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© 2011 FMI Corporation 1
Ethics and Risk Management:
When “Trust Me” Isn’t Enough
© 2012 FMI Corporation 0
December 13, 2012
National Society of Professional Engineers
Presented by:Jim Schug, FMI Corporation
Dilbert on Risk
© 2012 FMI Corporation 1
Who/What is FMI?
About FMI
‐ Get In ‐
Strategic PlanningBuyer RepresentationAcquisition Integration
‐ Get Work ‐‐ Get Out –
Ownership Transition
FMI services span every phase of the construction firm’s lifecycle…
…and we have chalked up a few wins:
59 years of continuous industry leadership and success
56% of the ENR 400 L t C t t
© 2012 FMI Corporation 2© 2012 FMI Corporation 2
BD AssessmentMarket Perception Studies
Presentation skills
‐ Develop People ‐
Leadership DevelopmentManagement SuccessionExecutive Coaching / Peer
Groups
‐ Do Work‐
Productivity ImprovementProject PartneringRisk Management
Ownership TransitionSeller RepresentationManagement Buyout /
Valuation
Largest Contractors
21% of the ENR Top 600 Specialty Contractor
77% of the ENR Top 100 CM Firms
14% of the ENR Top 500 Design Firms
Challenges & Changes
• Competition willing to work for “wages”
• Project speed, complexity and change
• Historically strong sectors have disappeared
© 2012 FMI Corporation 3
• Competition has doubled or tripled for your targeted customers or projects
• Poor‐quality documents
© 2011 FMI Corporation 2
What is Risk Management?
We operate in a VUCA environment now: Volatility, Uncertainty, Complexity, Ambiguity
The organizational leader’s antidote to VUCA is: Vision Understanding Clarity and Agility
© 2012 FMI Corporation 4
Vision, Understanding, Clarity and Agility
Risk Management is the structured approach to understanding uncertainty and creating clarity
Identifying potential risks
Analyzing the potential impact of those risks
Responding to risk factors to either mitigate or eliminate those risks
Average Trade Contractors Net Profit (Before Taxes)
2006 – 2007
2004 – 2005
3.8%
3.9%
2.4%
1.8%
1.20%
How well do Contractors Price Risk?
© 2012 FMI Corporation 5
0% 1% 2% 3% 4% 5%
2012 – 2013
2010 – 2011
2008 – 2009
1.40%
3.90%5.1%
3.8%
Source: RMA 2004 – 2011 Annual Statement Studies
Textbook Company Risk Management Process
1. Identify Potential Risks
2. Analyze Impact of Risks
3. Determine Potential Risk Treatments
4. Create a Risk Management Plan
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5. Implement Plan
6. Evaluate Plan
US Army Approach
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© 2011 FMI Corporation 3
Determining Potential Risk Treatments
AvoidanceEliminate
ReductionMitigate
Transference
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TransferenceOutsource or Insure
RetentionAccept and Budget
Risk Types
Strategic
Design
Financial
ContractualDisputes
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Delays
Subcontractor and Vendor
Operational
Project Performance
OTHERS: BLACK SWAN
Failure Chain
Mind of the Contractor
Nature of the Construction Industry
Failure Chain Reaction Model
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Bankruptcy Doom Loop
© 2012 FMI Corporation 10
Source: FMI Research on “Why Contractors Fail”, FMI Quarterly, Issue 2, 2007
Culture and Systems of the Organization
General Economic Conditions
Company Performance
Most Often Cited “Causes” for Contractor Failure
StrategicUnrealistic growth, over expansionUnfamiliar new markets and/or entry into new types of constructionVolume obsession
Unrealistic promises, bad contracts, poor project selection
OrganizationalInsufficient capital/profits
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Insufficient capital/profitsLack of business knowledge/poor financial management/poor sales skills/inadequate marketing
Poor leadership/poor leadership transferProject losses/poor field performanceOwner court battles/owner bankruptcy
UncontrollableIndustry or economic weaknessBanking and surety changes
Source: FMI Research on “Why Contractors Fail”, FMI Quarterly, Issue 2, 2007.
© 2011 FMI Corporation 4
Estimate for Advantage – Best in Class Techniques
Go No Go process clarity
Common systems, review process, highest and best use
Historical costs
Accuracy in pricing contingency
© 2012 FMI Corporation 12
3% contingency on 100mm vs
1% contingency on 100mm will win a job,
but it will also put many folks out of business…..
20‐ 40% of risks are typically insurable. The other 60‐ 80% are operational risks. ‐‐‐ Scott Razor, Zurich interview with FMI
Leader Decisions
New Geography
Same Service
New GeographyNew Service
© 2012 FMI Corporation 13
Same Geography
Same Service
Same GeographyNew Service
© 2011 FMI Corporation
Growth from “Great Operations”
© 2012 FMI Corporation 14© 2011 FMI Corporation
Communication is critical
Early Warning Indicators:• Accurate reports• Alerts, email notification• Key performance indicators (KPIs)• Communicate corrective action
Early Warning Indicators
Executive
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Reports
Work Packages
Cost
Critical Path
Changes
Resources
SchedulePlanning andScheduling
ProjectControls
Project Manager Project
Engineers
Subs
Client
© 2011 FMI Corporation 5
Who is your Risk Manager?
© 2012 FMI Corporation 16
How Companies Become Unethical
Slippery‐slope to remain competitive
Lack of awareness and training
Leadership ignorance
Organizational culture
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Unaware of laws and regulations
Project Leaders or Project Witnesses?
Does the Project Team?
Know where the job stands today
Know where the job will stand at completionDo your field managers know where they are compared to the estimated costs or targeted production rates
49%
39%
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Yes No Some Do Not Sure
at least on a weekly basis?
11%
1%
FORCES acting on the Project Team
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The Multi‐Faceted Project Leader
THETHEPROJECTPROJECTLEADERLEADER
The Planner
The BusinessPerson
• Procurement• Quality Management• Budget Establishment• Change Order Management
• Scheduling• Subcontractor Management• Safety• Meeting Management• Project Documentation
© 2012 FMI Corporation 20
LEADERLEADER
The Communicator
• Closeout Procedures• Project Integration• Ethics/ Risk Management• Customer Management
Reported Frauds for the E&C Sector
© 2012 FMI Corporation 21
Source: PricewaterhouseCoopers, Global Economic Crime Survey, March 2010
The Costs Associated
Average Company loses 7% of their revenues to Fraud annually – Jacob Blass, President of Ethical Advocate
A i i i d i $330 000 i id
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Average in construction industry is $330,000 per incident
Doesn’t stop there ….
Video
Managing Human Nature
http://www.ted.com/talks/dan_ariely_on_our_buggy_moral_code.html
© 2012 FMI Corporation 23
Dan Ariely, Ted Talks
(4:45)
© 2011 FMI Corporation 7
The Value of Ethics
“It’s not profitable to be unethical. While our safety program has a significant cost associated with it, you can’t afford to have an unsafe project. Neither can we afford to have other than the highest degree of ethics whatever the cost Many owners are
© 2012 FMI Corporation 24
highest degree of ethics, whatever the cost. Many owners are now going through more than a simple bidding process; they evaluate all aspects of our company and our reputation. Operating within the highest of ethical standards is not only the right way, but is sound business practice.”
Norm Holly, Vice President of Kiewit Corporation
Dilbert on Strategy
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Our chances of being a low cost producer depend upon process integrity
Process Integrity
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It also includes treating customers in a way that encourages repeat business
Customers go where they trust
Trust is an attitude
Bid situations: Trust is a factor in qualification to bid, but also in the trustworthiness of our business processes, which can increase our chances of being the low bidder
Contingency Plan Framework – Often missing from Strategy
2013 Mission
Business Operations Human
© 2012 FMI Corporation 27
Scenario Plans Development Plan
Operations Plan
Financial PlanHuman
Resource Plan
• How long and
how deep?
• Determine
trigger points
and actions.
• What is our new
Context?
• Find the right
projects with the
right clients at
the right price.
• Deputize non‐
traditional BD
resources.
• Analyze how BD
time is spent
• Execute all
projects
flawlessly!
• Drive operational
best practices
• Insist on
compliance
• Improve
productivity
• Cash is King!
• Challenge
budget
assumptions.
• What gets
measured, gets
done.
• Know your
breakeven point
• Communicate –
Who needs to tell
what to whom
and when?
• Scale the business
based on
dispassionate
view of the facts.
• Get rids of the
imposters!
© 2011 FMI Corporation 8
Ethics Best Practices
Building a better reporting mechanism, and a stronger ethics program
Continuous improvement
P l
© 2012 FMI Corporation 28
Prepare your employees
Promote your hotline
Ensure a thorough investigation
Prepare for the next report
Establish Project Performance Indicators
Identify the Key Performance Indicators – KPIs are essential shortcuts to understanding the status of the project. They enable the project team to quickly view a summary of project performance
Traditional Lagging Indicators
© 2012 FMI Corporation 29
gg g• Actual Cost versus Baseline Costs
• Actual Schedule Milestones Accomplished
• Productivity (rate or units) to date
• Cash Flow to date Compared to Budget
Common Leading Indicators• Projected Total Cost to Complete
• Projected Completion Date
• Projected Cash Flow
DPR on the “Gray Area”
It isn’t just a reactive approach :
“Sometimes there is no black and white answer. So you have di i b h ki d f hi d h i h
© 2012 FMI Corporation 30
discussions about those kinds of things and how you might want to be treated, and how you might want to handle the situation.”
‐ Doug Woods, DPR
Ethical Best Practices‐ FMI Interviews of 20 CEOs (1 of 2)
Ethics starts at the topLeadership must champion ethics policies, practices, and attitude
Keep ethics policy clear and tied to key valuesMaintain long‐standing company values
Get buy in from the entire company
© 2012 FMI Corporation 31
Get buy‐in from the entire companyDrive policy into the field e.g. on‐site training, field audits, etc.
Hire the right peopleCheck references and explore the applicant’s values
© 2011 FMI Corporation 9
Ethical Best Practices‐ FMI Interviews of 20 CEOs (2 of 2)
Ethics can be taughtMaintain discussions, dialogue, and training
Review, monitor, and report ethics behaviorE.g. open door policies, hotlines, self‐report measures, risk assessments
© 2012 FMI Corporation 32
Take action on ethical violationsReport violations and maintain repercussions; make violations clear i.e. suspension, reprimand, termination, etc.
Did You Know
A post‐job review meeting is the best way to improve performance on all projects going forward
You learn what went well, what didn’t and why, so you’ll be more prepared for the next job. It also provides great feedback to Estimating about how well it performed
© 2012 FMI Corporation 33
“Postmortem” meetings are often the most underutilized project management tool in the business
Key Learning Points
Common types of risks
Reducing project risks
Steps in the Risk‐Management ProcessIdentifying Risks
A l i Ri k
© 2012 FMI Corporation 34
Analyzing Risks
Potential Risk Treatments
Creating a Risk‐Management CULTURE across the company
Jim is a senior consultant with FMI, management consultants and investment bankers for the engineering and construction industry. He enjoys blowing up organizational silos to unlock profitability.
With more than a decade of experience as an Army Officer, Jim honed his leadership skills to motivate operations in complex and challenging environments. His roles included strategic planning, developing training curriculum for large organizations and command with honors. He refined these skills working for a national builder, leading his team to successfully integrate operations, sales
Jim SchugSenior Consultant
© 2012 FMI Corporation 35
Jim SchugFMI Corporation308 South BoulevardTampa, FL 33606
Tel: 813.636.1254Fax: 813.636.9601E-mail: [email protected] site: www.fminet.com
, g y g p ,and customer service.
Today, Jim is passionate about developing customized strategy and best-in class operations with his clients. He applies practical experience with an in depth understanding of leading lasting behavioral change in dynamic environments.
Jim earned a bachelor’s degree in quantitative economics from the United States Military Academy at West Point and a master of science in engineering management from the University of Missouri. In addition, he holds the Certified Equipment Manager distinction (CEM). He has served in leadership positions on various non-profit industry associations.
© 2011 FMI Corporation 10
About FMI
FMI is the largest provider of management consulting, investment banking and research to the engineering and construction industry. We work in all segments of the industry providing clients with value‐added business solutions, including:
• Strategy Development• Market Research and Business Development• Leadership and Talent Development• Project and Process Improvement• Mergers Acquisitions and Financial Consulting
Knowledge • Expertise • Relationships
Visit us at www.fminet.com
© 2012 FMI Corporation 36
• Mergers, Acquisitions and Financial Consulting• Compensation Data and Consulting
Founded by Dr. Emol A. Fails in 1953, FMI has professionals in offices across the U.S. FMI delivers innovative, customized solutions to contractors; construction materials producers; manufacturers and suppliers of building materials and equipment; owners and developers; engineers and architects; utilities; and construction industry trade associations. FMI is an advisor you can count on to build and maintain a successful business, from your leadership to your site managers.
Project Team ‐ Risk/Opportunities worksheet
© 2012 FMI Corporation 37
© 2012 FMI Corporation 38
To Receive Credit
Each participant should use this link
http://www.nspe.org/quiz/ethriskmgm.aspx to take the quiz. Once you have passed the quiz with 70% or better, you will be given a link to download your certificate. (Please note that you need the latest version of Adobe Reader to have the
© 2012 FMI Corporation 39
(Please note that you need the latest version of Adobe Reader to have the certificate display properly.)
© 2011 FMI Corporation 11
Give Us Your Feedback
Please go to http://www.surveymonkey.com/s/riskmgmand take our short survey. Your feedback will help us develop future programs
© 2012 FMI Corporation 40
develop future programs.
Check out NSPE on Twitter http://twitter.com/NSPE
and F b k htt //bit l /19Rf k
© 2012 FMI Corporation 41
Facebook http://bit.ly/19Rfak
NOTICENOTICE
The NSPE Online Seminar series is presented and copyrighted by the National Society of Professional Engineers®. All rights are reserved. Any transmission, retransmission or republishing of the audio or written portions of this program
© 2012 FMI Corporation 42
of the audio or written portions of this program without permission of the National Society of Professional Engineers® is prohibited. THANK YOU !THANK YOU !
© 2012 FMI Corporation 43
THANK YOU !THANK YOU !