficiencies is absurd. It is akin to setting an aggressive weight loss goal on January 1 without developing a plan or changing eating or exercising habits and expecting great results. The only real result to expect is frustration and disappointment. Similarly, contractors are finding surprising (and disappointing) losses on projects. Chaos indeed!

THE WRONG QUESTION

Maybe we are looking for the answer to the wrong question. Rather than, “How do we cut costs further to compete effectively?” we should be asking, “How can we create an adaptable company that will profit in a price-driven market?”

One approach might be reduction-focused, through unceasing enforcement. The better approach is profit-focused, engaging experts across the company and ensuring clarity in priorities. To continue the weight loss comparison, this is similar to losing weight versus getting healthy. A focus on reducing calorie intake and rapid weight loss goal may be difficult and only temporary. Developing healthy and active habits make for a better and longer-lasting health benefit. Within the company, the two approaches (reduction-focused and profit-focused) are worlds apart in leadership tactics and make a significant bottom-line difference in this challenging economic environment.

The cost-cutting mentality often depresses morale and reduces field leaders to execution-based tasks only. The focus of efforts for middle management becomes, “Did you complete this form?” A fear of admitting weakness echoes across the company. Reductions in the workforce, although many times necessary, often lead to fear across the company. Employees carefully walk the boundary of their duties and responsibilities, or what they perceive to be the expectations of their roles. In the dynamic construction environment, leading skilled managers in this manner typically results in frustrated employees focused only on pay as motivation. A symptom of this disconnect is hearing senior leaders suggest that they just don’t “get” young employees. “They aren’t dedicated to the company.”

In some project meetings, this disconnect and lack of engagement appears. Take the project after-action review (sometimes called the post-job review) meeting. The purpose of this meeting is typically designed to:

  • Identify areas on the project that the project team executed well and share these.
  • Identify areas on the project that the company can improve upon in the future.
  • Create a growth experience for the project team to understand what really happened.
  • Reinforce a learning culture across the company.
  • Create a library of best practices for similar projects in the future.

Instead, post-job reviews often miss the mark. They denigrate to either sword fights that result in wider differences between departments (taller silos) or numbingly ineffective discussions of how everything was out of our control. Neither results in any value for the company, nor does it address areas that can lead to improvement for the company leadership. As a result, companies are stuck in repeating failure unless demanded from the top. At that point, senior leaders often do not have a clear grasp of exactly what needs to change or the best method for change. The perception from the top of the company is that any change seems to require direct intercession every time by the top.

As described above, many adaptations required during the downturn magnified the chaos inherent in our industry and within our companies. As we look towards brighter days, it is no wonder why many contractors face their toughest years as the market begins to recover. Exhibit 5 demonstrates that the lowest profitability is historically the first year after we climb out of a recession. Is it possible that, as contractors, we are not agile enough to recognize the shift around us, too slow to adjust to the market, or simply unable to execute change?

2013q2_chaos_ex5

Project execution does not have to reflect the chaos rampant in our industry. Chaos is prevalent in our industry for many reasons. We must limit the chaos that exists within our organizations. Most of this is self-inflicted. Companies that can focus their efforts on controllable initiatives will have an advantage and endure the challenges evident today. Effective leaders recognize what they can change and focus efforts, reducing wasted energies across their staff.


2013q2_chaos_ex6Project selection — where strategy meets operations

Much discussion can be made of sharing and communicating a strategy. If employees have a clear understanding of the company vision for the future and understand the urgency of the goal, they are much more likely to understand how their actions meet or defeat that strategy. Many firms do not spend adequate time developing their strategy, resulting in a freewheeling effect (see Exhibit 6). Consider the bicycle in granny gear — front pedals have little or no resistance and are easy to pedal, but it still demands considerable work and frequent repetitions per minute to turn the big Operations wheel. Little ground is covered, and senior leaders put forth extreme effort to get little progress or change in operations.

Similarly, companies that have a clearly communicated strategy and are consistent in follow-through require less energy to keep operations on the tracks. This is a double-edged sword. The key here is as much getting involvement, buy-in and excitement around the company plan for the future. Consistent execution is difficult as companies are challenged to avoid revenue-generating projects. A client developed a strategy to focus on high-end projects rich in licensing and certifications where manufacturing and industrial clients value their work. When the town council approved development of a big-box retail store, this company decided to go after that as well, a project well outside its strategy. Often effective strategy deployment is about saying no to initiatives and projects. This is difficult during a downturn.

2013q2_chaos_ex7 (1)Where these gears meet is typically project selection. Go/no-go tools are often some of the most difficult to develop across the leadership team. According to Scott Razor, president of Zurich North America Construction, “20% to 40% of risks are typically insurable. The other 60% to 80% are operational risks.” Taking on projects that do not fit the company’s strategic plan, in order to chase revenue, increases that operational risk.

After the tumultuous pitches and dives of the recession, many companies see a disconnect between their strategic and operational gears, which are developed and executed in isolation. This results in margin erosion and shocking project losses that debilitate morale. Both strategy and operations turn in isolation with no connection (see Exhibit 7.) This is a common cause of confusion within organizations.

2013q2_chaos_ex8Exhibit 8 depicts a company where the operations and strategy gears are engaged. Effective strategy communicated and executed requires subtle shifts to match the market, pulling operations along. A large strategy gear also results in a much easier operational gear to turn. Every revolution of the operational gear is another project completed successfully. The diagram accentuates the importance of repeatable systems and best practices in operations.

BUILD A CULTURE OF MARGIN AGGRESSION

Football teams cannot win a Super Bowl with only a great defensive team. A team that highly recruits, develops plays and rehearses the defense at the cost of energy spent on the offensive team will lead to a weak quarterback and offensive line unable to score points. The team is effectively cutting its success factor in half. Instead, teams should take the field with the goal of scoring points and preventing their opponent from scoring. Likewise, our project teams must start and sustain an attitude of beating the estimated profit margin throughout the project. Too many companies just focus on preventing loss. This is endemic across the industry today. “We just need to make sure we don’t have any bad jobs in 2013-2014 and we’ll have good year.” This is a recipe for disappointment and parallels the football team above. Project teams need to be oriented around improving the profit margin set as a goal on bid day.

This aggressive attitude starts with company leadership. Leaders create challenges when they do not stick to the consistent company strategy. In other words, they do not effectively allocate the resources required to support the projects the company attacks. This might look like bidding work in new geographies and project types without the right resources or preparation. It creates a defensive attitude with their project teams.

COMMUNICATION AND INFORMATION ARE BIGGEST SOURCES OF WASTE

Most companies recognize the value in conducting meetings to transfer information across the organization. These meetings take a back seat to the whirlwind of daily activities and often do not happen as needed. This is certainly a leadership that does not set appropriate priorities for the company. In this case, leadership is not leading but letting the chaos of the day establish the priorities.

When a chief estimator says “We don’t have time for pre-job planning meetings or to develop a hand-off binder,” what is really being said is “We don’t prioritize the importance of handing information off from the estimating team to the project management team in a rigorous method to ensure our project teams start projects even better-informed about the project than when we bid it.”

One of the largest concerns of contractors today is a lack of effective communication and, as a result, poor information sharing. Misinformation and lack of information are both forms of waste that great companies avoid in this new economy. Misinformation and lack of information are some of those random elements and small changes that lead to wildly unpredictable outcomes. Chaos Theory in motion.

Know your cost and productions
Far too many companies that self-perform work have an inaccurate understanding of overhead and true cost that should be applied to projects. Some officers of the company understand the right amount of overhead and use intuitive cost rates; yet those bidding the work and pricing change orders do not have a deep understanding of them. Because of this oversight, our aggressive approach to win work is recorded as an estimated 4% profit margin, but includes an inaccurate calculation and record of overhead applied. It is no wonder why many companies have had “surprising” losses on projects at completion. At the post-job review, each department shrugs in disbelief, not knowing what truly happened.

Knowing your true cost to build work based on historical costs and accurate estimates is the first step. The best pricing strategy to win work at an achievable production rate is a combination of art and science in some markets. The involvement of field managers (superintendents and lead foremen) before bid day often results in frustration for the office and field. Some clients suggest it is unproductive to pull a superintendent from the field to review a bid. A well-developed bid process would bring field experts in to discuss the best means and methods or approaches to help win the job. This collaborative approach results in an improved relationship between the office and field and improved profits on projects. It is well worth the investment of the superintendent’s time.

Clarity and reality go hand in hand when the project team is involved in the bidding, handover and preparation of the job. An involved team sees integrity in the goals it has helped to set and strives to beat the estimated job budget.

Staffing and Structure
Companies with the lowest overhead do not necessarily have the highest profit margin. We must run businesses mindful of keeping costs in control, but there are vital positions that are a great investment.

Documentation requirements for projects have increased significantly, often pinning the project manager behind a desk in the process. Managing the customer is crucial, and ensuring that documentation is accurate and meets specifications often determines several profit points at the end of the project. Superintendents and foremen frequently are stretched out of their traditional mode-management and means-and-methods roles. Often, they are more involved in scheduling, subcontractor management and job-cost aspects due to the preoccupation of the project manager with documentation requirements. It is not hard to imagine how on a public works job accurately processing and following up on 10 different $15,000 claims can justify supporting an assistant project manager, project engineer or highly skilled administrative assistant. The reduction of this paperwork-intensive processing can also free the project manager to improve communications with the field and resource managers. Not every project or company can afford to staff project assistants on jobs, but done well, they are great mentoring and minor league farm teams to build a great future upon.

Most highly effective estimating departments use a layered system leveraging the right skill sets and experience with appropriate contributions towards winning work. Senior or lead estimators should be involved in conceptual estimating, compiling and reviewing work assembled for them. This is not a case of rank having its privileges, but recognition that some new college graduates cannot conduct these tasks, given their lack of experience. They can perform takeoffs, provide  estimating software input and coordinate subcontractor bidding and other tasks that help them grow with exposure while ensuring the senior estimator is employed for his or her highest and best use. Without such application of our own resources, small shifts in inputs produce unpredictable shifts in outcomes. Chaos theory again.

3 Ms: Meetings, Measurements and Metrics — A Telltale Sign
Meetings, measurements and metrics go a long way to inform your employees of priorities and what is important to the company senior leaders. A by-product of our increasingly technological industry is that many members of middle management often complain that they have too much data to manage. Best-in-class companies help their managers prioritize information and conduct analyses on the routine data with effective reports and documentation. Conducting focused meetings and developing regular project metrics and feedback measurements bring relevant data to the top of the pile for action. Some advanced software automatically blast important email reports to key leaders each week. Many companies develop a battle rhythm of these “3 Ms” to assist with time management across the company.

Companies that are rigorous in holding a new project kickoff meeting attended by the CEO often do a world-class job in ensuring the company has analyzed the project from every angle possible before mobilization. Too many meetings are prohibitive to an effective field orientation, but so are too few meetings. Some companies try to do both by conducting a staff meeting one day a week with everyone from project management and above in attendance. This standing meeting is ineffective, often leads to tangents and seldom gets to the level of detail needed for any one decision to be made.

Project metrics set priorities for leaders. Most effective dashboards should be limited to five to eight items and customized to each key position and role on the project. A superintendent dashboard should look different than that of the project manager or engineer. Some items covered may range from accounts receivable status, safety ratings, outstanding change order approvals, resource staff allocation, schedules, productivity feedback, projected costs and earned value, to name a few. Graphical metrics are best, providing quick-look information that can be zoomed down for more detail as needed, as shown in Exhibit 9. Many software suites are single-entry from bid, field manager time card entry, with integrated electronic invoices and approvals through payroll and project closeout. While not every company can afford expensive software suites, similar approaches can be developed with inexpensive investments. It is more about the process and how it is implemented than the software used to produce the information. Although amazing tools are available today, many contractors have expensive software sitting on the shelf with little or no investment in training, no reinforcement of compliance with software use, and lack of proper staffing and administrative support.

2013q2_chaos_ex9

Personnel measurements often are poorly executed and misconstrued. Compensation should be tied to how effectively the project team beats the estimated profit margin. It should reinforce important company strategic elements (customer service, safety, schedule, bench strength development, etc.) Performance evaluations should occur at the conclusion of each job (when several months long) rather than one time per year. Too often, company leaders wait until the end of the year when things slow down to provide feedback, and by then have lost track of any meaningful information or specific points to discuss. The project-based performance evaluation also allows for multiple sources of feedback as project teams often change during the year. At the annual review, a much more valuable discussion occurs as a result. Done effectively, 360-degree profiles, personality assessments and leadership development should be integrated for maximum effect. These tools should yield a consistent message to employees and enable focus on areas for further development. Unfortunately, some companies use a standard template form and cut-and-paste bullets copied from one evaluation to the next with little value for the rater or the employee looking for development. In the absence of consistent messages to each employee, we increase their sense of chaos in the environment in which they operate.

Two opposing forces are at work that need deliberate leadership: Retain and grow future leaders but improve the bottom line and reduce overhead costs. The top four concerns of executives from Deloitte’s 2012 Talent Management Survey2 results (in descending order by percent responses received):

  1. Developing leaders and succession planning (30%)
  2. Recruiting hard-to-find skill sets (29%)
  3. Sustaining employee engagement/morale (25%)
  4. Reducing employee headcount and costs (23%)

Not surprisingly, the style and leadership approach required to reduce employee headcount and costs is often opposite of the approach required for the top three priorities. Without understanding, both leaders and teams may perceive these conflicting approaches as evidence of chaos rather than tools with which to limit chaos.

LEADERSHIP

Done correctly, we empower project level managers and field leaders to improve profit. We can generate a climate open to sharing strengths and weaknesses for the sake of constant improvement. Implementing change effectively in this manner creates adaptable organizations that are not locked into just following orders.

From a leadership development perspective, great construction leaders today display authentic, self-aware leadership in order to build trust and clarity. They do not have all of the answers, but know the right answer lies within the company and put their energies into helping the company develop the best solutions. These leaders must develop and communicate a vision. Their chief skills are understanding, respect and awareness of the people they lead. They maintain agility in the face of changing circumstances around them, keeping vision and people at the front of priorities.

This is one of the most difficult markets to lead a business. There is more importance to helping project management teams develop situational understanding and clarity of a mediocre strategy than having a CEO announce a perfect strategy (if there is such a thing) in a memorandum. Effective change management is generated by great leadership at the top. The vision and culture is set and reinforced continually from this seat. Best-in-class teams often work together to identify effective market strategies and systems to execute effectively. In order to keep effective change and competitiveness in the market, the company must also create situational understanding across the field managers and project teams. Failure to engineer this agility successfully across the company results in an organization headed for a downward spiral, a victim of chaos theory.

DECONSTRUCTING CHAOS

In essence, great companies in this volatile market recognize great opportunities around them. Uncertainty and lack of clarity can be an impediment, but for companies that can adjust quickly, they can take advantage of this challenge and pull ahead in the market. These companies lead by regularly deconstructing the chaos around them. A mentor once stated that leading an organization during an environment of complexity requires “simple plans repeated clearly and often.” The essence of leadership is clear priorities and focused efforts. Steve Jobs once said he was as proud of the products they did not develop as the ones they did.3 In some ways, the essence of strategy is deciding which initiatives not to pursue. Many in our industry will look back at the past five years and be proud of some projects they did not win. Strategy is about identifying which priorities to focus on and make trade-offs to support. Contractors need to do fewer things — better.

During this volatile market, senior leaders lead most effectively by focusing the people in their organizations on controllable factors. As the great people in our industry are natural-born problem solvers on the jobsite, with effective leadership they can apply the same rigor off the jobsite to the strategic plans and operational designs of the troubled companies that employ them. This combined effort will continue to evolve companies in our industry through the market chaos we face and sustain long-term profitability.


1 Rothman, D. (2006.) Nonlinear Dynamics I: Chaos. MIT Open Courseware http://ocw.mit.edu (Accessed 12 Feb. 2013).
2 Deloitte, Talent Edge 2020: Redrafting talent strategies for the uneven recovery.
3 Morris, B. (2008). Steve Jobs Speaks Out. Fortune Magazine.

 

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