Allan Joyce, MD, Balmoral Tanks

Commentary - 11 July 2018

They told us to stop chasing the bottom line 200 years ago

By Allan Joyce, Managing Director
Commentary author

By Allan Joyce

Managing Director

Having been involved in the tank manufacturing industry for over 20 years I felt compelled to pull a few thoughts together in an attempt to summarise what is going on in our industry.

In my time in the industry I have witnessed many positive things which, unfortunately, seem to be overshadowed by a lack of business vision, strategy and medium to long term planning capability.

It would seem the never-ending pursuit of orders where the race to the bottom line – regardless of concepts such as market share, price/volume analysis, research and development, productivity and investment – represents all the skills needed to allegedly succeed in the tank industry.

And it’s not just our industry; there is plenty of evidence to suggest that global, multi-national organisations are similarly affected…

Does size matter?

The size of company would seem to be irrelevant. Carillion, a £5.2bn company went straight to liquidation, by-passing the normal route of administration, resulting in tens of thousands of job losses. I am not positioning myself as an expert on what went wrong at Carillion although I can see links to the concepts mentioned above. Some of the post failure analysis of Carillion focused on the impact of just four contracts.

According to The Guardian of 15th January 2018, failures in the construction of two English hospitals, one Scottish road project and a development in Doha were enough to kill off the company.

The three UK deals were Merseyside’s “new”£335m Royal Liverpool University hospital, the £350m Midland Metropolitan hospital being built in Smethwick and the £745m Aberdeen Western Peripheral Route. All of these were beset by seemingly innocuous problems that caused embarrassing delays and constantly increasing costs.

Construction of the Royal Liverpool University Hospital – a prestige project to build a new facility with 646 beds, the biggest single-bedroom hospital in England – ran into problems when workers found “extensive” asbestos on the brownfield site and cracks in the new building. In Smethwick, delays were blamed on “The fitting of pipes and wires [taking] longer than expected”. In Aberdeen, the schedule slippage was blamed on more predictable problems; cold weather during winter. Not exactly an unusual or unknown condition in the north-east of Scotland.

This appears to me to be a lack of discipline regarding the risks of such projects, which subsequently means the pricing procedures and end result must have been inadequate. Bad decision making will ultimately affect even the largest of companies. Here was a company trusted to build some of the country’s most important infrastructure – from NHS hospitals to much-needed new roads – yet the foundations of the construction giant were shaky enough for the group to be felled by just four contracts. How could the management team allow this to happen?

Carillion are not alone in this large company scenario. On 17th January 2018, Interserve, a company with gross annual revenues of around £3.6bn and employing approximately 80,000 people worldwide, were thought to be a subject of such concern to the UK government that the cabinet office reportedly assembled a team of officials to monitor the health of the company in the wake of the dramatic collapse of Carillion.

According to the Financial Times, civil servants had been keeping an eye on Interserve, which is listed on the FTSE 250 stock index and provides a slew of services to government departments, since it issued a profit warning in September last year. Shares in Interserve have lost more than 60 per cent of their value in the past 12 months.

According to the FT, its performance has been hurt by major losses on a waste-to-energy project in Scotland and pressures stemming from an increase in the national minimum wage. Interserve was plunged into a £94m loss last year after making a £160m provision for exiting its waste business and troubled contracts.

As with Carillion, I am not for one minute suggesting I am an expert on the business of Interserve. The waste-to-energy project in Scotland has certainly taken its toll on the company. The firm was removed from its delayed Glasgow recycling and renewable energy project late 2017 and has now installed a large team to chase claims on this and other waste projects. Interserve believed that its failed adventure in the energy-from-waste sector had cost it £70m but has now discovered it’s much worse than that to the tune of £160m.

Our company, Balmoral Industrial Tanks, provided a range of services to the Glasgow project under a novation agreement. The novation agreement was the result of a tank manufacturing business failure, Galglass Ltd. Balmoral subsequently purchased the assets of Galglass from the administrator and was delighted to work with Interserve and complete the works, although the story is yet another example of company failure primarily through bad management.

Tank company failures

Coming back to the world of tank manufacturing, we have witnessed the failure of some major players in our industry over the past few years. Galglass Ltd (June 2014) and Kirk Environmental Ltd (January 2018).

First and foremost we should be aware of the people impact resulting from these failures. Hard working staff, reliant on the professionalism and decision making capabilities of their directors to manage their companies in a manner that takes account of all stakeholders.

Leadership of a business is a privilege, and the sacrifice you have to make, at least mentally, is that you are there for the benefit of everyone; not just yourself or the chosen few at the top. If serving is beneath you, then I am afraid leadership is above you.

Moving on from the human effect, we have the impact on product warranties, approval body standards, suppliers, customers who need their projects complete otherwise they may be exposed to additional costs such as LDs. When a major player goes to the wall the fallout is messy and, of course, affects a lot of people and companies in the supply chain.

Our experience suggests and possibly confirms a lack of management and overall business skills is evident in the tank manufacturing industry. This is not a criticism of people it is simply down to the very low cost of entry to this particular market.

This will vary between types of tanks such as epoxy coated, glass-fibre, one piece, etc, although the reality is almost anyone can set themselves up as a tank manufacturer and, somewhere in the world, you will find these companies bending over backwards to supply you with their product on a distributor/agent agreement basis.

So, next to no investment, just some intangible assets such as tank industry experience, and all of a sudden you can establish a tank business and begin chasing projects from a range of customers.

You will undoubtedly set yourself up as a limited company, as you will already be thinking of your exit should things prove difficult, and therefore manage your exposure to risk. Let’s be clear, this is not a strategy for success, it’s a recipe for disaster that affects all stakeholders in our industry.

It will ultimately result in price, price, and price and, guess what, it will lead to yet another failure. In everyone’s world of business, sales, less cost of sales, must equal a surplus. Anything less is simply unsustainable. Supplier and customer relationships: Win-Win?

As far back as 1819 John Ruskin, a leading English art critic, patron, draughtsman, water-colourist, prominent social thinker and philanthropist, said: “Quality is never an accident; it is always the result of intelligent effort.

“There is hardly anything in the world that some man can't make a little worse and sell a little cheaper, and the people who consider price only are this man's lawful prey.

“It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money – that's all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

“The common law of business balance prohibits paying a little and getting a lot – it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

It’s difficult to argue with this statement which dates back almost 200 years. Yet, we still have to fight the constant battle which defaults simply to price. Added value, business reputation and capabilities, product approvals and warranties are all seemingly secondary discussion points.

The table below is an attempt to align the requirements of the customer and the supplier. It’s by no means a definitive list however it tries to represent a partnership approach to the process of customer/supplier relationship in the world of tank manufacturing.

Every manufacturer or supplier of goods is only as successful as its supply chain. Treat your supply chain with contempt at your peril. They are as important as your customers and deserve the same respect. Truly engage with your supply chain and you will both benefit – and more than likely be more profitable as a result.

This would appear to be relatively straightforward and make reasonable sense as a way in which to conduct business between two professional companies. But, what is actually going on in the industry right now? Are we learning any lessons?

Customer Supplier
Quality and product performance Clear specification
Professional installation – H&S focus Good access and site welfare
Detailed and accurate drawings Customer approval of drawing in a timely manner
Clear quotes, technical specification documents in line with the enquiry Clear specification
OTIF delivery in secure packaging Adequate lead times
Approved products Approvals respected, clear specification
Fit for purpose design Clear specification
Innovation leading to quality and cost improvement Partnership approach with key clients
Good competitive price Competitive price based on customer expectations
Maximum payment terms, bonds, retentions Payment in line with supply chain expectations
Product warranties Warranties respected, ability to deliver what is being offered

Are lessons being learned?

I don’t believe so. A recent example, mentioning no names, involved Balmoral losing out on the supply of a tank to a new competitor. A new competitor, that established their business in February 2018, yes, February 2018. A company which had been in business for less than a month, with no quality assurance system, no product warranties, no manufacturing or installation capabilities, successfully winning work.

The customer involved in this matter had a credit limit of £500. Balmoral refused to offer credit facilities on an order value exceeding six figures. The new competitor offered the customer 30 days’ credit and won the order. Realistically, how on earth can a customer place an order with a company that set up in business less than a month beforehand?

I am not bemoaning competition. Balmoral genuinely welcomes strong competition, believing it is good for everyone in terms of maintaining standards and creating a competitive market. However, we are somewhat disillusioned with the buying behaviour of some companies who seem to underrate investment in their supply chain while at the same time overrating the principle of price.

25 years ago I was involved in the industrial gas market. I was UK marketing manager and part of my training was to attend a two day course on the impact of pricing from a strategic perspective on business performance. Two thoughts have remained with me since then:

  • The most effective way for any business to improve its financial performance is through the price it can charge for its products. If you add real value to your customers’ business, you are likely to be in a position to charge more.

    If you are a “me-to” business then you will resort to price as your main approach to winning business. If you run a £50m business and can increase your prices by 1%, all other things being equal, you can add £500,000 to your bottom-line. Is there any more effective way to improve business performance?

    Our sales teams, like most other sales teams, believe they understand the market. Do they really? Are they fully aware and competent in regards to the knowledge and capabilities of competitors? My background is sales and marketing therefore I am not knocking the great work of sales people. However, going back to the £50m turnover business, if they had an average order value of £50,000 then I would be very, very surprised if the market was price sensitive within 1%. If a company can’t differentiate itself from its competitors to the tune of 1%, then you are very much in the world of commodities and I don’t believe manufacturing and the construction industries are commodities. They rely too much on engineering, design and knowledge to ensure long term business performance.
  • The other point relates to the concept of price/volume analysis. Not too be confused with cost/volume/profit analysis. In simple terms, you must understand the consequences of price reduction and volume over your given gross margin levels.

    For example, a 10% discount from a gross margin of 30% will require a 50% increase in volume to deliver the same level of profitability. A staggering thought.

This applies to every business, given that we all sell and purchase goods in order to run our companies.

There is another issue in the tank industry when dealing with large construction companies, namely retentions. It’s a process which is unfair, and I wonder just how much value it actually adds?

Construction News, 12th January 2018: “…trade bodies have voiced outrage after it was revealed that suppliers of McMullen Facades are owed nearly £650,000 in retentions following the cladding specialist’s administration. Administrator Deloitte reported that 46 firms were owed a total of £646,595.05 in held retentions by McMullen Facades… Deloitte has said there was no prospect of McMullen’s creditors, suppliers and subcontractors being paid back the money owed.”

In anyone’s language this is grossly unfair and is a flaw in the process of doing business in the construction industry. It’s certainly not based on a win-win or partnership approach. It is estimated that some £3bn of retentions remain outstanding in the UK construction industry at any one time. This is a staggering amount of cash with the undoubted potential to wreak havoc on the supply chain should the retentions not be paid in full.

In October 2017 the Department for Business Energy and Industrial Strategy published research carried out by Pye Tait Consulting looking at the use of cash retention in the construction industry. A number of findings have been published, although perhaps one of the most concerning relates to the fact that the majority of companies holding retentions do so in a main bank account. This suggests there is no protection for contractors from insolvencies of bigger companies further up the supply chain as cash retentions held against their work are not typically ring-fenced.

It looks like the UK government is taking this matter seriously as The Construction (Retention Deposit Schemes) Bill, was introduced as a Private Members Bill, and received its first reading in the House of Commons on 9th January 2018. The bill’s second reading was scheduled for 27th April 2018. Let’s hope common sense prevailed and this matter is satisfactorily addressed for the benefit of all stakeholders.

Invest in leadership

Business is exciting and, in the current climate, subject to rapid change. It’s imperative your business metrics include a focus on elements of risk to your organisation. A good strategy, based on your business competencies, is an effective place to start.

It’s a large market out there and the key for us and every business is to understand the market segment served. By that, I mean look for like-minded customers who have a requirement for your products and services and therefore value what your business offers.

Invest in your people, including your sales team, and most importantly in the general leadership capability in your business. At Balmoral, we have our own leadership academy where we develop our talent to help support the growth of the business and delivery of our business vision.

Our leadership academy programme is run over four years and is accredited by the Institute of Leadership and Management. We have an obligation to continuously improve the leadership capability in our business to ensure there is a broader understanding of what we believe it takes to be successful in our chosen industry. This is not just the job of the senior management team.

To conclude and re-emphasise the point of strong leadership, the following is an extract from a UK government report issued in July 2012 on the importance of leadership. It contains some startling facts and figures which must be enough to waken up every business which continues to underestimate the impact its leadership team has on business performance and longevity.

Leadership and management in the UK – The key to sustainable growth

This report contains many unequivocal facts on the impact and importance of good leadership and management of a business. Sponsored by associations such as ILM, CIM and CIPD, there can be no doubt about the content of the report.

Some key points worth noting as a result of poor leadership & management:

  • Ineffective management is estimated to cost UK businesses over £19billion per year in lost working hours. 43% of UK managers rate their own line manager as ineffective – and only one in five are qualified;
  • Nearly three quarters of organisations reported a deficit of management and leadership skills in 2012. This deficit is contributing to our productivity gap with countries like the US, Germany and Japan;
  • Incompetence or bad management of company directors causes 56 % of corporate failures.

Food for thought indeed.

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