The Road to Competition in the Building Improvement Industry

© 2011 by Dr Karl Myrsten. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

First published by AuthorHouse 08/04/2011

ISBN: 978-1-4567-8452-2 (sc)

ISBN: 978-1-4567-8451-5 (ebk)

Printed in the United States of America

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Contents

Introduction

Chapter One

The Building Improvement Industry

Chapter Two

EPS—a New Foundation

Chapter Three

MEPS—a manageable solution

Chapter Four

The Market Illusion

Chapter Five

Institutions That Stand in the Way of Progress

Chapter Six

Something More is Needed

Insurance claims

Public administration

Property management

Private landlords

Home and flat owners

Building improvement administration

Building appraisal

Contracting

Building improvement education

Chapter Seven

The Project’s Programme Areas

Chapter Eight

EPS for other manual services

References

Introduction

Swedes spend their money freely on cars, motorcycles, travel and many other amenities of modern life. However, they are much more critical of rates for manual labour, particularly in the area of building improvement. This book explores ways of promoting creative, effective competition in the industry.

Informal discussions about building improvement quickly turn to personal stories about how expensive and inefficient it can be. Everybody is more than willing to agree that manual labour is much more costly than the other expenses of daily life. While such viewpoints may be valid, they haven’t changed much during the 40 years that I have worked in the industry. Contractors and their customers tend to be mistrustful and disrespectful of each other. Each side blames the other for high rates and refuses to examine its own responsibility. Customers say that the problem is inefficiency and greediness on the part of contractors. The charge of greediness is difficult to substantiate if actual figures are considered. The budgets of contractors are often so tight that they have trouble making ends meet from one week to the next. Thinking about efficiency and modernisation under such circumstances is nigh unto impossible. Contractors maintain that the high costs are due to customer`s lack of competence in designing, planning, administrating and controlling the jobs they order. The blame game continues year in and year out. What customers and contractors have in common is the perception that a profitable transaction is possible only at the expense of the other party. Proceeding from such a zero-sum approach, contractors have repeatedly tried various ways of coordinating their activities. They have entered into local or industry-wide agreements concerning hourly rates and prices of materials for small jobs, and clandestine cartels when bidding on large contracts.[1] Customers have used various purchasing strategies to dodge such manoeuvres. For instance, some big customers have procured materials separately and subsequently offered them to contractors. Property managers may hire their own workers in order to circumvent the problem. At times when costs have gone through the roof due to inefficiency, the same managers out-source the entire effort. The solution frequently leads to disappointment, after which the whole cycle starts all over again. In other words, the conditions for building improvement are turbulent. They strike the observer as an endless carousel, and they are hardly conducive to an orderly, sustainable development process.

Furthermore, neither contractors nor customers seem the least bit interested in boosting efficiency in order to reduce rates. For someone whose career began in the manufacturing sector, this apathy on all sides when it comes to productivity is truly astonishing. If the industry were as efficient as others, criticism of its rates would be far less of an issue. Furthermore, the structure of the Swedish tax system contributes to the impression that the building improvement market is extraordinarily expensive. Nevertheless, the current government has forcefully addressed the issue by introducing a 50% deduction for home improvement services. Thus, the authorities have assumed their responsibility and the ball lies in the court of contractors and their customers. Now that the deduction has been adopted, they cannot blame tax rates for discouraging productivity. The concept of a zero-sum game is deeply rooted in the industry. Investigative reporters have repeatedly discovered that the industry suffers from genuine organisational problems caused by purchasing managers[2] who conceal the rates that they have procured and who enter into covert agreements with suppliers for personal gain. Such corruption hits the front pages only when it becomes too blatant and irritating for competitors to ignore. The contractors and customers who are involved in such shenanigans are satisfied with things the way they are and want to avoid any change that will shed light on the true state of affairs.

Distrust and preconceptions are thwarting modernisation of the building improvement industry. The principal parties are blind to the promise of greater efficiency, key people are corrupt, and public officials have ignored fundamental problems for many years. So is there any hope that things will get better? Yes, I am firmly convinced that there is. Despite its primitiveness and amenability to manipulation, adoption of the home improvement deduction shows that the authorities have finally realised that action is needed. Moreover, the solutions that this book presents for curing the industry’s allergy to modernisation have been selectively tried for a long time and have been shown to work. What the present situation requires is tenacity, as well as the dissemination of concrete information about how such solutions provide everyone concerned with brand new opportunities—if sometimes indirect—in their day-to-day work.

Sweden adopted the fixed-rate system for plumbing repairs in 1969[3]. Large-scale application of the initiative by many businesses clearly demonstrated that the productivity of the heating, ventilation and plumbing (HVP) industry would triple if fixed rates were to replace hourly rates for certain common types of repair and thereby made the market more competitive. Due to the excessive zeal of some public officials, the system did not last very long. Representatives of the Plumbers’ Association made sure that each community had only one contractor who offered fixed rates, thereby undermining the very competition that the system was intended to promote[4]. Productivity gains boosted profits without offering customers lower rates. Whether by design or not, the fixed-rate system collapsed. But those who wanted to hold on to the old way of doing things could not ignore the fact that the ice had been broken. It had finally been documented that the packaging of services and faith in the free market could dramatically boost efficiency in an industry that had previously been lulled to sleep by hourly rates. Observations of the fixed-rate system before it collapsed became the catalyst for the project (or long-term process) that this book discusses.

The purpose of the project is to create a dynamic change process to boost efficiency in the building improvement industry based on a market economy and packaged services or EPS.[5]

It all started in 1968 with a research project[6]. I was 34 years old at the time and thought that I knew most everything there was to know about management in general and production engineering in particular. I had held a wide range of positions in the manufacturing sector, including as a machine tool worker, machine tool designer, design engineer, factory engineer, production engineer and executive. As an organisational consultant for many different industries and businesses in both Sweden and the United States, I had learned a great deal about the problems they faced. Having started my career on the shop floor at the age of 14, I continued to pursue my education parallel to daily practical work and could thereby look back on many years of experience when the project began. Production engineering was the area that interested me most. I had been trained as a methods-time measurement (MTM)[7] instructor and had successfully implemented the system at a number of businesses in Sweden and the United States. As a result, my inclination when dealing with production problems was to analyse and propose complete solutions. The HVP industry contracted me in 1968 to boost the productivity of its building improvement sector, which was receiving a great deal of bad publicity in the press. In my youthful enthusiasm, I thought that I could complete the project within a few months. Little did I know what lay in store for me.

As I watched plumbers work from morning to night for several intensive months, the scales fell from my eyes. I discovered a totally different problem and cause-effect relationship than the lack of production engineering know-how that my customers and I had imagined. What became obvious was that the industry’s approach to doing business was the real culprit. The focus of customers on hourly rates instead of the price on measured provided services had extinguished all interest in modernisation and efficiency. The market lacked any competition worthy of the name. The insight was so earth-shattering for me that it has held its grip for 40 years. The issue also affected the topics that I subsequently studied. In particular, I have more deeply explored the fields of economics and business administration. The doctoral thesis that I completed at Stockholm University in 1984 was heavily influenced by my new way of looking at these matters.[8]

Prior to my project for the HVP industry, I had worked as an engineer who analysed problems and proposed solutions. It had now become obvious that a different approach was required. I had identified enormous potential for efficiency gains, as confirmed by the poor record of the fixed-rate system. Nevertheless, it was clearly impractical to simply import the traditional efficiency model to which I had grown accustomed in the manufacturing sector. Before a normal production engineering analysis could be carried out in the building improvement industry, the worksite had often been closed and a new one set up.

As a production engineer, I knew that a better method could multiply productivity many times over and that motivation was crucial to efficiency. The question was how systematic methods development and stimuli could be incorporated into an industry whose workplaces and attitudes were so averse to change and whose conditions of production could be neither planned nor foreseen. New situations were constantly arising, and the craftsman was frequently the only person who could determine what needed to be done at a particular moment. The responsibility for planning a project that a production engineer usually assumed in the manufacturing sector was largely borne by the labourer himself. So what would a new analytical approach involve? Frederik Hayek, who was well known in various connections,[9] seemed to be thinking along similar lines. But his ideas were most easily understood in terms of ordinary products.[10] Given the intangible services that the HVP industry provided, how could it take advantage of his findings?

My previous exposure to the work of Frank B. Gilbreth came in handy here. He had shown that manual labour could be regarded and treated the same way as a standard product.[11] The manufacturing sector had used the basic motions of MTM and their various combinations as a model for many years. This experience gave birth to a vision that the building improvement industry could evolve on its own with the assistance of market forces. The EPS concept subsequently emerged from my dialogue with customers, contractors and workers during a series of research projects and consulting assignments.

A subsequent series of research projects concerning various trades of the building improvement industry convinced me that I was on the right track and that a synthesis of the thinking of Hayek and Gilbreth was applicable in a number of areas beyond HVP. The theoretical vision was general enough to address modernisation and efficiency issues whenever certain types of manual labour were involved. It contained a seed that could revitalise and stimulate the service sector in a way that the Western manufacturing sector had enjoyed over the past century. Chapter Six explores the power and fertility of that seed. Modernising part of the service sector based on the vision requires packaging what it has to offer and subsequently ensuring that market mechanisms come into play. Adapting the vision to the building improvement industry proved to be a far-reaching but doable effort. But applying the vision in a way that would truly transform the sector turned out to be a gigantic problem—one that was far more demanding than the simple adoption of EPS and associated computer solutions.

Even the initial attempts to introduce a limited version of these new approaches to the building improvement industry encountered some of the same difficulties that other countries had experienced when transitioning from a planned to a market economy. The similarities have become even more glaring over time. Many institutions and structures are designed to serve old ways of thinking, while people’s values have grown narrow and inflexible. Some of them regard any change as a threat to their own positions. They do everything they can to prevent new ideas from taking hold. Others want to see changes but are subconsciously stuck in the old system and distrustful of fresh initiatives. Finally there are those who are unable to assess the potential of modernisation until they have seen others succeed. As is the case with a national economy, transforming an industry is a gradual process that may take an entire generation. While realising that such inertia is natural, it is hard for a project manager to resist the temptation to search for methods and strategies that can speed things up.

The question is what kind of strategy will make the conversion as smooth and rapid as possible. It became obvious at an early stage that the change must be internal, based on the energy and motivation of individual people and institutions. But how do you turn that insight into a workable strategy that will supply the system with the stimuli and catalysts it so badly needs. I started off with the naive assumption that progress would take off as soon as a practical market solution was available. But I soon discovered that most people in the industry did not deal with business transactions in their day-to-day work and never thought in terms of market forces. Packaged services and focus on the labour provided instead of simply obtaining low hourly rates were baffling or uninteresting notions to many of those who affected the direction of the industry. Clearly I had been overly optimistic in thinking that the concept of market forces alone would bring people around to my way of looking at things. A more sophisticated strategy was needed. That’s when I took a closer look at the work of Abraham Maslow. His hierarchy of five fundamental needs and their role in motivation concerned individual human beings. But the behaviour of the building improvement industry as a whole can also be described in such terms, and of course it is ultimately made up of people. Thus, we might imagine that the industry and its participants have satisfied the second need from the top (esteem). Everyone agrees that the industry is working to a certain extent, but nobody is satisfied with the underlying mechanisms. They are not so far from taking the next step and rising to the top of the pyramid (self-actualization) in line with Maslow’s dictum that What a man can be, he must be. It occurred to me that this potential could be the key to modernising the building improvement industry.[12] The drive for self-realization at the personal level is a popular theme these days. The same might be true of an industry that has no anointed decision maker or executive. If it can be shown that individual customers and contractors can make more rational decisions, in their day to day work, than they used to do a genuine opportunity to implement change appears. The fact that such behaviour was made possible by these new market forces is of small importance for someone who lacks interest in the economic mechanisms involved. People make the most rational available choice in particular situations based on self-interest. The strategy of encouraging the self-actualization of the industry, decision area by decision area, was used to implement the desired change during the latter part of the project. Integral to the strategy was to systematically identify the decision areas that need and are amenable to such encouragement and stimulus. One source of inspiration during this stage of the project was the work of Elinor Ostrom, a Nobel Laureate (2009) as well.[13].

It is important to describe this process in such a way that readers will reassess their view of the building improvement industry. What must be stressed from the very beginning is that the purpose of EPS is to create a bigger pie for customers, contractors and employees to share. A central concept is that EPS is not a zero-sum game that generates profit at the expense of others, as has often been the case earlier. Equally obvious is that lecturing and finger pointing cannot change the plethora of institutions and behaviour patterns that control the industry and are rooted in the thinking of several generations. Thus, internal processes and intellectual exertion by individuals is required. That is no easy challenge. Attitudes, approaches and ingrained patterns must undergo fundamental transformation. There are no short cuts. Readers must be able to draw their own conclusions about the value and desirability of a change process. In other words, not until people can relate what they have read to their own personal experience do they develop an interest in influencing the course of events. I hope this book will spur a friendly, professional discussion that can generate a productive mix of innovative thinking.

Even if the book is able to present my thinking in a respectful and accessible manner, many obstacles remain before sufficient information can be communicated for readers to reconsider their views. Including too many details based on a 40-year odyssey can bog the discussion down. On the other hand, excessive brevity undermines the message. I have not included descriptions of computer applications.[14] For those who want to follow the ins and outs of the development process, I have included relevant Internet links. Concepts that are keys to understanding my argument have been placed in readily accessible fact boxes throughout the book. The eight chapters have been structured in such a way as to highlight my basic line of reasoning. Chapter 1 presents the building improvement sector as viewed through critical eyes and the premises on which the project is based. Chapter 2 describes how the concept developed, and Chapter 3 how it was implemented by means of computer applications. Chapter 4 reviews the initial attempt to disseminate the concept and the poor results that the strategy generated. Chapters 5 and 6 look at how a more sophisticated implementation strategy was developed. Chapter 7 sketches the events that took place after the basic solution had been launched and shown to work. Chapter 8 relates the concept to more general considerations and points to the advantages of its application in other areas as well.

Many people have contributed to the process. I would like to take this opportunity to thank those who have had the most decisive influence. Above all, I want to mention Rune Nilsson, Managing Director of HVP firm Nils B. Nilsson, who was willing to take the first step despite widespread reluctance in the industry. Without his foresight, the EPS concept would never have got off the ground. Leif Viktorin, who chaired the Building Repair Committee of Swedish Insurance Companies, supported construction of the first thorough database for building improvement.

Many employees of insurance companies have offered their assistance through the years. My special gratitude goes to Gösta Gimbergsson and Gösta Ågren at Trygg Hansa, Åke Åkesson at Folksam, Jan Fridsäll at Wasa Försäkring and Kent Ström at Skandia. Lars Larsson, CEO of the National Association of Painting Contractors in the 1970s, encouraged crucial cooperation between customers, contractors and labourers when implementing the solution.

The many representatives who have supported the process include Sune Johansson and Olle Jansson at the Association of HVP Contractors, Rune Jansson at the Association of Building Contractors, Hans Spångberg at the Association of Electrical Employers, Hans Nygren at the Association of Glaziers, Olle Sjöblom and Olle Lind at the National Association of Painting Contractors, Holger Edorsson at the Association of Construction Workers, and Tore Högberg and Kjell Johansson at the Association of Painters. Among several hundred contractors who have enthusiastically contributed to the project are Anders Bergqvist at Rörsnabben Stockholm, Björn Johansson at Byggsnabben Stockholm, Stig Ohlson at SEKÅ Göteborg, KG Andersson at BPA in Borås and Mats Åsberg at Åsbergs Bygg in Uppsala, all of whom were willing try a brand new solution at a very early stage. Special thanks to my colleague Åke Jonsson, who has worked with me for the past 20 years and seen to it that the solution is now fully computerised. Last but not least, I want to express my appreciation to my wife Siv, who has patiently put up with me and all the time I have devoted to this project for so many years.

Karl Myrsten

Larnaca, June 2011

Chapter One

The Building Improvement Industry

A sector under constant fire

The building improvement industry is not a distinct entity that can be described in an unambiguous manner. Its boundaries are blurred, while its various phenomena and behaviour patterns are perceived differently depending on the observer. Following is a brief summary of how I have long regarded the industry from a systems perspective. Hopefully this overview will set the stage for the discussion in the remainder of the book.

The industry at a glance

From a systems point of view, building improvement is a huge industry. Customers and decision makers range from private individuals to listed insurance companies, large property managers and public agencies. Likewise, contractors extend from sole proprietorships to listed construction firms and other large enterprises. The industry also includes a number of service-oriented institutions—schools that supply it with trained craftsmen and engineers, along with various administrative functions. For the sake of simplicity, I have excluded suppliers of materials, shipping firms and the like but noted their relationship to the system.

What the system does

I will describe the activities of the system from two dimensions. The first dimension, that which is produced or serviced, comprises all types of physical labour from routine, preventive maintenance to extensive building improvement. Thus, I will include any improvement work that is carried out by established contractors. The line between such projects and new construction is based on how this organisation is structured. The second dimension—the superstructure or administration of that which is built—comprises the chain of activities from product launch to planning, implementation management, follow-up and payment. Thus, the system covers the entire process and includes everything from replacing a faucet seal or stove plate to repairing water