Finding New Ways to Negotiate an Industry in Flames
An oil worker is led to the edge of an offshore oilrig platform and given the command to jump into the icy waters below. The rational response, as you would guess, is an emphatic “no.” After all, why leave the comfortable confines of the rig for the unseen dangers below? But if that rig catches fire, you can bet the same worker will be the first to jump overboard to save his life.
It is that parable of survival that is facing nearly every general contractor today. If survival can only be assured if you jump, why are so many contractors still clinging to the burning platform, trying to run their businesses as if their industry isn’t on fire?
The question is intriguing and more relevant than perhaps you may think. Arguably, this recession is the worst any of us have seen in our respective business histories. Projects are fewer, pricing margins are nearly nonexistent and many contractors have either gone out of business or are teetering on the edge.
In a very real sense, your industry is on fire but the majority of business owners still try to fight the flames as opposed to looking for a better way—making an educated leap to a new way of business operations. Here are some thoughts that should get you motivated to act:
• Believe it or not, the recession is over and we have entered into a new economic era that no longer values traditional contracting services. While many contractors sing the refrain of wanting to wait the recession out, you have to ask yourself whether you can become accustomed to a long-term practice of achieving only single-digit profit margins.
The reality is that general contracting services will remain a commoditized offering, where low price is the primary basis for selection for the foreseeable future. Likewise, relying on doing only low-margin work puts a higher risk on your business continuity, as single-project overruns will quickly erode any idle cash in the business.
• Debt, in any form, is a dangerous gamble. When the recession first hit, the practice of increasing lines of credit and debt loading were used to fund short-term financing issues. Unfortunately, this was never the intent of how debt was to be used. Debt is a form of capital that allows owners to invest in their businesses, not fund working capital needs (i.e., meeting payroll). Now, as there has not been any economic rebound, this debt has decreased the valuation of firms, making them low-cost targets for acquisition hunters.
• Finally, the industry players have changed forever. It should be no surprise that many of your end-customers can buy their products directly from the manufacturers or at substantial discounts at big-box stores. The importance of supply houses has been marginalized as consumers now expect to pay only for the services rendered and not margins on “pass-through” products. As a result, the contractor’s profit mix has likewise been wiped out—as product margins were often healthier than pure service revenues.
The reality is that your business strategy must change or you run the risk of going out of business. It really is that simple.
Doing nothing right now is the worst business strategy to adopt. Face it, the economy has changed—not for better or worse—just different. The lack of action by many in the contracting community ensures that business death is a certainty.
Let me prove my point with one last example: A regional contractor grew nearly 30% three years ago—the result of aggressive business development tactics. When the recession hit, the contractor borrowed heavily and, at the same time, saw business revenues drop by 50%. Now the business has a negative valuation. It will literally cost the owner $200,000 to sell his own business.
He did not jump off the burning platform in time. Will you take the leap?