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As strategy naturally informs structure and organisational fitness to support the business case, this spread outlines the internal changes we made to ensure resilience for the future and capacity to cope with change. It contains information around the group’s strategy, efficiencies, risk management, transformation and remuneration. |
Group strategy
The group’s growth drivers are a diversification of what we do, where we do it and when we do it.
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Managing cost, efficiencies and business discipline
The global infrastructure opportunity KPMG survey of February 2012 clearly indicated that the majority of global and local construction firms identified a number of necessary internal modifications in a changed market, as depicted in the graph below.
Top functional areas with opportunities to improve efficiency (%)
‘Yes’ percentages represented
Respondents chose top two functional areas.
* Low base – findings are directional in nature.
Source: KPMG International, 2011.
As markets will remain tough, we echo the belief that companies should reflect on their cost and support structure and implement remedial action where needed.
| Although the strategy is expected to deliver medium and long term growth, short term uncertainty of contract awards continued and margins remain under pressure. Our attention has therefore been directed at addressing inefficiencies in the group – the cost base, our structure and efficiencies in work streams and risk management. |
The group implemented an internal efficiency programme at the start of this financial year, with the rationale to:
| Simplify the business and reduce complexity |
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| Lower risk |
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| Increase the speed of delivery and decision-making |
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| Reduce the costs base |
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The programme involves a number of inter-linked programmes, which include:
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Change management |
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Cost out |
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Structure |
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Process efficiencies |
Change management In view of the change management challenges faced in our ongoing transformation of the group into a multiregional, multi-disciplinary entity with a one-company mindset, the group launched a comprehensive programme to improve both the change management and the change readiness of the group. As outlined in the online section of the report at www.groupfive.co.za, a core group of senior leaders and change agents who will facilitate, implement and monitor any future change processes has been put in place. The programme will be focused on:
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Cost-out Based on the projections of limited growth in the short term, we focused on cutting overheads whilst not reducing capacity for future growth. Given that the group’s businesses are in markets with different levels of activity and with uncertainty around the timing of contracts, certain capital investment was rescheduled and unfortunately some employees retrenched. Other cost initiatives included:
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Structure Post the review of the group’s strategy and its imminent sale of all the Construction Materials businesses, the group’s portfolio and structure has been redefined in terms of its business model in line with its ability to develop, invest in, package, build and operate infrastructure. The group remains focused on its strategy of being a diversified construction, infrastructure concessions and services group. To support this strategy, with effect from 1 July 2012, the group has been restructured into a single Construction segment which is now led by one executive. This executive will deploy both the discipline and regional strategy of the Construction cluster. He and his operational team will ensure that the culture and behaviour that is entrenched is one of a unified Group Five construction company with the ability to deliver multi-disciplinary contracts in a number of selected growth regions. Andrew McJannet, previously executive director of Civil Engineering, has accepted the appointment as the executive director of Construction. Andrew has been with the group for just over 25 years. He has significant experience in working for both public and private clients in South Africa, the rest of Africa and the Middle East. He has technical and operational expertise in civil construction, with an ingrained ability to deliver highly specialised and complex contracts. He has a keen understanding of integrating businesses, which he has successfully done in the amalgamation of the group’s heavy civils, roads and earthworks and over-border civil engineering operations. The result of the restructure is four clusters, as the Engineering and Construction Services (E&CS) cluster has been added in line with the group’s strategy to expand its offering to include packaged, turnkey and engineer, procure and construct (EPC) solutions for specific sectors. A new corporate function of strategic project development has been created to generate new income streams through strategic partnerships with governments, investors, clients and professional service consultants, as well as driving the group’s African strategy. This role is intended to create the markets and income streams that entrenches Group Five’s position as a multi-disciplinary construction company through a single point of contact for large and strategic clients. Paul Le Sueur, previously the Building and Housing executive director, has accepted this new position. Paul has been with Group Five for more than 30 years and has a wealth of knowledge in the construction sector and a valuable network, with established relationships with both public and private clients. His relationship building and management skills will be a significant advantage in his new role.
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Process efficiencies The group reviewed its operating processes and support structures relating to finance, administration, human resources, legal, commercial and safety, risk, health, environment and quality to reduce risk, complexity and to drive efficiencies at a lower cost. This process will be completed in the coming financial year now that the group’s operating structure has been finalised. |
Managing risk
Although we experienced continued pressure on contract prices and margins, our generally good contract execution was maintained apart from a couple of contracts. As outlined, the worst single contract impact on the group’s Construction results was from the DISI pipeline contract in Jordan. Refer to page 61 for more information. The contract losses in the Middle East represent the main reason for our loss-maker ratio worsening from 15% to 27%.
Effectively managing contracts will become even more crucial going forward as we enter new markets, particularly where multidisciplinary contracts are involved. This requires more of the group’s businesses to work together seamlessly.
A review of our contract risk assessment regime will also take place by early F2013 to cater for new markets and the impact on the group’s risk-bearing capacity of large multi-disciplinary and engineer, procure and construct (EPC) contracts that are likely to be more prevalent in our new markets.
| The group’s risk-bearing capacity model was refined to cater for the measurement of both financial and operational capacity. The model is reviewed and monitored quarterly and utilised in the risk assessment of the impact of large contracts prior to tendering. |
It was therefore decided to move all Gauteng business unit head offices – with the exception of our manufacturing and plant operations – into a single building during calendar 2014. The Waterfall area in Gauteng has been selected as the best option based on cost, location and benefits. This will not result in any extra rental cost to the group and will realise the following benefits:
Coastal-based businesses will be co-locating in Durban and Cape Town where operationally possible. |
As part of our evaluation, it was found that the group should improve cross-business interaction and work more seamlessly. There is currently also too much duplication of certain functions.
Coastal-based businesses will be co-locating in Durban and Cape Town where operationally possible.
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ONE OF THE KEY INTERNAL ISSUES FOR THE GROUP DURING THE YEAR WAS ADDRESSING ITS BBBEE ownership FOLLOWING THE CANCELLATION OF THE SHARES OF ITS ONE PARTNER, ILIMA, AFTER A DEFAULT. THE GROUP HAS DEVELOPED AN EMPLOYEE-BASED EMPOWERMENT MODEL. THIS SCHEME INCLUDES AN EMPLOYEE-BASED SHARE TRUST AND A DIVIDEND-FUNDED EMPLOYEE BURSARY SCHEME. THIS WILL BE DETAILED TO SHAREHOLDERS THROUGH A CIRCULAR. |
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PHILISIWE BUTHELEZI Chairperson |
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What do you want to achieve with your new ownership transaction? The intent is not only to ensure that we comply with the spirit of South Africa’s BBBEE legislation, but to also create truly empowered black individuals who are economically active in our sector. The new transaction will include an employee scheme which will allow for immediate economic participation through dividends paid and a bursary scheme that will fund students interested in a professional career in our sector. It will be important that the transaction is acceptable to both the beneficiaries as well as the current shareholders of Group Five. These elements of the transaction will be detailed in a shareholder circular to be issued later this year. |
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What were the main lessons you learnt from the failure of the iLima shareholding transaction? iLima was required to fulfil a number of ownership transaction requirements. These milestones were not met over a significant period of time and unfortunately this resulted in a default on the ownership transaction. The iLima shareholding was held by the iLima Consortium, which was a BBBEE group with a majority stake in the iLima Group. The iLima Group was a successful Eastern Cape construction company that became one of the group’s first enterprise development partners. Unfortunately, they grew too rapidly without keeping pace with managing the risks associated with being a national player on larger contracts. This business was eventually liquidated. The lessons learnt by the group include ensuring that it monitors the performance of all enterprise development partners from an early stage to ensure rectification and support action as and when required and to protect any exposure through step-in rights if possible. |
Statement from the head of the remuneration committee Additional responsibility has been placed on the chairperson and the remuneration committee according to the new Companies Act and King III. This has been compounded by the additional scrutiny of executive remuneration by stakeholders. The group has actively engaged stakeholders to better understand their expectations in the design of executive remuneration. The committee also reviewed the group’s proposed redesign of its long term incentive programme for executives and senior managers to achieve the correct balance between retention of employees and managing an underperforming sector and share price. In recognition of the weak sector and company performance, the group’s executive team accepted a zero increase to ensure that some increases would be allocated to more junior employees. Refer to page 92. The remuneration committee also took a cautious approach to the overall employee annual increases to ensure that, after employee rationalisation, total payroll costs for the year decreased after effecting an increase to deserving employees. This required business units to evaluate efficiencies and certain downsizing. In the coming year, the remuneration committee will be taking a closer look at the group’s pay mix as the market trend indicates a leaning to offering larger guaranteed pay versus pay-at-risk or bonus pay.
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A detailed audit of available talent and support structures was conducted this year, which was aligned to a uniform standard and rolled out in the group. This alignment also ensured that the group is better prepared for growth beyond South Africa with the correct skills base. To ensure we are correctly positioned when markets start to recover, as well as continue progressing our black economic transformation goals and manage our critical vacancy risk, the group conducted a detailed succession planning review of the top three management levels. The exercise highlighted reasons for success as well as key risks around critical future vacancies. This process also provided a clear picture of the black management skill currently being developed and identified opportunities for further development. |
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