Geographic expansion is undoubtedly one of the most costly and often least successful strategic options that a contractor can employ. However, almost every contractor of decent size attempts it at least once.
In today’s hyperconnected environment, geographic expansion does not just mean opening an office in a new location. It can come in the form of traveling with a customer for one or more projects, sending business development professionals to seek out new opportunities in a market, or simply joint venturing in a new market to deliver a project right in your wheelhouse. Plenty of successful contractors realize this and maintain most project and corporate services back at headquarters.
By definition, a cash siphon is the drainpipe injected into a company’s balance sheet, discharging all available cash and working capital. An imprudent venture into a new market is one example. Following are a few tried-and-true lessons to help avoid the cash siphon.
Look before you leap
Research is challenging, expensive and time-consuming, but guess what? The other option—expansion into new markets with only one eye open—is even more challenging, expensive and time-consuming.
A little over a year ago, an electrical contractor sent some of its best people to expand in a new market. The company had a handful of customers that it could service based on existing relationships, although it realized that over time it would need to pick up additional clients. During a conversation at the time, FMI asked the vice president how the business development efforts were progressing in the new city.
The vice president replied, “We should get the keys to the new office next week and then we can start calling on clients.” This was a red flag. One year later, that office is a cash siphon with an unknown time frame for breaking even. It’s not because there was no work for the electrical contractor; the client simply did not understand the buying habits of customers, competitive forces, workforce dynamics and major economic trends that were driving work in the new city.
Mind the gap
The strain of managing a workload in an existing geography, coupled with starting up business development and operations in a new geography, is one of the hardest transitions any company can make. To keep employees engaged during this transition, leaders need to over-communicate and establish strategies that keep the team united. Celebrate successes, even when small, and recognize and reward field and back-office employees who are working double shifts to keep the wheels on.
Also avoid “cutting special deals” (compensation, living arrangements or per diem) with employees who need to travel temporarily or indefinitely to new regions or project sites. Every new lucrative “deal” that is cut will become the standard for all employees (face it, they talk to each other), and leaders will continue to increase their fixed costs to a point of unsustainability. Instead, use a standard “mobility policy” that states upfront what adjustments to compensation and fringe benefits will look like, and make exceptions on as few occasions as possible.
When forced into making an exception for an employee, he or she will be less likely to talk about it because any “hearsay” of the exception can easily be traced back to him or her. The mobility policy also will allow leaders to revert to standard pay if and when that employee returns to the home market.
Make your intentions clear
Ambiguity of strategy and direction is one of the biggest drains on any organization. Without making intentions clear to everyone (a short-term geographic transition to travel to a customer’s location or a permanent move to a new market), employees will make up their own versions of the story. That perception will become reality.
This may seem trivial, but the fact of the matter is employees will need to pick up the brunt of the extra work it takes to maintain existing operations and start up new operations elsewhere. They need to know that all of that extra work and effort is supporting a long-term strategy and vision with reasoning behind it. Without this information, they will quickly become disenfranchised to the point of disturbing the company’s home business.
Have an exit strategy
Even with proper due diligence and a sound strategy in place, geographic expansion is risky and can result in failure. Many contractors fail when tackling new markets simply because of market dynamics of supply and demand. Ask other company leaders: “What defines success—in terms of expected profitability, return on investment and time frame—and what should the company do if it does not achieve success?”
One of the core themes to avoiding the cash siphon of geographic expansion is transparency. Costly distractions can be averted by providing transparency to key employees around strategic and financial intentions. This can create a comfort level that allows them to focus on their jobs, be open about risks and issues and not stay awake at night worrying about what happens if this market does not work out.