Michael Kelley: 0:05

Welcome to Yellow Iron, Black Smoke, your podcast for construction heavy equipment, economics, and management. I'm Michael Kelley, your host. Hello, Mike. Glad you're back. We're here for the second episode talking about chapter two of the new book. How are you?

Mike Vorster: 0:24

I'm very well, indeed, Michael, thank you very much good to be with you again, all is all is well in, in southern Florida. Well, good. And all is well here in battleground Washington as well. So I'm glad that we're back here. I think that it's gonna be a good conversation today about the second chapter, I think that this is this chapter, reading through it again, as I was last night, it really gets to the heart of, of equipment management in a lot of ways because it's, well, well, it's titled success is a team sport. And, you know, it really talks a lot about I think, what people are struggling with, as their companies are growing, how did this chapter, how did this one get into a book about economics? You really can't, you really can't do anything without talking about the fact that success is a team sport. Okay? What it because I think about what would happen to a company if the CFO was the only person in the company that was concerned about cost and finance and financial performance, or if the production manager was the only person in the business that was kind of responsible, or thinking about production, we know that won't work. Or if a quality manager was the only person thinking about quality, or heaven forbid, that the safety manager is the only person who's thinking about safety, because we know that, in order for things to work, yes, there has to be someone that carries the flag, there's got to be someone who's the champion, or the function. But in today's construction company, and in today's world, everybody's got to be making their contribution one way or the other. And equipment is no different. Because we Yes, we need good leadership in an equipment group, to carry the flag, and to set the tone and to create the frameworks if you wish. But everybody in a construction company, everybody in a heavy civil engineering infrastructure company, or any other heavy construction company, everybody is one way or another, responsible or involved in equipment, and it can't be only the equipment manager, it's got to be the team, it's got to be the team that creates the success. And of course, one of the things that we mustn't forget, is that the most important player in that team is the hand that turns the key. And that's the operator. Okay. And so it's difficult for me to think about success in equipment management, and think only of the equipment manager, I think that would be very, very, very, very wrong thing to do.

Michael Kelley: 3:27

Gotcha. Gotcha. So, you know, I've been listening to all of this hype about Tesla and their battery day in an Elon Musk always talks about the machine that builds the machine. And I was thinking about that, that, you know, he cares so much about the factory that builds his Tesla's and he talks more about the factory than he does about the Tesla's themselves. And it's almost the same way I feel like in what we're doing is that there should be more talk about these machines. And, and I shouldn't say less talk, but more talk about the machines that build the bridges, the machines that build the roads, and maybe make it to bring that in parity with talking about the bridges and the roads themselves.

Mike Vorster: 4:09

Yeah, that you know, that's valid, very valid. And if you think about it from a, from a state, straight costing and accounting point of view, if you running six or eight or 10 jobs simultaneously out of your company, then your equipment account is probably the biggest job in your company. You know, let's let's sincerely hope that we're managing the equipment account or the same skill, care and attention as we pay to any of the of the large jobs that our companies running. And then of course, with equipment, we've got this thing about, the job never ends, right. There's no real beginning and there's no real end to this job called managing the fleet and looking after the all the transactions associated with managing the fleet. Fleet Management is critical. Another little fascination in it another little twist in it. And that is that when you look at the fleet, or you look at a machine, there are the operational aspects of owning and operating a machine, you know, how hard can it push? How hard can it pull? How much can it lift, and those aspects of the machine that relate to the straight production of work, right. And then there are the mechanical aspects of the machine. And that is the oil and grease, looking after it, repairing it, maintaining it, rebuilding it, replacing it, and those sorts of things, which is really where I've made my focus over the years. And then, of course, there are the capital investment, the financial aspects of the machine, and that is the dollars and cents aspect of the machine. So equipment, this machine that builds the work lies at the confluence of at least three very strong forces, or strong disciplines or strong mindsets that relate to how much can it push and pull? Are you oil and grease it? And then tell me about the dollars and cents, okay? Because and those three things can't work independently, you can't make a decision that makes 100% sense from a pushing and pulling point of view. But it's a nonsense when it comes to oil and grease or dollars and cents. And any one of those can't be sort of optimized relative to any of the others. And that's another reason why it's a team sport.

Michael Kelley: 6:42

It's it's a three legged stool. And if one of the if one of the legs is shorter than the other the stools not worth anything.

Mike Vorster: 6:49

Yeah, yeah. No, you know, you have these three, these, these three aspects that you just mentioned. But then you also talk a lot about the for performance areas. Do the is this like, this is another way of looking at this same thing, right? Yeah, yeah. And there again, one of the things I say fairly, very early on in the book is that if if you want to know your costs, as an equipment person, you could never become world class at knowing your costs. But that you sort of partner with your controller and your accounting group. And knowing equipment cost is a is really a partnership between the equipment group and the accounting group in your organization, if you wish, all right. How can you do utilization? How can you become world class at utilization, if you don't work with and partner with the folks who build the work? Because it's the folks who build the work that give the fleet its utilization, right, you've got to have the right stuff in the right place at the right time, if it's going to be utilized. Right. And so your ability to maximize utilization depends on your ability to communicate with, partner with and know and understand the needs of the folks who are building the work. Alright, reliability, are you going to become world class reliability? Well, that's much more sort of a homegrown thing, because the equipment guys are close to the shops, but you're not going to become world class in reliability if you don't partner with the OEMs. If you don't partner with fluid suppliers, if you don't partner with all the people that provide the inputs to the repair and maintenance function, alright. And of course, there's no way you're going to manage age, the fourth of our key performance areas, all right, if you don't partner with your CFO, and with the banks, and the lending houses, and the lease houses, and do all those sorts of things, so that you have the financial wherewithal to, to, to actually bring the replacement decisions to fruition. And so there's another way of looking at this reason for partnering and the reason why success is a team sport, because equipment management stretches way past the boundaries of the equipment discipline, if you're ever going to be world class, any of the, in any of those things, it truly is a team sport, and the description has served me well and the description has served a lot of folk with whom I work well as we as we kind of thinking about it.

Michael Kelley: 9:46

So, so I think that, um, you know, we talked about accounting and of course, accounting is kind of dear to my heart. In a way accounting, in a lot of senses is looking back Words at what has happened. And at its best, it's using that to predict the future. But if accounting is just looking at numbers, and really we have the operations, and the equipment department that have to play together nicely, and if they're not playing together nicely, then the accountants have a really tough job, or rather, they have their job might be the same, but the numbers are always bleak.

Mike Vorster: 10:27

There's, there's another dimension to to that issue. Alright. And I'd like to explore that dimension before we sort of talk about the construction responsibility. And the, and the operation responsibility, because this dimension is has helped me a lot as well. And that is, if you look at a construction company, let's think about it as a big matrix. Because the columns in the matrix consists of the projects, okay. And the projects are short term, single use teams. And for a construction company to be successful, you've got to have a lot of enthusiasm, and leadership and focus around the jobs around the projects, you've got to have a team that's, that's very focused on that project, a team that gets in gets done and gets out. Okay, yep. When you look at those projects, they are really the province of single use what I call single use plans, your CPM is never going to be used again, your project budget is never going to be used again, the project team is never going to be constituted in the same way ever again. So you've got the columns in your matrix. Let's now think about the rows in your matrix. The rows in your matrix are your standing groups, your accounting groups, your HR groups, your finance groups, and equipment is a row because an equipment group is a standing group, it's the province of standing plans, you have policies, you have procedures. And so who's going to govern who's going to who's going to call the shots, the project teams that want machines for a short while to do one particular function on one particular job, or a number of functions on one particular job, or the equipment team that's responsible for the lifecycle of this machine. And isn't really all that concerned about the fact that it's going to go to six projects this year, okay. Because they have their policies, they have their procedures, they have their standing plans. And so that is a big dimension of this conflict. I, like I said, I grew up building work, I didn't grow up running fleets. And I used to fight with the fleet guys like crazy because I wanted the machines to do what I wanted them to do on my project, where they came from, and where they were going to, was actually of little concern to me as a project team leader. But as an equipment manager, I'm really interested in that machine throughout its lifecycle. Okay. And so I've called this sort of short term team, project focus thing. I've called that project management. And the long term team standing plan focused thing is really general management. And so where is the conflict between seeing equipment as a project management function? or seeing equipment as a standing plan world with standing policies and standing procedures? Okay, so that is one of the very first fundamental differences between the equipment responsibility center and a project responsibility center, because a project is a responsibility center to it's a single use responsibility center. All right. And accounting is a standing responsibility center, much more interested in this year's results than in this projects, results.

Michael Kelley: 14:29

That's right. And so and there's a conflict there simply because you have people who are, are, by necessity, short term thinking, they're thinking about their job, I mean, think about from inception to completion of the job that has a different dynamic than the thinking of this is going to be going on forever. Forever.

Mike Vorster: 14:50

Yep. And you want those short term teams, you want the folks who are really, really focused on this challenge. This Project, get in, get it done, get out, build it safely, build it to the required quality, build it on time, on budget, and then go away. And yeah, and I think there's a fundamental differences in people. You know, there are some folks who will work in the post office, and sort the mail and deliver the mail every day. And there are some folks who will be driven completely crazy by a job like that. If you're standing plan environment person, the chances are your kids are only going to go to two or three schools if their lack of school and your furniture isn't going to be all better to broken because you've transported at over time. If you're a single use plan, if you're a project guy, you're going to be like me, I don't know how many schools I went to. Alright, a little bit like a military brat. But you know, in our furniture was all beaten up, because you just moved. Crunchy. We lived in eight houses, the first nine years we were married. Now the guy that looked after the fleet in our company, he lived in one house, the whole of his life. just completely different kinds of kinds of people. Alright, yeah. And you want those exciting, change driven folk in your business. But you also want the slow and steady guys, you know, we've got an organization here, this isn't complete anarchy yet. And I feel like that you have, to a certain extent this, this, this chapter is about mediating between the the, the Yin of the of the project managers and the Yang of the of the equipment managers, this Yeah, yeah. And, and it's, it's, it's that tension. And that tension is part of the the magic of our industry. But I'll tell you something that a very few people are realizing this might be a little off track. And that is that I don't think we realize the extent to which a corporate wide computer system must also accommodate the the wishes of the single use plan folk, and the wishes of the standing plan folk. Okay. Because, you know, when we did things with pencil and paper, or even when we did things with spreadsheets, we could all do them differently, right? Because we all had our own way of recording a cost, or our own way of recording a production. We had our own spreadsheets and our own cost analysis tools. And then somebody came in and said, Sorry, guys, this is now the standard for the corporation. And he said, No, no, can be the standard for the corporation. But what about my job? Right. And so I think one of the challenges of eirp implementation in a construction company, and one of the reasons why it is frequently such a torturous journey is that you are imposing on a lot of Mavericks, some order and sequence and some discipline, okay? hammer that discipline out of your business and they will business loses its magic. Let that those differences and those Mavericks prevail, and your business is just going to explode.

Michael Kelley: 18:32

Well it's just chaos

Mike Vorster: 18:33

whichever one of them.

Michael Kelley: 18:35

It just becomes it just becomes chaos.

Mike Vorster: 18:37

Chaos

Michael Kelley: 18:38

You better you better be really profitable. Because the only way you know you are because there's cash in the bank.

Mike Vorster: 18:43

Yeah, yeah. And you know, so part of this sort of uniform systemized. Data Processing, computing eirp kind of world cuts vary substantially across the province that the single use plan folk, the way they see it. And I think that's one of the problems of implementing a large database driven computer system in a construction company. Yeah, I don't like those plans. So standing there, what are you know, let's come on, you know, we've lived in this house for two years, let's change Let's change they are they are change driven people.

Michael Kelley: 19:26

Absolutely. It's interesting when you get involved in someone who's switching over to it to a new accounting system, is the is the switch driven by the VP of operations, or is the switch driven by the CFO. And there's a very different implementation, the same software, it could be that a very similar construction company and you would have you can have a completely different implementation, process procedure training, plan everything

Mike Vorster: 19:55

because in the one case, the implementation is done to support us. Plan environment. And then the other case, the implementation is done to support the columns. The single use plan. That's exactly project teams. Okay? And and it's a very different thing. Are you interested in the project's results? Or you're interested in this year's results? Are you interested in the performance of this machine on this job? Or are you interested in the performance of the machine throughout its lifecycle.

Michael Kelley: 20:28

So one of the places that comes up in in many of these implementations is, it comes at different times at different places. Sometimes it's even you're doing payroll, which is a funny place, you would never think equipment comes into payroll. But it's that payroll time that the foremen have reported, what equipment is on their job often, right? And so so you sit down as an ERP implementer? And you say, Alright, what are you going to charge the jobs per hour worked? The revenue rate, more than once? implementation has got derailed? Not permanently, but definitely for several weeks? While the that question has rolled around the organization, it feels like that is kind of one of the things that's at the heart of the marriage of your short term projects. And your long term equipment is what how do we how do we get this this cost recovery from the equipment department to to the jobs,

Mike Vorster: 21:29

the jobs? Well, that is a very thorny issue, to say the very least. Because what folks don't realize, or many folks don't realize is that in an equipment account in the cost structure of a machine or the cost structure of a fleet, there are a lot of costs, which are, which are constant, which are fixed. And if we wanting to recover costs on the basis of hourly usage, then we have to realize those fixed costs. And that is one of the huge issues. Because if you build a job on an hourly basis, only for the hours worked, then where does the risk the utilization risk lie? Because let's imagine that you set your rate and set your cost recovery expectation, at 40 hours a week, standard number, you would then take all your fixed costs for a week, or a month and divide them by 40 hours a week. Now, if that machine works, fewer than 40 hours a week, you're going to have a bunch of fixed costs that aren't recovered. And where is the risk of fixed cost recovery going to lie? Your project team is going to say we want only to pay for this machine when we use it. The equipment guy who's responsible for the lifetime cost recovery of the machine says there's a bunch of fixed costs, including a thing called the purchase price, or including a thing called the lease payment, or including the thing called the loan payment. And he's going to say look, we want 40 hours that we because that's what we divided the weekly lease payment into all what 160 hours, because that's what we divided the our the monthly lease payment into. And if you guys don't pay for this machine for 160 hours in a month, how we're going to make the lease payments, oh no, I'm gonna only report what you pay for the machine when I use it. So, you get that issue, you get all the issues relating to the risk of fixed cost recovery, you get all the issues relating to the decisions you make when you perceive a machine, which can perceive a situation where there are fixed and variable costs when you want to recover those on a variable basis. And so as a result of that, many companies are using dual rate machines, the job site will pay operating rate for the hours the machine operates. In other words, the operating rate covers fuel and oil parts and labor and everything associated with turning the key and putting the machine to work. Because you will own you only incur that those costs when the key is turned and the machine is working. Now tell me all owning costs all costs associated with keeping a machine in your fleet, bringing a machine into your fleet and keeping it there Well, the vast majority of those costs don't depend on how many hours the key is turned. They depend on how many days, weeks, months years, the machine is in your fleet. And so is are you going to build a job so much an hour when the key is turned and the machine is working? Plus so much a week, when the machine is residing on your job? Now the operating guys are going to say, No, no, no, no, no, we don't want to do it that way, we only want to pay when the machine is being used. And so increasingly, we seeing estimates made on the basis of this machine is going to be on the job for 27 weeks. So let's put into the bird 27 weeks of ownership for this machine. And in those 27 weeks, the machine is going to work 800 hours. So let's put into the bid 800 hours of operating costs. So what's interesting in all of this is that, that that sounds like such a rational approach. But these conversations that go off the rails, they often aren't super rational, at least at the beginning. And and how do you? How does a How does someone who's in charge the equipment management kind of bridge the gap there and get to the point where they can have that kind of conversation? Well, you know, communication is all about understanding is all about communication. And frequently, the equipment guys don't want to hear the problems associated with building a job in a tightly sequenced complex schedule using a tightly sequence complex schedule, where there is no such thing as an eight hour work day or a 40 hour non interrupted work week. And frequently, the operations guys don't want to hear that, fully a third of the costs that you encountered any that you encounter in the equipment account, are fixed and are not dependent on the number of hours the keys turned in the machine is working. So you know, you first got to get to the communication stage. And you first got to kind of get through the the age of denial if you wish, or and remember long ago and far away when most of our jobs were Greenfield jobs, when we were building the interstate system. They were blown go. Yeah, but not many years ago, the majority of the jobs were built in green fields. And you know, from eight o'clock on Monday morning till five, six o'clock on Friday afternoon, you master of your fate. And you could use your resources and plan and schedule your work to maximize resource utilization. Today, the vast majority of our jobs are in brownfields in and around traffic in and around people tightly sequenced when other utilities going to be used or moved and all those sorts of things.

Michael Kelley: 28:38

I and I remember I was doing an accounting accounting switch with a company who for the first time was with dealing with archaeologists.

Mike Vorster: 28:47

Right, dark, you know, you're gonna work a 40 hour week when you're dealing with archaeologists. But they see the world in millions of years, all right, not 40 hour weeks, yes, this this business of tightly sequenced work and not being able to be in charge of or control of the flow and sequence of work. Alright, this has caused there to be a lot of drama on a lot of job sites. Alright. And one of the ways in which that drama manifests itself is how do you recover the fixed cost of ownership of your fleet. Now, again, you know, talking construction rather than equipment. Labor is not a variable costs, either because you are duty bound or, you know, labor you pay 40 hours a week, right. And now, as someone who works on the job site is probably more versatile. tile than a large dozer. They can be sent to do all sorts of other jobs, they can easily be kept busy. But can they easily be kept revenue producing? Right. Okay. And so where do we build in the all the all the inefficiencies that arise from tightly sequenced job sites, okay? Your equipment guys are going to say we do not want to carry the risk of utilization, because equipment Superintendent can't go to a job superintendent and say, improve the utilization on this machine. It's only the job team that can manage the utilization of a resource. Therefore, the risk of utilization must lie with the job team. Right. It was an interesting case was when there was a, there was a team that was really focused on utilization. And they had pushed this out so hard that the the employees were leaving their machines idling in order to increase their utilization on paper. Yeah, and now you've introduced a whole nother subject and that sort of gamesmanship and dysfunctional behavior. Right, because then when they were caught, because they caught it, because the on the telematics, it showed that there was you know, it was just idling the machines, they started idling at full throttle. Yeah, yeah. You know, it was it was a problem at the top, it wasn't a problem, you know, that they were forcing this utilization, pushing, pushing, pushing without true understanding. Yes, yes. And when you write those kinds of rules, remember that one of the things we really want, with our focus, we want them to be creative, imaginative, we want them to, to, to come up with solutions. And so we have to as as as folks who are responsible for the leadership of the thing, or for setting the rule, you know, what do I say to somebody the other day, people will always do the smart thing. It's your job to make the smart thing and the right thing, the same thing. Because people will do the smart thing, and hopefully, the smart thing and the right thing are the same thing. Now, if you tell them you don't want idle, idling recorded, or you know, what they will do is they will do the smart thing and and solve that immediate problem. Their solution to that immediate problem will not be the right thing. Right. So that Yep, you've introduced the whole subject of gamesmanship and dysfunctional behavior. And that's another thing associated with guys. It's a team sport, right? Yes. And you get abuse too. And and so, you know, in managing abuses is part of that, you know, there was a, there was a product manager who is famous for his high productivity in the case manager said, Yeah, but the equipment comes back. thrashed

Unknown: 33:24

trashed?

Mike Vorster: 33:25

Yeah. Yeah, abuse under reporting hours, is another sort of part of it another piece of dysfunctional behavior that, that appears very often. And it arises because, you know, folks don't understand that you might be optimizing your little responsibility center or the results from your responsibility center. But you are sure, as hangs sub optimizing the results of our company. And so another phrase that I use frequently is, you know, take care that there's job margin that you creating, through over applying the equipment under reporting the equipment, and all those sorts of gamesmanship that you might be embarking in, in order to optimize job margins, take care, that those aren't sub optimizing the results in the equipment group, because as a company, I bring the Operations Group and equipment grouped together. And my margins on my job sites might end up by being a mirage, by the time I have to consolidate them into the consolidate in the results of the of the equipment group. Okay, so there's a thing called margin mirage. And that's very much part of the deal. Yeah.

Michael Kelley: 34:55

Well, and I feel like some that's part of the the The responsibility of the accounting team is to, is to illustrate the some of that margin mirage, sometimes to say, and maybe maybe I have this a little bit backwards, but sometimes numbers in front of people and to say, this is what happened. And this is, you know, yes, you had great profitability in your jobs. But look at the equipment department, or, yes, you made a lot of money on your equipment departments, but look at how the jobs have been faring compared to estimate, or is there? I mean, that's, you know, what, what role does the accounting team play in all this? I feel like that they're, they're often overlooked in this?

Mike Vorster: 35:37

Well, there's no doubt, there's no doubt that accounting is much more than looking backwards. Okay. We don't drive our motorcar by looking through the rearview mirror. And that counting must tell us, certainly where we've been and where we are with good degrees of accuracy. But they also are responsible for navigating the aeroplane. And for the headlights that we've got. Okay. And so I would, I think job one is the headlights, and there's no way that you're going to drive a motor car. without, without these, these headlights. I tell you a story, right? So I'm a young, upstart, General Superintendent on a job and flying and driving a job. And nobody had ever taught me about metrics and measuring stuff. And that sort of thing. You got up early in the morning, you worked as hard as you could. And you went to bed tired. And that was called success. Okay. I was just blessed to work with the most incredible vice president of our operating division who had been a hurricane pilot in North Africa in World War Two. So I've got lots of airplane stories. So my office on the job used to visit my job once a month, because we were in the bowels of Africa. And it was a big trip for him to come up from South Africa to Malawi to visit. He walked into my office on one of his monthly visits. And he looked around, there was nothing on the wall, no charts, no graphs, no nothing. And he said, Mike, you know, how do you do this and produce all these results. I said, Well, I get up early in the morning, I work like stink, I've got a lot of good people working with me. We all go to bed tired. And we believe that successful. And that's how that's how things happen is that you know, I would like you to start using instruments. They said, because what you are currently doing is you flying a single engine biplane. And you sitting there with a stick in your hand and you see the horizon, you listen to the engine, and you see the wing and you can bang on the fuel tank and find whether you've got fuel in that fuel tank. And you can actually fly this airplane by the seat of your pants. But I have this ambition that one day, you're going to fly a four engine airliner. Right now, if you crash, there's only one or two of you. But one day you're going to fly for engine airliner with a lot of people sitting in the bank, in the banks that are going to be relying on you. I'm going to want you to learn to fly by instruments. One day, you right now you can see the horizon your jobs in the clear, you will one day fly into a cloud, you will one day fly at night, you will one day fly an airplane that's got a lot to engines and you'd better learn how to fly by instruments. So I said yes, yes, yes. And the next time it came, there was one graph up on my office wall versus time and said Hi, your first instrument as it. And so yes, I think one of the things that quantitative performance measurement accounting folk have got to do is encourage people to learn to fly by instruments and provide them with the instruments provide them with the headlights. Because if you haven't got a headlights, you can't drive when it's dark if you haven't got a headlight so if you can't drive by instruments, you're not going to be able to fly when it's dark or when the cards come in. If you haven't got headlights or you can't fly by instruments, you're not going to be able to fly when your windscreen breaks one day and you can't something happens. Okay? So we've got to learn how to do that. And the bigger the airplane, the more complex the journey, the more important that becomes. Okay. So, construction generally not equipment, right? For sure. But I feel like that I feel like that the the accounting team can learn What those instruments are for equipment? And I don't think that it's it's well understood. Because, you know, there, there is no generally accepted accounting principles for the maintenance of equipment. Now there are for for the asset depreciation, right? Yeah, that's only one little piece of this, isn't it? Yeah. And you know, what, what measure? How do you measure success in an equipment group? Okay. Right. There's another thing that adds a lot of complexity to that subject. And that is that, if you, if you are doing Job Costing, and you've got a crew that's building a piece of retaining wall, at the end of the shift, you can measure labor, materials and equipment that went into that piece of retaining wall, and you can measure how much retaining wall came out. And you can do your job cost by seven o'clock in the evening, you've got an you're able to know what it costs you to produce that piece of retaining wall today. With equipment, you don't know what it costs you to run that machine that day. Because you might have put a half a teaspoon or a quarter of a teaspoon of dirt into the engine, when you topped up the oil. And that is going to come home to cost you $60,000 in a month's time. You might have damaged the machine, you might have done this, you might have done that you might have done the other. So there's our equipment and equipment costing. There's a lot of latency between cause and effect. Job Costing there's relatively little latency between cause and effect, your true up your labor costs on a weekly basis when you do payroll, right? Yep. Yep. Can only true up the cost of owning and operating a machine once you've sold it? After three years? Exactly. Alright.

Michael Kelley: 42:03

Yeah, after 10,000 hours of you know, you have work, you finally sell the machine and you realize that Well, it turns out that we made a bad decision eight years ago. Or it turns out

Mike Vorster: 42:16

that we thought this machine would have no residual market value when we said it's right. And she was looking at this $80,000 bucks we sold at for. And you know, when do you do that? Or do you assume you're going to sell it for 80 in calculating your internal transfer price for the machine. And it finally comes out at 20? Well, you're going to go back to the jobs that machine worked on three years ago and said, Gee was sorry, guys, your margin wasn't what you thought it was. called back bonuses. And you know, I often think about big muskie that stripped overburden and the coal mines in Ohio for 15 years. And when they finally sold it, they knew what big muskie custom, that they go back to the people who bought coal from them 10 years ago, and so he has a rebate. But muskie was really cheap. Alright, and so cause and effect equipment costing is is incredibly complex. And I think that it can folk need to realize that it is a discipline all of its own. And I think another thing that you can in groups can really do is talk about this business of transfer pricing. And the difference between a cost and a charge are where, you know, cost is when you write out a check and you pay somebody in the money leaves the business. The charge is when one responsibility Center, the equipment group provides a service to another responsibility Center, the construction group, and where they then charge for the provision of that service. And we're in the fullness of time, all those internal charges are chewed up and washed out of the of the corporate results. Alright. And I think to sort of keep the competitive juices flowing. But don't ratchet up the competitive business to such a level that you get all this, this this functional behavior and counterproductive kinds of misalignments that you frequently see in very aggressive competitive organizations where they do confuse internal transfer prices and the cost recovery process with the with a regular commercial transaction. It's a different kind of thing. Yeah.

Michael Kelley: 44:55

So. So in in the book you summarize These into five groups. The big I think you call them the Big Five in there. Yeah. How do you handle that? And I guess why? How did you come up with those? those particular five?

Mike Vorster: 45:14

The Big Five, that kind of kind of makes that makes, the things that make the things work? Okay. Well, firstly, amongst those big five, is the job charging system. Okay. How do you set the rates? How do you set the transfer price? And how do you handle the utilization risk? Okay. You have to, you have to have a sufficient communication and sufficient understanding of that. And that kind of brings us back to this communication thing. You know, folks have to understand why, in the early ages of machine, you might have to overcast it, because in the later stages, it's gonna cost a bunch of money. Right? And so, understanding and transparency with regards to the right calculation, understanding and transparency, with regards to how the equipment responsibilities, center, bills, if you wish the construction responsibility center up, and what happens to, to that to those to the flow of those funds through the organization, right. Number two in the Big Five, if I remember, rightly, is certainly the utilization risk. Okay. who carries the utilization risk? Are do we handle the risk of fixed cost recovery? Now, with regards to the equipment account, like I've said, that could be up to at least a third of the total costs? And how are we going to handle fixed cost recovery? construction, of course, being one of these businesses that is subject to a lot of booms and busts? And how are we going to minimize the fixed cost recovery risk? How are we going to handle the fixed cost recovery risk? How are we going to handle the waste associated with unrecovered? fixed costs? You know, the principle about waste, measure it and place the responsibility for that waste at the feet of the people who can manage it. Right. And it's utilization risk. It's got to be placed at the feet of the project teams who can manage it because the equipment guards can't. Okay. Number three, you've also we've also discussed to some extent, you see we've kind of gone round and round, but we've got to number three, get the reporting, right. Be honest with yourself. All right. Because under reporting hours worked under reporting utilization, you're just kidding yourself, you're introducing a cancer into the business, that's going to affect a lots of parts of the business. And nothing's achieved by lying to yourself about the hours the machines worked or the cubic meters, it's it's moved or whatever the deal might be, you introduce inaccuracy is that you absolutely don't need or want or that actually just, you know, subvert the whole process, you you effectively switch out your headlights. When you have errors in your reporting system. You know, where you dim your headlights, I think you switch them out, you just blow the filament in the glow under report when he when you know when you have errors in your reporting system. abuse. Interestingly, again, if you don't understand the impact of costs, if you're a little bit annoyed about things because you think things are unfair, then one of the ways you make the game a little more fair is to abuse the equipment. You know what they say about abuse? Why? Why is Disney World clean? Because they pick up the first wrapper. If you don't pick up the first wrapper, what's going to happen? It becomes that much more easy to drop the second wrapper. And if there are two wrappers and dropping the third wrapper is not a big concern. So if there's a ding or a scratch on a pickup truck, take it up. If there's a cracked windscreen, fix it or Right, if the back end of your excavators or beaten up because somebody swung it into a dead pile, fix it, because if you don't, swinging it into a dirt pile is going to become the norm. So what I say is nip abuse in the bud, pick up the first candy wrapper, right. And we've spoken about abuse as well. All right, one of the ones we haven't spoken about is, is on my list of the Big Five is eliminate the hostage mentality. Okay. Now, if you say to your operations, your construction guys, you can only use our equipment. And if you say your equipment, guys, you can only supply equipment to our team, then you making them hostage to each other? Sure, you don't want free trading. But you do want folks to have the ability to calibrate themselves by trading with outside entities. Not only do you calibrate the, you know, performance and behavior, but you eliminate the hostage mentality. If I believe I only have one equipment supplier, that it is unlikely I'm going to have a good relationship with that one equipment supplier. Right? If I only have one place where my staff can go to work, then it's unlikely I'm going to have a good relationship with that places, there's seldom be another psychologist talk about some, but there's seldom a good relationship between the hostage and the hostage taker.

Michael Kelley: 51:53

And we are talking about the Stockholm Syndrome here if we if we really want to, I have to say

Mike Vorster: 52:01

so. So give folks the ability to give folks the impression at least with the ability to trade outside calibrate behavior, find out if indeed the grass is greener other side of the fence. It does us all a lot of good to, to go up, don't go outside the fence and and see how things are on the other side of the fence. Okay, so transparency in the transfer pricing process, okay? manage your utilization risk. Don't mess with reporting, you're only lying to yourself and everybody else, pick up the first candy wrapper and visit the other side of the fence from time to time to see what it's actually like. Those are kind of the ones that experiences has taught me really, really do help to keep folk understanding each other working with each other understanding they're all on the same team working towards the big picture, as opposed to working towards the success of their little responsibility center their little, their little stuffed stove pipe. Now there are technical aspects to that. But then there is of course, the leadership aspect. All right. You have to have the strategic vision, you have to know what the big pictures are, you have to have the big picture sort of constantly in front of you one way or the other.

Michael Kelley: 53:45

So on that note, on the strategic portion. This is this wasn't specifically talked about in the Big Five, although you talked you kind of hit on this a few different places. What's the role of the CEO? Where does the where does the chief executive? What is what is that that role in all of this making sure that the everybody's playing together? And of course, you know, the CEO, that they're responsible for the bottom line for the for the protecting the integrity of the balance sheet, like as a whole, not individual jobs, not just the equipment department not you know, but what, what what role Have you seen, I guess that maybe maybe this is more the question, what role Have you seen them play when it's worked out well?

Mike Vorster: 54:38

Well, you know the story about seek first to understand before you seek to be understood, okay. I think that the first thing we have to do is to ensure that I'm going to use their why I'm hesitating is I don't want to say I want to, we need to ensure that the CEO understands, we need to ensure that to ensure that it is a common language. And everybody understands. I think that the the equipment manager, the Vice President of the fleet, the president of equipment, needs to understand the CEO, the CEOs role, how a balance sheet works, how a p&l sheet works, and all those sorts of things in exactly the same way as the CEO needs to understand that, you know, you can't make the assumption of a$2,000 working here, when it snows and it rains, and we've got traffic and you've got utilities, and you've got tightly sequence work. The CEO needs to understand how things flow and what the realities of the of the business are. And I'm sure they do understand the realities of the business from their office, but do they understand the realities of the business? from, from everybody else's office? Okay. And so, it's a really important question. And it's something that works, when encounters almost everywhere, that is, once you have folk who understand something about the whole business, and who have, you know, sought to understand before they have sought to be understood, you get a much healthier organization, you get an organization where the hygiene is just a whole lot better. Okay. And that, I think that goes for all of us in all walks of life. And that is, understand what the constraints are and where the other person's pinch points on what they're what keeps them awake at night. And I think, then, then you will understand thing, a whole lot better. And the CEO, I think, needs to needs to be a little bit of a gearhead in exactly the same way as the vice president of equipment needs to be a little bit of a CEO. Alright. So that's why all the courses I've ever taught, you know, have had a piece in them under the head for equipment, guys, under the heading of, you know, how does equipment affect the balance sheet? Because we it's quick enough, and we bump into p&l is often enough, but very few people really understand how equipment impacts the balance sheet. And just look at how much of the left hand side of your balance sheet is represented by net pp. Right. And you need to understand how that how that all kind of kind of fits fits together?

Michael Kelley: 57:58

Well, right at the end of the chapter, you, you talk you what the words you say something along the lines of that it truly is a partnership. So I guess, to wrap up our our conversation here about, we've touched just about everything in this last little bit here, but what are some of the things, I guess, the lessons that, that we all can learn the things that you that that strengthen that that partnership,

Mike Vorster: 58:32

is really, you know, it's really what we've spoken about, seek first to understand before you seek to understood knowing that, you know, you share a lot of common interests. Here's another one that folk don't understand, especially when they when they say, Well, you know, running an equipment feeders, maybe I running it, looking after those as much like we're looking after a motorcar, right? Because it's just just a big motor car. Well, I'll tell you what it is. And that is that, by the time a motorcar has run 100,000 miles at an average speed of 50 miles an hour, it's probably done$2,000 of work. Now $2,000 is not a respectable years worth of work for a piece of construction equipment. Right? And so construction equipment is wears out a lot more quickly. And it requires a lot more love care and attention. And I think one needs to understand that. Alright. Of course, there's the old adage of the match between responsibility and accountability. That forms that works. This partnership. manage the abuse thing is another thing that really impacts the partnership. But really, I think the partnership depends on this sort of common vision, common language, understanding that there's a common goal, understanding the way our paychecks are all signed by the same person and That's regardless of how we actually exercise our talents in support of the organization, our paychecks are all signed by the same person in the end.

Michael Kelley: 1:00:14

Yeah, yeah. One. One thing you you touched on here that we haven't talked about a lot is that common language? But I do feel like that that's sometimes when I'm coming in with, with this new accounting system, right? And people are asking me that I hear one group of people say one thing. And another group people say another thing, but they're talking about the same thing with different words. And sometimes just those the words alone, it's like, we need to write a dictionary for Acme construction company. This is what we mean, when we say this.

Mike Vorster: 1:00:50

Yeah. Well, I've, you know, when one frequently finds that internal partnering, or partnering, intra company, partnering is as important as intercompany partner. And knowing what happens inside of your organization, is often as clouded as what happens between your organization and another organization. And so if you're talking about working with an organization, in software implementation, or in systems design, or in something like that, we that exercise frequently produces more stress with intra within the company partnering and understanding then between your company and a third company, you know, how do you actually how do your systems work? Right? And yeah, yeah, the language, the common language, and the intro partnering, intra company, partnering is often more is more is more important than is often more difficult than the intercompany partner. intercompany.

Michael Kelley: 1:02:13

Well, I think that, you know, anybody who's been married for any length of time knows that it takes a lot of effort and work and communication, but it's worth it. And, and I think that the same goes for this intra partner partnering intercompany partnering is that, you know, the companies where you walk in, and you can feel that you can feel the difference when everybody's working together, and you can feel the difference and you walk in and it's closed and people are not working together. And it goes a long ways. Absolutely. Absolutely. Yeah. In truck intra family communication is way more important than inter family communication and understand.

Mike Vorster: 1:02:59

It's, you can feel it, and will tell a story one day, it's it's a little late for a new story today, but I think I think everybody will hang on for a new story. It's called, it's called felt leadership. It's called felt leadership. And for a long time, I spent a lot of time talking about felt leadership. The story goes like this that at one stage, I had a consultancy, where we were asked to look at fireproofing underground in deep level minds. Okay. Now, let me tell you a little about underground deep level mines. No, no underground deep level mines, you have your drives and your and your edits, but you, you remove a vein of ore. So it's kind of like taking the hammer out of a ham sandwich without having the bread collapse. And so you put in these props of of stack props of wood, as you take the hammer out to keep the bread apart. And of course, your bread is in some instances, a mile below the surface. So it's not a pretty place and it's not a nice place. And there is a huge amount of timber in a deep level drift and Stoke kind of mind. That timber Of course gets full of oil and grease and diesel and anything that burns as hot as all hang down there. And the fire risk is huge. And you can imagine the fire going up the stope and it's not not something you want, you just get out and you leave it You never go back. Because once the props have burned, the ham sandwich will close and you'll never be able to get back to take the rest of the ham out. So we had this very extensive consultancy about how to fireproof the property. You spray them with vermiculite to fireproof, the outside of these props, stacks of wood. We talk on the surface with a mind manager about what their policies were, what their procedures were, are they did it, are they maintained it, how they checked on it, and so on and so forth. We would then say something dumb, full of stupid like, like, well, let's go underground and look, you'd go yourself three quarters of a mile down or a mile down, and you'd have a look at what's happening. On some minds, what you were told on the surface. And what you saw underground were identical. On some mines, what you saw underground and what you were told on the surface were completely different. Because the mine manager was unable to make his leadership felt underground. Okay, now, that's, you know, going underground is, is at the far extreme of looking at your work, looking at looking at things and working with things. And it's much easier to get your leadership felt when you're in the next door office, or in the next office building than when you're underground. Okay, right. And the underground shifts work different hours to the surface shifts, and so on and so forth. And so we came up with a lot of conversation about how do you get leadership set through an organization? I don't know that there's anybody who's successful, who doesn't talk about integrated teams communication, eliminate dysfunctional behavior, have a strategic vision, cooperate, talk, communicate, but how do they then get those messages felt? Same as there isn't a mind manager in the in, in the world that's responsible for a deep level mind where there's a lot of timber on the ground, that doesn't say you should maintain your vermiculite spray, you should maintain the fireproofing of your props, you should eliminate diesel and oil and all those sorts of things. But which of those managers can cause that to be felt? Right?

Michael Kelley: 1:07:18

It's and it's the it is the ones that can make it felt that don't have the underground fire?

Mike Vorster: 1:07:24

Yes, yes. And it's the one who can make the leaders who can make their vision and their style felt at the workplace, who don't have losing jobs, losing companies, bad issues, and all those sorts of things. Well, perfect. I think that's an excellent story to wrap up on. Because it gets to the heart of what we've been talking about today about making all of these things actually happen. We can we can sit in a in a boardroom. Right with nice clean walls, a whiteboard or two, we get we could have plans for utilization, we could say we are against abuse, hashtag no more abuse. And we could you know, we could make promises. But if in the end, like you said, it's a guy who turns the key is the guy who turns the key. What is he doing? How and how are the mechanics? Are they actually taking care of things? How are the fuelers at what are they actually doing? And and so we can't just sit in a boardroom. It has to go all the way down. It's like in our world when Walt Disney through walked through Disney World and picked up candy wrappers boom. Yep. Oh, well, thank you, Mike. I sure appreciate it. It's been another good conversation. Yes, we'll, we'll do it again. That's it for today, folks. See you next time.