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Making Growth Count

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Leading construction-industry companies have successfully withstood the adverse effects of the global economic downturn by growing company revenue in spite of it. But the real challenge for engineering and contracting firm managers has been the ability to turn that growth into increased value for shareholders.

 

ROCA
In a 2011 analysis of 37 major global construction-industry companies, management consultant Accenture found that the firms reported a 6.4% compound annual growth rate in revenue between 2007 and 2010. But they also had relatively low profitability over the five-year and three-year periods ending in 2010.

Firms' average total return to shareholders was -4.8% annually for the three-year period. This compares with -3.1% and -0.9% for the freight-and-logistics and industrial equipment sectors, respectively.

Emerging Competitors

During the downturn, performance varied among global firms. From 2007 to 2009, some companies in emerging construction markets began to move ahead of many of their developed-market competitors.

In fact, growth of emerging economies is a key factor in the recovering global construction market, along with stimulus packages in the U.S. and elsewhere, and mergers and acquisitions.

Yet this high-revenue growth has not always translated into the creation of earnings and shareholder return. Whether industry firms are publicly or privately held, they are under more scrutiny from shareholders who want to see revenue growth converted into higher profits. As companies grow, this pressure will only escalate.

Creating Shareholder Value

Strategies that enable firms to allocate capital most efficiently are critical as global expansion and diversification take hold.

Construction companies need to become highly efficient financial managers that use dedicated central teams and streamlined internal processes to ensure group-wide access to capital, better debt-to-earnings ratios and accelerated rotation of assets as construction cycles change.

This approach also limits companies' exposure to client defaults and project risks by leveraging sophisticated risk-monitoring capabilities.

Better-performing industry firms also are boosting profits through more efficient operations and use of new technologies, such as building information modeling.

Infrastructure owners anxious to minimize both the risk and cost of complex, high-value projects are finding well-integrated suppliers increasingly attractive.

Fine-tuning logistics and the supply chain also is key. This strategy may include rethinking supplier relationships to slash administrative costs, improve quality and reduce completion time for increasingly complex projects.

Some leading firms have extensive global sourcing operations and use e-procurement, while others have internal programs to ensure subcontractor compliance.

Turnkey solutions and prefabricated products that embrace more customer-oriented approaches— not unlike those in consumer industries—can speed project delivery and monitor price volatility of key components, such as materials.

The macroeconomic environment and consumer trends are making a deep impact on the industry. The global construction sector is set to grow over the next decade, nowhere more aggressively than in the rapidly emerging economies of Asia, Latin America, the Middle East, Africa and Eastern Europe.

Fueled by urbanization, globalization, infrastructure renewal and the growing needs of developing megacities, construction in those markets could double within 10 years, says a 2011 industry-sponsored analysis.

According to "Global Construction 2020," this growth will result in a $6.7-trillion business by 2020 and account for some 55% of global construction output.

To take advantage of the opportunities these trends indicate as well as satisfy shareholder expectations, companies will need to boost their bottom-line strength.

In a changing global marketplace with a broader array of competitors, strong positioning will become even more critical. Those firms that are agile, efficient and customer-focused will reap the rewards. 

Based in Spain, Jordi Roca is managing director of the Construction Industry Group for Accenture, a management-consulting and technology services firm. He can be reached at jordi.roca@accenture.com.

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