The past decade has been very good to construction giant EllisDon Corp. and its president and chief executive officer, Geoff Smith. Revenues have soared by three-and-a-half times – to $3.1-billion a year – riding on strong Canadian construction markets and aggressive diversification. So why is the 57-year-old Mr. Smith losing sleep? His industry is in the throes of tumultuous change, he says, and EllisDon has to be out in front. The outcome, he predicts, is a new model of general contractor that not only builds things, but takes control of the end-to-end process of designing, financing and operating projects. EllisDon is becoming unrecognizable from the London, Ont., firm built by his father Don Smith, now 89.
In the blog you write, you say the changes are 20 per cent inspiring and 80 per cent terrifying. Is that your mood?
When you read about this stuff, the first thing you think is how cool and how much fun it is. And then you think if you don’t do it right, you’re finished – not tomorrow, but maybe five to 10 years from now.
So you are building a different kind of construction company?
Completely different. And I acknowledge that we get resistance to these kinds of changes from inside the firm, as well as outside.
How did you know you had to change?
[About a decade ago] we chose to go a different way in these new public-private partnerships [EllisDon was a partner in building two major Ontario hospitals]. Most of our competitors chose to stay in the construction box, but we wanted to control our success and failure. That happens by moving into the financing box, and so we had to get into financing and facilities management. That changed our entire view: We got to think how a client thinks. We thought about cash flows and whether this building will operate well for 30 years. We wanted to control our destiny, and we thought there was money in it, too. Some clients didn’t like us in those other boxes, but we did it.
Were all your clients opposed?
Actually, I had lunch about that time with a major pension-fund client, who expressed his serious frustration with contractors. We sit back and we don’t lead the site – we wait for the design to be done and then we price it and we say, ‘It is over budget – that is your problem.’ Everything is someone else’s problem. ‘What would it take to make you lead?’ the client asked.
So between our growing capabilities in PPPs, and a private-sector client saying it is time to step forward, we said okay. When it is time to pull the trigger, we now know how to make sure you are on budget, and ensure the design fits the need. On the back end, we’ve got to be able to run the building for years – and we developed those capabilities.
Was technology a factor, too?
Information technology is just changing everything. What is really important is that the same IT designs the building and operates the building and everything in a building is an [Internet] address. People don’t know how to run the buildings we are constructing, so we’ll do it. We are saying to the pension funds – and some are getting it more than others – ‘You are a pension fund that wants to deliver returns to your pensioners. Let us take the risk for you and we will guarantee it over the long run.’
But isn’t your company more vulnerable?
We are taking on more risk, but it gives us more opportunity to control risk. We are in the project earlier, and we have control over, say, building materials selected. To my mind, it is a wash: The additional risk is offset by additional control. The upside is we don’t compete on prices as much – it’s not about who is the cheapest guy that day. The message is: ‘We’re going to be there for 30 years, so choose carefully.’
Are other construction firms doing this?
Some international firms are closer to this thinking than our domestic competitors. Some Canadian firms will come down this path and others are just happier in construction. The conventional thinking is to stick to what you know, but the answer is the world is changing.
Are you now at the desired capability in all these new areas?
We are nearly there. We developed these abilities in the last 10 years through PPPs, but we are now running buildings – including the building intelligence systems. We will never do design – architects and engineers need to do it – but we say we make sure the process works. We guarantee it and put our balance sheet on the line.
Are you more of an IT company now?
We’ve invested millions in IT capabilities, and are about to launch an IT-based project management system. Most construction companies buy IT, but I think in your core business, you need to control your IT. General contractors are not builders – we are leaders and managers and it is all about information. We manage the process of other people doing the building. If you control that information and make the process efficient, you are ahead of the game.
Does this require a different kind of CEO?
I’m a lawyer and I’m the farthest thing from a construction CEO. I argue the firm doesn’t require that kind of person, but the engineers, of course, disagree. But to the extent that our competitors keep thinking in the conventional way, that is good for EllisDon.
Is EllisDon still family owned after more than 60 years?
It’s 55-per-cent owned by the Smith family and 45 per cent by employees and it will soon be closer to 50-50. The numbers are not exactly relevant. We are run by a shareholders’ agreement where the family and employees jointly select the independent board, and the management team reports to the board. The board can fire me – in fact, its major responsibility is to make sure the management team is the right one.
Would you ever go public?
Experience in the industry has shown that the employee-owned model is the superior one – to give everyone a real stake and give them all the information.
What makes you lose sleep?
The business model is changing, but there is no way to really predict how it is changing. Ask our clients what they want from us, and they aren’t exactly sure yet. I spend a lot of time at night thinking, ‘Okay, how will it all work out?’
What is the future structure of the industry?
There are still too many contractors in the business and there will be a shakeout, but if you are good, there will be work for you. The market has favoured larger builders over smaller ones. The smaller guys are getting squeezed, because the projects themselves have grown. Five years ago, who would have heard of a billion-dollar project, but now there are two [in the Toronto area], and now the business models are changing, too. Now you will have to design, build and finance and, if you are smaller, it’s become tougher.
President and CEO, EllisDon Corp., London, Ont., and Mississauga
Born in London, Ont.; 58 years old
Law degree, University of Toronto
Spent a year with a law firm before joining the construction company founded by his uncle (Ellis) and his father (Don)
Became president in 1990
Briefly left the company; rejoined in 1996, led his six siblings in buying out their father