To learn how a construction company is performing, the first place most people look is the financial statements. But the real measure of management effectiveness is whether it creates or destroys value. Some might say “sell more, work faster, be safer, and you will be successful.” But a company can sell a lot, work hard, have a great safety program, and still go out of business. The reality is that financial statements alone do not tell the whole story. Creating value means improving performance in the core elements of value.
The seven core elements of value are:
- Marketing/Business Development: This encompasses everything you do to get work. Do you have a strategy that clearly defines who your sales personnel should target? Do you have any capabilities that distinguish you from your competitors?
- Organizational Structure and Human Resources: Your people are your most important assets, but how well do you hire, train, and retain personnel? Are decisions made at the appropriate level or are there information bottlenecks? Do you have coaching and training programs to improve the value of your most important assets?
- Leadership and Strategic Management: Leadership starts at the top, but it can't stop there. Your strategy must be communicated to everyone in the company. Do leaders throughout the company serve as mentors to others? Is there a management succession program in case an urgent need arises?
- Operations: Does your estimating staff do a good job of handing projects off to operations personnel? Do you get productivity information from the field quick enough to impact performance? Does your project team know how they are performing compared to the estimate?
- Technology: Are your accounting, project administration, estimating, and scheduling systems integrated? Is everyone trained to use these systems to get the most out of them?
- Financial Management and Performance: Are all major assets identified and traceable? How quickly do you collect your money?
- Safety/Risk Management/Quality Control: Are regular “tool box” talks on safety effective? Does your safety officer visit all jobsites?
Each of the core elements has to function in concert to create value that reaches the bottom line. For instance, your sales department may be adding backlog, but is your project management weak? If your project managers are strong, but you lack sound control functions, you stand to lose money with little understanding of where it is going.
The question often is where to begin. FMI uses a tool called the Value Driver Scorecard to measure management's effectiveness in each of the core elements. The purpose is to establish a means of measuring, and thereby managing, performance in all of these areas. To drive value creation in these areas, you must:
- Develop a baseline measurement of today's performance against “best in class” companies.
- Measure performance regularly (at least annually) and be sure to do it the same way every time.
- Communicate the results to management, so they know where improvement should be made.
- Provide necessary coaching and recommendations for improvement in those areas that need attention.
- Reinforce and reward where performance meets expectations.
- Most importantly, be sure the proper structure is in place to enable value creation in each core element.
Assessment of the core elements of value will identify areas of strength and weakness and is a necessary starting point for improvement. Armed with this information, you will have a better idea of where to focus your resources to create value in your company.
In subsequent columns, we will look at challenges in each of the key areas above and some steps you can take to implement changes that build value in your company.
— Brian Moore is a consultant with FMI, Management Consultants to the Construction Industry. He works with contractors on in-depth market analysis, strategic and business planning, and market planning. Moore can be reached at 919-785-9269, or at firstname.lastname@example.org.