active business INTELLIGENCE CONNECTING INFORMATION TECHNOLOGY TO WORKFLOW

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1 Copyright 2014 by the Construction Financial Management Association. All rights reserved. This article first appeared in CFMA Building Profits. Reprinted with permission. active business CONNECTING INFORMATION TECHNOLOGY TO WORKFLOW CFMA Building Profits November/December 2014

2 BY JOHN B. CHANEY At first glance, workflow appears to be a straightforward concept a well-defined progression of activities that move a task or project from start to completion. Creating these well-defined workflows is easier in some industries than others. Consider a manufacturing plant where tasks tend to be repetitive and can be implemented on an assembly line. In such an environment, work moves consistently from one stage to the next in a linear and predictable fashion. It is fair to say that few construction projects share the same degree of consistent and predictable job progress, despite the best efforts of managers and supervisors. Unlike manufacturing, construction takes place in disparate locations with different participants from multiple companies. Add to this the fact that no two construction projects are identical and change orders are the rule (not the exception); then, multiply these complexities by the number of jobs a contractor manages simultaneously. Clearly, workflow management has a significantly different meaning on an unpredictable jobsite than in the more controlled environment of a factory floor. Follow the Information The popular phrase Follow the Money implies that if one follows a trail of money, one will uncover a trail of activity and ultimately the information that set things in motion. Let s consider the reverse: a flow of information drives a flow of activity or work, which drives a flow of money. This is a seemingly obvious statement, but it bears examination. Many mature construction companies separate the functions of information management, production, and cash management, which typically translate into separate groups of individuals responsible for IT, operations, and accounting. Since these disciplines each require specialized skills, some amount of separation makes sense. But, if one subscribes to the basic premise that cash flows from work that flows from information, it also makes sense to ensure these disciplines are well connected within an organization. Most companies recognize the need to both support a specialized workforce and keep everyone working well together, often relying on senior management to make that happen. However, department heads are typically specialized themselves, and so while they are well equipped to staff and lead a functional group, they often lack the experience or an explicit charter to establish cross-functional efficiencies. Executive management can mandate cross-functional cooperation, but it is challenging to make this happen in a realistic and productive way. November/December CFMA CFMA Building Building Profits Profits

3 To have the best of specialization and coordination, an organization needs more than a top-down directive. Fundamental business processes must be set up to do more than support cooperation they must require it. For work to flow smoothly through an organization, the information that drives workflow needs to do the same. This starts with understanding the nature and evolution of information management in the construction industry (i.e., by following the information). Building Silos As a company grows, specialization and division of labor are inevitable. The divide between staff who work in the office and those onsite (i.e., office vs. the field or accounting vs. operations) tends to run deeper in construction than in other industries for a couple of reasons. First and most obvious is the fact that work is often performed in multiple locations outside of the office. The second and more subtle reason is that for most contractors, particularly when working on new construction projects, cash flow is not consistently and predictably tied to production. That is not to say that payments are not tied to work completed. Rather, unlike industries that operate in more controlled environments, construction sites are constantly subject to uncontrollable variables weather, material prices, subcontractor performance, government regulations, jobsite accidents, etc. In construction, change must be managed by expectation, not exception. Predicting work completion is not as easy as calculating the expected number of units that will roll off an assembly line. Likewise, payments for work typically do not arrive in consistent, timely packages. Tracking, managing, and optimizing the complex and variable workflows and cash flows in a construction company requires professionals with different skill sets. Not surprisingly, these professionals gravitate toward preferred tools and processes. As a contractor s business grows, these different tools and processes create separation between business and operational management, which create work silos. Of course, regardless of role, everyone s work ultimately supports the objective of completing work on time and at a profit. One constant in achieving this objective is the existence of a predictably large set of data and documentation that surrounds each job. The Tipping Point Just as roles may not be very specialized in small companies (e.g., the PM may also be the bookkeeper and the owner may serve as IT director), data also tends to lack structure (e.g., the concepts of data processing and document management are often equally fluid). Data lives in computer files, on spreadsheets, and in filing cabinets. Individuals use and react to data, but smaller contractors don t typically invest much time or money in data management or processing beyond basic bookkeeping applications, spreadsheets, and storage. As a contractor grows, the amount and complexity of data moving through a company eventually demands more than simple organization. A PM might know where to find invoices, purchase orders, change orders, and all the many other documents and data relevant to a job, but pulling all this data together to create a clear picture of job costs, earned value, cost-to-complete, and other key measures of progress and profitability can eventually become a full-time job itself. The tipping point at which data management must become an area of investment for a construction company (i.e., when it needs to consider specialized construction software and IT staff) varies depending on the type and volume of work performed. A GC that manages a handful of large, similar projects may do just fine with generic, off-the-shelf solutions past the $10 million per year mark, whereas a trade contractor that manages many smaller jobs, service transactions, and inventory items may need to get serious about data management closer to the $5 million mark. These amounts are offered just as examples. Every company s tipping point is different and depends on many factors. Signs that a company has reached its tipping point include: Actual work begins to suffer as job data is lost, hard to find, or inaccurate Managers cannot easily determine whether jobs are on track to profitability Data management work tends to take place after hours and generates significant overtime The same data is entered and processed multiple times by multiple people Creating Intelligence In order for data to help people work better, it has to be structured and accessible. It must become more than just a centralized collection of facts, figures, and documents. CFMA Building Profits November/December 2014

4 active business Software is intended to transform data into something useful, interesting, or entertaining. Software used by contractors turns data into something more useful than a pile of facts, and different types of software accomplish this in fundamentally different ways. General Purpose Software Even the smallest contractor likely uses software that consists of general purpose applications (e.g., Microsoft Office) in order to track contacts, send s, and build spreadsheets. Other off-the-shelf software applications are targeted at more specific tasks and are less expensive than construction software. While they don t provide built-in construction-specific functionality, they do allow users to build some basic tools needed to get work done; they bring order to the large sets of data and documents that flow through a contractor s business. Construction-Specific Enterprise Software The silos that typically result from growth and specialization can be managed by implementing business practices and processes that encourage collaboration among functional groups. Even though these groups use different tools to generate the information they need, they can still use formal and informal communication to ensure they are pulling in the same direction. 5 Characteristics of Active Business Intelligence Construction-Specific Applications A combination of off-the-shelf software for accounting with Excel spreadsheets to perform operational tasks (e.g., estimating and project scheduling) is what most contractors use when they start and grow their businesses to the tipping point of specialization. When this point is reached, their more specialized staff gravitate toward software specific to their disciplines. Operational staff adopt applications for estimating, bid and vendor management, and project management. Business staff move from generic accounting software into applications that better serve the job cost accounting needs of the construction industry., One common characteristic of these more specialized applications is that they not only organize and categorize data, but they also turn data into information. They process and correlate data, giving it context and meaning for users to better accomplish their work. - These more specialized applications provide built-in support for the specific needs of construction professionals, delivering the information they need to work efficiently in their roles. An unintended but inevitable consequence of their adoption, however, is the encouragement of the work silos previously described. Staff becomes separated not just by the type and location of their work, but by the way they consume and process data. And the fact that multiple applications use the same data but do not talk to one another only exacerbates the problem. November/December 2014 CFMA Building Profits

5 However, as work volume increases, the inefficiencies of duplicate data entry into multiple systems becomes more evident. For example, purchase orders that were once generated in the field per week were also entered into an accounting system may have increased to over the years. Different groups still need to generate different types of information to do their jobs, but using a common data platform makes more sense. And that is what defines the enterprise software system: one common platform that supports applications that talk to each other. Reducing duplicate data entry and errors is an obvious benefit of implementing a single, enterprise-wide software platform. Working with one vendor instead of five or six is also beneficial. But perhaps the biggest benefit is that all groups are getting their information from the same set of data. Active Business Intelligence Another tipping point is reached when a construction company grows to about 150 employees. 1 At this point, communication among individuals tends to break down, particularly the informal, yet very valuable hallway meetings. Enterprise-wide software systems might connect everyone to the same pool of data, but the sets of information each group generates from this data are isolated. And the larger a company becomes, the less likely it is that organizational gaps will be bridged through spontaneous collaboration. For contractors to create truly efficient workflows across their organizations, they need to connect functional groups. DATA PHASE INFORMATION PHASE PHASE The development of an intelligent workforce requires work to flow among functional groups at the right time and be accompanied by the right information. For this to happen, business rules must be applied to the communication of information. Just as context placed around data transforms it into information, business rules that govern the filtering, funneling, and flow of information turn it into intelligence. The traditional definition of business intelligence is centered around the creation of summary reports that draw conclusions about a company s health based on information gathered from across the organization. This is indeed intelligence, but it is passively implemented. Instead of drawing from completed workflows to create reports, enterprise software systems that support active intelligence work in real time to help improve work in progress. They allow users to impart their intelligence into the software system, defining when and how information is passed to other groups, and use that information to drive action. They still serve up the information that each functional group needs to complete their work, but they take the additional, critical step of passing that information along in a way that is driven by a company s particular business rules. Active Business Intelligence at Work Let s consider the following example: It becomes obvious during the course of work at an active jobsite that additional, unexpected work needs to be performed (i.e., the infamous change order). Even in well-managed companies, some percentage of change order-related work is performed but never properly approved, accounted for, or billed. However, using software with active built-in intelligence helps minimize this by launching a flow of information to various individuals as soon as a change order request is posted in the system. This flow is driven by business rules and, in turn, drives the actions of all individuals who play a role in the work surrounding that change order. Let s say that the estimated value of the work is at least $50,000, that it will require the participation of a new subcontractor and new material purchases, and that it will have a significant impact on the project schedule. Instead of launching a series of one-toone s and phone calls, an active intelligent CFMA Building Profits November/December 2014

6 active business system will apply business rules to move the change orderrelated information through the system in a specific fashion and place it in front of the right people who can make the work happen. business rules that govern the filtering, funneling, and flow of information turn it into. Based on the expected value and costs associated with the work, a series of approvals are set in motion. The approving parties receive notifications when they log into the system and can also have alerts sent to any account. No money is spent until all approvals are received, then the purchasing department is alerted to the need to source new materials, PMs are alerted to the new approved status and can adjust schedules, and a subcontractor selection process can begin. The number, complexity, and dependencies associated with this flow of information and work is determined by predetermined business rules. For example, in the subcontractor selection step, a rule may be established that if a particular subcontractor is already working on more than three jobs for a company, the PM should be alerted because of concerns that the subcontractor may become resource challenged. The ways that active business intelligence systems can improve workflow are limited only by the intelligence of the construction professionals setting the rules. The key takeaway is that the software is not natively intelligent, but when properly designed, it allows the experience and intelligence of financial and operational managers to become formally embedded into the way a company works. Succeeding Together For every yard of concrete poured, every nail driven, every pipe fitted, and every compressor installed, work occurs through the hands of many individuals, including those who do not work directly for a construction company. Owners, architects, engineers, insurance and surety firms, trade contractors, material vendors, and others all have a role to play and a stake in the success of a construction project. Technologies such as cloud computing and mobile data applications are creating a landscape in which all these players can work better together. The next wave of innovation coming toward the industry is the intelligent system: software that builds on the foundation of these new technologies and takes advantage of the collaboration they can enable. Intelligence is only as effective as it is effectively communicated, and companies that embrace this concept and apply innovative technologies to realize it will be the ones to lead the industry. n Endnote 1. Gladwell, Malcolm (2000). The Tipping Point How Little Things Make a Big Difference. Little, Brown and Company. pp , ISBN JOHN B. CHANEY, CPA, is President and Co-Founder of Seattle-based construction software developer Dexter + Chaney, founded in John is involved in all aspects of development of Dexter + Chaney s construction software, working closely with clients throughout the U.S. A frequent author for CFMA Building Profits, John is also an active member of CFMA s Puget Sound Chapter, a former member of the chapter s Board of Directors, and a former chair of its Academic Scholarship Committee. He frequently writes about topics relevant to construction financial professionals. John earned his MBA from the University of Washington, Seattle, WA and his BS from University of the Pacific, Stockton, CA. Phone: jchaney@dexterchaney.com Website: November/December 2014 CFMA Building Profits