FMI Corporation 1 - NSPE

© 2011 FMI Corporation 1

Ethics and Risk Management:

When “Trust Me” Isn’t Enough


December 13, 2012

National Society of Professional Engineers

Presented by:Jim Schug, FMI Corporation

Dilbert on Risk


Who/What is FMI?

About FMI

‐ Get In ‐

Strategic PlanningBuyer RepresentationAcquisition Integration

‐ Get Work ‐‐ Get Out –

Ownership Transition

FMI services span every phase of the construction firm’s lifecycle…

…and we have chalked up a few wins:

59 years of continuous industry leadership and success

56% of the ENR 400 L t C t t

© 2012 FMI Corporation 2© 2012 FMI Corporation 2

BD AssessmentMarket Perception Studies

Presentation skills

‐ Develop People ‐

Leadership DevelopmentManagement SuccessionExecutive Coaching / Peer

Groups

‐ Do Work‐

Productivity ImprovementProject PartneringRisk Management

Ownership TransitionSeller RepresentationManagement Buyout /

Valuation

Largest Contractors

21% of the ENR Top 600 Specialty Contractor

77% of the ENR Top 100 CM Firms

14% of the ENR Top 500 Design Firms

Challenges & Changes

• Competition willing to work for “wages”

• Project speed, complexity and change

• Historically strong sectors have disappeared


• Competition has doubled or tripled for your targeted customers or projects

• Poor‐quality documents


What is Risk Management?

We operate in a VUCA environment now: Volatility, Uncertainty, Complexity, Ambiguity

The organizational leader’s antidote to VUCA is: Vision Understanding Clarity and Agility


Vision, Understanding, Clarity and Agility

Risk Management is the structured approach to understanding uncertainty and creating clarity

Identifying potential risks

Analyzing the potential impact of those risks

Responding to risk factors to either mitigate or eliminate those risks

Average Trade Contractors Net Profit (Before Taxes)

2006 – 2007

2004 – 2005

3.8%

3.9%

2.4%

1.8%

1.20%

How well do Contractors Price Risk?


0% 1% 2% 3% 4% 5%

2012 – 2013

2010 – 2011

2008 – 2009

1.40%

3.90%5.1%

3.8%

Source: RMA 2004 – 2011 Annual Statement Studies

Textbook Company Risk Management Process

1. Identify Potential Risks

2. Analyze Impact of Risks

3. Determine Potential Risk Treatments

4. Create a Risk Management Plan


5. Implement Plan

6. Evaluate Plan

US Army Approach



Determining Potential Risk Treatments

AvoidanceEliminate

ReductionMitigate

Transference


TransferenceOutsource or Insure

RetentionAccept and Budget

Risk Types

Strategic

Design

Financial

ContractualDisputes


Delays

Subcontractor and Vendor

Operational

Project Performance

OTHERS: BLACK SWAN

Failure Chain

Mind of the Contractor

Nature of the Construction Industry

Failure Chain Reaction Model

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Bankruptcy Doom Loop


Source: FMI Research on “Why Contractors Fail”, FMI Quarterly, Issue 2, 2007

Culture and Systems of the Organization

General Economic Conditions

Company Performance

Most Often Cited “Causes” for Contractor Failure

StrategicUnrealistic growth, over expansionUnfamiliar new markets and/or entry into new types of constructionVolume obsession

Unrealistic promises, bad contracts, poor project selection

OrganizationalInsufficient capital/profits


Insufficient capital/profitsLack of business knowledge/poor financial management/poor sales skills/inadequate marketing

Poor leadership/poor leadership transferProject losses/poor field performanceOwner court battles/owner bankruptcy

UncontrollableIndustry or economic weaknessBanking and surety changes

Source: FMI Research on “Why Contractors Fail”, FMI Quarterly, Issue 2, 2007.


Estimate for Advantage – Best in Class Techniques

Go No Go process clarity

Common systems, review process, highest and best use

Historical costs

Accuracy in pricing contingency


3% contingency on 100mm vs

1% contingency on 100mm will win a job,

but it will also put many folks out of business…..

20‐ 40% of risks are typically insurable. The other 60‐ 80% are operational risks. ‐‐‐ Scott Razor, Zurich interview with FMI

Leader Decisions

New Geography

Same Service

New GeographyNew Service


Same Geography

Same Service

Same GeographyNew Service

© 2011 FMI Corporation

Growth from “Great Operations”

© 2012 FMI Corporation 14© 2011 FMI Corporation

Communication is critical

Early Warning Indicators:• Accurate reports• Alerts, email notification• Key performance indicators (KPIs)• Communicate corrective action

Early Warning Indicators

Executive


Reports

Work Packages

Cost

Critical Path

Changes

Resources

SchedulePlanning andScheduling

ProjectControls

Project Manager Project

Engineers

Subs

Client


Who is your Risk Manager?


How Companies Become Unethical

Slippery‐slope to remain competitive

Lack of awareness and training

Leadership ignorance

Organizational culture


Unaware of laws and regulations

Project Leaders or Project Witnesses?

Does the Project Team?

Know where the job stands today

Know where the job will stand at completionDo your field managers know where they are compared to the estimated costs or targeted production rates

49%

39%


Yes No Some Do Not Sure

at least on a weekly basis?

11%

1%

FORCES acting on the Project Team



The Multi‐Faceted Project Leader

THETHEPROJECTPROJECTLEADERLEADER

The Planner

The BusinessPerson

• Procurement• Quality Management• Budget Establishment• Change Order Management

• Scheduling• Subcontractor Management• Safety• Meeting Management• Project Documentation


LEADERLEADER

The Communicator

• Closeout Procedures• Project Integration• Ethics/ Risk Management• Customer Management

Reported Frauds for the E&C Sector


Source: PricewaterhouseCoopers, Global Economic Crime Survey, March 2010

The Costs Associated

Average Company loses 7% of their revenues to Fraud annually – Jacob Blass, President of Ethical Advocate

A i i i d i $330 000 i id


Average in construction industry is $330,000 per incident

Doesn’t stop there ….

Video

Managing Human Nature

http://www.ted.com/talks/dan_ariely_on_our_buggy_moral_code.html


Dan Ariely, Ted Talks

(4:45)


The Value of Ethics

“It’s not profitable to be unethical. While our safety program has a significant cost associated with it, you can’t afford to have an unsafe project. Neither can we afford to have other than the highest degree of ethics whatever the cost Many owners are


highest degree of ethics, whatever the cost. Many owners are now going through more than a simple bidding process; they evaluate all aspects of our company and our reputation. Operating within the highest of ethical standards is not only the right way, but is sound business practice.”

Norm Holly, Vice President of Kiewit Corporation

Dilbert on Strategy


Our chances of being a low cost producer depend upon process integrity

Process Integrity


It also includes treating customers in a way that encourages repeat business

Customers go where they trust

Trust is an attitude

Bid situations: Trust is a factor in qualification to bid, but also in the trustworthiness of our business processes, which can increase our chances of being the low bidder

Contingency Plan Framework – Often missing from Strategy

2013 Mission

Business Operations Human


Scenario Plans Development Plan

Operations Plan

Financial PlanHuman

Resource Plan

• How long and

how deep?

• Determine

trigger points

and actions.

• What is our new

Context?

• Find the right

projects with the

right clients at

the right price.

• Deputize non‐

traditional BD

resources.

• Analyze how BD

time is spent

• Execute all

projects

flawlessly!

• Drive operational

best practices

• Insist on

compliance

• Improve

productivity

• Cash is King!

• Challenge

budget

assumptions.

• What gets

measured, gets

done.

• Know your

breakeven point

• Communicate –

Who needs to tell

what to whom

and when?

• Scale the business

based on

dispassionate

view of the facts.

• Get rids of the

imposters!


Ethics Best Practices

Building a better reporting mechanism, and a stronger ethics program

Continuous improvement

P l


Prepare your employees

Promote your hotline

Ensure a thorough investigation

Prepare for the next report

Establish Project Performance Indicators

Identify the Key Performance Indicators – KPIs are essential shortcuts to understanding the status of the project. They enable the project team to quickly view a summary of project performance

Traditional Lagging Indicators


gg g• Actual Cost versus Baseline Costs

• Actual Schedule Milestones Accomplished

• Productivity (rate or units) to date

• Cash Flow to date Compared to Budget

Common Leading Indicators• Projected Total Cost to Complete

• Projected Completion Date

• Projected Cash Flow

DPR on the “Gray Area”

It isn’t just a reactive approach :

“Sometimes there is no black and white answer. So you have di i b h ki d f hi d h i h


discussions about those kinds of things and how you might want to be treated, and how you might want to handle the situation.”

‐ Doug Woods, DPR

Ethical Best Practices‐ FMI Interviews of 20 CEOs (1 of 2)

Ethics starts at the topLeadership must champion ethics policies, practices, and attitude

Keep ethics policy clear and tied to key valuesMaintain long‐standing company values

Get buy in from the entire company


Get buy‐in from the entire companyDrive policy into the field e.g. on‐site training, field audits, etc.

Hire the right peopleCheck references and explore the applicant’s values


Ethical Best Practices‐ FMI Interviews of 20 CEOs (2 of 2)

Ethics can be taughtMaintain discussions, dialogue, and training

Review, monitor, and report ethics behaviorE.g. open door policies, hotlines, self‐report measures, risk assessments


Take action on ethical violationsReport violations and maintain repercussions; make violations clear i.e. suspension, reprimand, termination, etc.

Did You Know

A post‐job review meeting is the best way to improve performance on all projects going forward

You learn what went well, what didn’t and why, so you’ll be more prepared for the next job. It also provides great feedback to Estimating about how well it performed


“Postmortem” meetings are often the most underutilized project management tool in the business

Key Learning Points

Common types of risks

Reducing project risks

Steps in the Risk‐Management ProcessIdentifying Risks

A l i Ri k


Analyzing Risks

Potential Risk Treatments

Creating a Risk‐Management CULTURE across the company

Jim is a senior consultant with FMI, management consultants and investment bankers for the engineering and construction industry. He enjoys blowing up organizational silos to unlock profitability.

With more than a decade of experience as an Army Officer, Jim honed his leadership skills to motivate operations in complex and challenging environments. His roles included strategic planning, developing training curriculum for large organizations and command with honors. He refined these skills working for a national builder, leading his team to successfully integrate operations, sales

Jim SchugSenior Consultant


Jim SchugFMI Corporation308 South BoulevardTampa, FL 33606

Tel: 813.636.1254Fax: 813.636.9601E-mail: [email protected] site: www.fminet.com

, g y g p ,and customer service.

Today, Jim is passionate about developing customized strategy and best-in class operations with his clients. He applies practical experience with an in depth understanding of leading lasting behavioral change in dynamic environments.

Jim earned a bachelor’s degree in quantitative economics from the United States Military Academy at West Point and a master of science in engineering management from the University of Missouri. In addition, he holds the Certified Equipment Manager distinction (CEM). He has served in leadership positions on various non-profit industry associations.


About FMI

FMI is the largest provider of management consulting, investment banking and research to the engineering and construction industry. We work in all segments of the industry providing clients with value‐added business solutions, including:

• Strategy Development• Market Research and Business Development• Leadership and Talent Development• Project and Process Improvement• Mergers Acquisitions and Financial Consulting

Knowledge • Expertise • Relationships

Visit us at www.fminet.com


• Mergers, Acquisitions and Financial Consulting• Compensation Data and Consulting

Founded by Dr. Emol A. Fails in 1953, FMI has professionals in offices across the U.S. FMI delivers innovative, customized solutions to contractors; construction materials producers; manufacturers and suppliers of building materials and equipment; owners and developers; engineers and architects; utilities; and construction industry trade associations. FMI is an advisor you can count on to build and maintain a successful business, from your leadership to your site managers.

Project Team ‐ Risk/Opportunities worksheet



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FMI Corporation 1 - NSPE

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