Construction Today Magazine

Skewed Priorities

Do you manage your company’s value or does it manage you? a savvy owner will treat his or her company as an asset and appreciate its worth.

By Ken Sweet

The ability to understand and increase business value represents a competitive advantage and opportunity for construction company owners. Savvy business owners treat their companies as assets and appreciate their worth rather than merely working in the business as an employee, and not on the business for the benefit of the shareholders. When this happens, it’s likely the business runs the owner instead of the owner running the business.

In the 1980s, business value was computed with the financial and income statements along with the balance sheets. Today, more value is place on the intangibles – the intellectual capital, proprietary processes, brand name, relationships with suppliers, customers and employees and the additional knowledge from experienced management. Ultimately, the primary objective of the owner and senior management is to create value for the company shareholders by maximizing revenue and minimizing costs associated with that revenue. Value derives from steady, effective growth, a continual – not occasional – profit, the removal of business threats to positive cash flow and the ability to effectively communicate the company’s vision to customers, employees, suppliers and shareholders.

Value Terminology

To be effective at continuously increasing a company’s value, owners must address four key factors:

1. Value drivers – The crucial factors that, when managed effectively, will increase the revenues and profits in a business while keeping expenses low

2. Value inhibitors – The actions or behaviors that result in reducing or eliminating the value and the benefits that customers, shareholders and employees are looking for from the company

3. Value propositions – The unique benefits a company offers to its customers as a result of distinctive products or services or the way it conducts its business. Value propositions answer the question, "Why should I do business with Charlie instead of Bob?" In other words, these tangibles or intangibles are what the company offers that competitors do not, or what the company does better than others.

4. Core competencies – The areas in which the company excels and the things a company does better than its competitors. Determine what these are, and then decide what the value propositions will be and how to integrate them into daily business practices. Typically, core competencies provide potential access to a wide variety of markets, increase perceived customer benefits and are hard for competitors to imitate.

Drivers and inhibitors greatly affect the company and its ability to increase and maintain value. Although both are controllable, owners frequently ignore inhibitors. Inhibitors can often have a ripple effect across numerous areas of the business, directly impacting cash flow and profitability from several directions at once. Developing strategies and initiatives to limit and control the impact of the value inhibitors will have a positive impact on the value of the business.

The Value of Communication

Business owners rarely communicate how they define the company’s value proposition to their employees, which limits the employees’ ability to deliver that value to customers. Employees may believe they are performing their tasks adequately, but not understand the bigger picture and their individual part in the overall success of the company.

This produces a disconnect between the owner and the employees. Without a clearly communicated vision of where the business is headed, the employees only see the small piece they are working on and not the entire picture. The vision represents the future of the company. When an owner works on the business, he or she uses this vision to drive the company into action.

Turning Vision into Reality

There is a process for empowering employees to turn vision into reality. Once the vision has been identified, communicate it to employees. Decide what part each employee plays in this vision, set goals and objectives and create incentives and rewards for achieving this vision.

Then, measure employee performance to recognize if the objectives and goals are on track to be achieved in a timely manner. If there are any deviations from anticipated timelines, corrections can be made to get the project back on track before it is too late. When employees understand the company’s vision, management can effectively encourage them and guide them to adopt good value habits and strategies to move the company toward fulfillment of the vision.

Upside-Down Value Equation

If an owner goes from project to project without a plan or purpose, it is a clear indication that the value of the company is managing the owner instead of the opposite. Frequently in the construction industry, owners do not have an ongoing plan or process for bringing in new business. Often, they are too busy doing the work they have. So the business comes in cycles, up and down. They find work, and when those jobs end, they seek more work. The company is no more valuable than the project currently being worked on.

Additionally, project delays occur, causing ripple effects throughout the company. To solve these problems, the owner often becomes the tradesman who does the work, not the manager who directs and delegates the work to be done. Other dilemmas ensue, including increased frustration and long hours, excessive rework, construction delays tied to permit problems and subcontractor timing problems. Conversely, when the marketing arm of the company is working effectively and efficiently, there is a constant flow of activity that brings in new business, predictably.

When a company’s value is managing the owner, the business is frequently engaged in strategic misalignment. In this case, the owner does not take on projects that are consistent with the company’s stated business strategies; the owner pursues and accepts jobs that will not increase the value of the company. Rather, he or she takes on work that just pays the bills.

Manage the Company’s Value

Managing the value increases the growth and profitability of the company and improves the company’s reputation in the industry, not only with peers but also in the marketplace. When clients are deciding which contractors to hire, they look at the quality of the construction, the on-time delivery schedule, the curbside appeal and the attention to detail – factors that are part of the value function.

Another reason for managing a company’s value is to stay competitive in the bidding process. When owners have costs under control, they know the parameters within which they can competitively bid a job and still be profitable. Without tight cost controls, owners run the risk of constructing bids that build in a guaranteed loss. This not only decreases the value of the company but also affects the company’s eligibility for bonding negatively impacts cash flow and reduces company profitability.

Ken Sweet is the executive director of consulting services for IPA and IBA. IPA and its related companies provide comprehensive business consulting, tax planning and business valuation services to companies in the United States and Canada. For more information, call 847-495-6786 or visit www.ipa-iba.com.