The essence of survival is reinvention. Unfortunately, the way corporations grow seems almost designed to make this impossible.
Once you find you find something you’re good at, you naturally specialise in it, investing to become as efficient and effective as possible. That’s the best use of capital... at least until your method, model or product becomes obsolete, which it inevitably will.
As Charles Handy writes in the Second Curve, firms rarely respond to this scenario until it’s too late – and once you start shrinking, finding your next success story becomes exponentially more difficult.
But not impossible, as the story of British construction support firm Elecosoft shows.
Elecosoft in brief:
Turnover: £20m (2017)
The company was founded in 1895 as the Gilbert Arc Lamp Company, changing its name in 1920 to Electric Lighting and Engineering Company. Over the decades it diversified from lighting, and after a survival scare in 1997 pursued a highly successful strategy based on construction components, manufacturing product such as pre-cast concrete, natural roofing and timber frames.
In an effort to retain customers for what were essentially commodities, the company, by then called ELECO, started acquiring software businesses in the 1990s and 2000s, providing services such as planning, computer aided design (CAD) and visualisation. When the global financial crisis hit, the firm had 500 employees.
‘It was a really awful period – there was an overnight fall in construction. Competitors were closing doors around us, customers were shutting down, there were zero margin contracts being awarded. Contracts slowed and we had to go through rounds of redundancies to ensure the business didn’t collapse,’ recalls chief operating officer Jonathan Hunter.
ELECO had the same problems as all construction firms do when caught by a down cycle: cash flow, difficult conversations with banks, over-reliance on major contracts. Losses and debt mounted, and at one point, the company’s share price fell to barely 7% of its pre-crisis peak.
Yet ELECO had a bold plan. Under the direction of long-time executive chairman John Ketteley – who had already turned the company around over ten years previously – it began to divest all of its core manufacturing businesses in order to focus entirely on software.
‘I decided that to survive we would need to sell or close our construction components businesses and catch the wind that was beginning to blow in the field of construction software – with a cash injection from old friends and family. I am pleased to say we caught that wind,’ Ketteley explains, pointing to the increase in share price from 6p to 85p since 2013.
This strategy had obvious advantages – not least the long term growth of digital technology, and the fact that ELECO’s existing software division had proven quite resistant to the downturn – but it was no small undertaking.
At the time, the manufacturing division turned over 71% of ELECO’s total revenues and the state of the market meant it was hard to get a decent price for the businesses.
‘We wanted to do the right thing by the shareholders and the employees – some of these colleagues had been here for their entire working lives. We didn’t want to just close the businesses down, we wanted to find a good home for them,’ says Hunter.
ELECO’s strategy was twofold, expanding the software portfolio while attempting to get the various manufacturing businesses back to a point where they could be sold. This meant, counter-instinctively, putting money back into things like product marketing, which had been cut when the crisis hit.
By 2014, ELECO had completely divested its manufacturing business, and rebranded the following year as Elecosoft.
‘It’s certainly been a transition. I can’t walk into a factory and see the stock any more. I walk into an office and see a development team having a scrum meeting, going through tech that I can’t hold and feel,’ says Hunter.
As a tech company, Elecosoft no longer faces the problems of uncertain sales (49% of revenues come from maintenance contracts) and problematic payment terms (‘software is just completely refreshing,’ says Hunter). Instead, it faces new challenges, not least a new breed of competition. Its biggest rivals now are Autodesk, Oracle and the mighty Microsoft.
Elecosoft differentiates itself against these US giants by its breadth: as a construction specialist, it offers a full suite of software for every stage of a building project, from design through to engineering, which Hunter says allows the company to understand customer needs better (it doesn’t hurt that it also provides opportunities to cross-sell).
Indeed, Elecosoft counts amongst its customers 94 of the top 100 UK contractors, as listed last year by Construction News, and 15% of the biggest 400 such companies in the USA.
The UK’s competitive advantage?
CAD is proving easier to export than concrete: sales outside of its three core markets (the UK, Germany and Sweden) currently comprise 7% of Elecosoft’s revenues, but Hunter sees opportunities rising.
Before you ask, this is not because of Brexit (the company is naturally hedged against currency movements as it has both costs and revenues abroad, and its products aren’t affected by customs duties), it’s because of BIM...
Building Information Modelling (BIM) is a digital framework that covers the full life cycle of a building project. Essentially it requires all parties – from architects to plumber – to use a central file for data, so that everyone knows who’s done what, with what and when. This makes it far easier for the highly fragmented industry to collaborate, with everyone seeing how all the parts fit together.
BIM is being adopted around the world, but the first country to make it mandatory was the UK, in 2016. Hunter says this is proving to be a competitive advantage for a UK-based company.
‘There’s a lot of talk about BIM in the US, and our resellers in Australia are getting meetings very easily because companies are looking to adopt this technology. It feels like we’re slightly ahead because some of the pains that companies are going through right now outside of the UK, we’ve already experienced with our customers.’
The bottom line
The transition from manufacturing to software has not been painless. Elecosoft’s turnover and profits are barely a quarter of what they were a decade ago, and its headcount is dramatically lower. But at least it’s healthy. Indeed, Elecosoft has now cleared its debts from refinancing, it’s increasingly profitable (pre-tax profits were £2.3m in 2017) and it’s growing again (revenues last year were £20m, having risen 31% from their low in 2015).
It goes to show that while sometimes you may need a prod (or a global financial crisis) to spur you to reinvent yourself, it can still work so long as you really commit to it.
Image credit: optimarc/Shutterstock