Transcript Document

Why, who, when and how?
An empirical view of the UK
construction industry’s decision
making process
Tony Williams
Building Value Ltd
the independent strategic advisor to the
building materials, construction & support
services sectors
11 June 2004
UK construction industry is the focus
of the study
Number three market in Europe
Accounts for 8% of GDP (below average)
Largest single domestic industry
Some 1.5 million employees
UK construction output 1955-2003
(£billion at 2000 prices)
Source: DTI
UK construction - history
Sustained growth since 1994
Relatively impervious to politics, aside from
mid-1970s
Three major collapses in 1974-7; 1980-1; and
1991-3
UK construct. output 1998 – 2006E
90
80
70
60
Public W.
Infrast
50
House
40
Pr. Build
30
RMI
20
10
0
1998
1999
2000
2001
2002
2003
2004
Source: CFR, Spring 2004
2005
2006
UK construction – the future
Average ‘3% plus’ real growth through 2006
One of best major markets in Europe
Private Finance Initiative increasingly
important
Repair, maintenance & improvement (RMI)
averaging more than 48% of total
Methodology
 All UK publicly quoted companies on London Stock
Exchange; the sector is world’s biggest 65 companies and
£52 billion of value
 35 large privately owned businesses; many large
 Wrote to the CEO with confidentiality assured
 46 multi-choice questions and one written answer with
expected completion time of five minutes
 Supplied SAE, promised to send results and donate £1 per
questionnaire to industry charity (CITY)
Excellent response to 100
questionnaires
r-to-sender
answered
nil reponse
Those who volunteered identity,
others guessed plus anonymous
volunteered
guessed
anonymous
Questionnaire idiosyncrasies
 90% of respondents used ticks in the question
boxes; with 5% each employing crosses or slashes
 Two thirds used black pen, 30% blue and 3% red
 The PA of one CEO called, emailed and wrote to
say he didn’t have time to fill it in; another declined
my invitation to the conference
 5% eschewed the SAE and one send it back empty
 40% of companies identified themselves
Type of business
Contract.
Develop.
Dist.
Manufact.
Services
Mixed
Length of time in business
1-4
5-9
10-14
15-19
20-24
25+
Number of countries in which each
company operates
1
2
3
4
5
6+
“Those who run international
businesses do so because they like to
travel. Very few construction
companies make more from overseas
operations than at home; so why do
they stay there?
UK contractor, 2004
Distribution of employees
% in each band
30
25
1 - 99
100 - 499
20
500 - 999
1,000 - 2,499
15
2,500 - 4,999
5,000 - 9,999
10
10,000-19,999
20,000+
5
0
Revenue share by number and value
By value
By number
1-49
50-100
100-499
500-999
1000+
Are you a public company?
Yes
No
Number of Executive Directors
0
1-2
3-4
5-6
7-8
9-10
11-12
13-14
Number of Non Executive Directors
0
1-2
3-4
5-6
7+
Executive Chairman & Chair/CEO?
Are Chair & CEO combined?
Executive Chairman?
Yes
No
Managing director & COO?
COO?
MD?
Yes
No
Is your CFO an accountant?
Yes
No
Human Resources Director?
Is he/she on Main Board?
Is he/she on the Main Board?
HR Director?
Yes
No
Subsidiary or regional boards? & are
these Directors on the Main Board?
Subsidiary boards?
Subsidiary directors on main board?
Yes
No
Frequency of Main Board; incidence
of Executive Committees? (% replies)
Executive committee?
Board meeting frequency
80
70
60
4 or less
50
5-6
Yes
40
7-12
No
30
13+
20
10
0
Who takes the majority of major
decisions (% of replies)?
40
35
30
25
Chairman
CEO
Main Board
20
15
10
5
0
Exec. Cttee
Combined
“A poorly controlled area at large
corporate level is strategic decision
making that doesn’t hold firm for the
medium term. This means subsidiary
managers never get to understand
how they can be part of group-wide
goals......
“…The lack of political will ‘to stick
to one’s knitting’, even if market
conditions change, means that a lot
of second tier decision making is in
vain”
UK construction CEO, 2004
Capital raising in last 12 months and
acquisition or divestment?
Capital raising
Acquisition/divestment
Yes
No
How long did acquisition take?
Did you use an external advisor?
Advisor?
Acquisition time
60
50
< 6 mths
40
30
> 6 mths
Yes
12 mths
No
Longer
20
10
0
What level of capital spend is agreed
by Main Board (% of replies)?
20
10-20,000
18
16
14
12
10
21-50,000
51-100,000
101-250,000
251-500,000
501,000 - 1 million
8
1.1-5.0 million
6
5.1 - 10 million
4
10.1 - 20 million
2
More
0
How many budget rounds are there?
4+
3
2
1
0
5
10
15
20
25
30
35
40
45
50
How is budget accuracy?
Bang on
Very good
In line
Good
OK
Poor
0
5
10
15
20
25
30
Do you employ Zero Budgeting?
100
90
80
Yes
70
60
50
40
30
20
10
0
No
Do you have a pricing policy?
Is it adhered to?
Do you have a pricing policy?
Is it adhered to?
Yes
Yes
Mostly
No
No
No policy
Price vs Cost and Cash vs Profit
50
45
45
40
40
35
Price
35
Cash
Cost
30
Profit
Both
25
Both
30
25
20
20
15
15
10
10
5
5
0
0
Most important financial variable
80
70
60
Turnover
50
40
30
20
10
0
Working cap.
EPS
Frequency of cash flow monitoring
60
50
40
Daily
Weekly
30
20
10
0
Monthly
Key financial performance measure?
25
GM
20
Cashflow
Combinations
15
ROCE/RONA
Net margin
10
Op. margin +1
Op. margin
5
0
Pretax margin
Use of EBITDA and ROIC
EBITDA?
ROIC?
Yes
No
Use of EVA?; and do managers
know their Cost of Capital?
EVA
Cost of capital
Yes
No
Incidence of Risk Management &
Strategic Planning
Risk management?
Planning
Yes
No
Focus on total Return to
Shareholders
Yes
No
“What surprises me about
construction is that decisions are
taken without a proper review of the
facts, particularly the risks, which
many refuse to quantify by arguing
that such issues are subjective or
even emotive…
“…Not pricing for a known exposure
at the bidding stage is very blinkered
indeed – to say the very least”
Development company CEO, 2004
“Risk is not related to size. You
could just as easily lose £1 million
on a £5 million job as one that is
worth £50 million”
Construction CEO, 2004
Measurement of incentive earnings
against range of targets
40
35
Individual
30
25
Gp/Subsidiary
Mixed
Group/Individ.
20
Gp/Subsid./Ind.
15
10
5
0
Subsidary
Group
In-house communications and/or
investor relations person
Communications manager
In house investor relations
Yes
No
“Construction is a long term
business and trying to make
decisions to satisfy shareholders on
a quarterly basis can be inconsistent
with the strategic plan.......
…and if decision making favours one
group of stakeholders at the expense
of others, for a prolonged period, the
business is virtually guaranteed to
under perform”
Construction CEO, 2004
Management style: top down;
proactive; and opportunistic
100%
90%
80%
70%
60%
Both
50%
2nd one
40%
Ist one
30%
20%
10%
0%
Top Down / Bottom up
Proactive / Reactive
Opportunistic / Calculated
Summary and conclusions
 Mature industry with 74% trading for ‘25 years plus’
 Mean revenue in £500 to 999 million band and
typical head count of 1,000 to 2,499
 Those with revenue of ‘£1billion plus’ dominate
share of value (47%); while companies with less
than £100 million dominate by number (31%)
 Smaller companies enjoy greater productivity
Summary and conclusions
Operate in one country or more than six
Three-quarters are public companies
72% have 5-to-10 Executive Directors
44% have 2-to-3 Non Executives
Executive Chairman and combined
Chairman/CEO are now much less common
Summary and conclusions
Managing Directors are employed in less than
half of companies
Chief Operating Officers are present in only
21%; clearly they are not popular
Human Resources Directors are also in a
minority (47%) and only 11% of those are on
the Main Board
Summary & conclusions
 Subsidiary or regional boards are common (71%)
but only 34% of companies appoint these directors
to the Main Board
 Main boards meet 7-12 times per year (79%)
 66% of companies have an Executive Committee
 The CEO alone (37%) is at least as important as the
Main Board (39%) in making the major decisions
Summary & conclusions
 In acquisitions or divestments, 68% of those active
used an external advisor
 No definite relationship between size of firm and
spending limits to be agreed by main board
 63% claimed that budget accuracy was ‘good’, ‘in
line’ or ‘very good’; only 5% said it was poor
 Two budget rounds – the most popular - produced
an outturn ‘in line’ or better in 63% of cases
Summary & conclusions
Only one quarter of respondents employs
Zero Budgeting; however it led to 78%
hitting ‘good’ or better budget accuracy
66% employ a pricing policy but one third
did not adhere to it
Cost and Cash are more important, than
Price and Profit, respectively
Summary & conclusions
Earnings per share are the single most
important financial variable (74%)
Only 55% monitor cash daily
Operating & pretax profit margins are most
favoured financial performance measures
Summary & conclusions
ROIC is used by a majority (66%)…
… but less (53%) say that regional managers
know or understand their Cost of Capital
EVA is cited by only 26% of respondents
Summary & conclusions
Risk management and strategic planning are
employed by only a narrow majority
By far the most common financial incentive is
based on group performance against target
In house communication staff are not
popular; even less so for investor relations
Summary & conclusions
Industry led by top down decision making
Vast majority claims to be proactive…
…but three-fifths remain opportunistic as
opposed to calculated (and 5% are both)
Final word
 The CEO rules & doesn’t like executive competition
 Modern management tools not wholly popular
 Cost and cash are a focus; but budgeting accuracy
looks too good to be true
 High incidence of ‘proactive’ companies maybe
wishful thinking
 Uncommunicative and Opportunistic
“Prevarication is the bane of British
management: a bad decision is
better than no decision”
Building materials CEO, 2004