Obviously we have been getting a ton of questions about the economy and what we believe the current market holds for contractors. 

With the people we talk to on a regular basis including contractors, developers and people who provide services to the industry we can place companies into roughly three major categories:

1. TROUBLED:  This is the group that thanks to our media’s philosophy of ‘bad news sells’ we hear the most about.  The truth is that in most cases when we start peeling back the layers of the onion it is apparent that many of the companies in this group are having difficulty or failing due to reasons that were present prior to the overall economic problems.  The economy has only highlighted these underlying flaws in strategy and execution.   
2. STAYING THE COURSE:  Construction has always been a cyclical business and for those companies with management teams that have been through this before they are simply staying on course making minor corrections but avoiding rash moves that lead to over-correction and more problems.  For these companies they will emerge with a stronger team and will have executed plans to make already lean operations even leaner. 
3. GROWING:  There are a percentage of contractors out there who have built their businesses for long-term stability including having diversified revenue sources and conservative financial management systems.  During boom times they saved their pennies and have always been on the lookout for strategic opportunities.  They are positioned to grow through a downturn by being able to build at cheaper prices (for developers), have the time and money to improve their business infrastructure and even start or buy into new markets at discount prices.  In addition these businesses will have access to talent that was not available in a booming market. 

Whatever group you are currently in your goal should be to focus on moving your business into the ‘GROWING’ group.  Some of the elements that every company should be working on in order to move their businesses in that direction include:

• REVENUE DIVERSIFICATION:  All sources of revenue have different sales cycles and are tied to different elements of the economy.  If you are tied too closely one source of revenue your business may be subject to rapid growth but also to rapid decline – for instance anyone related to the production housing markets in rapidly growing metro areas.  Revenue diversification is painful and slow but once a company is properly diversified the overall earnings become much more predictable.  Does your business have a mix of public, private and institutional revenue?  Does your business have service elements along with new construction?  Remember that when businesses can’t afford to build new structures their spending on maintenance increases. 
• BIZ-DEV AS A PROCESS:  One of the weakest disciplines we see with all contractors is their business development processes.  This goes hand-in-hand with revenue diversification and growth.  Do you have a centralized customer list that everyone in the company works from?  For each revenue source (market area) do you have an exhaustive list of all potential customers in a centralized database?  Do you have a regular and formal communication program that keeps your company’s name in front of all customers and potential customers at least quarterly?  Does at least 25% of your business each year come from new customers?  If you don’t have business development down to a process then you open your company up to significant problems when existing customers or markets start to tighten. 
• ACCURATE SCOREKEEPING:  Many construction businesses that we see have poor financial reporting systems in place.  If you can’t see a clear path from a particular source of revenue all the way to the net profit line including accurate accounting of direct and indirect expenses associated with that source of revenue then you can’t make accurate management decisions.  This is something we see as a problem in companies of all sizes and sophistication levels.  Having financials that provide an accurate picture of exactly who is contributing (or not contributing) what is crucial especially in times like these where you need to make hard decisions about what to cut and what to invest money in. 
• FINANANCIALLY CONSERVATIVE:  Businesses and individuals who are being hit the hardest right now are typically those who were the most leveraged.  It is a perfect storm of failure to get hit by both slowing revenues, later payments from existing clients and tightening of credit.  Businesses who remained relatively unleveraged and worked hard to build working capital are able to make great decisions right now about how to use that capital. 
• TALENT MANAGEMENT:  This is one area where the best companies really shine.  They have developed strong, loyal and cross-trained talent that can effectively scale up in boom times while effectively scaling down when necessary.  We saw too many businesses that took advantage of a single booming industry such as telecom in the late 1990’s and they built sizable organizations but their depth and breadth of talent was limited.  Many of their people could only do a single function and while that worked well for the original Ford assembly line it does not work very well for a contractor when economic changes in a market require scaling back.  An organization with strong cross-trained talent can scale back to a much leaner “fighting weight” than an organization with a bunch of people who are only good at a single discrete function of the business. 

There are dozens of other factors that flow into this including investment in internal systems for streamlining operations but these are basics that every company should have been working on and should continue to work on. 

If your company falls into group one and you take a hard look I bet that you will find some underlying problems in one of these areas; most likely in the revenue diversification and conservative financial management of the business. 

We will be discussing each of these in more detail in upcoming posts.  In the mean time reflect on this graphic showing market activity from last week taken from Sunday’s NY Times.  As much as it feels like it the volatility of the market does not really change the underlying dynamics of a business. 

Do some research on what Ben Graham calls “Mr. Market” and read into how Warren Buffet describes having a business relationship with “Mr. Market” in one of Berkshire Hathaway’s annual reports.  Some Google searches should turn up some good reading.  Right now we are experiencing a challenging time when there are some serious underlying problems with the market.  This is making “Mr. Market” moodier than usual and this moodiness is doing more damage than the underlying root causes.  As a contractor keep in mind that… 

Structures still need to be built and maintained – contractors still need to perform those functions. 

As always if you have any questions or situations you would like to see specifically addressed in this blog please leave a comment or email david@dbrownmanagement.com

Tags: business development, construction, economy, strategy

This entry was posted on Sunday, October 19th, 2008 at 10:14 pm and is filed under David Brown Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.