The Garrison Report #2003-11

Another Viewpoint about Not Cheapening Your Services in a Slow Economy

I always encourage readers to submit their viewpoints, and after last month’s issue of The Garrison Report, I received the following comments. I thought they were valid points and might help take the discussion to higher level, so with Mr. Krueger’s approval, I have included his comments in full. (If you didn’t read The Garrison Report #2003-10: Marketing Tips for the Savvy Contractor, – go to www.tedgarrison.com/resources/garrison-report.)

 

Dear Ted--

I enjoy getting your newsletter and have agreed with your observations wholeheartedly for quite some time. I was disappointed in 2003-10. Specifically, I disagreed with your thoughts regarding “cutting back people”. From a consultant’s point of view in a Pollyanna world, you are on the mark. However, in the real world, you just can’t operate that way.

I offer the following as an alternate viewpoint. Bear in mind this comes from an owner of a mid-sized general contractor in the Midwest ($30 million in sales per year) that has been around for 49 years. I had a hard time coming to terms with my philosophy regarding letting good people go in hard times. In principle, I feel exactly as you do. I agree, the human resource is our greatest asset and the heart of a company. But, if you carry overhead that you can’t afford to support, you need to let them go or pretty soon you won’t have a company. I would think having a business that is being run responsibly outweighs having no business. You may have to let a few good folks go during the hard times to keep a few more good folks employed. No one likes to let people go. But, you need to size your business to the workload or perish.

Unfortunately, your best people are often those with the highest wages. Consequently, the impact of their underemployment will bring a company down faster. Using your scenario of keeping people when the business can’t justify the cost, everyone loses. The business will go under due to financial irresponsibility and no one will have a job. I have seen 3 competitors go down for the very reason that you espouse. For my company, it was a good thing as the very same employees that my competition held onto when they had no work now work for me. As an added bonus, there are 3 less competitors on the street. However, I doubt the principals of those 3 companies would enact the same strategy a second time around.

I believe if you treat your people right, they will come back when the times improve. I have seen it happen. You need to be honest with them and conduct your business with integrity. I have let good people go, but when we needed them, they came back. Granted, at times it wasn’t always the exact time I needed them, but their allegiances would bring them back at the first opportunity.

It is probably safe to say that when the construction industry feels a slowdown, it is not felt just by a single company here and there. Thus, when the economy goes sour, some companies go out of business. That results in there being a LOT of good people on the streets. When the economy improves, it probably improves for those that survived the downturn. From a macro economic viewpoint, the laws of supply and demand kick in. There are fewer companies for which to work and a larger pool of talent available from which the surviving companies can choose. Thus, those that survived will be able to attract those they let go, or recruit newer talent. There may be some new upstart companies, but I would think the talent pool would rather go with an established company with a track record of responsible management than with a new company that is trying to get their feet on the ground.

We are very fortunate in the construction industry as we can look 3 months down the road and know with a high degree of certainty whether we will have enough business to support our costs. We either have contracts in hand or we don’t. Those owners that don’t have a feel for the pulse points in their operations will soon lose the heartbeat of their company and it will cease to exist. It is still about numbers. You can’t keep a customer coming back when there is nowhere to return to.

Keep up the good work. I just felt strongly about this and wanted to share an alternate viewpoint with you. If you wish to use any of the above in your work, I wouldn’t have a problem with it as long as I have a chance to review any document before it is published or released.

Again, keep up the good work.

Mark A. Krueger

Chief Operating Officer

The E & L Construction Group, Inc.

 

 

Dear Mark,

 

I certainly agree that a Pollyanna approach to the real world is counterproductive and could be disastrous. However, what is the real world? Is it the world we accept because of our shortcomings, or is it a world we can create? This is the heart of the issue.

I’m glad you basically agree that it’s not a good idea to let good people go in hard times. So let’s build from that agreement. Your point that a contractor can’t keep unproductive overhead is valid. My next question may appear to a bit Pollyanna-ish, but the closer we get to solving the problem, the better off your company will be. As a realist, I don’t expect a 100 percent compliance, but that doesn’t mean we don’t try. However, I believe we are a long way from our best effort.

I don’t believe the question is what to do with unproductive overhead; that answer is obvious as Mr. Krueger accurately stated. I believe the correct question is “How can we keep that overhead productive?” Instead of discussing what to do with workers when we don’t have work (since there are few options at that point), why don’t we focus on how to keep them busy? This situation is similar to the airline industry that keeps whining that it’s losing money because of the economy. Sorry. It’s not the economy. If it were, then Southwest Airlines would not have made money in every quarter for 34 straight years while Delta, American, US Air and United were losing millions every quarter.

Construction is no different. During the recent economic slowdown, the construction industry was off by only a couple of percentage points in volume, so why has the effect seemed so much greater? I recognize that some areas of the country were hit harder, but overall I still sense the effect was worse than the actual conditions merited. My guess is that the construction industry and maybe your company have a broken business model.

Isn’t it management’s responsibility to ensure enough business diversity to avoid a major effect during downturns? Isn’t it management’s responsibility to build relationships with customers so the firm doesn’t have to compete on highly competitive bids since they are affected the most during a business downturn? Highly competitive bids are hit hardest because the worst contractors in the marketplace become desperate and drive the bid prices down in an effort to survive. This doesn’t work but it has a negative effect on the entire industry. The most successful contractors focus on building relationships with clients, thus avoiding the bidding in both good and bad markets. While their volume may drop, they at least maintain their margins.

Further, companies that rely on building relationships with clients by focusing on delivering greater value make great profits during upturns and, therefore, are in a better financial situation to deal with downturns. While no contractor is immune to downturns, if they create better business models, they can minimize the effects. If you get less work but the margins stays intact, then you might be able to assign extra people to your projects and offer greater value to clients. After all, during a downturn, many of your clients are looking to outsource more activities due to their own downsizing.

I’m not naive enough to believe what I’m proposing is easy, but I do believe it’s worth the effort. After all, almost every survey on the challenges facing the construction industry indicates that right at the top is hiring enough good workers and quality managers. They are leaving the industry due, in part, to the industry’s hiring and layoff policies. In our society, people’s self-worth is wrapped up in what they do. If they are unemployed, their self-worth suffers. While Mr. Krueger may have been fairly successful in rehiring people who were laid off, the industry statistics indicate it’s losing that battle. Here another thought that might make a few of you uncomfortable: Why should the employees carry the burden of keeping the company alive by being laid off because of management’s mistakes or poor policies? Oh, I know I’m being idealistic, if not silly, but it is an interesting question just the same.

In conclusion, I don’t disagree with Mr. Krueger’s comments after the crisis occurs. My challenge to everyone reading this report is to find out if your company is doing everything possible to avoid the situation. It can cost an estimated 1.5 times a person’s salary to replace a manager, so did you really save money by laying off someone for six months to a year? I don’t think layoffs are the answer because that is like closing the barn door after the horse ran away. We need to find ways to keep our people in the company. That’s where the focus needs to be. If you lose, you always have Mr. Krueger’s solution. My position is that if the industry doesn’t take this approach, it will lose many able people and individual companies will suffer lost profit potential. So I’m not arguing with Mr. Krueger because one has no choice in the situation he described. However, I’m suggesting there are other alternatives to avoid that dire situation. In fact, some companies have had a great past two years. Were you one of them? It’s not easy but it really is the best course of action because the company will make more money overall and its employees will have a safer financial environment, which will make it easier to attract the best candidates.

Thanks for your comments, Mr. Krueger. You made me better articulate my position. While this report didn’t explain how to create the better business model, other Garrison Reports and articles on my Web site provide some answers to that question. I hope this report challenges you to demand more from yourself and your company. I believe the industry can do better, and those who want to do better, will. For those of you who want to fight this concept, I hope you don’t go bankrupt with the airlines. If you need help, call me. I still have a few “business life preservers” left. “It’s time to work on your business, not just in it!”


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