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FMI Quarterly/March 2015/March 1, 2015

Data-Driven (Business) Development

DataArrows_imageDecisions made with clarity and intention are better decisions, even when conflict occurs.

Business development is a very structured and intentional activity in best-in-class organizations: A strategy is developed, customers and markets are targeted, and relationships are built. While the effectiveness of some strategies may be up for debate, all firms have one or more strategies — a charge that will guide them forward. Additionally, the construction industry relies heavily on relationships, so it comes as no surprise that most firms excel at building and leveraging relationships. Targeting remains the challenge for most. With work on the doorstep from repeat clients and an urgency to “feed the beast,” it is easy to understand why some contractors hastily stumble through this critical step.

By considering the trickle-down impact of each sale, the importance in finding the “right” work becomes clear. Even the best estimating team can quickly be overwhelmed by the volume of estimates generated from bidding jobs that should have never been pursued. Ideally, estimating serves as another filter to prevent undesirable jobs from slipping through, but inevitably some projects that don’t fit wind up in backlog because the quantity of work being bid reduces the ability to discriminate between bad, good and best jobs. The responsibility of delivering the project with a profit is that of the operations team. This responsibility is difficult to execute when projects are undertaken without accurate cost estimates and appropriate margins.

Targeting and pursuing work that most closely aligns with the strategy and competencies of an organization is paramount. Because this is such a critical and challenging step, it only makes sense to leverage all of the available tools to achieve this result. The expertise of a business development and executive team is an expected strength in firms, but the use of data can add valuable clarity in selecting the “right” work and developing a comprehensive business development strategy.

Why Not Target?

The first reason many contractors stumble through the targeting phase reminds us of Alice and her trip through Wonderland. As Alice learned from the Cheshire cat, “If you don’t know where you are going, any road will get you there.” Business development without purpose or direction will produce results but not necessarily those desired. One potential result is a stack of opportunities that may or may not fit the organization, tossed to estimating and operations to land and perform to achieve hoped-for profitability.

The second stumbling block for contractors is pursuing the same old familiar targets. As the adage “people buy from people” reminds us, relationships are a critical component of any strong business development program. Whether they are serial buyers or one-time buyers of construction services, owners desire a level of trust in the company they hire. They want to be comfortable knowing their contractor will build the project as if it were building its own.

While the importance of relationships can’t be understated, relying too heavily on relationships to direct business development strategies is risky. In these situations, contractors become comfortable with current relationships and stick with them even as the markets shift or as spending changes. This can put firms behind the curve in developing the next opportunity. We generally hear something that sounds like “we’ve made money on that client for years” or “small jobs are our bread and butter.” These sentiments are often coupled with a “gut” approach to business development, with firms abandoning the possibility that the data may reveal something altogether different.

The Role of Data

In our seminal piece, we outlined several basic questions which can be answered with data.

  • Who are your best clients?
  • What type of work fits best with your core competencies?
  • Are you more profitable on large projects or small projects?
  • Geographically, where has your firm enjoyed the most success?

While this list is by no means exhaustive, it does address several critical questions every firm should ask while formulating a business development strategy. It is also worth pointing out that, to a large degree, these questions can be answered with data that is readily available. As we framed in an earlier article, every construction company tracks at least two data points per project to gauge performance — the estimated costs and the actual costs of completing a project.

In the simplest form of this analysis, we are comparing the estimated figures (direct costs, contract amount, gross margins) to the actual outcomes and measuring gain or fade for each statistic. On any one individual project, those involved on the project generally know this information. And while these experiences can guide small adjustments in behavior, they don’t provide collective clarity to the organization.

By analyzing project cost and production information across all jobs, firms can assess aggregate project performance by any number of categories. Consider the questions above asked with this data in mind.

  • Who — “With which clients do we experience the greatest margin gain?”
  • What (Type) — “What type of project do we consistently perform well?”
  • What (Size) — “We believe our small projects are our bread and butter. Is that the case, or does the data tell us something else?”
  • Where — “What geographies most significantly impact our direct labor costs?”

Analyzing the Data

When it comes down to actually crunching the numbers, there are a few ways to get the most out of the process. For example, we recommend performing the analysis without bias. In some cases this means having someone who may not be directly impacted by the results or, at the least, an employee with a pragmatic mind. Like most data analysis, if the witness is led to the answer, the results are likely to be very predictable. The results will prove most valuable when the exercise is performed without an initial hypothesis.

Secondly, leave the “bad” jobs in the analysis. Taking them out can skew the results and cover up issues or problems that we’d like to be forgotten. Many contractors will argue, “You can’t include that job in the analysis because it’s not a normal job for us.” The fact is, these projects are completed, whether they are normal or not. If we can’t wish away their impact to the bottom line of the business, we shouldn’t exclude them from the analysis. If you want to take out your biggest losers because you view them as outliers in your data, you have to take out your biggest winners too! We DO want to talk about the losers, why they skew the data, and how to avoid them in the future. Many contractors have one or two bad jobs every year that turn best-in-class profitability into mediocre performance. Learn how to spot those jobs before you bid them so you can avoid them. That’s the whole point of the exercise.

Once the data is reviewed, the interpretation begins. Approach data interpretation as a process and not as a single occurrence. Reviewing the results will likely raise more questions about the information. Be prepared to run a follow-on analysis to address these questions with the information available.

At this point in the process, you’ll be able to review the project characteristics that are currently tracked. Very often, a data point is revealed that is not currently monitored, but would be valuable to have going forward. Now is the time to start tracking it. The best day to plant a tree is 20 years ago; the second best day is today.

Once we’re happy with the resulting analysis, the questions begin. We outlined several basic project characteristics earlier in this article. And while the list of questions you could ask seems never-ending, the basic idea is to try to understand if the gain or fade experienced on a category of projects was the result of some particular aspect of estimating, operations or some external variable.

As you come up with conclusions on the information, be sure to test a hypothesis and use this analysis as a data point in a decision. In promoting the value of analysis, we’d also like to caution against sweeping changes to your organization based solely on these results. View your findings as an indicator that should lead you towards further investigation and pragmatic conclusions.

With finite resources and a growing number of potential project opportunities on the horizon, the role data can play in targeting the “right” client should be clear. Use business development energy efficiently and effectively. Be purposeful and accurate in lining up the firm’s capabilities and strengths with the needs of potential clients and projects. Better targets will provide much better results.

External Focus

We focused on internal data in this article, but we would be remiss if we didn’t at least mention the wealth of data available in the marketplace. Losing sight of macroeconomic trends or other forces at work in the market that will impact client spending can leave firms holding the bag. Business development professionals must be conscious of changes in spending, adjustments in buying practices and market growth or contraction, just to name a few. This information should be filtered back to the strategic team to ensure proper course corrections are made along the way. Analytics in business development have direct bearing on strategic decisions of the company. The well-informed executive team will ensure that good information access is available for business development purposes.

Conclusion

Collecting, analyzing and interpreting important data is understandably a big task, and this responsibility will consume a certain amount of bandwidth internally. However, many firms already collect a significant amount of the information we have referenced, and a large number of firms do some level of analysis. Considering the impact the results may have on every part of the organization, the investment and additional focus should be an easy decision. For firms that aren’t accustomed to using data to guide their business development strategies, there will likely be some growing pains. Additionally, some strategic decisions may be made that contradict the results of the data. Firms may pursue a client that has proven to be a challenging client in the short term, in order to position themselves for opportunities on the horizon. However, decisions made with clarity and intention are better decisions, even when conflict occurs. Over time, the investment in better business development information will result in better targeting of the projects to be pursued and the risks firms choose to accept. Used in concert with the information operations and estimating can gather, the results of this process will most certainly lead to more efficient and profitable outcomes for any firms willing to make the investment. Q

David Madison is a consultant with FMI Corporation. He can be reached at 919.785.9213 or via email at dmadison@fminet.com. Rick Tison is a consultant with FMI Corporation. He can be reached at 919.785.9237 or via email at rtison@fminet.com. Tyler Paré is a consultant with FMI Corporation. He can be reached at 813.636.1266 or via email at tpare@fminet.com.

 

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