R.I.P. Your Business

RIP your business.

As an experienced electrical contractor, you should always have some semblance of a business plan for the year ahead in January. But this month, try taking a different tack. We challenge you to write a pretend obituary describing why your company went out of business in 2020.

Media outlets prepare obituaries in advance for famous people. Your company is important enough to justify this as a worthwhile exercise. Thinking about potential problems before they occur can help you avoid them.

To get you started, we offer five common causes of business failure that could fit, or come close to, the issues you might describe in your own business’s obituary.

The following are all classic reasons based on industry studies and statistics. Virtually every firm is susceptible to them to one degree or another. Even so, look at them as prompts to help inspire you in this exercise. Based on situations unique to your firm, you can probably add a few more. Prevent failure by planning.

We grew far beyond our capabilities.

Nothing kills a contracting business quite the way ballooning contracts can. By shouldering more than it can handle, in good times or bad, an EC can take itself right out of business. Field-level problems crop up first. Financial woes quickly follow.

If your company is guilty of this, your obituary might read something like this:

As we entered the new year, we were ecstatic with the seemingly endless economic growth pushing construction activity sky-high. We couldn’t possibly respond to every bidding opportunity; there were just too many. We stretched to capture more work than we sensibly should have. Construction is full of ups and downs, and many of us can vividly remember those downs. We did not want to miss out on the boom times.

We’ll admit, the state of the economy has never been the sole reason we’ve worked beyond our capacity. We’ve done it, but when we were overextended before, we had always managed to pull ourselves out of trouble.

Our biggest mistake this year was taking on a contract that was larger than normal for us. At bid time, we failed to realize that it also was bigger than usual for the general contractor. At least, it was too large for the GC’s project manager assigned to oversee it.

To compound the problem, the dollar-value of the GC’s contract was a size smaller than it should have been. Having received a last look in the final review of their bid, we know the GC had decidedly undercut its competition. In a world where general contractors function more like brokers than builders, the pain and suffering was immediately transferred to the subcontractors.

In another instance of reaching beyond our capabilities this year, we ventured outside of our traditional market area. To appease a long-time customer, we reluctantly went out of town for a contract we thought we could handle. The surprising loss, though, was well beyond our financial comfort zone. In addition to losing money, we almost lost a customer. Thankfully, we saved that relationship.

The damage to our balance sheet from these two disasters was devastating. If these were the extent of our problems, given the luxury of time, the company might have limped along toward gradual recovery, but we were faced with further difficulties.

We were mired in performance problems.

Contractors should remember that the projects they know the least about are too often the ones they have the greatest level of enthusiasm for. An EC should make a go/no-go decision about whether to pursue a contract outside of its normal reach based on answers to the following three questions: 1. How strong is your relationship with the customer? 2. How experienced is your company with this work? and 3. How well do you know the workforce that will perform it?

In uncharacteristic eagerness to take on new work in new places with new customers, we violated one of our earliest promises to avoid chasing contracts that even hinted at the slightest threat of serious unknowns.

We strayed into a few situations where customers enforced standards that were foreign to our supervisors and foremen. Failing to heed unfamiliar specifications, our frontline managers did things the way they had always done them. Unfortunately, the customers’ representatives expected something else. These strangers were unbending, and their refusal to compromise cost us a lot of money.

As a result, our profits took a big hit. We did not lose money on every job, but our margins shrank enormously from the cost of rework and other unforeseen expenses.

In addition to the challenges that accompany any away game, we suffered from having to disperse our varsity players throughout many locations. It required us to break up project teams that had successfully worked together. We backfilled with new, sometimes untested field staff. Many of them rose to the occasion and displayed long-term potential, but not nearly enough.

All along, the manpower shortages that afflict the entire industry affected almost every one of our jobs, too.

As in the case of our runaway revenue growth, we might have avoided—or at least mitigated—the causes of our performance problems. Perhaps we could have controlled our destiny on both counts. But we had other problems.

We had no leadership- development program.

In the financial loss blame game, there are always the usual suspects: the project manager, the estimator and the anonymous culprits in “poor productivity.” Instead, this may be the right place to assess the company’s track record in leadership development. There will never be enough blocks on the organization chart for everyone to be a manager, but there will always be plenty of room for everyone to be a leader in some way.

As we look back on the difficulties that beset us this past year, it is clear that, in all divisions and departments on all levels throughout the company, we had a common problem. We universally lacked leadership.

In another era, we would have thought of leadership as being the exclusive territory of the top officers of the company. Those leaders, assisted by managers, were followed by everyone else. But today, we recognize the need for leadership at all levels. Everyone is in a position to exercise personal leadership.

If we had focused on developing leadership abilities in individuals throughout the organization, the adversities we faced could have been reduced or even eliminated. But now, it’s plain to see how we stuck to an outdated, top-down management model, which did not serve us well when difficulties began to come at us from every direction.

We suffered from inadequate accounting systems.

The more high-risk the business environment, the more professional a company’s financial and managerial accounting must be. In construction, timely and accurate reporting provides an early and ongoing indication of trending in field costs, which can be addressed if identified quickly. Hence, nothing is more critical to the success of a contracting organization than its accounting system.

Sadly, our accounting system was horribly inadequate and sometimes inaccurate.

We knew that, because the level of risk in specialty contracting is disproportionately high in comparison to average profitability, there is not enough room for a poor accounting system.

We had constant reminders of the shortcomings, but we never dealt with the problem. It did not require an advanced accounting degree to call out what was wrong. We just let it go on, and it affected the business.

We had top management issues.

Every company endures some kind of senior management problem. Perhaps, the owners and managers are at odds with each other. They might remain in their roles too long without a succession plan or maybe they jump too soon. The possibilities are many. These management issues are more apt to beset smaller, privately owned companies than any other kind.

When it comes to management issues, we checked off most of the boxes over the years.

Our chief executive was also the biggest shareholder, which may seem to be an insurmountable problem. But that gets back to the notion of leadership—leadership beyond the top spot and throughout the organization.

In retrospect, we could have worked our way through these management issues. With the early identification of problems and a reasonable amount of determination, we could have seen it through its difficulties.

The five scenarios above are merely a starter set. There are many other kinds of situations with comparable gravitas that can shutter a business, so think deeply about the issues you need to address.

When your business obituary is complete, use it like a reverse road map highlighting the dangers and pitfalls your business could hit: the road you don’t want to take. As 2020 races forward, along with periodically rechecking your actual-versus-anticipated results per your business plan, revisit the obituary you composed. View it as a reminder of those hazards that could undo all the hard work that you and so many good people have devoted to your company.

Then, just as you would expect to find appropriate safety barricades on a job site, put barriers in place to prevent those hazards, or similar ones, from fatally disrupting your business. Hopefully, your business obituary never makes it to print.

About the Author

Andrew P. McCoy and Fred Sargent

SARGENT is an electrical industry consultant focusing on service expertise. He can be reached at fred@sargent.com. MCCOY is the Preston and Catharine White Fellow and department head of the Department of Building Construction in the Myers-Lawson...

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