We continue to be amazed by contractors and developers who have so effectively used the tool of financial leverage to fund projects and create wealth, but so often struggle to effectively leverage themselves with others, particularly clients and employees. Believe it or not, the principle is really the same.
The construction industry understands and appreciates the wealth-creating value of using “other people’s money.” Savvy construction and real estate development professionals invest the necessary time to nurture and develop relationships with investors and sources of debt financing for their projects. They often give as much attention to important sources of capital as they give to their projects. However, the industry’s use of “other people’s time” to build an organization and create wealth is a very different story.
As with financial leverage, effectively developing and managing people can have a tremendous impact on a company’s investment return. Employing and developing people provides business owners the opportunity to focus their efforts and talents on the most important value-added activities of their businesses. Unfortunately, our experience indicates that contractor-owners who are strong people developers and people managers are very rare.
From our experience, we offer three observations as to why:
- Successful contractors and developers are often extremely talented and capable people. They can truly perform most of the specific activities of their business better than the people they are able to attract to their companies as employees. The result: They try to do everything themselves.
- Contractors tend to be project-centered versus people-centered. They employ people to “help them with their projects” rather than to help them build their companies by investing in and developing their people.
- Successful contractors and developers are highly skilled and experienced negotiators. While solid negotiating skills are extremely important in many aspects of construction and real estate development, attempting to attract and retain the best talent for the absolute minimum compensation often backfires.
It is, therefore, not surprising to see that large construction and real estate development organizations are rare and account for only a very small percentage of the total construction and development marketplace. Many successful contractors are unable to entice new owner-shareholders for expansion or succession because much of the value of their existing organization is tied to the efforts and talents of the current owners. They have not sufficiently leveraged themselves with other people to create sustained organizational value. In fact, most construction and development companies do not survive a single-generation ownership life cycle.
What have the successful larger organizations done with respect to “people leverage” to overcome the challenges and trends common in the rest of the industry?
- One very successful commercial developer, contractor, and real estate services firm considers its employees its most valuable resource. It recruits top-notch professionals from the nation’s top-tier MBA programs using highly attractive compensation packages, including attractive annual performance bonuses. The company commits substantial resources to hire, support, and train outstanding people.
- A nationally recognized leader in commercial real estate development and construction services, uses the byline, “Our strength lies in our people.” It offers a very competitive compensation and benefits program and has established a company-sponsored “university” to ensure the personal growth and advancement of its people.
- Many large community developers/homebuilders invest heavily in employee training and development programs. Further, through performance-based compensation systems and decentralized organizational structures encouraging operational autonomy, they are able to attract and retain high-quality personnel.
Consider the following as suggestions in addressing these issues:
- Focus on your people not your projects.
“The effective development of and delegation to other people is perhaps the single most powerful high-leverage activity there is” according to Stephen R. Covey, author of the best seller, The 7 Habits of Highly Effective People. “Transferring responsibility to other skilled and trained people enables you to give your energies to other high-leverage activities.”
- Work on your business, not in your business.
Direct your attention to continuously improving the productivity of your company by establishing operating systems and procedures that will allow for each important business activity to be delegated and effectively performed by the lowest possible skill level.
- Use performance-based compensation systems for your key people.
Consider using partnership equity participation agreements for “develop-and-hold” ventures and profit sharing (tied to specific performance criteria) in “build-to-sell” and “build-for-others” situations.
Contractors and real estate development companies are primarily— often exclusively—service businesses. The intrinsic value of a service business lies in the quality of the people it employs. Attracting, developing, empowering, and retaining quality people is the key to building a successful, growing organization having sustainable value beyond the tenure of its current stakeholders.
A final thought: there is one important difference between the tools of “financial leverage” and “people leverage.” There are practical limits to the use of financial leverage. There are no such limits with people.