Originally published in Constructor
By Shane Brown and Bob Tinglestad
Industry peer groups are a great way for companies to break out of their bubble and share valuable insights with one another. Often though, CEOs and CFOs aren’t getting the most out of them.
Peer groups, usually comprised of around 10 CEOs or other top-level executives, have a long history in the construction industry. The basic aim is to share experiences, challenges and opportunities in order to learn and grow stronger companies. Typically, this will involve sharing certain financial and operational information and discussing national trends.
Unfortunately, some peer groups can get stuck in a rut. Sometimes they fizzle out because members feel they are talking about the same things and not getting much value out of the meetings. A common problem is for groups to get bogged down in spreadsheets, using data that are prone to error and which only give a patchy snapshot of performance. Starved of meaningful data insights, too many corporate leaders end up using the group meetings as a simplistic way of ranking their company’s performance versus the rest.
The solution is to stop thinking of peer groups purely as a way to share history and best practices. Rather, companies should leverage the peer group to gain better, data-driven insights into their business and to invest in innovation.
Peer groups can be an ideal platform for companies to test drive advanced data analytic and business intelligence tools. Using a small composite data set from peer group members, companies can experience the power of these tools at a much lower cost and risk than they would face by implementing the systems internally.
What these peer groups end up with is a data warehouse that can be accessed for business insights that are light years ahead of what normally gets cobbled together in Excel.
The tools give executives powerful visualizations of business trends, allowing them to run data analysis over multiple years and to compare themselves against specific peers. They can really drill down into the data — for example, identifying a specific cost trend and analyzing how they compare on that to peers of a similar size.
Executives can screen out companies that operate in non-representative regions or markets to get a more accurate sense of how their true peers are doing across a range of metrics. To get a broader view, the data tools can also be made to incorporate best-in-class industry key performance indicators and industry surveys.
Done this way, business intelligence tools can transform the mindset and quality of peer group meetings. This new approach can create a buzz within the groups.
CEOs, huddled with their CFOs, can really dig into trends that hadn’t been visible to them before. Participants can use their new data warehouse to think much more innovatively about their peer groups, generating a lot of discussion and questions that hadn’t previously come up.
Gatherings can become much more like true innovation centers, compared to the previous norm of executives showing up to a breakfast meeting to look at the composite data and check their rankings.
To make the most of this approach, peer groups should be steeped in industry benchmarks and key performance indicators and constantly be challenging over whether more should be added. For the construction industry, those key benchmarks might include the working-capital multiplier, profitability, bid-hit ratio and the gain-fade analysis as projects progress.
One of the great things about this data warehousing approach is that the peer group data remains alive, relevant and accessible to participants all year round. It also enables executives to look back on historical performance to help build contingency plans for the future.
Anyone bracing for the next recession, for example, could look back at what kind of drop in volume peer group members experienced in 2008. If it was 25 percent, maybe executives should start planning for that kind of scenario. Drill down into what cost cuts your peer group made during that period and what the effects were.
Putting this in place within a peer group can be surprisingly cost effective, especially when compared to building a business intelligence system internally. The latter can easily cost a quarter to half a million dollars, reflecting the complexity of understanding all of a company’s data and mapping it to a new warehouse.
But thanks to a smaller composite data set and sharing of expenses, costs fall drastically for a peer group, helping to ease a lot of the fear factor for CEOs.
MAXIMIZING ITS POTENTIAL
To get the most out of data tools within peer groups, there are several principles that companies should follow:
- Compatibility. Make sure your group consists of peers who have a similar mindset and business philosophy. You need to make sure you share aspects of culture and agree on certain non-negotiables. For example, if you define yourself as a sustainable business, you should avoid being in the same group as companies that just want to maximize profit.
- Mindset. Approach the group discussions with the right attitude. Are you interested in being the best in your peer group, or genuinely learning from your group?
- Facilitation. Make sure the group has an independent industry expert who can bring the right resources to bear based on various topics, facilitate discussions and challenge members to avoid slipping into group-think.
- Relevance. The composite data used by the group needs to be steeped in the most relevant industry benchmarks, along with following consistent costing methods and normalization standards.
With these elements in place, many companies can reap the benefits of innovating with their peers using state-of-the-art data analytics. And all at a much lower cost than they would normally face.
Shane Brown is a partner at Plante Moran, leading the construction practice for the Rocky Mountain region. Bob Tinglestad is a business technology consulting partner at Plante Moran. Plante Moran is a member of multiple AGC chapters.