I Didn't See All the Danger Signs

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Podcast Transcript

Loren Feldman:
Welcome, Shawn, William, and especially Mel Gravely. Mel, you’ve been on Dashboard before, but this is your first appearance on the 21 Hats mainstage, and it’s really great to have you here.

Mel Gravely:
I’m excited to be with you guys.

Loren Feldman:
Mel, in case there’s someone out there who hasn’t memorized every 21 Hats podcast episode, can you tell us a little about Triversity Construction? How big is it? What kind of work do you do?

Mel Gravely:
Yeah, we are a Cincinnati-based commercial contractor. We’ve got about 105-110 people. We’ll do about $120 million in construction volume this year. We service large private customers who are buying construction all the time. About 40 percent of our business is health care, or maybe a little bit more than that in some years. We were founded in 2005, and we self-perform some of the interior trades, drywall, ceilings, floors. How about that?

Loren Feldman:
That’s good. How’s this year been for you?

Mel Gravely:
I would call it steady. We’ll exceed the plan. From a profit standpoint, we’ll miss our revenue target. We can talk more about why that is, but mainly because of the capacity of our team. We just ran out of gas to say yes to more work. I would say getting back to normal disruptions in supply chain, which we think are going to be the future. Normal in pricing. So, in general, those are the norms of our industry, and so we’ve settled in to execute against those norms.

Loren Feldman:
When you talk about the capacity of your team and the impact that’s had on revenue, is that a labor-shortage issue you’re talking about?

Mel Gravely:
Yeah, I would probably call it “picky Mel.” [Laughter] We probably could have hired to meet our revenue targets. But we’re betting on a long-term play here, and what we keep talking about at our executive level is: Let’s hire people that if they were on the bench with nothing to do, we’d be fine with it, because they’re that talented. And when you set the bar that high…

You know, we don’t hire for projects. So we’re hiring steady. But we want people who are going to be here a long time, Loren, and sometimes hiring for projects doesn’t get you there. So yes, shortage, it is tight. But this is structural. So this is not an economic reality for construction. This is construction. Construction labor market is tight. It will always be tight. And productivity gains are the only way to get us there.

Shawn Busse:
Hey, Mel, so you used the term self-perform. Maybe you can talk about the difference between a contractor who does self-performance and those who don’t—and also why you chose to go that route.

Mel Gravely:
Thanks for making me clarify that, Shawn. So the difference is most general contractors or construction managers—which is a lot of how we deliver our services to our customers—own the risk of the outcomes of the project. But they’re subcontracting everything to plumbers, electricians, drywallers, asphalt people, roofers. They’re managing that process, but the work is actually being done by subcontractors.

We do subcontract a great deal. But we also self-perform, and that’s the term when you are doing the actual work—people wearing tool belts, cutting drywall, putting in ceiling, ripping out floors, and putting it back. That’s the self-performance part. So we do sub, still, a lot of our work, but we self-perform a growing piece of our work.

Your second part of your question is intriguing. We didn’t start out self-performing work. We actually bought this company in 2013, and they were a drywall contractor at the time. And the reason is twofold: Number one, a little bit of vertical integration. So I get a little more margin from the self-performance, and I can self-perform my own work. The second reason, though, is it gave us control of the edges of projects.

So sometimes you get into a project, and there’s stuff in between what the drywaller does and the electrician does, and you need somebody to fill that gap. Well, if you don’t have anyone who has a tool belt on and a truck and some tools, you sometimes are fighting and trying to figure out who’s going to fill that gap. It gives us more control around the edges of our projects, to just have people be able to come in and fill some of those gaps.

Shawn Busse:
So the little random stuff that crops up, the stuff that maybe doesn’t fit real nicely, in terms of a scope of work for a subcontractor.

Mel Gravely:
Yeah, absolutely. You know, like you go into a hospital—again, we do a lot of work—and you need to set up a containment wall, so you separate the work from the patients. That containment wall is a bit of a pain in the butt. Someone’s got to put it up, someone’s got to maintain it, someone’s got to make sure you’ve got negative airflow. And our folks can pop that stuff up for us, and we can go in and then do the work.

So things like that, that our folks can show up and take care of, just gives us more control. And if we get behind, our folks can paint. So if the painter gets a little behind, we can supplement the painter. Even if we subcontract, we can supplement the drywall. We can supplement the demo person, if we have to. So it just gives us a lot more flexibility around the edges.

Shawn Busse:
So the consequence of that is now you have a fixed cost, in terms of workforce, which is, a lot of these contractors try to protect themselves by basically not carrying any fixed costs other than the owner and maybe a small administrative crew. So you’ve found that the advantages of this offset the risks that you take on?

Mel Gravely:
Well, let me start with the answer: Yes, there’s no doubt. I mean, our ability to deliver a differentiated value to our customers is pretty high because of our self-perform capability. But also, we did two things with our interiors business: One, we kept it small, so it’s still a pretty small organization. They’ll do about $6.5-7 million this year.

The second thing we did, though, is they competitively bid work in an open market. So they’re competing against other interiors companies for work with some of our competitors. So they’ll bid work to our competitors and go out and be a subcontractor to them. And being able to balance that allows them to run their business from a complete P&L standpoint. So they do some of their work with us, some of their work with other contractors. And we found that that balance, if we can keep it a balance, works pretty well.

Loren Feldman:
Mel, I think you said that you’re hitting your profit goals for the year, but not your revenue goals. How have you managed to do that?

Mel Gravely:
Well, first, I think we’re pretty conservative planners. So, as my board would say, we sandbag a bit. So there’s a little bit of that in there. But also, our drywall business, which is our higher margin business, is far exceeding their plan. And going back to the value of having them, there have been years that they didn’t far exceed their plan. But this year, they’re far exceeding their plan, which is adding a disproportionate amount of income to our bottom line. And, listen, the business that we have, although it’s below what our projections were, is good, profitable business. And it’s given us an opportunity to have a pretty good year.

Loren Feldman:
Mel, you and I met at a Tugboat event. I believe you’re the first regular on this podcast who belongs to the group, which believes in building businesses to last 100 years. Part of the idea is not selling to private equity or other investors. By the way, I think this is a group that would be of interest to both William and Shawn, if they don’t already know about it. I’m curious, what has that concept of building a business to last 100 years meant to you, and why are you part of the group?

Mel Gravely:
Yeah, that’s a great question. And yeah, I’d love to share it with William and Shawn anytime they show any interest at all.

Loren Feldman:
Right now!

William Vanderbloemen:
Yeah, Mel, I’d love for you to sell that to me. I looked at Tugboat. I get their journal. I think it’s a great idea. For me, it comes down to: love the concept, but don’t have the time to get to the events. And then the money becomes a question as well. So sell Tugboat to me.

Mel Gravely:
I would agree with you. Let’s start with that. If you can’t make the events, I agree with you, the value diminishes to just not enough, in my mind, for the cost. But let me tell you why it’s been a transformational organization for me personally, and I believe, over time, for our organization.

It helped me clarify and find the words to articulate what my vision was for this organization. So it helped me with that. And there ae so many different ownership models, scale models. How do you vertically integrate models? How do you deal with employee issues? So there are so many models and things to learn, but all of the people there are subscribing to the same set of core business principles around people and profit and longevity and evergreen. So you’ve got this commonality with all this difference. And so the models that I’m seeing… I mean, it’s just an incredible opportunity for me to learn and grow as a leader.

And to get very practical, there are times in our organization where I can maximize profitability and I choose not to. Because my horizon is so long that it allows me to say, “No, we don’t need to optimize tha.t”. Because this is more important, because we’re trying to not just accumulate profitability. We’re trying to accumulate culture and the power that goes with that. We’re trying to accumulate management talent that can take things from one generation to the next. So the intentionality around the decisions around succession, and decisions around ownership structure, and decisions around investments and horizon are just terrific.

In this group, you’ve got Edward Jones, which is huge, and you’ve got companies that are $10 million or $5 million even—I think they get that small—so everything in between. You’ve got ESOPs, and you’ve got family-owned, and you’ve got partner-owned. So no matter what you’re trying to solve for, you can find it in the group. The last thing I’ll tell you is, I’ve never been around CEOs, and none of them are beating their chests. None of them are blowing smoke up your skirt about how great life is for them. None of them are holding back information. If you want to know it, you can ask them. They’ll share it with you under a code of silence. I’ve just never experienced this openness.

Loren Feldman:
We have the same thing here, by the way, Mel, except for the code of silence part. [Laughter]

Mel Gravely:
So I just think it’s been a great group for me. The president of our company, Jim Watkins, is joining now. He’s attended one event. My team goes to a team event they do in February. We went last year. We’ll go again this year. So I’m exposing them to it at the next level. And it’s not cheap, guys, and I’m not a guy who spends money like that—except on clothes. So it’s that valuable to me. So, William, that’s what I would say, buddy.

And here’s the problem with Tugboat if it’s got a problem. And I don’t know how they can fix it. It is hard to articulate the value without going to an event. So no matter what they write, no matter what they send you, it is just hard to articulate the value—unless you’ve been to an event. And once you’ve been to one—and it only takes one—I think you either connect with it or you realize: This is just not for me.

William Vanderbloemen:
That makes sense.

Loren Feldman:
Can you give us an example of a decision you made differently, because you have that 100-year horizon in mind?

Mel Gravely:
Yeah, I’ll give you a great example. So if you gotta be around for 100 years, you’ve got to do a bunch of things right. But one of them is, you’ve got to have strong, smooth succession. You’ve got to be able to go from one management team, one leader, to the next. So three or four other Tugboat companies got together. They all had presidents and CEOs in some phase of going through transition. And to be able to model and benchmark and discuss, “How did you do it? What are you planning? How are you working on it?”

So the president here and I are going through a similar transition that we’ve been working on for two years. But we’ve been working on it with the insight and input of others who are a bit ahead of us, some behind, but some way ahead of us that they finished their transition already. And so just that alone, and the things that we planned in, and the development that we’ve sent the president through to get him ready, and the way we brought along our board of directors—and we do have a fiduciary board of directors. The way we brought them on and the way we’re positioning the executive leadership team for the transition.

And even to how we’re PRing this, our plan for PR as we make the announcement. All intentional, and they’re informed by our affiliation with this group. And I would have never thought about any of that, to be honest with you. I mean, the details of transition are very, very important. But if you don’t get that right, you’re not going to be around for 100 years.

Loren Feldman:
How far along are you, Mel? Is the plan in place?

Mel Gravely:
The plan is in place. It’s got dates on it. So I’ll say we’re in the red zone, if I can use a football analogy.

William Vanderbloemen:
Mel, I’m interested. We do quite a bit of succession planning for our clients. Your transition is moving you out of your current role, I’m assuming?

Mel Gravely:
Correct, it will be moving the president into a president/CEO role, and me out of a role. I’ll continue to be the chairman of the board. And I’m the primary shareholder, too. But I’ll also move to a role we’re calling an executive chair, which we gave its own job description. It will not be a day-to-day job. I won’t have an office in the facility, for a number of reasons, but the title is executive chair.

William Vanderbloemen:
How did that process start? What was the first domino to get pushed over?

Mel Gravely:
My recognition that I wanted to demonstrate orderly management transition. That was the first domino.

William Vanderbloemen:
That’s awesome.

Mel Gravely:
I’ve gotta be honest with you guys—I feel like I’m in a counseling session—but I’ve got the best job I’ve ever had. Like, this is a really cool job. We’ve got a really cool company. I’ve got a great executive leadership team. And I’d kind of like to stay in the seat for a little while longer. But the truth is, I came to realize that, based on my limitations and the needs of the business, that it’s time for me to take that step. And I think—I don’t think, I’m sure—it totally helped me realize that reality. So the first domino, though, was my realization we had to make that transition. And so we began to process from there.

William Vanderbloemen:
Well, yeah, I’m convinced that success in succession begins and ends with the outgoing person. And so that just backs up what I’m thinking. Well, it does.

Mel Gravely:
I agree with you. I agree. And that’s one of the reasons I won’t have an office. So, you know, some of the people we’ve modeled and benchmarked against the outgoing person at an office. And I’ve got a big personality. I’m very outgoing. I’ve got an opinion on everything. I won’t be able to not be me. And so I’ve got to not be in the building. And I just have to know that about myself. But we learned that by watching some others. And like, ooh, that’s just not going to work. Either the team is ready, or they’re not. If they’re not, then you’ve got work to do on the succession. But if they’re ready, then get the hell out of the way.

Loren Feldman:
You’re making me nervous, Mel. Are you going to be okay with this?

Mel Gravely:
I’ll let you know when it happens. [Laughter] Here’s the truth: I think I am, because I’ve had time. So you know, succession is not just preparing the next person. It’s preparing you, too. And I’ve talked to these folks who have already stepped out of their role about what it’s going to be like and what to expect. And the biggest thing is that no one calls you for your opinion. And we’ve all gotten addicted to that.

So I’m really preparing myself emotionally for that. I think people are gonna say I retired, and some people fight that. I’m not retired, but I’m not gonna fight that. Whatever you want to call it, you know? But yeah, I’ve been working on myself, too, Loren. So it’s a great question. I think I’ll be okay.

Loren Feldman:
William, you’ve talked to us in the past about how each year, you’ve been taking more time away from the business, sort of to prepare the business for a transition eventually. Did you follow through with that this year as well?

William Vanderbloemen:
I did. I’m actually somewhere in the midst of the five stages of grief that summer’s over right now. So we started by going away—so I’m not there, present in the office, as Mel says—which I think is critical. And then we started spreading it, you know, one more week a year for the last… I don’t know, six or seven years or so.

My annual review with my board is—Loren’s heard this before—one question, and it’s pass/fail. The question is: Did you make yourself less essential to the growth and running of the firm? That’s my one task every year, to make myself less essential. And I think we’ve done a pretty good job of that.

I’m learning a little bit more each year. This year and last year were the first two years that we’ve seen growth while I’m not involved. We’ve seen it run itself. It might be my ego, which is way too big, but I think we could probably grow faster if I were more involved. But that doesn’t get me a 100-year outcome. That doesn’t make this sustainable. And at the end of the day, when I do decide whatever trigger I want to pull with succession—right now, I want to have all the options open, whether that’s hand it off to a CEO, do an ESOP, sell, just be chair of the board, just be a passive-income owner. I want all those options available. So that’s the one question.

This year we were gone—well, we’ll be gone about half of September, kind of in and out—but we were fully detached for about two months. And that went well. And I say fully detached. I had a 30-minute call once a week with my COO to resource her in any way I could. But that’s about it.

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