How to boost margins without chasing volume workload is something which has preoccupied most if not all of the major contractors over recent years. All have suffered the effects of chasing volume at the expense of profits and heavy resulting losses have made them realise the folly of their ways.
Many contractors are now attempting to reinvent themselves as more efficient, client friendly organisations trading on their unique strengths to build higher margin businesses.
Typical is Tarmac, which has recently launched itself on a path of continuous self improvement through an internal initiative called 'best in class'. The idea is more than just a management gimmick, and has already resulted in significant changes within the organisation.
Put simply, the initiative involves borrowing best practice developed by leading companies not just within construction, but across all companies.
'Best in class' is one of the key responsibilities of Tarmac Construction Services director Leslie Atkinson who joined the group from BP just over a year ago. Like many outsiders coming into construction, he soon appreciated the need to do something to boost profitability. 'As the newest director I was surprised at the low margins which seem to pervade the construction industry in this country,' he says.
Soon after he joined Tarmac, he sat down with his Construction Services management team to identify the key factors affecting the company's financial performance - 'obvious but important,' he says. He then set about putting some flesh on the bones of the - initially vague - 'best in class' concept originally thought up by chief executive Sir Neville Simms and finance director Chris Bunker.
Atkinson and his management team narrowed down Tarmac's key performance factors to customer service, supply chain management and procurement, prod- uctivity, information technology, personnel and safety. The idea was then to work out ways of improving its approach to these key areas in pursuit of a claim to be 'best in class'.
This has meant comparing activities like supply chain management with other blue chip companies such as airport operator BAA, brewing company Bass and retailer Tesco - 'people who have done the most to have a really effective approach to procurement'.
To this end Tarmac has joined a benchmarking club with half a dozen companies drawn from a range of industries. Comparisons with other companies showed that Tarmac's procurement procedures were fairly middle of the road and could be improved.
The contractor found that best practice in procurement had progressed much further in other sectors. Other companies had benefited more than Tarmac from the introduction of new technology, the development of partnering arrangements and the use of more efficient procurement practice.
The benchmarking process pushed Tarmac to review and ultimately scale down the number of suppliers it relied on for some materials. This resulted in the establishment of three or four national supply agreements to replace an inefficient network of hundreds of local contracts.
On customer service, Tarmac found that most of its profits - two thirds - came from around 70 clients. This was something of a revelation for Tarmac, which has grown rapidly in recent years as a result of the Wimpey asset swap and major acquisitions like that of PSA Projects.
This realisation led to the establishment of 70 strategic accounts, identifying key clients across the group. Tarmac has also appointed a strategic account manager to look across the group at what it can add to services it is pitching at clients and promote Tarmac-branded multi- disciplinary services. 'We have not been so aggressive at this in the past,' says Atkinson.
One of the key instruments of the 'best in class' philosophy has been Tarmac's Target 2000 initiative. This predates 'best in class' by a couple of years, but is emerging as a key element of the whole philosophy. Target 2000 rewards staff who develop efficiency savings or who come up with ways of involving other Tarmac divisions in a project (see box).
Just how much of an effect 'best in class' is having on profitability is hard to quantify, as Atkinson readily admits. 'It's hard to distinguish what the organisation has produced from what the environment has produced,' he says.
But the initiative is clearly changing the way the Tarmac group operates and Atkinson believes there is room for more improvements especially now the recession is over. He believes that during the recession people were too worried about job security to think about taking risks with new ideas.
As a result new, young recruits uninhibited by the fear of losing their jobs could be some of the best sources of ideas in future. If the momentum can be maintained it would seem to be only a matter of time before it has some impact on profit margins.