Three key trends to be aware of in 2014 and beyond…

With total output expected to grow by 5% in 2014, the outlook for the construction industry is more positive than it has been in years.

However, the State of the Industry Barometer findings reveal a number of key trends that construction companies need to be aware of and prepare for, in order to make the most of the upturn.

1. Are you focusing on your recruitment and training strategy?

Survey findings

•  44% of companies said recruiting, training and retention of staff was a key strategic issue, a 175% increase in the figure 12 months ago
• 46% of companies cited lack of resources to meet demand as a major barrier to wining work this year.

Key issue to consider

With around half of industry saying that they are struggling to meet the recent pick-up in demand, on top of the long-term skills gap that continues to build, this is an issue that is unlikely to go away.

So, do you have a long-term strategic plan in place to review where the gaps are in terms of key skills and resource levels? This review should be undertaken in the context of the long-term pipeline of opportunities and the dynamics of the markets they are working in. This process allows for early identification of potential shortfalls and reduces the risk of having to turn down opportunities, or worse still, carrying out sub-standard work due to a lack of skilled personnel.

Initiatives to work effectively alongside industry bodies and the government to retain and attract talent also need to be developed to ensure a new generation of skilled talent is available to deliver the infrastructure (eg nuclear, HS2) and buildings the nation needs. Developing ways to attract more young people into our industry should be a priority for every company.

2. Do you have a strategy in place to manage the impact of aggressive tendering?

Survey findings

• 62% of companies stated that aggressive tendering is a major barrier to them wining work, although this figure fell 5 percentage points from the last survey
•  25% of companies said this area was a top strategic priority for them in 2014.

Key issue to consider

Despite the upturn, some companies are still putting in very low price bids. This increases pressure on margins already being squeezed by recent increases in labour and material costs.

Successful strategies you could employ to negate this issue, include:

• Having a clear plan in place for which jobs to target to increase the win rate and avoid costly procurement processes
•  Effective targeting of key clients to build long-term relationships with increased emphasis on service and value
• Continuously educating customers to consider life costing over lowest capital cost
• Partnering more closely with the supply chain to look for efficiencies to drive down costs without comprising on quality.

3. Do you have the right level of marketing resource in place as the market picks up?

Survey findings

•  69% of companies are planning to increase their marking spend
•  33% of companies are looking to grow their marketing headcount.

Key issue to consider               

Marketing is usually one of the first areas to be cut when sales and profit budgets are under threat. However, the majority of companies are now increasing their marketing spend as their sales prospects improve, although the growth in headcounts is lagging behind. This is partly due to the fact that it is less risky to increase marketing spend, which can be gradually increased or decreased, compared to headcount which tends to be more fixed.

One point is very clear though. ‘Doing more with less’ is now the key mantra for marketers and ensuring that each pound spent can be justified to the senior team should be the key focus when reviewing your marketing strategy and plans.

Also, you can use the results of the barometer as evidence to help support any requests for additional budget to take advantage of new market opportunities.

Download an executive summary of the latest report.

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How to ensure your company really buys into the Net Promoter Score

If you are struggling to really ensure senior colleagues understand your customer service metrics then here is a potential idea. But first, for the benefit of all, let’s review what the Net Promoter Score (NPS) actually is.

In summary, it’s an easy way of measuring the overall performance of your company through your customers’ eyes. The use of the NPS has also grown in popularity in recent years as a way of tracking your customer service performance at a top level with a single easy to understand figure.

By asking a sample of your customers this question – “how likely are you to recommend (your company) to others if asked, where 10 is very likely and 1 is very unlikely?” – it allows you to classify them into the following categories:

• Promoters – customers who scored, 9 – 10
• Passives – customers who scored, 7 – 8
• Detractors – customers who scored, 1 – 6.

By subtracting the percentage of promoters from detractors, you arrive at your NPS. To give you a broad steer, in a B₂B market an average score is around 5 – 20% with the top performing companies achieving scores of 50 – 80%.

Armed with this number you can then present it to senior colleagues, which often prompts a response to identify areas for improvement in order to improve the score. For example, finding out what actions need to be taken to move the ‘detractors’ and ‘passives’ towards being ‘promoters’.

However, you may have faced this reaction when presenting your NPS – ‘so what’? After all, it’s just one key performance indicator among a number that the company is looking at to help guide strategic decision making. So, how do you relate your NPS back to what really matters to the company – improving turnover, margins, market share, competitive advantage….?

What about if you could put this chart in front of them?

To explain the chart. By conducting research to determine both how your customers rated you (ie NPS score) and also finding out how much of their expenditure goes through your business, then you can start to build the relationship shown in the graph. It’s just dummy data but highlights the power of this analysis.

So, if you can stand there and say we can increase turnover by £xm if we reduced the number of detractors we have by x%, then we bet this will increase the impact of using the NPS. The investment in customer service improvements to ensure all your company’s customers are promoters will surely follow. You might also consider the NPS relationship with other variables that are more relevant to your market.

If you are looking to benchmark your NPS against other companies in your market, then please get in contact with us as we are building a database for the construction sector to enable companies to compare NPS scores anonymously.

How to make effective use of construction output forecasts

The latest sets of construction forecasts (January 2014) are now out. The figures, shown on the graph below, highlight a much more positive outlook for 2014 – 2016, compared with 12 months ago. Forecasters are predicting growth of 3 – 5% in 2014, with 2015 looking set to deliver total output growth of over 4%. The outlook of 2016 shows a slowdown in growth, primarily caused by the impact that the end of the Help to Buy’ scheme is likely to have on the housing sector and the fact that the growth is coming from a higher base. At least, that is Leading Edge’s take anyway.

Whilst the expected upturn is welcome news following years of declines and false dawns, we are focusing this blog on how market forecast data, developed internally or bought in from a third party, can add real value to your business. We can’t cover all the areas in one blog, but a couple are detailed below to give you some ideas.

1.   It ensures you are operating in the right mix of sectors

A good analogy is to think of your personal investment plan. Most people want to have a well balanced portfolio to ensure a decent return on their hard earned investment. This is where forecast data by sector and region can prove of such value.

For example, there are some sectors, such as repair and maintenance, which offer a relatively steady work flow. In this case it is mainly because there is a certain level of cyclical and reactive maintenance that cannot be postponed, regardless of the economic conditions. These you could class as safer, lower risk sectors offering steady streams of work, although the potential returns might not be spectacular.

Then you get high risk sectors, such as new private housing, that offer periods of rapid growth often followed by rapid contraction – just think that output fell by 48% between 2006 and 2009, but is now forecast to grow by 30% between 2013 and 2017. So, get your timing right on your exposure to these sectors and if offers significant opportunities.

Understanding the growth rates and the potential changes to these in each sector can therefore be a big asset when looking at your risk profile. You need to ensure that you are operating in the right mix of sectors or sub-sectors at the right times to offset the potential for a large collapse in your sales.

 2.   It helps you develop a more accurate sales forecast

Understanding when activity in a sector or region is going to turn up, down or remain flat should be a vital input into your resource planning and sales forecasting process.

Many construction businesses need to make large capital investments to allow them to meet their customers’ demands. For example, an equipment hire company must ensure that it can meet a sudden surge in demand for its machines by having the right level of stock, or customers will go elsewhere. Similarly, they wouldn’t want want to be caught with lots of unutilised machines sitting in the yard during a recession. When working on thin margins, making sure your resource levels match demand can make all the difference. So how can market forecast data be of help?

A first step could be to go through the process of comparing your sales data to economic and construction output data to determine if there are any links. This way you have a working sales forecast model to run scenarios and reduce the risk of being caught out by changes in market size.

As you may have spotted, the common theme with forecasting is its usefulness in helping you to better manage risk. The more market data you can gather that is relevant to supporting your business plans the better, otherwise your risk profile just goes up. And as a rule, many executive boards and investors don’t like risk!

Which construction sectors will be the winners and loser in 2014…?

As we look ahead into 2014, we have analysed all the latest market data and used the results of our latest construction forecast to help you with your planning. Here are the predictions for 2014.

The winners

• New public housing – driven by the Government’s Affordable Housing programme which has a huge target to hit by 2015
• New private housing – driven by the Government’s help to buy scheme and a thawing in the mortgage market. Private rental market to be a key niche growth sector to meet demand from the growing number of people who can’t afford to buy their own home
• Repair and maintenance private housing – the rise in transaction numbers to help support growth, as will a rise in consumer confidence as house prices rocket
• Infrastructure – driven by Crossrail and the need to upgrade the UK’s ageing infrastructure network. Road output to return to growth after recent declines, with rail remaining a star performer
• Commercial – driven by improved business confidence and a more stable financial backdrop. This will allow larger developments to get off the ground or be re-started, with London and the South East the main driver of growth
• Universities – the need to improve facilities to attract students as fees rocket to make this a buoyant market.

The losers

• New public non-housing – despite the large declines of 2011 – 13 ending, output levels are not expected to show any sign of growth as the Government’s spending cuts continue to bite
• New private industrial – weak manufacturing output, the Eurozone remaining subdued and an oversupply of vacant space all combine to throttle growth in 2014
• Energy retrofit market – the slow uptake of the Green deal due to a lack of consumer understanding and unattractive loan rates will keep this potential growth sub-sector subdued.

Read a detailed breakdown of construction order and output figures, by sector, up to Q3 2013.

A key question to consider before starting any construction research project

So, you have decided to undertake market research to help you make a major decision, but are unsure about what type and level of information you want to collect. Choosing the most appropriate market research technique depends on a number of considerations such as the research objective, the level of detail required, level of existing in-house knowledge and the budget available.

In short, the main choice is between quantitative (the numerical analysis) and qualitative (why the respondent responded that way). Or you could use a combination of the two.

When is it best to use quantitative research?

If, for example, your objective is to measure the number of respondents who act, feel or think in a particular way in order to draw conclusions on the wider population then the focus should be on a quantitative study.

The sample size chosen mainly depends on the level of confidence you need in the results and the level of detail required. Depending on the circumstances, a sample size of 50 is the recommended minimum with some companies contacting over 1,000 respondents.

If you want to drill down into the data to assess trends in particular segments of respondents, then the sample size usually ends up being in the hundreds. There’s always a trade-off between budget and the level of confidence you want in the results.

The end deliverable of a quantitative approach provides you with a statistical analysis by question allowing you to draw conclusions and develop a course of action based on these.

And when is qualitative research a better approach?

If you are looking to gain an initial understanding of an issue or uncover key trends and reasons for customer behaviour, then you probably want to focus your questions mainly on the qualitative side.

An effective approach is to use semi-structured interviews and ask open ended questions to around 10 – 30 key decision makers. The best insights often come from more senior level respondents with the right level of knowledge and experience in the market.

This approach is particularly effective when you have a limited budget or knowledge about a sector or customer group and want to build an initial picture before taking any further decisions. For example, a smaller scale study might reveal that a target market is smaller than you expected and is dominated by a handful of key players with no obvious entry point for a new company. You could then take the decision to look for a more attractive opportunity without having burnt through your whole budget.

It may also be the case that the initial interviews reveal that you need to change tack completely. Undertaking a smaller scale qualitative study gives you more flexibility to adapt the questionnaire structure and approach the project from another angle.

Whilst the smaller sample size means the data analysis is often less conclusive than a larger quantitative study it does provides a sound base for decision making, particularly when backed up with desk research.

However, a combination of the two often work best

From experience, and when the budget allows, we have found that the most effective research projects are those with a good balance between quantitative and qualitative questions.

You can use the numbers to help convince your colleagues of the key findings, but it is the qualitative feedback behind the numbers that helps to bring them to life. By reviewing both it helps ensure the recommended next steps are the right ones for your business.

For example, when using rating questions it is recommended that if there is a high or low score that you prompt for the reason why. More often than not these hidden gems provide the answer to a key question you might have otherwise missed.

GB construction recovery continues, but not for everyone….

The findings from our latest state of the construction industry barometer show that 76% of companies improved their sales in Q3 2013, compared with the same period in 2012. Also, 87% of companies expect their core markets to grow over the next 6 months.

These are the best set of figures since the survey began in Q1 2008 and continue the positive trend that has emerged since the recent low point of Q1 2013. The data also reveals some interesting ‘big picture’ insights for consideration:

1.   The impact of the Government is huge

Whilst the outlook for many construction sectors is more positive for 2014, the survey findings are currently following the same trend as seen in early 2010. Then the massive boost to public spending promoted a rise in optimism but, 12 months later, this quickly evaporated when the public sector cuts started to kick in.

This time round it is the new build housing sector that is driving the growth in the industry, mainly off the back of the Government’s mortgage lending initiatives. The continued strength of the buoyant infrastructure sector also relies heavily on the Government’s commitment to ensure major schemes are funded and make it to site. If the Government were to withdraw its support for these two sectors, then how rosy would the picture look?

The barometer findings also highlight that the R&M housing sector is the weakest in terms of sales expectations, mainly due to the fact that the Government’s flagship ‘Green Deal’ has struggled to gain momentum. Like it or not Government policy, the speed at which it is implemented and how effective it proves are all vital to ensuring the recovery is sustained.

Action: ensure you evaluate the impact of different scenarios on how Government policy can impact on your organisation’s sales.

2.   Beware the double pinch when activity levels suddenly leap up

Output in 2012 was over 13% lower than the peak of 2007 with private residential, commercial and industrial the worst affected sectors during this period.

As these sectors, particularly housing, start to recover we are seeing spikes in wage and material costs as shortages occur. These should fade away as manufacturers increase supply and companies expand their workforces, but the impact of this over the next 12 months needs to be factored in.

This is the ‘first pinch’ and impacts mainly on those contractors who bid for jobs in past years when prices were lower, which are now on-site. Margins are likely to be squeezed for those that can’t renegotiate contracts, or worse, contractors are likely to go bust just at the point where the market is turning around. Specialist second tier contractors are most at risk as they are further down the payment chain.

The ‘second pinch’ comes in the form of ‘aggressive tendering’. The barometer highlights that 67% of companies are concerned about this issue over the next 12 months. With this practice still occurring regularly across the industry, the likely outcome is lower margins and a greater risk of more insolvencies.

The combination alone of these two pinches sends a warning message that it may get worse for some companies, before it gets better.

Action: selective tendering and bid pricing along with strict cash flow controls should be top priorities, now more than ever.

3.   Short-term skills shortages are a key issue

The barometer findings show that:

• 47% of companies stated that a lack of key staff is a major risk to them winning work over the next 12 months
• 40% of companies indicated that recruitment and retention of key personnel is a top strategic priority for them over the next 12 months. The figure was 4% 12 months ago.

With the sudden lift in activity over the last 6 months, many companies have gone from survival mode to working out how they are going to find the resources to undertake all the projects they are now bidding for.

Our research in the industry often highlights that it is the quality of the project leader and the key operational front line staff that have a significant influence on the success of a project and also when maintaining a long-term positive reputation with customers. We often hear the line ‘a supplier is only as good as their last job or project team’.

Thinking further ahead, the ability of UK construction companies to deliver large projects – eg nuclear – is also an on-going issue. If overseas companies have the required pool of senior leaders and operational staff to draw from then UK companies risk losing out as activity levels increase. For the long-term the industry needs to start working together more effectively, to ensure more young people consider a career in construction before they are lost to another industry.

Action: focusing on employee retention, managing career progression and developing an effective talent recruitment strategy are key areas to get right when seeking to secure a long-term competitive advantage.

3 key areas for manufacturers to consider when carrying out market research in the construction sector

Selling products into the construction industry is no easy task. However, the risks associated with launching a new product, targeting a new sector, or improving your profit margin can be reduced by undertaking market research.

Over the years we have found that there are often three key elements which are essential to get right to ensure that you obtain a good return on your research investment. These are:

1.    Define your objectives

Ensuring you have a clear idea of how the findings are going to be used to improve your business is a must. For example, the research may help you improve your service levels, increase your product sales or support a product development plan. Make sure to avoid any ‘grey areas’.

Once you have taken the time to write down what you want the research to deliver, you can then move onto tackling the next two key stages.

2.    Assess who you want to speak to

It is vital to consider the target groups which have a significant influence on whether your product is purchased or not. From a manufacturer’s perspective, the main groups that provide the most valuable feedback are normally:

• Distributors – eg builders merchants, DIY chains, specialist distributors
• Installers – eg main contractors, jobbing builders, specialist sub-contractors
• Specifiers – eg architects, engineers, consultants
• End users – eg developers, local authorities, self builders.

Then you need to determine the sample split between the groups you want to research. Remember to refer back to your objectives, as this provides the starting point for determining which groups hold the insights you are looking to uncover.

3.    Ensure you ask the right questions

Once you have a clear picture of the insights you need and where to uncover them from, the next step is to put together the question set.

The key here is to review your research objectives, note down each table or chart you want to produce and then ensure the questions allow you to populate them. This process is effective as it forces you to think through what format the data should be collected in and how it can be best analysed.

If you are researching a number of target groups, a good approach is to develop a core of questions that can be asked to everyone. You can then add in specific questions relevant to a particular group. For example, past experience tells us that it is not worth asking architects about the installed price of a door as most won’t know this type of information.

Below we list some of the topic areas that feature regularly in research carried out for building product manufacturers in recent years:

• Assessing the level of specification switching that goes on once the project drawings reach the installers and why this occurs
• Rating the top manufacturers against different attributes such as, product quality, innovation, competitive prices
• Assessing the importance of specific factors in the choice of manufacturer selected – eg product availability, price, environmental credentials
• Determining if there are any new legislation or standards on the horizon and the likely impact on the market dynamics of these
• Evaluating the importance of providing a ‘one shop stop’ to the market – eg associated products and parts
• Analysing the level of awareness of the top brands and their usage levels.

You are now in a position to look at the finer details of how to approach the data collection, from sourcing the contact names for non-customers and whether to use an on-line platform, telephone calls or face-to-face interviews.

Finally, a good source for research advice is the MRS.