What Causes the Failure of a Business

Revenue is booming, and times are swell for many construction organizations. What could possibly go wrong? Many leaders in the industry believe that the most challenging aspect businesses face currently is the availability of personnel. However, this cycle has played out several times before, and the conclusion is always the same: Undisciplined management and a lack of good strategy lead to failure.

In 2007, FMI Corporation released a groundbreaking study titled “Why Large Contractors Fail: A Causal Analysis of Large Contractor Bankruptcies.” The study was a deep examination of more than 30 large engineering and construction companies that neglected to search for the root causes of their decline before failing. While each of the participating business owners had their own reasons for failure, the majority of factors could be summarized into three common key areas:

• Strategy—Unrealistic growth, volume obsession, etc.
• Organization—Poor cash flow, operational inefficiencies, legal problems, etc.
• Factors beyond control—Banking or bonding issues, poor economic conditions, etc.

Business owners’ fixation with the last item remains a curiosity. Many view this item as the primary cause for failure when, according to the study, misguided strategy and poor organizational performance were the leading causes of failure, and factors beyond control were simply exacerbating factors. In other words, it is always easier to blame the economy than it is to admit the role of poor leadership when a business falters.

Yet, the cycle continues to play out. Contractors are once again seeing record highs in many categories, both good and bad. With strong revenue comes increased risks due to higher receivables and demands for cash and time. Construction companies should use their current position and internal inventory to benchmark against not only superior companies, but also against their own risk profile.

The Talent

Often, leaders say, “If we only had more people, we could do more.” In fact, the talent crunch has served as a de facto governor for some business owners, allowing them to live within their means. However, it often becomes hard to say no when saying yes to customers feels so good. And thus, the cycle begins. Companies acquire more work and end up shelving their strategic plan for growth and the development of people in favor of engaging new talent and unproven entities.

For example, a snapshot of what happens during this process usually includes the following events:

1. New, unplanned work is acquired.
2. The company hires free agents to complete the new work.
3. The new hires lack connection to company culture and/or require training to execute correctly
4. Project losses occur due to lack of training, accountability, etc.
5. More work is acquired to offset losses or a lack of discipline.
6. The cycle begins again.

More revenue is not a bad thing. In fact, this catalyst for growth—when handled correctly—is a good thing for the company, helping every aspect of the business grow and improve.

As the aforementioned FMI study indicated, it is the lack of discipline that leads to negative reactionary behavior. Of course, the contrarian argument is, “How do you say no to a customer?” There is no easy way to say no, whether it is by providing a hefty price tag or simply being honest with a customer about your capabilities. But, the corollary of failing to execute selectiveness will usually have graver consequences.

The Playbook

Leaders talk about training and development often, but true talent maturation is less about sitting in a classroom and more about having a script that the team can practically apply to their jobs. Hiring free agents is beneficial to the company in many cases because they bring a new breath of air to the organization; however, they also bring in a new set of negative behaviors that can be challenging to break. In the absence of an operational model, free agents will default to their old ways (good or bad).

More importantly, without accountability to a companywide standard, it is easy to rack up losses through inefficiencies, weak change order management and an overall lack of proactiveness. This does not mean that companies shouldn’t train. Rather, it means that training should be focused to reinforce the right behaviors within the company. Professional development should never stop, even when firms are busy. In fact, waiting for slow times to conduct training is counterproductive and once again, reactionary.

The Money

“Cash is king,” is the mantra usually pounded into leaders on the part of bonders, bankers, financiers, experts, consultants, etc. This should resonate clearly, but the influx of workload volume often distorts perspective.

Working capital should be an element of every leader’s dashboard, but it is often relegated to the margins while the obsession with volume and profitability dominates the business. Profitability is vital, but without cash, companies become unsteady, finding themselves floundering as they overextend their line of credit, loosely manage collections and witness the reduction of assets resulting from poor operational performance.

There will always be economic cycles that thin the industry pool. However, it is ignorant and misguided to blame every downfall on external environmental factors. There have been countless businesses that defied conventional wisdom and thrived during years of recession. Whether they became lean and efficient, or simply had a good strategy, many were more profitable during these times of scarcity than when volume flowed freely. To achieve the same, business owners should pair strategy and operational performance, and, more importantly, execute discipline and commitment to avoid the disaster trap. CBO