E. Pihl & Søn A/S from a management perspective
For many years, E. Pihl & Søn A/S was one of the most international and well-known contractors in the world. In its 126 years of existence, the company completed projects in more than 60 countries as it developed from being a small masonry company in Copenhagen, Denmark to a multi-national contractor with a turnover of 6.5 billion Danish kroner (1 billion USD). The long history and great productivity of the company were some of the reasons that it took most people in the industry by a surprise, when E. Pihl & Søn A/S on the 26th of August 2013 was declared bankrupt [1].
To provide an insight on the significance of the case of E. Pihl & Søn A/S in the aspect of project and portfolio management in construction, this study will briefly go through the history of the company, including the great expansions in the later years. The business and management strategies will be elaborated and analyzed to clarify the challenges the company faced through the years and how they were handled, and finally a conclusion summarizing the reasons for E. Pihl & Søn A/S’ bankruptcy will be presented together with implications from the case that can hopefully contribute to other companies not suffering the same fate.
The main source for the information used in this article is the acknowledged book “Sørens Saga” [2] written by journalist Poul Høegh Østergaard and published in 2014.
Contents |
History of E. Pihl & Søn A/S
Early years
In 1887, bricklayer Lauritz Emil Pihl founded his business. In 1918, his son, Carl Pihl, entered the company, and E. Pihl & Søn was established. During the next 20 years, the company took on both concrete and bricklaying tasks in projects by nationally acknowledged clients such as the National Bank, H. N. Andersen and Carlsberg, and they built up a solid reputation in the Danish building industry. After World War II however, the business was not going well: Lauritz Emil Pihl was dead, Carl Bro was seriously ill, and the once extensive client base had dwindled significantly. The company needed new blood and a change in leadership to survive.
From Pihl and son to Langvad and son
May 23rd 1947 civil engineer Kay Langvad bought his way into E. Pihl & Søn after having left his former employer Højgaard & Schultz (today MT Højgaard). At that time the company consisted of 15 people including the owners Kay Langvad and Carl Pihl.
In 1950, the renewed company landed its first big contract in Denmark for the client Carlsberg and also their first contract abroad; construction of a hydroelectric power plant in Iceland. To be able to bid on the latter, E. Pihl & Søn formed a joint venture with two Swedish companies, a collaboration form the company would later exercise for numerous other projects.
With the civil works on the hydroelectric power plant in Iceland, the foundation of a new path for E. Pihl & Søn was laid to become a contractor rather than a masonry company. This direction was manifested even further during the following years with more hydroelectric power plant projects on Iceland and many other civil work projects in Denmark.
On January 1st 1963, Søren Langvad, Kay Langvad’s oldest son, became a co-owner of E. Pihl & Søn after having worked in the company for 13 years. During the following few years, Kay Langvad gradually stepped down and left the responsibility of managing the company to his son.
International development
In the beginning of 1971, Søren Langvad officially took over the role as CEO of E. Pihl & Søn from his father. At the same time the company got listed and became E. Pihl & Søn A/S as which it remained until it ceased to exist in 2013. Soon after receiving the title of CEO, Søren Langvad also came to own the majority of the company and later all of it.
In the 1970s, Pihl was typically prequalified to five bigger tenders per year. Through the 80s, the amount rose, and in 1987 the number of prequalifications was 37. The turnover at this time was around three quarters of a billion Danish kroner, of which three quarters was created outside the Danish borders. The equity also grew and approached 50 million Danish kroner (around 7.7 million USD).
By the end of the 1980s, E. Pihl & Søn A/S was represented in Guinea, Mali, Niger, the Central African Republic, Nigeria, Tanzania, Bangladesh, the Maldives and Bermuda, besides the ongoing businesses in Iceland, the Faroe Islands and Greenland. The company reached 1,000 employees stationed around the world. Despite the significant growth in staff, no HR department was established.
The great international expansion continued through the 90s, especially in Africa, where Pihl won projects in Uganda, Mozambique, Lesotho, Botswana, Namibia, Mali and Ghana. Also in Lebanon and Jamaica, E. Pihl & Søn A/S was now represented. When the Danish market began to evolve at the end of the 90s, Pihl managed to land several notable contracts here as well, and by the end of the millennium the company had a turnover of more than 2 billion Danish kroner (around 300 million USD). The profit was not more than a couple of percent, but enough to make the equity grow, and everything pointed towards a continued progress.
Some of the most well-known Danish projects that Pihl has been involved in :
- The Danish Royal Theater
- The National Gallery of Denmark
- The big mall Field's
- The hotel Crown Plaza
- The significant round dormitory Tietgenkollegiet
- Several inner harbor bridges in Copenhagen
- The Great Belt Bridge (the East Bridge)
- The Øresund Bridge (the tunnel)
Financial crisis and the last years
From 1996 to 2008, E. Pihl & Søn A/S increased their turnover tenfold from 600 million to 6.5 billion Danish kroner (which corresponds roughly to going from 100 million to 1 billion USD) and became the second largest contractor in Denmark. Søren Langvad was not afraid of giving himself credit for this great expansion, but other reasons such as other contractors going bankrupt or being taken over and Pihl delivering satisfying work on time were definitely also part of the considerable success. At this time, the growth of the company seemed natural and healthy in spite of its abnormal scale, and though the great increase in turnover strained the equity of the company, the bank did not have any concern extending the line of credit to the successful company.
When the financial crisis stroke in 2008 , E. Pihl & Søn A/S suffered together with the rest of the industry. They had trouble collecting their payments from different giant projects in e.g. Norway and Jamaica, and with the equity in Iceland being written down to half the value due to drastically changing exchange rates (for elaboration see “Portfolio management” later in this article), all account balances went negative. In these times, a willing bank connection was essential, but Danske Bank, who was E. Pihl & Søn A/S’ connection now had enough trouble keeping themselves going, and with a non-existing risk management and organizational structure in Pihl (for elaboration see “Management in E. Pihl & Søn A/S” later in this article), the bank was not alone in being worried.
From 2008, the company’s equity situation only got worse. In 2011, the market was changing and the competition was getting harder. Furthermore the contract terms were undergoing a change as well; more and more often the contract involved designing and calculating the statics for the project as well as the actual construction (Design and build contract), which made it radically more time demanding and thereby expensive to calculate a bid. Also Danske Bank now wanted to look through and approve all bids that E. Pihl & Søn A/S calculated before they entered the tendering process, which resulted in the company several times using time and money on calculating a bid that was then discarded by the bank.
In the fall of 2011, the economic situation in E. Pihl & Søn A/S continued to heat up. Employees were getting anxious and suspicious, but no one doubted that the 124 years old company would pull through. Søren Langvad finally decided that it was time to pass on the torch, and so he inserted Halldór Ragnarsson as CEO taking effect on the 1st of April, 2012.
In April 2012, Birgit Nørgaard was inserted as chairman of the board in E. Pihl & Søn A/S at the behest of Danske Bank, who had actually had controlling influence in the company since 2010, when Søren Langvad had to give up his shares to extent the line of credit in the bank. At her request, work groups were being set up with the purpose of formulating common procedures within vital areas such as calculation and bidding. The majority of the staff welcomed it when for the first time procedures for working routines were being written down for everyone to follow. In May, the first organization chart was being sent out together with other new regulations.
Through the year 2012, all problematic projects were being investigated, which led to the findings that the economic situation in the company was even worse than predicted. New bank agreements were made and money was transferred from several holding companies to increase the equity of E. Pihl & Søn A/S, but it was not enough. In December 2012, Chairman Birgit Nørgaard stated at a Tuesday meeting that Pihl was in a difficult situation; the company had included profits from claims in their accounts for no legitimate reason and severely underestimated the costs of completion of numerous projects. Furthermore, her opinion was that a calculated margin of 6 %, which had been used for most projects, was not enough to make a profit.
In the beginning of 2013, Birgit Nørgaard fired CEO Halldór Ragnarsson [3] in a last attempt to save the company. However, despite all the efforts made by her, the executive managers and Danske Bank the bankruptcy was inevitable, and on the 26th of August 2013 it became a reality [1].
Management in E. Pihl & Søn A/S
Business strategy
From the very beginning of Søren Langvad’s leadership in Pihl, the hierarchy was clear and not to be discussed; all correspondence in and out of the office went by him – no exceptions – and he had the last say in all matters regardless if the concerning project was in Denmark or abroad and if it was a harbor, dam, housing building etc.
Besides from the autocratic leadership, the organizational structure in Pihl was always very flat. From the beginning, Kay Langvad gave his employees the freedom to make decisions and take action on their own. When they were in trouble, he would help them, but he expected them to be able to solve most problems themselves. This wide-ranging trust (almost to the extent of anarchy, as some employees have later stated) in project leaders and other employees was maintained by Søren Langvad as a fundamental value in the company. Furthermore, he always showed his trusted employees loyalty and gave them second chances had they made a mistake rather than fired them, which was otherwise quite common in the industry. Many employees found their way into the company through this loyalty, as Søren Langvad often hired people on the ground that they were relatives to other employees.
Another characteristic of the business strategy in E. Pihl & Søn A/S was – up until the last couple of years – that there was no written report to explain the strategy: It was simply to see the possibilities when they occurred and seize them.
The extensive trust and lack of written procedures scared away some employees very fast, while others embraced the freedom and felt stimulated by the challenges and wide-ranging responsibilities, and so became proud and loyal “Pihl-people” who worked in the company for decades. The loyalty was expected from Søren Langvad in exchange for the trust and responsibility, and also he expected every employee to do their utmost and not spare themselves any exertion.
Project management
From the first noteworthy sized projects in the early 1950s, a clear strategy for project execution was laid by both Kay and Søren Langvad. The “Hit & run” strategy as it was called involved careful planning, active leadership and a quick take off to set a tough cadence to be followed throughout the project.
As for the staffing, Kay Langvad was of the opinion that it is better to have a project slightly understaffed with stand-by reserves who can be sent in if necessary than to overstaff a construction site from the beginning, arguing that the latter will be used as a measurement for the whole period resulting in people not giving their best and most.
E. Pihl & Søn A/S often did not have the necessary financial power to take on the big projects they wished to themselves, and so they repeatedly formed joint ventures with other, larger companies with a greater equity, who could provide the demanded guarantees.
“He shoots at everything that moves” is an often used comment to describe how Søren Langvad chose the projects for E. Pihl & Søn A/S to get involved in . The economic benefit would always come in second to the constructional challenges he saw in a potential project. This has probably been the key to the initial success of Pihl, who has won numerous contracts by offering a lower price than the competitors and bidding on projects too risky or challenging for anybody else to want to take on. These risky projects – often situated in secluded areas of less developed countries – were carried out by local craftsmen but with engineers, foremen and machine operators from Denmark. The project management team would control the project in close collaboration with the head office back in Lyngby as so to avoid the need for further local representation.
Portfolio management
Risk-taking and decisive are keywords when describing the portfolio management strategy in E. Pihl & Søn A/S.
Ever since Kay and later Søren Langvad took over E. Pihl & Søn, the company has been managed with a tight liquidity. Already in the 1960s, when the expansion of the portfolio of the firm became noticeable, making ends meet in the company’s accounting was a challenge, since the guarantee sums held back by the clients until final deliveries with errors and omissions rectified would often amount to more than the profit. The overdraft facilities E. Pihl & Søn had in the bank did not at all meet the needs, but in spite of this the company continued in taking on bigger contracts that it often did not actually have sufficient funds to carry out.
The international focus in the portfolio management mentioned earlier in this article has saved E. Pihl & Søn A/S more than once. In the 1970s, the company survived the massive oil crisis in Denmark by taking on numerous projects in the Faroe Islands and also starting up business in Africa.
The subsidiary Ístak in Iceland contributed substantially to the earnings of Pihl for around four decades, and due to unfavorable exchange rates a fairly large share of the companies’ equity was tied in Icelandic investments. When the financial crisis hit in 2008, the Icelandic krone went down to about half of its previous value which resulted in a massive loss for E. Pihl & Søn A/S who had to depreciate their equity significantly.
Tuesday meetings
To keep track of the progress of all ongoing projects, a meeting was held in the head office every Tuesday with participation of the owners (later owner), directors and senior employees. As the business expanded through time, the meetings would cycle through focusing on projects in Denmark, “Near Abroad” and “Far Abroad” and every fourth week the meeting would be only for the top directors and the owner discussing the overall business. As in every other aspect of managing E. Pihl & Søn A/S, the focus on the Tuesday meetings was on the constructional challenges and details in different projects rather than the financial and schedule-related situation.
The Tuesday meetings did not have an official agenda. Søren Langvad had a pile of paper with subjects he wanted to go through, and as one employee expressed it “You were not discussing with Søren, you were told what to do” .
Conclusion and implifications
Up until 2012, the board of directors in E. Pihl & Søn A/S consisted of four people; three equal executive officers with the responsibility for activities in Denmark, “Near Abroad” and “Far Abroad” respectively, and Søren Langvad as the CEO. However, most people were of the opinion that there was only one real executive officer; the CEO, and the others were looked upon more as head project leaders. As a side note, it should be mentioned that none of the directors had a MBA or any other education within management or leadership; they were all practical people who were promoted to directors because they had done well as project leaders for Pihl for many years. This lack of management skills within the board probably contributed to irrational decisions being made and the management of the company being unstable.
The leadership in Pihl was criticized on more points; it was never visionary and did not point out a direction for the future of the company, and also it never communicated its decisions to the employees. Also the opinion was that the members of the board were to detail-orientated and wanted to dig into every aspect of all projects instead of focusing on the big picture and provide general management.
Many people who knew Søren Langvad and worked with him through the years agree on that he was an engineer first and a business man second. His interest in the business aspect of running and managing the company was almost non-existent in comparison to his interest in the construction details and challenges of ongoing and potential projects. The greater the risks, the greater his fascination and desire to land the contract of the project. As previously mentioned, as much as this attitude undoubtedly contributed to the success of E. Pihl & Søn A/S as it was working its way onto the big scene in the construction industry, it also resulted in great losses through the years and especially during and following the financial crisis in the late 00s.
The leadership style of having a combined owner/CEO made it possible to make decisions fast, which probably was another contributing factor in E. Pihl & Søn A/S going from being the insignificant bricklaying company that it was to being a worldwide recognized and large contracting firm. However, as the company grew it became clear that this type of leadership also led to what some have called an “enlightened despotism” that suppressed any other opinions on the management style than the one of the owner/CEO himself. Since the owner/CEO in this case, Søren Langvad, did not see the need of any changes it was not possible for the board of directors (however much they wanted to) to go through with even the slightest change in management style. And when a company goes from 15 to 1500 employees and increase the turnover more than tenfold in a decade, management changes are necessary, as this case evidents.
Through the last 15-20 years of E. Pihl & Søn A/S’ existence, several leading employees and directors made appeals to Søren Langvad to change and streamline the organization and delegate more responsibility to the other executive officers. But as Søren Langvad did not want to pass on any consequential responsibilities, the changes in the project and portfolio management and business strategy therefore did not happen before the bank intervened and put Birgit Nørgaard as chairman of the board in 2012. Had she been put in that position just five years earlier – or maybe even just two years earlier, before the financial figures went red – things might have turned differently.
Annotated Bibliography
Østergaard, Poul Høegh (2014); Sørens Saga. Copenhagen, Denmark: Gyldendal Business.
The book “Sørens Saga” is written by journalist within the construction sector Poul Høegh Østergaard, who since the 1980s has been working as a reporter and communicator in the industry and thus possesses a unique knowledge in this field. “Sørens Saga” was initially meant to be a biography of the owner and CEO of E. Pihl & Søn A/S for 42 years Søren Langvad, but with the crisis in the company and Søren’s death, Poul Høegh Østergaard changed the focus so that it became a more general story about the history and management of Pihl. The book was given good reviews when it was published in 2014. In one review, the reviewer (another journalist in the construction field) is claiming that the book contains enough insights and reflections on the construction industry and the management hereof that it should be mandatory in the curriculum for all civil engineering educations [4]
References
- ↑ 1.0 1.1 http://borsen.dk/nyheder/generelt/artikel/1/264287/byggegiganten_e_pihl_soen_gaar_konkurs.html Hansen, Uffe (2013); Byggegiganten E. Pihl & Søn går konkurs. Børsen
- ↑ Østergaard, Poul Høegh (2014); Sørens Saga. Copenhagen, Denmark. Gyldendal Business.
- ↑ http://www.business.dk/ejendom/hun-rydder-op-i-pihl Vibe Hyltoft, Vibe (2013); Hun rydder op i Pihl. Berlingske Business
- ↑ http://ing.dk/artikel/anmeldelse-dramaet-om-pihl-boer-vaere-obligatorisk-paa-ingenioerstudiet-167785 Lyngsø-Petersen, Erik (2014); Anmeldelse: Dramaet om Pihl bør være obligatorisk på ingeniørstudiet. Ingeniøren.
