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Risky Business — Five strategies
to improve profits
Companies can enhance financial performance
by implementing planning and minimizing risk with some often-overlooked
practices
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Warren
Friedman
VICE PRESIDENT
Warren Friedman is a vice president with Construction
Management & Development Inc., based in New York City.
He oversees large real estate development projects, primarily
for the firm's investment banking clients who have a financial
interest in the projects. For many years, he has been
a management consultant to large and mid-size construction
contractors and has served on many of their boards of
directors. Friedman holds a bachelor's degree in civil
engineering from New York University.
Web site: www.cmdintl.com |
Contractors have always had to deal
with risk, but in these uncertain times, their exposure is
greater than ever. However, many companies simply react to
their growing risks rather than anticipating them through
sound analysis and management.
Here are five strategies that contractors
can use to improve financial performance.
Develop a Risk Strategy
Effective risk management is about playing both defense and
offense. The process begins by assessing risks, including:
> Competitive risks. Competition has intensified
among contractors and with full-service, mega real estate
firms competing against traditional contractors.
> Pricing pressures. Clients are pressuring contractors
to cut prices using reverse bid auctions that drive down
prices and squeeze profits.
> Rising materials and fuel costs. Materials
shortages and increased costs for fuel and construction
materials will continue.
> Litigation costs. They never go down.
> Fast-changing markets. Contractors are having
to adapt to rapid changes in the public and private sector
markets, including power, telecom, commercial and others.
> Geopolitical risks. War, terrorism and other
global events have increased risks to contractors and their
clients.
> Labor shortages. Contractors face looming shortages
of qualified people.
> Sarbanes-Oxley. The tightening of accounting
and auditing standards has put public contractors, like
public companies in general, under a microscope, requiring
them to disclose deficiencies in their internal controls.
> Insurance/surety. These areas continue to tighten,
with costs rising, deductibles increasing and coverage shrinking
or disappearing. Sureties are pressuring private contractors
to improve internal control standards and systems.
Once risks are identified, they can be quantified, prioritized
and strategies can be developed to mitigate their impact.
Develop a Growth Strategy
Companies must decide whether they want to grow and how much.
They need to analyze current markets to determine if they
are still attractive. If existing markets are declining, companies
may need to diversify, expand geographically, acquire other
firms or recruit new talent.
A growth strategy also requires the resources to get more
projects done. These include sound internal processes, experienced
managers and a strong "bench" of new managers who
can free senior managers from day-to-day operations to pursue
new business.
Alternatively, a company can choose a no-growth, negative
growth or selective growth strategy to reduce risk. It can
focus instead on reducing costs, increasing profits and capturing
market share in existing markets or making selective acquisitions
in related business areas.
While a moderate or no-growth strategy may work for large
companies, smaller companies that follow the same strategy
must consider the risk of losing business to bigger competitors
that can work on larger, more complex projects or provide
a broader range of services.
Develop a Profit Strategy
How can a company meet its profit goals? Reducing costs can
boost profits, but once excessive costs are eliminated the
payback from cost cutting diminishes. If a company is not
generating enough profits, it may have to grow or diversify
to reinvest in the company, create a reserve for future opportunities
or pass profits through to shareholders and investors.
If a company chooses growth as a way to increase profits,
it should employ the least risky growth strategies, like generating
new business from existing customers rather than trying to
win new ones. Keeping current customers happy also keeps competitors
at a distance.
Develop a Competitive Strategy
Competition in the construction industry is intensifying,
both globally and locally. Global contractors generate billions
of dollars and thus also have the capital to compete with
regional and local contractors. Among U.S.-based firms, large
specialty, heavy and building contractors-such as Granite,
Modern Continental, J.E. Dunn and others-have developed a
commanding presence in local markets.
Companies need to evaluate how their current and potential
competitors are diversifying, acquiring companies and hiring
people. How are competitors eroding their own market positions?
How is their own company viewed by its customers? This information
is best gathered from customer surveys done by an outside
firm.
Based on analysis, companies may need to fine tune existing
strategies or create new ones. But they also have to consider
the risks, like diversifying from private to public sector
work or jumping into unfamiliar markets.
A competitive strategy also looks at defense-companies have
to protect their flanks from competitors who may try to steal
customers or employees.
Develop an H.R. Strategy
Strong growth can help companies attract managers and workers.
They can offer more jobs, job choices, career opportunities
and advancement, and they are in a better position to compete
for the best and brightest employees.
Does this mean a slower-growing company will lose the talent
competition? Not necessarily. Some people may prefer to work
for a company if it offers interesting work, more responsibility,
greater autonomy, faster advancement, a supportive culture
or other advantages. But smaller companies need to create
work environments that meet workers' expectations.
Do Strategic Planning
Companies must not only have strategic plans but also a process
for implementing, revising and adapting them to changing conditions.
Plans should include action steps to improve operations and
financial performance and capitalize on business opportunities.
Planning begins with a review of the business, its operations
and finances. It should include research about trends in existing
and prospective markets to identify business opportunities.
But whatever planning decisions companies make, their success
depends not only on business acumen and financial strength,
but also on how well they manage risk.
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