Electrical contracting firms are no longer the "single-product" firms they once were. For most of the history of electrical construction, the electrical contracting firm's market has been traditional contract construction and its customer base, predominantly general contracting firms. Advancing technology and changing customer needs have changed who electrical contracting firms do business with, what work they perform and how they deliver needed services.
Traditional contract construction is now just one service electrical contracting firms offer, and general contracting firms are only one of their customers. The electrical contracting firm's management needs to recognize that it is no longer a "single-product" firm and begin to think of today's firm as a portfolio of businesses. This article will introduce the portfolio concept and how the electrical contracting firm can use this concept to better manage and plan its business.
The idea of managing a company as a portfolio of businesses rather than a monolithic business is not new. Manufacturing firms that make and sell a variety of products to a variety of customers in different markets have used this concept for years. The portfolio concept provides these multiproduct firms with a framework for analyzing business results, allocating limited resources between competing products and markets, and effective planning methods. By taking a portfolio approach, these firms are able to understand how each of its products contributes to the bottom line today as well as how that product will help the firm achieve its growth and profitability goals.
Electrical contracting firms today are multiservice businesses. In addition to traditional contract construction, electrical contracting firms are presented with a myriad of opportunities in a variety of markets. In the way of services, electrical contracting firms are becoming involved in design-build project delivery, voice/data/video system installation, service and performance contracting, equipment fabrication and systems integration, equipment and system dealerships, among others. Market segments include commercial, industrial, institutional, utility, infrastructure and residential as well as subsets of each for highly specialized firms. Customers include general contracting firms, specialty contracting firms, design firms, owners and developers, tenants and end users, public and private utilities, and system and equipment manufacturers and suppliers. Today's electrical contracting firm is multidimensional and its management needs to understand what businesses it is in and who its customers are to effectively manage the firm on a daily basis as well as achieve long-term growth and profitability goals.
What businesses are you in?
The first step toward managing your firm as a portfolio of businesses is to decide exactly what you are in. This question is often easier to answer for larger, more mature firms than for smaller ones. The organizational structure of larger electrical contracting firms has typically evolved based on the service or market segments served with identifiable departments, divisions or subsidiaries representing these segments. On the other hand, smaller, less-mature electrical contracting firms have a much harder time answering this question because everyone often does just about everything, and the organizational structure does not reflect the services offered or markets served. This is especially true for small firms in dynamic, rapidly growing markets. Despite the difficulty, it is extremely important that the firm's management understand exactly what businesses it is in.
That determination requires segmenting your business based on services offered and markets served. For example, one firm might decide that it is in three businesses: power distribution, VDV cabling and service work, and all of this work is "plan and spec" in the commercial and institutional building market. Another firm may identify a more specific set of businesses based on its market, which might include "plan and spec" industrial control systems, design-build industrial control systems, custom control-panel fabrication for installation or sale to others, control system software development, and industrial control service contracting. The key is to identify those "businesses" that could stand alone because of, among other factors: services provided and customers served; unique work force skills; equipment or inventory investment; and area served.
Set up profit centers
There is an old adage in business that states, "you can't manage what you can't measure." Measurement and managing with the facts is key to managing your company as a portfolio of businesses. Each of your identified businesses should be set up as a profit center so that you are able to determine its financial contribution to the firm as a whole. In addition, setting up profit centers helps to focus management on other important quantitative and qualitative aspects of the business such as customer base, market share, investment and future direction and potential. A profit center also provides information that allows management to analyze individual businesses using financial metrics such as return on investment that would not otherwise be possible.
Establishing profit centers doesn't mean that you have to have a large organization or that your organization must be divided into departments or divisions. A one-person firm with several "businesses" can establish and effectively use profit centers to answer such important questions as: most profitable work performed; what work provides cash flow; and what "businesses" are growing the fastest and which ones should be invested in for growth and profits.
Establishing profit centers simply involves setting up a managerial accounting system within the firm that will allow management to easily gather analytical data for each "business." Your accountant can help you establish these profit centers and your current accounting system will probably support data gathering and processing for individual "businesses" and the firm.
Visualizing your firm's businesses
The Growth-Share Matrix is an effective way to visualize how each of your businesses contributes to the overall success of your company. The Boston Consulting Group developed the matrix in the 1960s as a way to help diversified companies understand and plan for their overall business. The matrix is illustrated in the figure above:
Cash Cows are businesses that produce steady cash flow and profits for contractors as well as provide a foundation for expansion into more profitable businesses. These businesses are typically characterized as having low market-growth potential but high market share. The electrical contracting firm typically does not have to make any significant additional investment in these businesses to maintain its current market share and profits. Even though an individual firm may not have a high market share of traditional contract construction, its market share is often steady, and traditional "plan and spec" power distribution work could be classified as a Cash Cow.
The Stars quadrant is for those businesses that can be categorized as having both high market share and high market-growth potential in the future. These businesses often require significant investment to retain this market share and ensure growth. However, these businesses typically have high margins and generate significant profits for the firm to finance this growth. An example of a Star might be providing design-build services directly to selected customers.
The Dogs quadrant represents those businesses with low market share and low market-growth potential. These businesses typically don't require a lot of investment but also don't generate much income. A typical first reaction to discovering a Dog would be finding some way to put it to sleep. However, businesses that fall in this quadrant are often important to the customer and cannot be eliminated without making an impact on the firm's full capability. An example in many firms would be their service department. This is ironic because that department is necessary for most firms, and many others would classify service as either a Cash Cow or Star. Management should take a close look at their Dogs to see if and how they can be groomed into Stars or Cash Cows.
Question Marks, the matrix's fourth quadrant, are businesses that have high growth potential but, because of low market share, generate little income. Additionally, they often require significant investment by the firm to move them into the Star or Cash Cow quadrant. An example might be VDV systems integration that would require a significant investment in both people and equipment. EC
This article is based on the Electrical Contracting Foundation Inc. research project titled Executive Management Education Program. This research project has resulted in the weeklong Executive Management Institute for senior management being offered by NECA's Management Education Institute. The author would like to thank the foundation for its support of this research project.
GLAVINICH is director of Architectural Engineering and Construction Programs in the Department of Civil, Environmental and Architectural Engineering at The University of Kansas. He can be reached at 785.864.3435 or email@example.com.