Glenn Carniello is a Construction CPA based in Southern California. Glenn is a Partner with SingerLewak LLP, a CPA firm specializing in serving contractors. Topics include surety, accounting/reporting and tax matters, legal, succession planning, information technology, etc. If you wish to ensure delivery of new content as it is posted, please complete the subscription link below (to the right) and click on the confirmation link sent via email once received.
Wednesday, October 1, 2008
Discovering Your Weaknesses Through Gap Analysis
Most owners of construction companies came up through the operations side. They were the ones in the field early in their careers, learning their trade from the ground up. Today, many contractors find themselves owning a business that has grown significantly from where it started. They generally aren’t experts in organization structure and therefore aren’t aware of the need to assess the organization they have in place to handle the current and future volume of the business. This is certainly not unique to business owners in the construction industry. Most business owners, no matter the industry, weren’t trained to run a business…any business. I would suggest that the core principles and skillsets involved in running a construction business are the same as those needed to run a manufacturing business, a professional services firm, a retail store, etc. Most of the skillsets involved in managing a business efficiently and effectively revolve around how one deals with the issue of people. One has to put the right team in place and then it’s important to keep the team together all working towards the same goals. It’s imperative to have the right people in our organization and have those people in the right places within the business. This article introduces you to a process which aids the business owner in identifying both the position slots needed, and gaps which may exist, on his or her team. The Gap Analysis is an effective way to accomplish that objective.
Keeping Up With Your Growing Business
We all tend to work within our comfort zones. If the construction business owner came up through the field operations, he or she will tend to run the business from that perspective. The office may be viewed as overhead and the number of people allocated towards office functions may not be appropriate. The accounting department may find itself short-staffed and the owner may find him or herself spending little on the accounting function. At the same time the owner is probably not getting adequate financial and management reporting resulting in poor and/or untimely decisions being made or not made costing the business far more than the savings in short spending on the accounting and reporting function.
The same scenario could be painted for the operations side of the house; not having enough people in a certain function or missing a function altogether. Most contractors started out doing a few million dollars in revenue (sometimes less) in their first few years and today finding themselves doing twenty, thirty, fifty or more million dollars annually in revenues. The organization structure for a five million dollar a year contractor is very different from that of a contractor doing fifty million dollars a year. Often times as a contractor moves through various revenue levels, he or she does not keep up with those revenue changes with the appropriate changes in the infrastructure of the business.
Over my career I’ve made an observation that many contractors can grow reasonably successfully up to approximately 40 or 50 million dollars in annual revenue without significant changes to their executive management infrastructure. That’s not to say that changes should not have been made during that growth period, I’m just noting that many of these businesses tend to perform at least at an average level. When the business grows past approximately 40 to 50 million or so in annual revenues few contractors can successfully navigate those volume levels without significant mistakes and financial pain with their incumbent management team. The reasons usually trace back to not having the appropriate personnel in place in key management positions to be able to deal with the issues which invariably arise in organizations of that size. There are significant “gaps” in management which, in best case scenarios, would have been filled as the contractor was approaching the fifty million dollar revenue levels to begin with. It is important to put the management team infrastructure in place before crises develop.
Many owners refuse to allow other top level management personnel do their jobs without some micromanagement or they don’t acquire top level management to help professionally run the business as many contractors are “overhead” averse. Those actions by an owner can ultimately cripple a business that otherwise has solid prospects as long as the right team was put in place each fulfilling the correct areas of responsibility. A Gap Analysis engagement can be a very useful tool for the business owner who lacks the time and/or perspective to be able to see and understand all aspects and requirements of the business at a high, professional and objective level.
Benefits of a Gap Analysis
Our firm has performed many Gap Analysis projects for contractors and they are always an interesting assignment because we are taking a holistic view of the contractor and his/her business. The business owner generally is not very sure of what his or her team is specifically doing on a daily basis, nor should s/he be. S/he should, however, have a good understanding of what those who directly report to him/her are doing, however this isn’t always the case. This knowledge of what team members are doing is generally the responsibility of a person’s direct supervisor. Throughout the organization supervisors are not precisely sure what their team members are doing and sometimes there are no supervisors for a team when there should be. The problems arise when the reality of the day to day world set in and people starting moving in different directions and assumptions are made about who is doing what. Often times no one is performing a critical function while other times the same functions are being performed unnecessarily by multiple people or in some cases the wrong people. Sometimes a task is being performed with little or no commensurate value and no one is questioning why they are doing the task relying on the knowledge that “this is what we’ve always done”. It is at these times where profitability is eroded and frustrations, mistakes and breakdowns in quality and service are maximized. The team is not pulling in the same direction or they are pulling but their hands may not be on the rope so to speak.
The Gap Analysis helps to identify gaps in areas of responsibility or overlaps within a company. The gaps are created over time through lack of attention to process evaluation and improvement or growth in the company’s business which gives rise to new needs which are never addressed. In order to perform a successful Gap Analysis it is important to first understand the business as it currently exists and operates and fully document the needs of the business. In doing so, one can create an organization chart outlining all the roles and responsibilities of all the positions that should exist within the organization. Once the organization chart and position descriptions are created, we can then evaluate the existing infrastructure, including current roles and responsibilities, and compare them to an ideal organization structure. At this point gaps and overlaps are identified and either re-assignment of responsibilities between existing team members can be suggested and/or the need for new positions are identified. Further, it is possible that the existing organization structure is so far divergent from what the current business needs call for that a complete overhaul is the most efficient solution assuring the needs of the business, its customers and team members are being met.
As mentioned above, it’s imperative to have a good general understanding of the business including its nature (what does it do and how?), scale, market(s) served and existing structure. One of the best ways to gain an understanding in these areas is to interview key employees. Once the interviews are done, a findings and observation memo is created and presented to the management team. The memo often gives management a different perspective of what is going on in their business versus what they think is going on. The interviews will yield both positive and negative results, each of which are equally important in the process. Many of the comments and feedback are based in tangible events and observations occurring in the business while other comments may be based more in perception and feelings. Both types of feedback are also equally important as the organization is built on both tangible (policies, procedures, methodologies, etc.) and intangible (primarily core values, mission, vision, corporate culture, etc.) fundamentals.
After input and discussion from the management team, with the Gap Analysis Project Manager serving as facilitator, a customized Gap Analysis questionnaire is developed. The Gap Analysis questionnaire is given to all key employees and addresses how each views his or her role. For each task listed, the employee notes whether s/he manages, performs, or assists in that task. Once the results in this area are analyzed, it becomes evident who is doing what and whether the right person is performing the function. Also this analysis will identify whether no one is performing a function or if certain functions are being performed but no longer need to be due to changes in the business and/or its processes.
A Responsibility Delegation Summary is also created in chart format. All of the company’s key operational tasks are outlined by responsibility codes for different departments and displays in chart form who should be delegating which duties, tasks and responsibilities to whom.
A Functional Organization Chart is developed which outlines the departments and the roles and functions of each department. Think of this chart as one level up from a traditional Organization Chart which outlines positions. This Functional Organization Chart shows a broader view of the overall company and serves as a good basis from which to create the more traditional Position Organization Chart.
When we build a Position Organization Chart for a construction company, we are sure to include the roles and responsibilities of each position right on the chart. We find titles are simply not enough to convey what that team member means within an organization. A CFO in one company will not operate in the same exact way as a CFO in another company. Many other variables are in play that affect roles and responsibilities and it is also best not to leave it up to subjective opinion as to what is expected from each position. Clearly defining the roles are the best way for the expectations we have for each team member to be met. Position Guides are also created for each role. We also provide a Position Guide Development Procedure to ensure consistency when they are developed in the future as the organization grows and its needs change. Each Position Guide is reviewed with each employee and s/he, as well as management, sign off on the document.
One of the keys to success in business is having the right people in the right places doing the right things. A Gap Analysis project can be of great use to the construction business owner. This project will provide insight and perspective as to the current state of the organization structure as well as provide the road map that will assure the needs of the business, its customers and team members will be met.