A C T A U N I V E R S I T A T I S L O D Z I E N S I S
FO LIA O EC O N O M IC A 173, 2004
Jan M ichalak*
OPERATING AND STRATEGIC CONTROLLING IN POLISH AND GERMAN CONSTRUCTION COM PANIES - A COM PARISON
Abstract. T he construction sector is one o f the most im portant sectors in the economy. The paper is a result o f a research project conducted in 2000-2001. T he m ain objective of this paper is to depict the organization and functioning of controlling systems in tw o leading construction com panies from G erm any and Poland at the beginning o f a difficult period of stagnation, to identify main problem-generating areas and to outline the planned changes, which are supposed to influence positively the effectiveness o f the presented companies. The controlling systems are depicted a t three levels: corporate, division and project level. A t the time when the research was conducted the controlling systems in both com panies had features characteristic of operating controlling. However, the slum p in the construction sector and increasing com petition resulted in both companies in the introduction o f the elements of strategic controlling. The research shows th at the process o f unification o f controlling systems in Polish and G erm an construction companies is progressing.
1. Introduction
The construction sector is one of the m ost im portant sectors in the economy. In spite o f an increasing interest o f investors in new industries like IT, pharm aceutics and biotechnology, the construction sector still generates a huge part o f G D P in m any countries (for example 7,4% of G D P in Poland in 1998, 5,5% o f G D P in G erm any in 1999) and employs m any people.
Because of the structure o f the demand in the construction m arket the construction sector is strongly influenced by fluctuations o f econom ic conditions. Both in Poland and in G erm any the construction sectors have been going through a period o f crisis since 2000. The crisis began after the boom in the construction m arket, which was the result o f the quick
development o f other industries in the late 90s. As a result o f its susceptibility to economic fluctuations, the decrease in the dem and in the construction sector in Poland and G erm any was significantly stronger than in other sectors. F or example, in Poland the decrease was 23% in 2001 com pared to 1997, and in Germ any the decrease was 8% in 2001 com pared to 1999 (see w w w .sta t.g o v .p l,w w w .d e sta stis.d e ,www.bossa.pl). Additionally, the situation o f the construction sector is m ore difficult due to long terms of payments and delayed payments. Problems with liquidity of construction companies often result in bankruptcy o f construction companies, especially the smaller ones. However, at the time o f crisis not only small companies are in danger o f bankruptcy. F or example, one of the biggest G erm an construction groups, Holzm ann, employing m ore than 70 000 and receiving significant subsidies from the government went bankrupt during the crisis. A nother danger characteristic o f the period of crisis is acquisition m ade by another company, as was the case with one o f the biggest Polish construction companies, Exbud, taken over by the Scandinavian group Skanska.
The consequences of the decreasing demand are the escalated competition and the decrease in the rate of m argin realized on contracts, in m ore favourable periods construction companies in Poland used to generate m argins reaching 30% and at the m om ent the margin docs not exceed 8%. The economic slump coupled with strong com petition create a need to reorganize m any areas o f the company. The period o f crisis forces actions intended to cut costs, increase co-ordination of processes in the com pany and eliminate internal disruptions. Such actions are the m ain tasks of controlling ( S i m o n s 2000, p. 3-15; H o r v a t h 1998, p. 109-124).
2. Specific features of the construction sector as a factor influencing controlling systems
Controlling is a cross-functional coordinating system, which should facilitate com pany m anagem ent by providing inform ation necessary for m aking optim al decisions ( A n t h o n y , G o v i n d a r a j a n 2000, p. 71-75). A controlling system should be tailored to suit specific features o f the firm.
The construction sector is considered to be one o f m ore traditional sectors o f the economy. The distinctive features o f the construction sector are high m arket fragm entation and execution o f long-term , multi-million projects. It results in a relatively high risk caused by potential changes in the business environm ent. One risk factor is the change o f m aterial and services prices that could occur during the realization o f a project. The financial situation o f the contractor also could create a risk. In case of
bankruptcy or solvency problems o f the client, a construction firm could lose its receivables or the project could be suspended, which would negatively influence the cash flow o f the enterprise. In the course o f executing foreign contracts another risk that could arise is currency risk.
Construction companies commonly use the project or matrix organizational structure. The project organizational structure is characterized by division not according to functions but according to executed projects. Every project is supervised by a project m anager, who usually has considerable decision freedom, and is fully responsible for the successful com pletion o f a project. Successful com pletion o f a project m eans finishing it according to the specification and other contract conditions, on time and within the budget. The m atrix structure is often a com bination o f the project and functional structure. In a m atrix-type organization an employee is sim ultaneously subordinated to project m anager and functional m anager ( K e r z n e r 2001, p. 113-142).
3. Objectives of the paper and research methods
The m ain objectives o f this paper are to depict the organization and functioning o f controlling systems1 in two leading construction companies from G erm any and Poland at the beginning of a difficult for them period o f stagnation, to identify m ain problem -generating areas and to discuss the planned changes, which are supposed to influence positively the effectiveness o f the presented companies.
The main research areas in both enterprises are the following:
- procedures o f d ata collecting, analysing and reporting used in cont rolling,
- tools and techniques used in controlling, - organisation o f controlling departm ents.
The research project was conducted in both com panies during 2000-2001 and was carried out using the following research m ethods:
standardized interviews with employees o f both companies, - critical analysis o f documents and procedures,
- observation o f daily routine o f controllers.
Statistical m ethods were not employed due to the small sample size - the research project was carried out in 2 companies, in which interviews were conducted with about 40 persons at different m anagem ent levels, employed in different departm ents. The research was conducted in a Polish
com pany by a research team o f the D epartm ent o f Accounting, from the University o f Łódź. The team consisted of Prof. Irena Sobańska, Dr Tom asz W nuk and two PhD students - Jan M ichalak and Radosław Gajewski. The research in a G erm an com pany was conducted by Jan M ichalak under the supervision of Prof. Irena Sobańska.
In social sciences, including accounting, the use o f case studies and descriptions of procedures are common m ethods of expanding the knowledge o f academics and practitioners ( S c a p e n s , R y a n , T h e o b a l d 1992, p. 112-130). Only a p art o f the research results is presented in this contribution because of the imposed size of the paper. Due to business secrecy reasons the names o f the companies were changed. The Polish com pany was given a fictional name - Polbud and the G erm an com pany - Deutsch bau.
3. Similarities and differences between the companies
The construction m arket is highly fragmented in Poland as well as in Germany. A lthough both enterprises have high levels o f employment (about 9000 people in Deutschbau and about 1500 people in Polbud) as well as high sales (about 1800 million E U R - D eutschbau and about 150 million E U R - Polbud), their m arket share stays at a low level of about 1-2% o f whole m arket. Despite a low m arket share both firms are considered to be am ong the biggest and m ost renow ned in their countries. Hence their contract acquisition strategies are similar and focus on activity in all segments o f the construction m arket - from industrial constructions, roads, artificial lakes and dam s to housing. Such a strong diversification is forced by the current m arket situation. Strong dive rsification helps to m aintain a stable and relatively high level o f acquired contracts resulting in stable cash flows. In all segments both companies specialize in general contracting executing the biggest and m ost challenging construction contracts. Large construction contracts enable the companies to obtain high contribution margins that cover high overheads resulting from the complex structure o f the head office and local units. Acquisition and realization o f big contracts help to gain renow n on the m arket. Consequently, high renown helps to acquire new contracts. Both firms use services o f subcontractors, either when there are no necessary skills in the company or when subcontractors offer lower prices than internal entities.
Both Polbud and Deutschbau represent the group-type structure. D eut schbau comprises 30 companies and Polbud comprises 6 companies. Both
groups have local divisions th at are m ore im portant for the m anagem ent process than legally separated companies.
Creating local divisions is favourable for construction com panies because it enables them to build relationships with local authorities and inhabitants o f the region. Nearness to the building site also helps to decrease the cost o f construction services. High transport cost of heavy construction m achines and people in case o f great distances to the building site could m ake the project unprofitable.
Both groups focus on m arkets o f home countries, but they also try to acquire and realize contracts abroad. They used to be m ore active on foreign m arkets in the past. However, the num ber o f foreign contract decreased due to stronger competition, protectionist policy o f governments tow ards the construction m arket as well as dom ination of the international construction m arket by a few biggest com petitors.
Both companies are highly centralized especially in the financial area. High centralization results from the high risk connected with projects. A few unsuccessful large projects can cause a b ankruptcy o f a firm. Strategy is developed by the top m anagem ent and medium and lower levels o f m anagem ent do not have m uch knowledge about the m ission and strategy of the company. Last years were quite difficult for both companies and they had poor financial results, which is characteristic o f construction firms in both countries.
There also are some significant differences between D eutschbau and Polbud resulting from differences between Polish and G erm an construction m arkets. The construction m arket in Germ any is bigger and m ore stable than in Poland. Hence also D eutschbau is bigger than Polbud in term s of the num ber o f employees and value o f executed projects. As a result, D eutschbau is able to benefit m ore from the economies o f scale. As the G erm an capital m arket also is m ore developed than Polish, it is easier for D eutschbau to secure funds for its operations. High credit rates and a not very well developed system o f m ortgage credits are considered to be the main factors hindering the development o f the construction industry in Poland.
D eutschbau has a product-based divisional structure. Divisions were created according to the type o f products or services provided by the division: roads and underground constructions, housing and industrial constructions, production of construction materials.
Both groups also have different structures of capital owners. The m ain shareholder in D eutschbau is a foreign construction group, while Polbud has m any individual and institutional shareholders. D eutschbau pursues a m ore active acquisitions policy resulting in a changing structure o f the group.
5. Comparison of the organization and functioning of controlling systems
Due to a multi-level organisational structure o f presented enterprises resulting in different inform ation needs o f m anagers o f various levels the structure and organisation o f controlling is multi-level, too.
5.1. Corporate controlling
The highest level o f controlling is corporate controlling, which supplies inform ation directly for top m anagem ent o f both groups. It cannot be equalled to strategic controlling, as in both presented com panies it has features characteristic o f operational controlling and uses tools peculiar to operational controlling.
C orp orate controlling collects the m ost aggregated d a ta th at after thorough analysis enable the board o f directors to m ake proper decisions. Controlling departm ents in head offices are responsible for collecting data used by top m anagem ent. Controlling departm ents are relatively small in both groups and employ only several people. At the corporate level most o f the prepared analyses arc based on Financial data.
M ain measures analysed in D eutschbau are the following: 1. Value o f newly acquired contract.
2. Revenues from executed projects.
Both measures m entioned above are calculated for one-m onth periods and cumulatively, separately for divisions, departm ents and m ore significant projects. These measures are also calculated for groups as a whole and com pared with measures calculated for the whole sector. The m easures for the sector are prepared by professional associations active in the construction sector in Germany.
3. Free cash flow (informing about a com pany’s liquidity).
4. Value of payables and extended guarantees (informing about a com pany’s debt and level o f financial risk).
5. The ways of investing available cash (financial investments, acquisitions of other companies, investments in tangibles and intangibles).
6. Com parison o f the financial result and m ain factors influencing this result with the planned financial result and financial results of the com pany from past periods.
7. N um ber o f employees in particular qualification groups as well as the num ber o f employees and labour costs in all product divisions, local divisions and departm ents.
M ain measures analysed in Polbud are the following:
1. Analysis o f revenues and the value o f newly acquired contracts. 2. Cost analysis by types and entities on a monthly basis and cumulatively. 3. Em ploym ent and labour cost analysis.
4. Analysis of the financial statem ents o f com petitors quoted on W arsaw Stock Exchange, which can be treated as a substitute for a com parison with G erm an construction companies (on the basis o f d ata provided by G erm an construction sector associations).
5. Detailed vertical and horizontal analysis of the balance sheet and profit and loss account.
6. Production per employee.
5.2. Budgeting
Both companies use incremental, top down budgeting ( D r u r y 1996, p. 467-474). In Polbud as well as in D eutchbau both operational and financial budgets are prepared. A num ber o f differences have been identified in the budgeting systems o f the companies presented. There are m ore budgets and they are m ore detailed in the G erm an enterprise. Q uarterly continuous (rolling) budgets are used in the German enterprise and traditional annual budgets are used in the Polish enterprise. The G erm an com pany’s budgeting procedure is m ore formalized and complex than the one employed in the Polish enterprise, but it is better described in various handbooks. In Polbud budgets are prepared only for the whole company; cost estim ations prepared for every project are not included directly into the budgeting system.
5.3. Performance measurement and the motivational system
The m ethods o f connecting perform ance with m otivational systems are different in both companies, ln D eutschbau the m ain part o f the bonus is paid after the end of a project, and in Polbud during the execution of the project. Both m ethods have advantages and disadvantages. The m ethod employed in D eutschbau helps to tie closely the profit on the project with the rem uneration of project employees. Its m ain disadvantage m ay be a dem otivational influence on workers during the execution o f the project (people are not m otivated if the bonus is m uch delayed). The m otivation m ethod used in Polbau enhances the m orale of employees during the execution of the project, but it also creates the risk o f high labour cost even in case o f unprofitable projects. Sometimes the last stages o f the project are crucial for its financial success.
5.4. Division controlling
Division controlling is realized in D eutschbau at the level of product divisions and geographical divisions and in Polbud at the level of geographical divisions. The scope o f inform ation prepared by controllers at the division level is similar to the scope o f inform ation prepared at the corporate level, but it is limited to the inform ation concerning a given division. There exist slight differences in the scope o f inform ation prepared for various divisions in D eutschbau resulting from m arket segment differences between the prod u ct divisions. Especially construction m aterial division controlling gathers inform ation peculiar to itself as it differs strongly from other divisions - it usually does not execute long-term projects like other product divisions. F or supply of inform ation at a division level in D eutschbau are responsible controllers in the divisions and in Polbud - controllers from the head office (as there are no controllers in divisions).
5.5. Project controlling
In Polbud project controlling focuses mainly on technical issues. The main tools used at this level are schedules, technical specifications, workload plans o f labourers and equipm ent as well as cost calculations prepared by project m anagers, which are based on calculations prepared by sales departm ent. In order to evaluate a project variations between the planned and actual profit are calculated as well as time variations (delay or being ahead of schedule). Project m anagers are responsible for perform ing the controlling function at the project level.
The organization of controlling at the project level is significantly different from the organization in Polbud. In D eutschbau every project has two project m anagers - the technical project m anager and the economic project m anager, who, as a team, are responsible for the results o f the project. Thanks to such organization the economic project m anager can focus on the financial control o f project execution. T he economic project m anager is able to observe m ore thoroughly the variations between the planned and the actual costs o f individual construction services. It helps to identify unfavourable trends quickly and, consequently, to correct actions in order to increase profitability of the project.
In D eutschbau one o f the m ain objectives of project controlling is periodical, formalized risk analysis o f executed project. In Polbud risk analysis is conducted in a less formalized and non-systematic way.
Summarizing, on the basis of a com parison of controlling systems used in Polish and G erm an construction enterprises the following similarities have been identifiedt:
- focus on financial m easures, - neglect o f non-financial measures, - focus on operational controlling, - m onthly period o f internal reporting,
lack o f implem entation o f the newest controlling tools and techniques, - controlling departm ents employing few people,
- com m unication problem s between sales departm ents th a t prepare offers and controlling departm ents,
use of m any specialized (not integrated) com puter software systems. The m ost im portant differences between controlling systems in Polish and G erm an construction companies are the following:
- the d ata in Deutschbau that are gathered are m ore detailed,
- the d ata in D eutschbau are collected in a m ore formalized m anner, which is characteristic o f G erm an companies ( H a h n 1996, p. 855-1208),
- there are m ore controllers in D eutschbau, who are employed in the head office but also in product divisions and geographical divisions,
- m ore data bases and standardized norm s are developed in D eutschbau.
6. Planned changes in controlling systems
While the research was being conducted both com panies planned to introduce changes in their controlling systems (i.e. introducing new m ethods and tools) in order to collect m ore accurate and useful d ata. Better inform ation should help companies to m ake better decisions and to gain sustained competitive advantage on a shrinking, increasingly competitive m arket. Some tendencies and plans were similar in both companies. Both companies intended to:
- buy and implement m odern integrated com puter systems th at should help to gather m ore data, analyse it and present it in on-line m ode; such systems enable the use o f m ore complicated and sophisticated m athem atical d a ta analysis m ethods as well as m ore interesting and clear presentation o f analysis results;
- tighter connection between offer cost estimation and budgeting (thanks to integrated com puter systems and new ways of com m unication);
- development of high quality d ata bases;
- stronger decentralization o f controlling responsibilities;
Planned changes specific to Polbud were the following2: - design and implem entation o f Balanced Scorecard,
- design and implem entation o f m ore detailed budgets and analyses, - introduction of continuous quarterly budgeting,
application of elements of ABC and Life Cycle Costing in cost budgeting and analysing.
In Deutschbau the following changes were planned: - improvement of risk controlling,
- development of benchmarking,
- increase in the use of relative data (presented in relation to the whole sector and the m ain competitors).
7. Conclusions
C ontrolling systems in both companies are similar to each other in general premises. Both use similar tools and corresponding analyses. Both conduct budgeting, but the level of details is different. There are some differences between controlling systems resulting from strategies employed by the companies, situation on the m arket and d a ta availability. F o r instance, in Deutschbau one of perform ance measures considered to be the most crucial is liquidity. In Polbud the m anagem ent uses m ore detailed balance sheet analysis to evaluate com pany performance.
C ontrolling systems in both enterprises are undergoing intensive develop m ent. Both companies try to enlarge the scope o f collected data, basing on the rule “w hat you can ’t measure, you can’t m anage” . On the other hand, m anagem ent of both companies try to avoid d ata overload th at can result in “ analyse till paralyse” situations.
At the time when the research was conducted controlling systems in both companies had features characteristic of operating controlling: focus on historical financial d ata and production issues, the use o f real units of m easurem ent, and non-elastic com puter software ( S o b a ń s k a 2000). In both firms, controlling m ethods were characteristic of operational controlling: budgets, indexes, exception reports, schedules. However, the slum p in the construction sector and increasing com petition resulted, in both companies, in the introduction o f the elements o f strategic controlling, which is m ore prospective, focuses on com petition, uses financial and non-financial d ata
2 Planned changes in controlling systems were developed in cooperation with a research team consisting o f specialists from the Accounting D epartm ent o f the University o f Lodz headed by prof. Irena Sobańska.
and integrated, flexible software. Both corporations use plans to implement strategic controlling methods: balanced scorecard, benchm arking and project life time costing.
In view of Poland’s approaching entry into the European Union and full liberalization o f the construction m arket the com petition between Polish and G erm an construction companies will increase. According to D i M a g - g i o and P o w e l l (1983, p. 147-160) enterprises start to resemble each other because of:
- cultural expectations o f clients, com petitors, suppliers, governments, - uncertainty of the environm ent,
image of professionalism created am ong the professionals.
As shown in this article the process o f unification o f controlling systems in Polish and G erm an construction companies is fairly advanced. T he speed o f changes in controlling systems and increase in effectiveness are factors influencing the ability to compete on the highly com petitive construction m arket.
Rcfcrences
A n t h o n y R. N., O o v i n d a r a j a n V. (2000), Management Control Systems, R. R. Donnelley & Sons, Boston.
D i M a g g i o P., P o w e l l W. (1983), Institutional isomorphism, “ A m erican Sociological Review” , N r 48.
D r u r y C. (1996), Management and Cost Accounting, International T hom pson Business Press, London.
H a h n D. (1996), PuK Controllingkonzepte, Verlag G abler, W iesbaden. H o r v á t h P. (1998), Controlling, Verlag Vahlen, M ünchen.
K e r z n e r H. (2001), Project Management. A System s Approach to Planning, Scheduling and Controlling, John Wiley & Sons.
M e c k l R. (2000), Controlling im Internationalen Unternehmen, Verlag Vahlen G m bH , M ünchen. S c a p e n s R. , R y a n R. J., T h e o b a l d M. (1992), Research Methods and M ethodology in
Accounting and Finance, Academic Press.
S i m o n s R. (2000), Performance Measurement & Control System s fo r Implementing Strategy, Prentice Hall U pper Saddle River, New Jersey.
S o b a ń s k a I. (2000), Rachunkowość zarządcza konwencjonalna i strategiczna, “ C ontrolling i Rachunkow ość Zarządcza w Firm ie” n r 99.
www.stat.gov.pl/serwis/b_s/wskaz.xls w w w .destatis.de/basis/d/vgr/vgrtabl.htm bossa.pl/analizy/fundam entalne
Jan Michalak
C O N TR O LLIN G STRA TEG IC ZN Y I O PERA CY JN Y W PO L S K IC H I N IE M IE C K IC H PR ZE D SIĘ B IO R ST W A C H BUDOW LANYCH - PO R Ó W N A N IE
(Streszczenie)
W artykule prezentowane są wyniki badań systemów controllingu w branży budowlanej. Celem niniejszego artykułu jest:
• skrótowe przedstawienie organizacji i funkcjonowania controllingu operacyjnego i strategicz nego w dwóch dużych przedsiębiorstwach budowlanych z Niemiec i Polski na początku trudnego dla nich okresu dekoniunktury,
• wskazanie głównych zakresów problemowych i kierunków zmian, które m ają w przyszłości wpłynąć pozytywnie na sprawność funkcjonow ania tych przedsiębiorstw.
W artykule opisane są cechy charakterystyczne rynku budow lanego, przedsiębiorstw branży budowlanej, jak również metody controllingu stosowane w obu przedsiębiorstwach. W momencie prow adzenia badania systemy controllingu w opisywanych przedsiębiorstwach posiadały cechy charakterystyczne dla controllingu operacyjnego. Jednakże dekoniunktura i silniejsza konkurencja skłoniła oba koncerny do p rób w drożenia elem entów controllingu strategicznego. W wyniku badań zaobserwow ano upodabnianie się systemów controllingu w obu przedsiębiorstwach, co świadczy o występowaniu w nich efektu mimikry opisywanego przez P. Di M aggio i W. Powella.
Jan Michalak
O PER A TY V IN ÉS IR STRA TEG IN ÉS K O N TR O LÉS SIST E M U PA LY G IN IM A S L E N K IJO S IR V O K IE TIJO S STATY BINÉSE JM O N ÉSE
(Santrauka)
Statybos sektorius yra vienas iš svarbiausii) šalieš ekonomikai. Straipsnis pateikia 2000-2001 metais atlikto tyrim o rezultatus. Pagrindinis straipsnio tikslas yra aprašyti kontrolés sistemos organizavim ą ir funkcijas dviejose vedančiose V okietijos ir Lenkijos ýnonése, nustatyti pagrindines problem as, iškilusias stagnaciniu periodu, atrasti to b u lin tin as sritis, pabréžti planuojam us pokyčius, teigiamai veikiančius pristatytí) jmoniij kontrolés sistemy efektyvumą. K ontrolés sistema yra aprašom a trim - imonés, padalinio ir projekto - lygiais. Tyrim o pradžioje abiejose (monése kontrolés sistemos turéjo operatyvinés kontrolés pożym ius. Tačiau nuosm ukis statybos sektoriuje ir auganti konkurencija paskatino abi jmonés diegti strateginés kontrolés elementus. Tyrim as parodé, jog kontrolés sistemij suvienodinim o procesas Lenkijos ir Vokietijos imonése progresuoja.
