Classification of Knowledge within the Electrical Contracting Industry: A Case Study

There is an increasing demand for electrical contractors specializing in new markets. The wind energy market grew by 24.5% from 1997 to 2001 (“Winds of change” 2003), and continues to grow (“GE energy” 2006). Cabling for data communications is once again a growth market (“Datacom cabling” 2003), with increased demand for wireless products and fiber-to-home (“Wireless networks” 2002).

Increased competition is leading to both small, niched companies, and large, consolidated companies. Some large companies are also considering the niched approach. One such market is providing power protection for industrial controls and medical laboratory equipment (“Nontraditional markets” 2004). Competition will remain high, but profit margins at the project level are anticipated to increase due to cost cutting and market changes.

Design/build is increasing in proportion to the requests for quotations (“A/E/C Firm” 2004). Electrical contractors will be expected to work over a large portion of the project life cycle by partnering with owners and performing larger-sized design/build projects. Work complexity of future projects is anticipated to increase while project durations are anticipated to compress when associated with owner requirements. Job lead times are anticipated to decrease—also associated with more demanding owner requirements. This broadening of work scope is leading to more joint ventures. The respondents felt that design/build contracts, fostered by value engineering and constructability, will become an increasing percentage of revenue. Essentially, firms that focus on providing comprehensive services (e.g., design/build/operate contracts) will increase their market share and be able to focus on low-volume, high-margin projects. Improved margins are attainable if firms are successful in attracting, retaining, and educating additional manpower. Other areas of specialization will only be profitable if improved margins can be attained. For example, removal of polychlorinated biphenyls (PCBs) and asbestos is still an environmental issue, but insurance premiums tend to erode profits. This is an example of one area where firms should elect to reduce their risk exposure by focusing on environmental projects as a core competency, and enjoy the resulting higher margins.

Strategic plans will be based on opportunistic (project-driven) growth, often informal, and of indeterminate length. Electrical contractors are beginning to put more focus on the front end of jobs by performing constructability reviews, doing value engineering analyses, and establishing personnel assignments early in the project (Russell and Jaselskis 1992). There is also a stronger focus on marketing and maintaining owner relationships. Additionally, labor availability at all levels is seen as a major constraint, with the industry treating labor as a resource, not a cost, through greater training emphasis. There is also informal risk management at the corporate level, mainly through estimate control in bidding.

Electrical construction firms, as with nonconstruction firms, are examining their corporate structure. Recently, large corporations have been converting their organizational structure from a traditional hierarchical structure to a matrix management organizational structure (Kole and Lehn 1997). With the matrix management structure, functional areas of the business are combined, and managers, on a daily basis, lend their expertise to any functional area of the firm. Several interviewees indicated that their firms are in the process of “flattening” the hierarchical management structure to accelerate information exchanges among operations managers (e.g., project managers) and those individuals traditionally thought of as top managers. Additionally, a web or matrix management organization fosters increased employee interaction within projects. Employees are typically encouraged to cross train and provide suggestions to improve all operations of the firm. This type of interaction is not typical with the traditional vertical hierarchical structure that usually gives rise to “silos” of functional areas with little interaction.

The potential benefits of a flat organizational structure are numerous. Cross training of employees permits increased utilization of employee hours and leads to improved employee morale, lower turnover, and improved administrative efficiencies that result in an improved profit margin. Firms with flatter organizational structures are able to more easily communicate across functional boundaries; increased communication leads to faster management decisions and improves market response to emerging opportunities. Given the rapid development of information technologies, the implications for building rewiring, and the limited life of new infrastructures, contractors in general need to improve information flows across management boundaries. Assuming electrical contractors are successful in improving information flows across management divisions, electrical contractors may become the general contractors of the future.

Electrical contractors are beginning to seek efficiencies through supply-chain management. This is in line with a study from the National Association of Electrical Distributors that recommended instituting a horizontally integrated supply chain where all parties can use their expertise for material procurement (“Study recommends” 2005). This will lead to increased productivity and lower construction costs. It is anticipated that firms will experience greater outsourcing of materials management through inventory control, just-in-time material delivery, and just-in-time production of materials. At present, there is no general consensus in this area as some of the administrative functions are being strengthened by some and outsourced by others.

There will be decreasing site inventories due to just-in-time delivery, just-in-place, kitting (inventory is preassembled in ready-to-install kits), and outsourcing materials management. Also, there will be extensive use of “preferred suppliers” supporting standardization of purchase orders, shipping documents, and invoices. Supplier qualification will not be based solely on cost but will consider other criteria such as service quality and timeliness.

The impact of inventory management innovations will force changes in financial analysis. For example, the average value of inventory has already dropped to 3 percent of total assets and may no longer be meaningful for liquidity estimates according to the 2000 NECA Financial Performance Report (Industry Insights 2000). The increased use of inventory outsourcing will increase current liabilities and further deteriorate measures of liquidity. The hope is that increased profit, through more efficient operations, will translate into increased cash and improved working capital.

In addition to kitting, firms are also working to improve inventory flows. Much of the improvement that has already been attained in inventory cost reduction comes from strategic alliances with inventory providers. As noted by several participants, nationwide supplier alliances make it easier to expand market shares to new geographical segments.

Safety will continue to be a priority. Improved standards for protection from arc-flash and shock hazards will need to be heeded (Ayer 2005). There will also be a continuing hazardous material disposal concern (e.g., PCBs in electrical transformers, mercury in fluorescent bulbs, and exposure to electromagnetic fields); however, these issues are not as much of a concern as safety at this time.

The single most pressing constraint to long-term electrical contractor viability is succession planning (Parson 2004). Succession planning should be viewed as an opportunity for the founder to provide a legacy that is not necessarily embodied in family ownership. The challenge to provide a leadership vision is closely connected to the issues of succession planning and employee retention. Increasingly, founders are faced with challenges from top management that focus on shared ownership. Although an employee stock ownership plan (ESOP) is one option for succession planning, and an exit strategy for private owners, the creation of ESOPs offers unique challenges for union shops. ESOPs also constrain investment options, since funding of an ESOP consumes working capital that might otherwise be used for expansion. As an alternative to family succession and ESOPs, founders should consider structuring buyouts with members of top management who share the founder’s vision. This recommendation becomes more pressing when considering the extremely tight employment market and opportunities offered to top management in other fields. Essentially, some form of employee ownership is becoming an issue of retention.

Electrical construction jobs are becoming more specialized and complex, and changing more rapidly, as evidenced by increasing emphasis on training. The tendency to replace labor with capital (equipment) is being offset by rising wages due to labor shortages.

Field supervisory personnel will be provided greater authority in the field. Responsibility will be assigned to lower levels, thus empowering the journeymen or foremen to be almost project managers.

Less skilled labor will be available in the future, which has led to proactive recruitment efforts, greater training, and equipment/technology investment. There is also an attempt to change the industry image. Most of the case participants articulated the need to increase the utilization of NECA training programs. The participants identified increased relationships with institutions for higher education (e.g., community colleges and universities) as key components in future labor markets. However, as with other industries, stronger employee relationships need to be formulated as early as high school.

More detailed and timely control through information technologies is anticipated. This will occur through more detailed work breakdown structures and installation drawings. There will be an increasing integration/coordination requirement, especially for subcontractors. Improved information and communication technologies will facilitate this added integration/coordination effort.

There will be an increased use of information technology to increase end-user efficiency and effectiveness. Some firms will use this technology for business process integration. Other administrative infrastructure (e.g., benefits programs, hiring programs, retention programs, and legal reviews) is not anticipated to change dramatically.

New developments in employee financial management, consistent with advances in information technologies and open-book management, is the use of data warehouses and software that permit the employee to obtain real-time, detailed project information. However, these advances in open-book management and real-time information availability have created new challenges. Company controls can be identified as management controls, of which accounting internal controls are a subset. Firms will need to devise both management controls (e.g., contracts that both safeguard inventory held by suppliers and provide mechanisms for alternative inventory sources) and internal controls (e.g., password protection and electronic firewalls to limit information theft). Management control procedures need constant revision to adapt to managers’ need for faster, more accurate information.

Firm growth will be primarily financed by working capital. However, there is isolated consideration of using market capital to finance company operations. At the project level, companies will continue to finance labor and materials. Project joint ventures may increase project-level finance. Leasing will continue to be driven by external forces. However, there is some consideration of operations flexibility in the own versus lease cost tradeoffs.

The reported reliance on working capital to finance growth is consistent in both the case analysis and the random survey; however, a reliance on working capital will not typically support rapid expansion. To attain aggressive growth, firms will need to explore a greater reliance on long-term debt or an increased use of equity financing that includes mergers. Although neither of these funding options are typically consistent with private ownership, there are firms that have grown to be dominant players in their industries while remaining private (e.g., Cargill and Koch Industries).

Alternative measures of labor and asset utilization focusing on the cash and accrual expenditures for labor and equipment should be considered (Leftwich 1983). Firms are obtaining benefits from information that utilizes a mix of cash and accrual-based accounting. The benefit of using accrual-based accounting is the predictability of future cash flows (Ou and Penman 1989). The benefit of using cash-based accounting is to evaluate the actual timing of the accrual-based commitments into cash. Improved measures of corporate efficiency are evolving, such as the comparison of working capital (an accrual measure) with cash generated by operations (a cash basis measure). As traditional financial statement elements (e.g., inventory, plant, and equipment) are redefined in this age of information technology, contractors will have to establish new measures to evaluate their firms’ financial preference of projects.

With higher exposure for the electrical contractor, a more litigious environment is to be anticipated because the general business environment apparently encourages more litigation. Partnering for negotiated work may be one method for establishing limits on litigation. Increasing insurance premiums and sexual harassment might also be issues to deal with in the future.

Consistent with the use of flat organizational structures, firms are beginning to explore open-book management. Open-book management is the phrase given to the participatory management style that permits employees to have access to previously private financial information. The basic notion is that for employees to be fully informed decision makers, they need full access to timely financial information. However, the ownership structure within the construction industry, in general, has led to resistance to opening financial information for employee consumption.

Overall, the respondents noted that aggressive growth will be based on management-defined opportunities. In general, contractors will be forced to adapt very quickly to emerging technologies and construction techniques, plus the entrance of new competitors, such as utilities purchasing traditional contractors. While financial management techniques will be utilized for evaluation of projects, nontraditional opportunities must be explored to remain competitive.

To be competitive, firms need to push administrative functions at the field level. Although field superintendents currently provide support for administrative functions, new technologies, such as pen-based computers, will enable all workers to share in the process of information acquisition and analysis. Increasingly, contractors will need to explore entity-wide databases, such as Oracle, SAP, and PeopleSoft, to facilitate entity relationship planning. In the past data collection has focused on accountability, financial reporting, and regulatory compliance. Today, data need to be more flexible and in user-friendly forms for quick analysis of financial flexibility and production capacity. Firms will increasingly focus on employee empowerment, more distributed control, and improved information systems.

Any change to quicken decision making will necessitate additional expenditures for risk management. Some firms are exploring the use of a company-wide risk manager. Additional risks will occur as firms assign more management controls and decision making to superintendents and foremen. To provide assurance to creditors and investors that the firm is viable and controlling risk, several respondents identified the increased use of external auditors to conduct financial and performance audits. The research team also believes the firms will increase their use of internal auditors to conduct performance audits and challenge firm managers to remove constraints on inefficient operations.

Value engineering, at the time of bidding a project, provides a competitive edge that firms need to increase revenue and put a larger percentage into income. Project lead time, from award to the start of work, will almost completely disappear, since this is one of the easiest ways to gain slack in the overall project schedule. Partnering between owners, general contractors, and specialized (niche) contractors will facilitate value engineering. Some respondents believe that by focusing on specialization and niche marketing, successful companies will be able to more than triple their revenue in a decade. Consistent with the expected growth in value-added engineering, firms will need to commit significant resources to technology, especially computer-aided drafting (CAD) workstations.