Five Steps to Organizational Peace

June 27, 2013

Conflict and tension all too often interfere with good relations between operations—those who use equipment to complete construction on time and on budget—and equipment—those who look after equipment and make sure it achieves its minimum lifecycle cost. It is a precarious relationship because the two sides have legitimately different points of view as to what constitutes effective equipment management.

Good companies overcome the differences by stressing overarching business goals and the fact that both sides work for the same company. Companies that struggle with the problem pay lip service to cooperation and establish silo goals and metrics that drive equipment and operations further and further apart.

Operations rightfully focuses on building safely, quickly and economically. They expect equipment to be reliable, available and productive, and work must be done efficiently. Operations seldom sees equipment for more than a slice of its life, and they are not really concerned about life cycle cost, component life, and fleet average age.

Fleet managers see it differently. Life cycle cost, component life, and fleet average age are their day-to-day, bread-and-butter concerns. The slice of life a machine spends on a job is important, but it is only a portion of that machine’s life cycle. Successful equipment managers look beyond the now and see equipment as a long-term productive asset.

The nearby diagram shows how the two mindsets intersect and emphasizes the fact that neither is right and neither is wrong. The two must balance and use differences of opinion as a positive rather than negative feature of the way we conduct our business.

I see a lot of organizational conflict in a lot of companies. Experience leads me to believe that there are five ways to reduce conflict and facilitate better understanding between operations and equipment. Let’s see what we can learn from them.

1) Share the rate calculation

The way an organization calculates internal rental rates and uses them in estimating, job costing, and equipment management is often the subject of a lot of confusion and mistrust. This is natural: Jobs see the rates as the principal determinant of the equipment costs they experience and want to see them as low as possible. The  equipment division knows that equipment costs are determined by the actual owning and operating costs experienced. They see the rate as an estimate for the total actual life cycle costs and want it to be conservatively high in their constant struggle to balance their books.

Setting rates in the dark using arbitrary or misunderstood methods causes everyone to be suspicious: What is included in the rate, how was the number calculated, are you featherbedding your performance? These questions can eat at business relationships.

Setting rates in the open, using transparent and well-understood methodologies, does the opposite. Both operations and equipment know what is included and why. Both can work together to minimize true cost. Nothing improves understanding and cooperation as much as clear, well understood, and accepted rate calculations.

2) Eliminate the hostage mentality

Some companies prohibit renting equipment to or from other organizations. This creates a hostage mentality. Jobs feel they have no option but to use company equipment regardless of the cost and service received; equipment feels they have no option but to serve one master—construction operations.

The fleet is, of course, owned and operated to support company operations, and utilization of company assets must come first. But, calibration of both cost and performance relative to the market is a great leveler of expectations.

Good companies permit some freedom in the relationship between operations and equipment and constantly test themselves relative to the market. Equipment must be able to hold its head high because it knows it is a competitive supplier of competitively priced equipment; operations must be proud of the fact that it is a desirable customer and end-user of the company fleet.

3) Manage the risk of low utilization

Often called “the 40-hour rule,” this conflict has to do with the fact that jobs may be required to report and pay for a minimum of 40 hours of utilization per week on each and every machine regardless of the actual number of hours worked. The purpose is to stop sites from “hording” machines and to provide a mechanism whereby the equipment account is assured a minimum of 40 hours per week against which it can offset the fixed costs of ownership.

Hording machines for short periods to increase flexibility and reduce mobilization cost is an understandable phenomenon. Seeking a fixed monthly rental income to cover the fixed cost of ownership is an understandable requirement. The problem is that operations sees a straight 40-hour-per-week minimum applied to the full rate as arbitrary. They do not like paying for equipment they do not use and soon find creative ways of not paying for equipment they do use. The spiral builds and soon playing the game is more important than maintaining trust.

Job sites manage equipment utilization through their daily and weekly planning activities, and they define the number of machines needed to maintain scheduled performance. Job sites must therefore carry the risk of low equipment utilization. The mechanisms used to manage this risk must, however, be practical, realistic and well understood. They must, above all, be seen as fair and reasonable. Little is achieved by penalizing low utilization and not rewarding high utilization. Little is achieved by applying the full owning-and-operating rate to un-utilized time when only the fixed costs of ownership are being experienced. Mechanisms such as those set out in “Give Me the Ball, Coach” work, solve the problem, and build trust. They need to be implemented, and everyone must understand that risks are best carried by those who are able to manage them.

4) Insist on accurate reporting

It is a data-driven age. Thoughts, opinions and speculation must give way to reasoned arguments and data-driven facts. “This machine is useless, it keeps breaking down” is a good way to start an argument. It is not a good way to make an argument and solve a problem.

Having the required facts at hand to make good data-driven arguments depends on good and accurate reporting. Under-reporting hours worked is a self-serving tactic used to incorrectly suppress job costs and, in many instances, respond to a draconian 40-hour rule. Crews feel they are paying for the machine anyway, so why report the actual hours used. This introduces a cancer that spreads throughout the organization. Under-reported hours produces artificially high actual costs per hour and distorted production rates. The job costing needed to support estimating becomes a meaningless exercise in fudging the facts, and the risk of underpricing future bids becomes unmanageable.

Good companies collect accurate data and use it to make rational decisions. They avoid data wars and minimize emotion and prejudice in their decisions. They understand that accurate reporting builds good relationships.

5) Nip abuse in the bud

Rates seldom, if ever, include an allowance for the costs associated with damage or “other than fair wear and tear.” Most companies have mechanisms to back-charge job sites when this occurs, and arguments about who caused the damage or when it occurred invariably arise. Emotions run high, blame is shifted as often as possible, and yes, the charges are invariably seen to be exorbitant.

The secret is to have a fair and reasonable policy and to implement it consistently, quickly and without exception. Broken glass and dents are not fair wear and tear. The counterweight was not designed to move earth and tailgates will bend if used as push blocks.

We all know how to keep an amusement park clean: Pick up the first candy wrapper dropped. It is the same for abuse and damage. Fix the first dent and the first broken tail lamp. If you do not, the second one is easier and the third one is almost automatic. Companies that nip abuse in the bud and have a close-to-zero tolerance policy on the subject have fewer arguments and lower costs.

Conflict, tension and differences of opinion are part of everyday life in the business world, but they should not prevent us from building good professional relationships. Reducing the impact of the Big Five will help to facilitate understanding. We do, after all, work for the same organization.