Here are two key mantras of business success, which are not entirely in harmony:
- Consistency of service delivery is the only way to build a brand that can succeed over time.
- Any business model needs to adapt if it is to avoid future failure. Management gurus don't like the concept of "if it ain't broke, don't fix it" – life moves too fast for that.
In analysing Kier, one is struck by this dilemma. Is a share-owning, decentralised, locally accountable business with a high level of risk aversion going to survive, and thrive, in the future world glimpsed in Building's recent 160th birthday supplement?
Colin Busby, the man who has led the company through buyout and float, has taken the job of chairman and, as his swan song, has produced an interim report that is the envy of the industry. It is difficult to see an indicator that is not positive:
- Dividends are up 15.6% and earnings per share up 23.5%.
- Turnover is up 4.5%.
- Operating profit is up 39.1%.
- Some £45m is generated from its operating activities.
- Its acquisitions are bearing fruit earlier than expected.
- Property exposures are covered by pre-sales.
- It has a strong order book across all businesses.
- All its minor problems are provided against.
I struggle to find any fundamental problems hidden behind mealy-mouthed covering words. We have seen a smooth handover to John Dodds – yet another experienced, trustworthy and people-oriented construction professional – as well as planned appointments to replace retiring managers across group.
I think these interim results show why Kier has outperformed the industry share index since it floated in 1996. So what are the consistent elements that have built the Kier brand?
I used to work with a chairman who handled each analyst briefing with a slide show of a single slide displaying two columns: "Promises made" and "Promises kept". He set out targets for each year and then showed that we had delivered. Colin Busby has done the same in his own way by stating simple objectives and never delivering a surprise – let alone a shock or a profit warning. Kier is seen as dependable. It will not promise what it cannot deliver.
It has made limited and opportunistic acquisitions but each one has formed a major strategic building block to complete the Kier offering. And it does not overpay for any purchase – the near-fatal mistake of Amey and Marconi. I have spoken to executives in companies Kier has bought, and their opinions went like this: "It was made clear why they bought us, what they wanted us to do for them, what the ground rules were, and then they left us to deliver. The Kier corporate family was easy to join and enjoy."
Kier people are pretty down to earth and they reject any of the "bull and bravado" brigade early on. Corporate politics is not a big feature, and the top people seem to get on.
So far, so good – a conservatively led business, focusing on its strengths and with clear succession planning. Even its major projects business and its overseas operations are not rashly managed – no Millennium Stadiums or National Physical Laboratories here. The move into support services has been solid and risk-free, with all the costs of pursuit properly written off.
Ownership is in-house, in partnership with solid, dependable and loyal institutions. It has a low average size of contract in the regions, a good mix of markets, and a good balance between hard-money local contracts and its partnership framework contracts. Busby is even bullish (not a natural characteristic) about the next two years, as he has reduced exposure to commercial clients and has a record workload on hand.
So is there really nothing to do? Just keep on rolling with a model that works, even in the present tougher climate? Now that really would be complacency, and John Dodds should beware that cardinal sin.
I would hate to see Kier kept away from cutting-edge clients because it is seen as too conservative
I can't help but mention a few issues that I feel need to be addressed by the group.
First, the idea of an ever-growing group of independent regional businesses with local market focus has always horrified me. The person at the centre who is in control of the regional operations moves on to be chairman or to buying or developing new revenue streams. Control and personal knowledge of events weaken with corporate growth and suddenly the gross margin drops. Regional businesses are private fiefdoms that protect their independence and refuse to merge. If they were to merge and become centrally controlled, their cost overheads would be reduced.
For example, Kier has three companies operating in the South – Kier Southern, Braziers and Henry Jones. I am sure they all know what their market segment is and how they compete, but why three sets of overheads?
Regional businesses have notoriously low margins but this is balanced by good cash generation. But if you lose the management touch, then losses suddenly appear and cash vaporises. Control must increase and some rationalisation surely needs to take place. I would look at the reporting systems and ensure that there was continuity of approach and conformity in application. If you lose track of this business you will pay dearly – one-time contractor Trafalgar House did just that and paid the price, and Bluestone's problems are another example of how rectifying an out-of-control regional business is a larger task than anyone expects.
The expansion into housing was well-timed and not expensive. Nevertheless, Kier now has the problem of landbank management. Tony Pidgley, Lawrie Barratt and their like knew when to be rich in land and when to reduce exposure. Kier needs to figure out if it is under or overexposed to future and present land holdings, since housing is now a significant part of its earnings.
The same concerns exist about the property portfolio: how quickly can its development potential can be realised? Will it generate a continuing and regular stream of income when the property sector is in some crisis?
Is the "safe pair of hands" image acting as a drag on technical innovation, the need for which was proclaimed so eloquently by Peter Rogers in his speech at Building's House of Commons reception? Kier needs to be a leader in this area, but that requires some image-building. Many clients are moving in this direction and I would hate to see Kier kept away from cutting-edge clients because it is viewed as too conservative.