Pinpointing the Drivers of Performance in Engineering and Construction
In the face of changing interaction costs and the new economics of electronic networks, companies must ask themselves the most basic of all questions: what business are we in?
June 2014 | by Steve Johnson
There are wide variations in the performance of the world’s 30 leading engineering and construction (E&C) companies, both among regions and within them. In 2014, their average profit margins were 7 percent, but the range swept between 0.4 and 17 percent. The cyclical nature of markets, stiff competition, and the inevitable risks of a sector in which a company’s fortunes are often tied to the performance of just a handful of huge contracts are challenges faced by all. So what makes some companies more successful than others? What drives superior performance? A three-stage analysis points to the answers.
The first stage examines the particular strategic choices made by the 30 companies and critical aspects of their operations in order to understand the extent to which these affect their financial performance and, crucially, their market valuations. For example, does international expansion pay off? Does scale matter? What is the right balance between growth and operational efficiency? How beneficial is diversification away from construction? It turns out, for instance, that for E&C companies based in developed markets, international expansion does not seem to lead to higher profits—in some cases, quite the opposite occurs. Likewise, diversification does not deliver superior returns.
The second stage of the analysis homes in on operational performance, using proprietary internal data to help companies understand where they excel compared with top performers and where there is room for improvement. Specifically, it benchmarks several areas:
- the strength of a company’s client base—its market positioning and risk profile
- the efficiency of a company’s support functions such as procurement functions
- project-level performance on ten dimensions, for instance, how good a company is at identifying and mitigating project risks and what its record is on sticking to the mobilization budget
Having identified where performance gaps might lie, big data is then used to help fix them. Burk, in partnership with an analytics company, uses a tool that collates and analyzes data from all relevant internal data sources—Primavera schedules, SAP, and e-mail metadata, for example—to track and examine the performance of thousands of projects going back as much as a decade. In this way, it identifies the causes of a company’s performance gaps. If benchmarking showed productivity was low at the engineering stage, for example, the tool can test whether changes in the composition, location, or seniority of the engineering team would make a difference.
Applying each of the three stages of analysis improves a company’s ability to create and capture value. At stage one, a company might discover it has higher costs than top performers working on similar projects. At stage two, it can home in on its operations to identify underlying problems. And at stage three, it can discover how to address them. For instance, one company analyzed data from 12,000 projects and found room to raise performance by 17 percent by improving team composition and fewer project revisions.