The subtle art of regime change

1 Contract writedowns

Row factor

What’s involved … The incoming boss takes a look at existing contracts and comes to the conclusion that some or all of the unpaid money is unlikely to come in. This can happen after a dispute with a client over the project sum, or unpaid insurance claims.

This is the prudent view. However, by continuing to account for this money, or refusing to admit in the accounts that it probably won’t be recovered, firms can look more successful than they truly are. A new boss will want to ensure that there are not too many contracts ticking away on time fuses, as they will inevitably sully their own reputation when they detonate. The timely write-off or writedown of existing contracts only reflects on the competence of the ancien regime.

Where you’ve seen it before … After a review of 200 contracts, Costain’s new chief executive Andrew Wyllie wrote down £11.9m on about 10 jobs in its building division. There were further writedowns in the international division, with the result that the contractor declared a £21m pre-tax loss in Wyllie’s first interim results, released last month.

In a bid to pre-empt what the incoming chief executive, Samir Brikho, might be forced to do, Amec boss Sir Peter Mason has announced £140m worth of hits in the past 12 months (15 September, page 28). Mason conceded that the construction division’s management had failed to review tender bids properly, effectively underpricing a series of jobs.

Potential pitfalls … There’s a problem of believability. Chief executives tend to be ultra-conservative in their accounting when they arrive, and estimating how much a contract is likely to bring in is a subjective business. Even if the writedowns are necessary, some City commentators naturally assume that the board has taken off more than it had to, thereby giving creating extra cash to bolster the next set of accounts. According to one analyst: “As you never have to say on which contracts you are making writedowns, you can make provision for more than you need, and this extra can be added to the profit in the next set of results.”

Costain has admitted that it has not given up hope of getting back some of the £11.9m, and Mason is similarly optimistic about £15m he has written down on a Middle Eastern contract. As a result, some analysts might assume the money will come in when making their forecasts for later results.

Real-world equivalent … Steve McClaren, Sven-Goran Eriksson’s replacement as England football manager, immediately wrote off the man his predecessor saw as one of his most vital assets, David Beckham. Similarly, he wrote down the value of Theo Walcott. Eriksson took the 17 year old to the World Cup, but McClaren thinks he’s one for the future and sent him back to the under-21s.

2 Strategic reviews

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What’s involved … The new boss will undertake a review if they are keen to remodel the business and stamp their authority on it. As a City source puts it: “The chief executive often gives the company a personality. The first 100 days are the most important. You bring in your own people and set a new agenda.”

The idea is also to galvanize the workforce to take the company in a specific direction, such as working in new sectors or opening offices in emerging geographic markets.

Where you’ve seen it before … When McEwan, took over Currie & Brown last September, he began planning the the strategic overhaul that he implemented earlier this year. His aim was to focus the company and its workforce on four core areas: cost management, project management, building surveying and management consultancy.

Bob Johnston had been global chief executive of Bovis Lend Lease for less than a year when he decided to restructure the UK company into two separate divisions – one focused on PFI and the other on construction.

Potential pitfalls … Both of the above examples seemed to alienate as many staff as they inspired. Last month, McEwan sacked directors Bill Booker, Myles Cameron and Ian McCallum after he found out they were defecting to rival consultant SKM. But as one source put it at the time: “The three guys were unhappy with the direction that McEwan was taking the company. But that’s what happens when new management comes in – you have to follow their lead or ship out.”

At Bovis Lend Lease, Jason Millett, the UK chief executive and a rising star in the company, was angered that Johnston’s restructuring would carve up his empire. After a series of heated discussions, Millett parted company with the firm he had been with for 20 years.

Real-world equivalent … John Major’s change of policy when he took over from Margaret Thatcher in 1990. The poll tax was dropped, although – as with the construction examples above – this upset hardcore supporters of the previous regime.

3 Selling the business

Row factor

What’s involved … The new boss comes in and looks at the construction group’s range of businesses, be they sector-specific or in particular geographic markets. They decide some of the divisions are not profitable enough and are dragging down the rest of the group, are loss-making with little chance of turnaround, or are simply not in markets with potential for growth.

Where you’ve seen it before … In May last year, Mowlem boss Simon Vivian axed 200 jobs as he sought to salvage the business. He had been in the job for just four months, but had already tried the first two measures described here: completing a strategic review that led to writedowns on what the company described as “historic accounting issues”. The job cuts were partly caused by those steps but were mostly a prelude to the closure and sale of six construction businesses at the end of last year. They were felt to be expendable as they had contributed to a pre-tax loss of £73m in its first-half results for 2005. Vivian later sold the whole group to Carillion for £291m.

When Alan Lovell took over as chief executive of Jarvis in late 2004, when its debts stood at £230m. He promptly sold its PFI business to Hochtief. Weeks later, he sold a big chunk of its property portfolio for £25m.

Potential pitfalls … Closing down businesses is arguably the biggest slur on previous management. At Mowlem, Vivian’s decision to close the loss-making construction firms incensed previous chief executive Sir John Gains, and this was not helped by the veiled criticisms made by Vivian of historic accounting policies. Gains told Building at the time: “I had nine great years as chief executive. We had consistent profit, transformed the scale of Mowlem, built up the services businesses to run alongside construction without any writedowns, had an improved safety record and took the share price from 53p to more than £2 at its peak.”

Funnily enough, Gains had been criticised by his predecessor, John Marshall, back in 1996, for spinning-off the firm’s scaffolding business. Marshall branded the move “a disgrace”.

Similarly, before Jarvis admitted the extent of its problems to the public, then chief executive Kevin Hyde argued with his predecessor and chairman Paris Moayedi about plans to cut the size of the business in 2003. Moayedi felt the company’s success was based on its expansive nature.

Real-world equivalent … Batman Begins. OK, not quite the real world, but director Christopher Nolan decided to cut the fat out of the Joel Schumacher era by going back to the comic-book hero’s roots and ditching Robin and Batgirl. Result: worldwide box-office of $372m.

Row factor

The tactics of incoming bosses can lead to disputes, both with their predecessors and with staff who may retain loyalty to the previous regime. Building has scientifically measured the possibility of such altercations with the following Row Factor chart:

Miffed

Peeved

En guard!