Subject: Failure in older companies
When Even a Rolex Stops Ticking
Recent news from around the world-wide construction industry should cause US construction professionals to pause and ponder.
Recent Headlines
RIYADH/DUBAI (Reuters) January 2018 – Saudi Arabia is taking managerial control of Saudi Binladin Group and discussing a possible transfer of some of the giant construction group’s assets to the state… Binladin… the biggest builder in the country…
JEDDAH (Saudi Gazette/Okaz) April 2017 – Struggling construction firm Saudi Oger – owned by the family of Lebanese Prime Minister Saad Al-Hariri – ended operations… after 39 years in the business, local Arabic daily Okaz reported.
LONDON (NY TIMES) January 15, 2018: The British government scrambled… to contain the damage as the country’s second largest construction firm [Carillion] was forced into liquidation after… racking up around $1.35 billion in debt.
It seems that no construction concern, large or small, domestic or foreign, old or new, is exempt from the risk of sudden failure. In no other industry do thirty, forty, and fifty-year-old multi-billion-dollar companies suddenly disappear. I have investigated why contractors fail and published the steps to be taken to minimize future catastrophic risk. Still, billion-dollar concerns all over the world collapse without warning.
The Shocking Unavoidable Conclusion:
From the beginning, the construction industry has adopted
A FLAWED BUSINESS MODEL
Historically the construction industry seems to have been fit into the category of industrial concerns and similar business models were adopted as if they were manufacturing companies. That original misperception has proven to be a fatal flaw.
“People may spend their whole lives climbing the ladder of success only to find, once they reach the top, that the ladder is leaning against the wrong wall.” – Thomas Merton
The Industrial Business Model
Ford Motor, Standard Oil, Goodyear, U.S. Steel, and General Electric were the giants of the industrial revolution. They were all founded by geniuses who intuitively created modern management practice. With slight nuances, all industrial businesses are still modeled after these concerns. Here are just a few of the management techniques invented during the industrial revolution:
- Centralized management
- Top down span of control
- Efficient production
- Expanding markets
- Competitive edge
- Market dominance
- Brand development
- Constant growth
- Public financing
The above list of features has become almost generic. What sane industrial company wouldn’t want to adopt all of those elements? But what if you are not an industrial? What about farmers, service or entertainment companies? What about construction companies?
The Big Insight
I contend that construction companies are not like giant industrial concerns and that our industry has fatally adopted the wrong business model. Construction companies differ from industrial concerns in at least six important ways:
- Subcontractors are de facto “decentralized” managers
- Output is not centralized
- Increased output does not result in increased efficiency
- Growth is generated externally – not internally
- Specialization, not generalization, increases efficiency
- Production is incremental, not linear
I further contend that when it comes to an appropriate business model, construction companies are more akin to film studios than manufacturing plants.
- Every new contract should be seen as an entirely new business that imposes new challenges on a distinct and dedicated management team.
- The risks inherent in each new contract should be walled off from the parent company, and the capital, credit, and management expertise of the parent should be rented to each new job rather than shared.
- Every new contract sinks or swims on its own merit.
To avoid the persistent risk of catastrophic failure in the future, the construction industry must adopt an entirely new business model. In future posts and research materials on this site, we will discuss the techniques that can be employed to adjust our self-image and dramatically reduce the failure rate.
