Examining a Case Study in Failure

Consider, if you will, this tale of a business that collapsed at its peak. While elements of the tale may sound far-fetched, the only “fake” things are elements used to protect the innocent/guilty. A trade contractor had all the makings of a true success story — growing revenue, innovative tools and techniques, new office locations and seemingly happy customers. What could possibly go wrong? 

The only thing quicker than the growth was the subsequent failure that resulted in bankruptcy and the loss of 200 jobs. As one looks at this catastrophe, it is hard not to compare the analysis of the failure to the way one views a crime scene. Tragic as it is, construction firm failures are common occurrences. 

Why Contractors Fail

Several years ago, FMI released “Why Contractors Fail.” It was a comprehensive study into numerous construction organizations’ failures and, more importantly, the root causes of said failures. For edification’s sake, the most common causes of failure that were observed in FMI’s study were as follows:

1. Strategic 

• Unrealistic growth or expansion
• Volume obsession
• Bad contracts and unrealistic promises

2. Organizational 

• Insufficient capital
• Lack of business acumen
• Poor leadership
• No leadership transfer plan
• Project losses/field performance
• Court battles

3. Uncontrollable

• Industry/economic challenges
• Banking and surety issues

Most would look at this list and say, “Well, of course these are the root causes. That’s like saying, ‘I didn’t know eating a box of cookies every night would affect my health.’ ” It is important to note that the study was completed in 2007, yet many contractors still make these same mistakes every day. Additionally, businesses also tend to focus on the uncontrollable and seem to attribute too much to those characteristics. “If only the market didn’t go soft,” or “It was just a bad economy — we could’ve been something.” Sure, if only the dealer at the card table hadn’t dealt himself a blackjack the last 20 hands. This is not to discount bad luck, but it is important to recognize that many businesses survived a bad economy and even thrived. It was the ones that didn’t proactively attack the first on the list and encountered a poor economy that failed.

So, back to our trade contractor. What went wrong?

CSI – Construction Scene Investigation

There was certainly top line growth for this business. So much so that the business added additional offices. Some of this was through acquisition; some were simply expanding the footprint organically. The first question that required answering was: “Why?” 

“We had to.” Call it a detective’s hunch, but that is almost like saying, “Because.” 

Strategic growth is a great vehicle to expand the business and ultimately provide opportunities for team members to grow and follow profitable customers/sectors. However, hubris is a dangerous thing. Growth simply to satisfy an ego or for some irrational reason — in this case it was because a family member was not being a team player — is dangerous. First, the question of market viability was not even addressed. Put another way, the firm had not even exhausted the market potential in the current market. Furthermore, it chose markets that may not have been well vetted and were probably rushed. It was as if a general fear of missing out (FOMO) pervaded all aspects of the leadership team. “If we don’t do it now, everyone else will be in that city. … ”

Another piece of evidence was the addition of numerous staff members that appeared to be cobbled together somewhat haphazardly and even “post strategy.” For instance, hiring a “strong No. 2” to lead the new satellites with no knowledge of the company, culture and team seems like a risky proposition. This is not to say a business should steer clear of “free agents,” but rather appointing an untested leader/manager to run a new satellite office might be flawed. 

There was an item left off that previous list (i.e., company, culture, etc.). 

It is important to note that there were no systems in place in the home office, so it was equally unlikely that a “Brand X System” would be adopted in the satellites. Put another way, the firm was underperforming in the home office, so it probably wasn’t going to perform well in the satellites. Before a business can develop “franchise units,” there has to be something to franchise. Throw in an overall lack of controls in the mix, you have a runaway train, feverishly rolling down the tracks without a set of brakes.

Last, it is important to consider why the organization even decided to expand geographically. It was thought this would be a great way to provide “separation” from family members who had a slightly dysfunctional relationship. I am not sure if best-of-class organizations would classify this as a best-of-class action. It is like having a challenging relationship with a life partner only to decide that getting a pet will make the relationship better. Sure, we weren’t getting along before, so let’s add a new life-form to the mix. 

The Verdict

A single data point didn’t sink this organization. For instance, many businesses have had satellite offices go under. Furthermore, there are bad projects, and many organizations are able to grimace and move on. The death spiral for our friendly contractor was a compounding of many bad decisions culminating into bad outcomes at the same time. There are many firms that will say, “That will never happen here,” only to have one domino start the fall. At what point does the organization realize the flaws in execution and strategy? 

It should be noted that all of this happened during a strong economic climate, so the failures were not because the firm lacked projects. Rather it was the amalgamation of too much work, lack of organizational control, lack of strong talent, lack of strategic prowess and an overall failure of leadership that sank the ship. 

Will you heed the evidence in this cautionary tale or fall victim like so many other casualties?