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Rear View: Recession Lessons

An unlikely source, perhaps, but it was the German philosopher Friedrich Nietzsche who first pointed out that, “That which does not kill us makes us stronger.” • And it was another wise man (an Austria-born American this time), Billy Wilder, who later added (as if to amplify): “Hindsight is always 20/20.”




With the construction downturn now for the most part a thing of the past, and with these pearls of wisdom in mind, we could do worse than take a good look in the rearview mirror to see what lessons we might draw from the turbulent waters we just crossed.




When asked, many of the AWCI member contractors we interviewed for this article obliged and took time out from their now busier and busier days to take 20/20 stock of their recent experiences and lessons in survival.




We’re all wiser for it




First Signs


So that we may recognize the signs in the future, should they reappear, we asked the vital question first: What were the first signs that the recent recession was afoot?




Doug Stegemoller, president of E&K of Phoenix, an Arizona contractor, knew he was looking at trouble when “many major projects were suddenly put on hold. In Phoenix alone, we had several billion dollars’ worth of projects on the table that mostly evaporated as financing became harder and harder to secure. Also, the few projects that still had financing in place began going to the lowest bidder, invariably.”




Jack Austhof, president of Sobie Company, Inc., a Michigan contractor, knew the downturn was coming when, with little warning, his bank withdrew the company line of credit.




Gary Smith, president of Western Plastering, Inc. in California, counts himself lucky because he had more forewarning than most. “I have several high-school and college friends who work in the financial industry,” he said, “and they tipped me off that a disaster was imminent. They told me that banks were now lending money to people who, strictly speaking, could not afford the debt burden. It was an unsustainable bubble, they told me, and it was going to burst, if not tomorrow, then the next day.




“Based on that, we took a look at the feeding frenzy that was still going on around us and we decided to back off, to stay out of it, to not be too greedy. As a result, we did not take on projects that promised a windfall but necessitated more staff than we could sustain. This way we never overextended ourselves. It allowed us to wind down as the market around us wound down.




“That said, I have always made a point of never ever saying ‘No’ to those who got us here, never to turn my back on the smaller builders who got us here. So, when the large developers went away, our smaller guys didn’t, and they kept calling us. Had I been greedy and chased the bigger developments, which then went belly-up as the bubble burst, I would not have had the manpower to serve the smaller builder. I’m glad I stuck with them.”




For Howard Bernstein, president of Penn Installations, Inc. in Pennsylvania, the red flag was that “After 25 years of doing business with them, both banks and bonding companies began asking many and detailed questions about every project, and then, suddenly, requested face-to-face meetings.”




Tara Desirae Davis, owner of Southeast Walls & Ceilings, LLC in Georgia, knew that when her accounts receivables began aging—showing no signs of catching up—things were heading downhill.




“Our residential general contractors could no longer sell their developments, and their banks would no longer finance them,” she says. “As a result, they soon ran out of money, and not long thereafter our A/R hit 60 and then 90 days. It was a domino effect: As the GCs could no longer move their inventory, their banks withdrew funding for future projects, and the GCs then stopped paying their subs.”




Fritz Reitter, president of Reitter Stucco and Supply in Ohio, experienced the same thing. “Our receivables started stretching out,” he says. “A couple of large projects that we were involved in had their financing pulled mid-project. On one of these projects, our men went to the site one morning to find the entry gate padlocked. Not too long after that, our largest residential builder customer had the first of many staffing reductions.”




Danny L. Bonnell II, president of Commercial Systems Plus, Inc. in South Carolina, noticed his normal weekly call volume drop about 70 percent, “and what calls I did receive were more hot air than actual work,” he says.




If these warning signs share a common denominator it would be that as banks began to recognize the bubble they had created, they tightened up on money. And the best indicator of this is your accounts receivables. Keep a very close eye on it.




First Corrective Maneuver


Once it was clear that a recession had—or was about to—hit, what was the first corrective measure taken?




Stegemoller says, “We saw it coming early, and we cut staff and reduced expenditures about six to eight months ahead of our competitors, while we still had ample backlog. This was not an easy thing to do since we were just finishing an amazing three-year run and were very profitable. Many of our employees didn’t realize where the market was heading and didn’t take it too well.”




Austhof started letting people go, as did Giles Turgeon, president of Green Mountain Drywall Co., Inc. in Vermont.




Bernstein tried a different tack: “Several of my key people agreed to take a cut in pay to avoid lay-offs. Unfortunately, we ultimately did have to trim the work force as well.”




Smith says, “Our first action was to cut any and all frivolous spending—like the habit of buying three instead of only the one we needed in order to bring about additional write-offs.”




Tara Davis took a two-pronged approach: “We refused to allow our A/R to grow beyond 30 days and addressed anything past 30 days right away. We took whatever action we could take to collect because by providing both labor and materials, we were often out money ourselves and could not afford to carry that for 60 or 90 days.




“We also began requesting joint checks from the GC, requesting that the GC pay the supplier directly for the materials we used on the project. This took some of our exposure out of the picture and some of the pressure off.




“It is true that a request for joint checks carries some stigma, but if handled right, it works well for both sub and GCs; it protects all concerned, including the suppliers. Joint checks are not about cash flow, it’s about getting paid for materials that you use on a job. Implementing joint checks has protected us financially.”




Reitter’s first action was to “change banks from a large regional bank to a more business-friendly small community bank, and we went from paying a bank to give them our money to getting paid for our deposits. We also replaced the credit line that we had with the previous bank, at a better rate, and with no personal guarantees.”




Bonnell’s first action was to “expand my search for work beyond EIFS applications.”




The two most intuitive, immediate actions make perfect sense: Cut back on expenses, including staff, and make sure you’re paid for the work you do.




Most Successful Corrective Maneuver


Looking back, which was the most successful corrective measure taken?




“For us,” says Stegemoller, “it was right-sizing our staff and streamlining our back office.”




For Austhof, staff reduction and multitasking went hand-in-hand to see him through.




Smith digitized most business functions and consolidated most administrative operations onto his laptop. “I also got heavily involved in online advertising,” he says. “I read up on and implemented online marketing and social networking.”




For Turgeon, it came down to selectively trimming his staff, keeping his star performers.




For Davis, it boiled down to never allowing her A/R to age beyond 30 days.




Reitter says, “We successfully changed our mindset from growing sales—to hopefully, generate more profits—to reducing our controllable costs in order to survive. We found that reducing costs is both easier and more effective than trying to grow sales with paper-thin (if any) margins.”




Bonnell’s most successful action was to cut his overhead. “I cut everyone but my key employees,” he says.




For most, tightly monitoring and cutting down on expenses, over the long haul, also proved their most successful corrective action.




Should Have Done Sooner


Looking back, what actions should have been taken sooner?




Smith says, “Once the recession took hold we diversified into other construction areas—such as masonry. I wish we had begun that process sooner.”




“We should have right-sized our office a lot sooner,” says Stegemoller. “We were spending an awful lot of money on business overhead that, in the final analysis, was a waste.”




And all the others—Austhof, Turgeon, Bonnell and Bernstein—agree that staff should have been cut sooner, too.




“Sadly, more layoffs should have occurred earlier as our sense of optimism and compassion for our people put our company at risk,” Bernstein says.




Bonnell agrees: “We held on to workers longer than needed. We hoped that the market was going to turn any day and instead, months, years went by.”




For the compassionate business owner—and most are—the welfare of staff and crew come first, and he or she will hold on to people as long as possible, even while the ship is sinking.




The painful truth, which most recognize in hindsight, is that staff (and other overhead) reduction must be immediate and surgical. Keep in mind that should your acts of kindness lose you the business, there will be no place for those laid off to eventually return to. Better, then, to act—even if it seems heartless—than hope.




Never Again


Knowing what they now know, what pre-recession way of doing things would our contractors never repeat?




Austhof puts it plainly: “I would have hung on to, rather than spent, any surplus cash.”




Turgeon agrees: “We spent too much money unnecessarily. These days, and going forward, I am more fugal and I put aside more.”




Reitter learned some lessons, too. “We will never again allow customers to string out payments or talk us into performing more work or extending more credit with promises of payment without taking all legal measures to secure the debt,” he says.




“We purchased more vehicles and equipment than strictly needed. We also kept excess inventory on hand. Never again,” adds Bonnell.




Downtime Put to Good Use


Less available work almost invariably means some downtime, and our wall and ceiling contractors put this downtime to good use.




Stegemoller says his company used the extra time to build and nurse relationships, while Austhof used it to learn how to multitask.




Smith branched out. “We spent our downtime acquiring new skills, including masonry,” he says. “Going forward, diversification is the key for us.”




Davis and her company “researched new products and new ways of doing things. People always invent things; they come up with new ideas, even during a recession. People think out of the box, and we, as a company, spent some of the downtime looking at how we could be more effective, how we could bring new products and services to market, how we could save time and money while at the same time interacting better with the environment.”




Reitter says, “Training is a big part of our culture. We all believe that you never know all there is to know about anything. So, during downtime, we utilized vendors as much as we could when it came to product training, and we encouraged our office staff to plug in to the various trade and business association training programs.”




Bonnell says, “We spent some of the downtime improving our take-off and accounting software.”




It seems that the survivors have one thing in common: if there is a lull in work, they spend that time planning and preparing for the future, whether by training, streamlining or diversification.”




Today’s Operation


Now that lessons have been learned and we move forward into a new era of profitable construction, what are contractors doing differently today than what they were doing four years ago?




Stegemoller says he is keeping “a much closer eye on overhead costs,” and Austhof will “never take on a job I don’t feel we can profit from.”




Smith says he runs “a much tighter, leaner shop,” and Turgeon is doing the same thing. “Now we train our workers to do more with less effort,” Turgeon says.




Bernstein has changed things, too. “Today,” he says, “every purchasing decision is weighed more than in the past, and each individual is expected to step up their game.”




Davis is “putting a lot of attention on assembling the best team I can. When we went lean, we worked as a much smaller group. The core of us were (and still are) very dedicated. As a result, now that the economy is coming back, I am very selective about who to add. In fact, I’ve just filled a position that I worked a year to fill. Today, I refuse to hire just anybody in order to have a warm body there; I am making sure I am hiring the right person for the job.”




Reitter’s company is now an open book. He says that today they are “much more focused, and everyone has input about how we operate. We share the company numbers with our employees so that they always know how we are doing. We believe we have raised the level of accountability in our organization and have definitely raised the level of communication. We still have a ways to go as it is more of a process than a project as conditions are always changing.”




At Bonnell’s South Carolina company, they are spending more time going over pricing and bids before they go out the door. “We have learned that there is a number we simply cannot drop below,” Bonnell says.




It is words like focus, leaner and communication that seem to capture the new, post-recession, mindset.




Several of our contractors also brought up the importance of a well-informed and participating staff and crew, especially during hard times.




Roger S. Olson, president-treasurer/owner of Sig Olson & Sons Plastering, Inc. in Minnesota, is one good example: “We have emerged from the recession in better shape than we were going into it. We’re certainly more aware.




“These days I involve my crew more and more in important decision-making, so that we work more as a team. They also know that things like bonuses and overtime depend on the success of the company, they aren’t givens.”




Success


Brian Allen, president of Precision Walls, Inc. in North Carolina, used to past experience and saw this most recent recession coming from a ways off.




“We’d been burned during the ’91 and ’01 downturns,” he says, “so once we saw the first signs—this was around 2007—we hired an economist to come in and brief us on what to expect. Based on this data, we developed a detailed plan about how to deal with what lay ahead. We anticipated several stages to this recession and outlined what actions to take at each stage. One of our first actions was to step up collection of Accounts Receivable.”




Employee Ranking. “Part of our story is that when the 1991 and 2001 downturns forced us to cut back on staff, we had a hard time determining who to let go. As a result—and also for incentive purposes—once things were booming again, we decided to rank all of our employees based on skill, work performance and attitude.




“We established three ranks: first—our superstars; second—those with great attitude and good promise, our future superstars; and third—those who do OK work but primarily just show up for a paycheck and whose attitude would never see them become a superstar. With this ranking in place, we made very sure that we only considered the lowest ranked employees when it came to trimming the workforce this last recession. This way we only lost the ‘right’ people, not our highest producers or those with the best attitude and promise. Also, by taking this approach—and this is important—we only had to implement one set of dismissals. We only made one force reduction during the entire recession.




“And by letting employees go based on ranked performance, we avoided the politics of trimming personnel—where, if evaluations are not performance-based, they tend to depend more on who you know, or whose uncle or nephew you are.”




Communication. “Another key to surviving this last recession is that we greatly increased the level of communication throughout our company,” Allen continues. “We made sure that everybody knew what was going on.




“When I say communication, I must stress that this was formal communication—meetings, video calls—communications labeled as such, not just casual, in-the-hallway conversations.




“During rough times (though at all times, actually) staff and employees need to be well informed. We stressed this throughout the recession, and still do.




“We also increased our emphasis on performance measurements and we established weekly video conference calls to all branches in which we’d go over the week’s production.”




Margins. Allen also laid down the law when looking at new jobs. “As part of established measurements,” he says, “I set a minimum, company-wide margin requirement for each type of job, forbidding us to bid on any job that did not meet that margin requirement—this to prevent us from taking on work too cheaply. In fact, if any one branch wanted to take on a job below that margin, they would have to call me personally on my cell and get my approval.




“This is one thing I wish I had implemented a lot sooner. I have always stressed for all involved never to take on cheap work, never to work below cost, but I never stressed this enough, and not early enough, not until I put this in writing formally: If you want to take on something below this margin, you call me first.




“You may think that you want to take on a dubious project—it may promise future and fame—but, believe me (once you crunch the numbers), it is often a lot less expensive to walk away from a bad job than to take it on. The potential loss far outweighs the potential gain.”




Lessons Learned. Allen learned some valuable lessons as a result of the recession, and he is willing to share what he learned. First, don’t chase bad work in bad times. Second, establish some form of performance measurement. Third, increase formal communication.




“Make sure people know what the future is all about—formally increase company communication,” Allen says. “Schedule these communications and make them more frequent during a recession. People worry; they need to be kept abreast of what is happening.”




And final bit of advice is to increase training and become better negotiators.




Last Company Standing. Allen set a lofty—yet achievable—goal for his team in December 2009. “We had a companywide meeting where I stated that our goal was to be the last U.S. drywall company standing,” Allen says. “I wasn’t saying that we were going to make tons of money. What I was saying was that we would do whatever it took to survive. We would be the last one standing. We were going to win this game, and we were going to keep the attitude it took to make it.




“It is very hard to be a leader at times like that. You always have to keep your game face on. It would not do to let your employees see that you’re under strain. They need to see you as a positive leader who knows that he or she will make it.




“And we did make it.”




And so can you and your company.





Los Angeles–based Ulf Wolf is the senior writer at Words & Images.

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