Reacting to problems

Rapid response teams are one of the seven habits of highly successful firms.

Dave Coduto, chairman of Terra Risk Retention Group and the author of a white paper on the seven habits of highly successful firms, highlighted the need for a rapid response to problems that surface where a firm is potentially exposed to claims of professional negligence. The precursor to rapid response is, of course, exchange of information and making sure that the "right" person or persons in the firm know of the conditions, that they recognize the conditions of potential liability, and then that they take action on the warning signs.

Action is usually one of two types—proactive or reactive. In the first case, actions are taken or procedures are put in place as preventative measures. Within a professional services firm, a detailed quality control plan is an example of a proactive approach to solving or minimizing exposure to liability. In a reactive approach, action is taken in response to a certain set of events. More often than not, these events have negative implications, usually economic in nature, such as professional liability, and the action steps are designed to eliminate or minimize the impact on the company. While it is ideal to prevent something bad from happening in a proactive way, we more often than not find ourselves dealing in the reactive mode, trying to mitigate impending problems.

Rapid response is a type of reactive action whose purpose is to minimize the perceived problem by dealing with it as early in its life cycle as possible. Developing this capability is relatively straight forward. Incorporating the rapid response capability into the corporate operating philosophy as a fully functioning process is a bit more problematic.

To be effective, the rapid response capability relies entirely on the ability to tap in to a timely, comprehensive communications network designed to pass along the exceptions or out-of-norm events. The basis of this "system" is a process map that spells out the normal flow of events for each function in the company. The normal flow of events could either be described verbally as in, "Call the customer 30 days after the invoice has been sent and ask for a payment date," or as a metric, such as, "Days receivables outstanding between 30 and 35 days." Individuals would then report through the communications network any exceptions to the normal range of events contained in the process map.

So where is all of this "communications" going to? In smaller companies, it flows to the owner/president. In mid-size entities, it flows to someone who oversees corporate business practices and has a solid understanding of operations throughout the company. In the largest of companies, the information flows to the manager of each functional area (accounting, operations, sales and marketing, human resources, etc.). Each one of these individuals is then responsible for determining if there is the potential for a problem and, if so, identifying and categorizing the problem. An effective communications system consistently alerts firm management to potential problems before they become actual problems.

The next step is to deal with the identified issue by outlining the universe of acceptable solutions and choosing the most effective option. This selection will determine the resources necessary to address the situation. Once the resources are in place, an action plan must then be developed and implemented in a timely and efficient manner.

For example, a construction company was involved in a major project that required daily communications between the project manager and the general contractor. Phone calls were promptly returned by both parties for a period of several weeks during the project.

However, shortly after the construction company finished its portion of the project, phone calls to the general contractor were not returned and pay applications were not paid in a timely manner. These out-of-the-norm events were communicated to the president of the construction company who immediately became involved by contacting the owner. Turns out, there were some major settlement issues and the owner was unsure how to proceed. The president of the construction company developed a strategy for mitigating the settlement, presented it to the owner the next day, and got his buy in. The construction company notified its insurance carrier, handled all of the logistics of getting mitigation services in place, paid for all of the mitigation costs, and got the project back on schedule. Taking this rapid response avoided the owner filing a major lawsuit and won the construction company a strong ally in the local commercial building market.

While some would argue that the construction company jumped in too soon and that its actions could be construed as an admission of liability, the circumstances surrounding the settlement issue were such that it would have been virtually impossible to determine actual liability. The president of the construction company correctly judged the character of the owner and realized that by taking the lead on this issue, the owner would perceive the construction company as a team player that had paid its "dues." Subsequently, the rest of the associated settlement damages were paid by the other subcontractors in an amount far in excess of what the construction company paid for the mitigation services.

The final step is the feedback and monitoring process. Once a client or project has been assigned a rapid response team, one team member should be assigned the function of closer. In this capacity, responsibilities include making sure the strategy is executed in the proper sequence and that each element of the strategy has the intended impact. Constant (daily) communication with the client ensures that the necessary feedback is being received and that the plan is going as intended. Should the feedback become negative, this level of monitoring will allow real-time adjustment of the strategy, versus one or two weeks down the road when it is too late.

Finally, the entire process should be documented and presented to the management team or perhaps to all levels in the company on a quarterly or semiannual basis in the form of a Lessons Learned Log. The intent is to learn from past mistakes and to fix the system for the future.

The final line of defense in protecting a client’s interest and avoiding professional liability is having a rapid response culture and system in place within your firm. Key elements include the following:

  • Managers communicate without fear of delivering bad news to leaders in the firm.
  • Leaders recognize the warning signs of projects and relationships gone (or going) bad.
  • Leaders take action as a group in a team approach to solve problems and get back on course.
  • Document the conditions that led to the problem, the corrective action taken, the results of the countermeasures, and the lessons learned.
  • Share the outcome with appropriate staff.

One ASFE member firm reports that it recently deployed a rapid response team in a proactive manner to make a "go" or "no go" decision on a large development contract with a major national client and its development firm. This mid-sized engineering firm had done some initial development work with the client (survey, soils, and planning) and over the course of three or four months had developed a sense of the business philosophy and core values of the development firm. There were many familiar warning signs on the horizon:

  • constant complaints about the cost of the services and a used car salesman approach to negotiating fees ("What will it take to get you to survey my site today?");
  • constant bad mouthing past consultants that had worked for them in other jurisdictions;
  • poor and slow decision making on real estate transactions in the upfront portion of the project;
  • unreasonable schedule and budget demands for construction in a northern climate;
  • only tepid support from references provided by the development team; and
  • a generally antagonistic and bullying approach to dealing with people.

This ASFE member firm deployed a senior-level rapid response team and reviewed the facts of the case and the data that was known and made the decision to walk away from potentially more than $2.0 million in fees because the project did not "feel" right. The president of the firm reported that they felt it was against their best interest to work with a developer that had a different set of core business values. The phone conversation where the client was fired was professional, swift, and honest and centered on the fact that the ASFE member firm focused on happy clients and profitable projects, and that the chances of achieving either one of those given the differing core values seemed very remote. The phone conversation and the response from the ex-client confirmed the decision of the rapid response team.

Stewart Osgood, P.E., president of DOWL Engineers, oversees the growth and development of a 220-person firm headquartered in Anchorage, Alaska. He can be contacted at Richard Ross, CPA, has served as a senior-level financial executive in a wide range of industries and in various capacities on both the national and international levels. As CFO for GeoConstructors, Inc., Leesburg, Va., he has provided financial guidance that has helped the company grow from $6 million to more than $30 million in annual revenues during the last four years. Both authors are members of ASFE’s Business Practice Committee.

Posted in Uncategorized | January 29th, 2014 by

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