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FMI Quarterly/June 2014/June 1, 2014

Future Shock: When Good Is No Longer Good Enough

Tech9_imageLeading for the future demands a leader that thinks strategically about their business.

It is a safe bet that no one in the construction industry who experienced the decade of 2004-2013 would characterize it as stable or consistent. To the contrary, an apt one-word description might be turbulent: five years of explosive growth followed immediately by a gut-wrenchingly steep downturn. Its effects still linger across the industry. Hundreds of thousands of workers have left the industry unlikely to return. The carnage of companies that closed their doors or sold out is scattered across all industry sectors. Average industry profit margins continue to be squeezed and are well below those from pre-2007.

Consider former White House Chief of Staff Rahm Emanuel’s classic quote: “You never want a serious crisis to go to waste. And what I mean by that it’s an opportunity to do things that you think you could not do before.” Emanuel knew that in times of crisis people are looking for answers with an intensity that dissipates (or perhaps disappears) during periods of great success. The Italian poet Horace well understood this 2,000 years earlier when he coined the famous phrase carpe diem— or, seize the day. Such a day is indeed at hand!

Odds are that if you are reading this article you have survived this crisis. Yet some thrived in the midst of the chaos while others still hang on by a thread. Others were not so fortunate. Were these widely divergent outcomes more the result of good fortune or good preparation? Can the lessons learned from this turbulent period inform today’s leaders of potential paths that mitigate the downside risk of recurrence? Most importantly, can we take steps today that swing a business from crisis survivor to crisis thriver?

Let us begin with the premise that many of the tools leaders need in order to make that survivor-thriver shift are not in today’s toolkit. This era of high volatility, unprecedented complexity, and constantly accelerating rate of change demands a retooling.

By now, many are familiar with the Jim Collins-popularized notion that the good is the enemy of the great. If this is true, then we should be on search-and-destroy missions to root out pockets of goodness in our organization. In the following pages, we will explore how you can effectively lead for the future, and what tools along the way will help you capitalize on opportunities that may not be obvious at first glance.

LEADING INDICATORS VS. LAGGING INDICATORS

No one in their right mind pulls their car out of the driveway after dark without turning on the headlights. Even on routes we have driven hundreds of times, all motorists instinctively understand the importance of illuminating potential perils that lie in our path. Moreover, with increased velocity of movement, the need for some type of early warning system becomes even more imperative.

Yet in the business context, we rarely focus on systems and measurements that give notice to a company of changes ahead. Income statements and balance sheets mostly tell us where we have been and not where we are going. Cost-to-complete reports are little better at warning us of an approaching disaster.

2014q2_future_shock_lead_indicatorsWe recently spoke with a construction executive who told us that he received phone calls on the same day from two different clients that resulted in 75% of his backlog disappearing. Would it have been useful to have a notion 60 or 90 days sooner that this was a distinct possibility in light of market conditions that existed at that time? You bet! Were there opportunities in the preceding weeks and months when he could have detected what was barreling down the track? Again, an emphatic yes.

The risk in this particular instance closely correlated to certain commodity price fluctuations and the interrelationship between the spot price of product “A” versus product “B.” A subsequent review of commodity price charts showed a trend developed three to four months prior to the decision to terminate the contracts. Similarly, the CEO of a major engineering company shared with us that his firm had been in search of an external metric to assist in benchmarking team performance. After much study and analysis — naturally, all are engineers — they decided to utilize total U.S. housing starts and total construction spending as the two most salient measures.

How did this serve the business in 2006-2009 when U.S. housing starts dropped by 1.25 million units? Similarly, what of construction spending as it fell by over $150 billion in the period from 2008-2010? Were there different metrics that could have predicted the roughly 75% drop in the housing sector? Alternatively, are there metrics that would have given a clearer warning? What would it have taken to set off alarms inside the boardroom before the tsunami hit?

In both instances, these executives based today’s business primarily on benchmarks derived from lagging indicators. According to Merriam-Webster, the definition of a lagging indicator is a measure that more often than not maintains an existent trend for some time after an opposite trend emerges. Reliance upon indicators of this nature links a company’s future to historical outcomes, thus lessening opportunities for rapid adjustment to changing circumstances. Conversely, leading indicators, while typically more difficult to track, illuminate factors that we can positively influence for superior results.

To better illustrate the concept of leading versus lagging indicators, let us examine one of the top concerns in today’s construction industry: safety. By far, the most widely used safety metrics are the Occupational Safety and Health Administration Total Recordable Injury Rate (“TRIR”) and the Experience Modification Rate (“EMR”). Both are clearly lagging indicators and of little  value in reducing or eliminating future injuries.

However, a new trend is emerging in safety best practices to embrace leading indicators. A recent Construction Industry Institute report defines such indicators as “measures of attitudes, behaviors, practices, or conditions that influence construction safety performance.” Examples of leading indicators for safety include near miss analysis, worker safe behavior observation, safety audit tracking and analysis, and pre-activity project hazard analysis process and compliance measurement. Each are indeed more challenging to measure yet strongly correlate to the likelihood of serious and costly future accidents.

ADAPTABILITY VS. EFFICIENCY

2014q2_future_shock_adaptabilityRunners are just crazy enough to think that running marathons is fun. It takes a great deal of time and many miles of running to train the body to be efficient enough to make the 26.2 miles from start to finish. Almost as important is knowing the race course: flat or hilly; gravel or paved; shaded or sun-drenched, etc. Runners thoroughly break-in their shoes, drink the same liquids to hydrate, eat the same foods at roughly the same time pre-race — you get the point. We control as much as possible in order to be as efficient as possible. Adaptability falls somewhere between secondary and irrelevant in the training pecking order.

Yet every world champion marathoner knows that it is his or her ability to adapt to ever-changing road conditions that separates the good from the truly great. The body is a fickle thing; one minute all is well and the next you are ready to step to the curb overcome by fatigue. Accurately reading those often conflicting signals and discerning those true from false requires a clear mind and riveted attention. Failure to adapt appropriately can ruin a potentially great day.

Looking back to pre-crash 2008 and knowing what ultimately transpired, would you prefer to invest in a company that was particularly adaptable or particularly efficient? Naturally, a shrewd investor would look for both characteristics but in turbulent times, adaptability is the ultimate trump card.

Adaptability is different from reacting on the fly. Whereas reactionary is after-the-fact, adaptability takes into account the power to detect and respond to change, no matter how surprising or inconvenient. This is important because if you see change coming, yet sit on the “fix” until it is too late, obviously you do not model adaptability.

Blockbuster provides a great example to this end. As Netflix and Red Box started their climb to extreme movie-rental disruption in 1999 and 2003, respectively, Blockbuster watched and denied that this change was material in nature. This blunder proved fatal as Blockbuster ultimately filed for bankruptcy in 2010. In Blockbuster’s case, increasing efficiency would not have been nearly as important as immediately adapting to the rapidly changing business environment dictated by its new competitors.

Consider that engineering and construction companies spend millions of dollars each year measuring and enhancing productivity. Rarely are we around industry leaders where productivity is not mentioned prominently. Conversely, we can count on one hand the number of times we have participated in discussions concerning their firms’ ability to adapt to changing conditions — arguably far more critical to their future success.

LEARNING VS. KNOWLEDGE

The old news is that we live in a knowledge society. Yet we find it ironic that never before has knowledge been so useless. Consider that the current estimate of the half-life of medical knowledge is between five to seven years. Moreover, in a recent report the National Academy of Engineering estimates that the half-life of an engineering education is between two to four years. As leaders, we run the risk of becoming functionally irrelevant absent a commitment to lifetime learning.

2014q2_future_shock_systemsA superior approach would be to acknowledge this condition and take proactive steps to remain connected to emerging trends and research-related advances. Most of us are familiar with popular search engines like Google and Bing. Few are familiar with the hundreds of content-specific alternatives like LazyLibrary (to locate books on a specific topic) and Yudu (to search over 1 million current publications per month). In a learning society, power is balanced between what we know and knowing where to find (and learn) what we do not know.

Yet this environment demands that leaders not only know the vital information, but that they must wisely apply it to a given situation. This represents a far more nuanced challenge made even more challenging by the risk of data overload. Much has been written about the difference between raw data, which is in overabundant supply, and actionable intelligence. Former Supreme Court Justice Oliver Wendell Holmes, Sr. recognized the data dilemma over a century ago. “I wouldn’t give a fig for the simplicity on this side of complexity; I would give my right arm for the simplicity on the far side of complexity.”

Our mission as learning leaders is to find the simplicity that lies beyond, sharing its wisdom with our teammates. To achieve this end, there are no shortcuts, only deep, reflective thought. Further, as leaders constantly immersed in the chaos of urgent matters, how can we bring this gift to our respective teams? It is impossible to do so. Great leaders must periodically detach from current affairs for the sake of improving the state of future current affairs. If we fail to do so, we fail our organization.

SYSTEM VS. GOALS

Thinking back on our marathoning experiences one quickly learns that multiple goals are essential. Say you decided on a singular goal of running your fastest time ever, called a “PR” in the trade, or personal record. Yet you arrive on race day to find it unseasonably warm, humid and quite sunny. The chance for a PR is gone before taking the first step. After perhaps 120-150 hours of training for that moment, do you shuffle back home in disgust? Hopefully you anticipated the possibility of circumstances arising that were beyond your control. Otherwise all the sweat, commitment and preparation of the past months goes up in flames, rendering that singular focus of a PR relatively useless.

Scott Adams, creator of the Dilbert comic strip, addressed this very predicament in a recent Wall Street Journal article. His view is that systems are much better than goals to avoid the continual “cycle of permanent presuccess failure.” Dare he say a discouraging word about the importance of setting goals? Indeed, he goes on to slaughter the sacred cow saying, “To put it bluntly, goals are for losers.” Wait just a minute, you say. All successful people are great at setting goals. Perhaps, but what about the University of Scranton research that suggests just 8% of people achieve their New Year’s goals? Is there something beyond the mere identification of noble, uplifting targets that predicts success versus failure?

Adams’ penetrating and politically incorrect perspective comes from the search for his first job. A CEO seated next to him on a plane shared this nugget of wisdom that stuck with Adams. “He said that every time he got a new job, he immediately started looking for a better one. For him, job seeking was not something one did when necessary. It was a continuing process [emphasis added].” Instead of the goal of finding a job, he felt best served by having a system to continually look for better job opportunities. In Adams’ example, the goal was subsumed by the system. As leaders, consider how a systemized process of always being on the lookout for better opportunities serves us well. Such a mindset continually reinforces the notion of incremental improvement and sustained growth. It is also valid to assert that a system, when faithfully followed, usually turns into a habit — and in this instance, a particularly good one.

Eric Haas, founder and CEO of ThinkTQ, Inc., built an entire business around the notion that goals alone, indeed, are for losers. ThinkTQ offers its clients a rigorously systematic approach to the accomplishment of objectives. Haas figured out that it was not the goal setters — the people seeking to raise their personal bar — that were the losers. No, it is just that their likelihood of success was ridiculously low absent a system to support their best intentions. Rapidly changing circumstances allow a given goal to come and go with ease if there is an underlying system.

When FMI works with its clients, we typically go through an extensive process that identifies the big goals (or objectives) a company seeks to achieve. Beyond that, we work to think through and establish the actions necessary to achieve those goals. When rephrased in the context of this article, we mutually identify the necessary systems to achieve a big goal that at first seems overly challenging.

Perhaps you are familiar with the notion of a Big Hairy Audacious Goal, or “BHAG.” James Collins and Jerry Porras first coined this phrase in their 1994 book entitled Built to Last: Successful Habits of Visionary Companies. We propose that a team can only achieve a BHAG after establishing the necessary actions and systems to provide feedback on progress made to date. Further, midcourse corrections in pursuit of a BHAG are most efficiently made when informed by the accurate feedback derived from supporting systems. It bears witness to the fact that the combination of a powerful system coupled with a stretch goal truly can transform an entire business (or leader) for the better.

CONCLUSION

There is no silver bullet or secret formula for leadership excellence. It is not the case today nor will it be in the future. Some have equated leadership more to an art than a science. Whereas great artists never follow a set script for generating a riveting novel or impressionistic masterpiece, leaders, too, must look for inspiration and guidance from multiple sources. Moving into the future, tapping multiple sources for guidance, as well as the ability to synthesize this information to track trends and opportunities, will be what mitigates the future shock.

The phrase, “what got you here won’t get you there” is all too familiar. Yet many still rely on the same practices until it is too late to adapt. Leading for the future demands a leader that thinks strategically about their business. He or she relies upon a variety of diverse tools, many of which are discussed in this article. While it may seem overwhelming at times to bring all of these aspects together, leveraging just one of these can produce positive, sustainable momentum. We are certain that the future holds many changes for our industry, and utilizing these tools to impart continued agility for your business may prove to be the difference in transforming today’s good into the great of tomorrow.


Michael Mangum is a senior consultant with FMI Corporation. He may be reached at 919.785.9219 or by email at mmangum@fminet.com. Paige Ferguson is a staff consultant with FMI Corporation. She may be reached at 303.398.7254 or by email at pferguson@fminet.com.

 

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