The Role of Data in Competitive Strategy: A Case Study in Applied Data Analytics

How one industry player leveraged data analytics to launch a business turnaround.

This is the fifth and final article in a series on data in the construction industry. The previous four articles discussed the value of analyzing project data and gave some applications for doing so. The following article presents the story of a company in a state of crisis that was able to right the ship thanks to the insights generated via project data analysis.

Big Shoes to Fill
When Ray Wilson first took over as CEO, he had big shoes to fill. Ray was brought in as interim CEO in the wake of the sudden, unexpected passing of John Taylor, founder and patriarch of Intuitive Contractors. In the local contracting world, John was nothing short of a legend. At the age of 28, he led a mutiny of concrete form workers from his then-employer and rolled the dice on a new business venture in structural concrete. To make a long story short, John parlayed his youthful wager from a single foundation pour contract in 1990 to a $50 million structural concrete firm in the span of two and a half decades, becoming one of the most well-respected trade contactors in the region. If a marquee project were awarded within 100 miles of Intuitive’s Headquarters, you could guarantee that John would be competitive on the job. Over the years, John’s leadership had been recognized several times over by local contracting associations, and his employees’ loyalties to the company were even greater monuments to his success in the construction business. Ray had big shoes to fill.

Ray was not a tradesman. In 1998 he received his master’s in civil engineering from Emol University and went to work as a project engineer for one of the nation’s leading heavy-civil contractors. After a series of well-deserved promotions, Ray became the leader of a highly profitable highway construction division in the Southeast. While running the division, he had contracted Intuitive Contractors on several of his project’s more complex structural bridge needs. Intuitive had always performed at a superior level on Ray’s projects, and he admired the company’s ability to execute. So, when Ray unexpectedly received a call from Intuitive’s board of directors in 2013, he didn’t immediately hang up.

In his first three weeks on the job, Ray attests, “I accomplished nothing.” For one, he couldn’t bring himself to prod the grieving family of employees. Additionally, Ray thought it brash to make any knee-jerk decision without fully understanding the situation. Not wanting to desecrate John’s corner office (the quarters remain vacant to this day in his honor), Ray took up an unassuming position in the accounting department. Ray spent several marathon nights under a lonely desk lamp, pouring over the company’s financial and job cost history. After much analysis, Ray’s decision to leave his stable career as division manager at a national contractor was beginning to look like a potentially big mistake.

John’s firm was hemorrhaging money. At one juncture, Ray contemplated whether Intuitive’s dire financial situation was in fact the trigger for John Taylor’s massive heart attack, but he quickly dismissed that notion. Still, the company was in rough shape. Intuitive was experiencing margin fade on the majority of its projects and had just experienced its first unprofitable year since 1993, with losses for FY 2013 recorded at $900,000, almost 2% of sales. To make matters worse, cash was nonexistent. The company had accessed $3 million of a credit facility with its local bank, and the average age of its accounts receivable approached 80 days. How could such a well-respected firm, a pillar in the contracting community, be in such financial straits?

Ray went in search of an answer to that question. He continued his exhaustive exploration of the accounting archives. “I could have passed the CPA exam with flying colors by the end of it,” he remarked. But he didn’t stop with the numbers. He went on to personally interview key managers and long-tenured employees within the Intuitive family. What he found was more disturbing than the numbers. For example, he was taken aback by the general apathy and lack of urgency among what, on the surface, appeared to be highly technical and sharp individuals. No one seemed concerned. Then again, what cause did they have to be concerned? They worked for one of the best construction companies on the East Coast. How could the future hold anything less than promise?

After much investigation, Ray drafted a memo to the board of directors, outlining what he surmised to be critical threats to the continuance of Intuitive Contractors as a living, breathing company.

Members of the Board:

It is with great urgency that I write to you and report what I believe to be immediate threats to the future of Intuitive Contractors:

• Currently, several of the largest projects in our backlog are experiencing significant margin fade. In 2013 alone we had $2.2 million in project write-downs.
• In 2013 we experienced direct labor budgeted cost overruns of 15%, or $3 million. Our superintendents, like our project managers, equate this to an estimating problem.
• Our project managers do not appear to have motivation or urgency around this margin fade. They simply believe estimators dealt them a poor hand.
• The chief estimator claims that the market is so tough, and that they are doing everything they can to win work. Our hit rate on public projects is currently 9%. We are simply not competitive in this market right now. In order to keep winning work and keep our field guys busy, the estimating team has become aggressive in its approach. They are trying to put a number on every bid opportunity in order to keep up.
• To supplement declining backlog in the public market, Intuitive has increased bidding efforts in the private market. Overall, the private work has been profitable, but there were a few jobs in 2013 that lost significant dollars.
• Job cost reporting is inaccurate, plain and simple. In our cost accounting system, we have large cost overruns on specific phase codes and zero dollars charged to other phase codes.
• We currently have several claims against our municipal clients for nonpayment on additional work performed. Our change order documentation is inconsistent, and the likelihood of collecting on these claims is poor.
• Our project managers are not monitoring A/R and feel that it is purely an accounting function. As a result, we have alarming cash flow issues.
• After reviewing our overhead structure, we need to be bidding work at 15% gross margin just to break even. Several of the large public jobs that are currently on the books were bid with estimated gross margins of less than 15%.

We need to develop a structured plan to address these issues promptly. These are extremely serious issues, and they pose incredible threats to Intuitive Contractors. I would like to organize a meeting with all of you next week to discuss how we will tackle these issues.

Addressing the Board
The day of the meeting, Ray laid out his turnaround plan to the board and to his senior leadership team. The mood in the room was still somber only one month after John’s death. Ray knew that engaging his leadership team would be a struggle, so while he had analyzed reams of project performance data to review with them, he limited his report to just three hard-hitting, irrefutable charts to highlight his main points.

After a few opening comments, Ray pulled up the first chart and started into his main observations, Exhibit 1, which were:

• We had margin gain in our health care projects. While this is certainly better than the alternative, I would like to know why there is such a significant gain. The reality is that we may be able to price more competitively if this gain can be attributed to consistent performance on the job site. Pricing more competitively may give us more opportunities in a profitable sector.
• For both government and education projects, the data would suggest that while we are getting profitable margins, we are experiencing margin fade on those projects and delivering them below our overhead. Digging into the project specifics could provide some insight into customers we’d like to avoid as well as those whom we’d like to target more going forward.
• We need to correct our margin erosion problem in retail work or stop pursuing it altogether. While we are getting profitable margins, we experience significant margin fade.

Ray paused after delivering the main points from his slide; the room was speechless. In the 25 years Intuitive had been in business, retail work was a cornerstone of its work program. The mere suggestion of getting out of that market bordered on heretical. The data, however, did not lie and, despite vocal protests from a number of his senior leaders, Ray stuck to his guns. “We either need to find out how to make money in this market or get out,” he told his audience.

Ray moved on to his next slide, Exhibit 2, outlining estimated versus actual margin performance by customer.

• As you can see, there is some significant performance variance in the data, and again this data set raises some questions.
• Looking at the first four (i.e., our most frequent clients), we are experiencing some of our worst performance. We need to sit down with these customers to create new pricing expectations or stop working with them.
• On the other hand, we see several clients for whom we performed very well and had varying degrees of margin gain. We should dig deeper into these relationships to determine what is behind our success. These customers may warrant more of our attention to get a larger share of their work program.

Again, the room was in shock. Would we really fire our four largest customers? Ray could appreciate the concern of his board and his senior leaders. In the first two slides of his presentation, he had suggested that Intuitive might need to abandon a key market and fire its four largest clients. Even he was beginning to second-guess his conclusions. While there were many things he felt the company needed to stop doing, it could only stop doing so many at one time if it wanted to remain in business.

Ray pulled up his third and final slide for the discussion, Exhibit 3. The slide showed that Intuitive was overshooting labor budgets and that the problem was getting worse year over year. He could think of no explanation for this issue beyond poor project and field management. This was the last piece of evidence in conjunction with overwhelming signs of margin fade, poor collections and change order resolution. Ray couldn’t help but wonder whether this was truly the root cause for a number of issues the company was experiencing across different markets and customers.

While Intuitive had always prided itself on the strength of its management, the facts were hard to argue. Ray was amazed at the contradictions between the conclusions of his analysis and the long-held beliefs of his board and senior leaders. Throughout his discussion, he was met with genuine disbelief, as if he had something to gain by making the numbers up. The company had never looked at performance in such great detail and was not arming senior and middle managers with the right data to make good decisions.

With a clear understanding of project and portfolio performance, Ray and his team had the opportunity to let past performance inform strategy. This knowledge helped focus the firm’s efforts on improving project management practices and providing better information to managers who, in turn, could make good business decisions. These changes didn’t cure all of the company’s sins. Nevertheless, the insights generated from better analyzing the business allowed Ray and his senior leaders to return to profitability one step at a time. Q

Rick Tison is a consultant with FMI Corporation. He can be reached at 919.785.9237 or via email at rtison@fminet.com. David Madison is a consultant with FMI Corporation. He can be reached at 919.785.9213 or via email at dmadison@fminet.com. Tyler Paré is a consultant with FMI Corporation. He can be reached at 813.636.1266 or via email at tpare@fminet.com.

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