BY ROBERT P. MADER
Of CONTRACTOR’s staff
Kinetics Group is our Mechanical Contractor of the Year, in part, because the semiconductor market tanked. The Santa Clara, Calif.-based company, No. 6 in last year’s CONTRACTOR Book of Giants with revenues of nearly $863 million, was already the best high-tech process piping contractor in the country when the slump hit in 2001.
“The No. 1 thing is that everybody goes through tough times, even industries like telecommunications and semiconductor,” says Kinetics founder William Bianco. “But I’ve never seen a recession in these industries like the type you see now.”
So, while it may be easy to ride the wave of whatever the hot market du jour is and look like a genius, it’s an altogether different proposition to have one of your core markets collapse and keep going with the same focus and drive. Kinetics, however, is accomplishing just that by emphasizing continuous improvement, employee satisfaction, jobsite safety and a determination to adapt itself to its customers’ changing needs.
Kinetics knows exactly what it is: It is a high-purity piping contractor for the semiconductor and biopharmaceutical industries. It will not be installing rooftop units on burger joints.
“Our strategy is to focus on two of the most dynamic and technologically innovative industries that require sophisticated mechanical systems and to get as much of that capital spending as possible,” says President and COO Kurt Gilson, who started with the company in 1988 as a project manager. “We’re not just selling pipe but adding value.”
Kinetics knows who its customers are and makes sure that it stays on top of what their problems and needs are. If the customer wants a different product or its construction delivered a different way, then Kinetics will change as the customers’ needs and desires change. Kinetics will try to take more of its customers’ capital spending budgets because it believes it has a valuable product and service to sell.
“One job and gone is out,” says Chairman and CEO David Shimmon.
We did not name Kinetics our Mechanical Contractor of the Year because of the company’s size or financial performance. Far from it, Kinetics’ revenue was off last year.
Rather, we were fascinated by how Kinetics is adapting its business during the economic slowdown. It sets an example that smaller contractors should study.
Kinetics is big. It is organized under the parent Kinetics Holding Corp. and includes Kinetics Group, Celerity, TRiMEGA LLC and BioKinetics. Kinetics Group is the construction operation. Celerity sells piping-related manufacturing equipment to semiconductor OEMs. TRiMEGA is a joint venture that bundles construction with gases, chemicals and water for the semiconductor industry. And BioKinetics sells to the biopharmaceutical industry, which has different needs from Kinetics’ semiconductor customers.
Kinetics has become what it is because of its focus on its core markets, Shimmon explains. Its geographical footprint — all over the United States and the world — has been determined by it customers’ locations. Kinetics tries to bundle its services for its customers and give them a complete solution through one vendor, itself. And Kinetics lets the core industries pull it along in whatever direction the customers want it to go.
In the long run, it doesn’t matter that the high-tech market is weak. Nobody has ever suggested, Shimmon points out, that the business community, the supply chain or communications will advance without technology. Computers are not a fad.
“We have a longstanding commitment to understanding and meeting the needs of the customer and to being a leader in the process solution,” Shimmon says.
Meeting the needs of the customer means that Kinetics reinvents itself as the industry changes. High-tech customers make money by increasing their yields and speeding their cycle times, so Kinetics has to help them do that through more efficient construction and better installation techniques.
Kinetics, for example, is participating in a process to become a preferred provider for the semiconductor industry called SSQA or Standardized Supplier Quality Assessment, says Dennis Sowards, manager of continuous improvement and communications. Only four contractors have attempted the multiyear process, which Sowards says is akin to a combination of the Malcolm Baldrige Award for quality and ISO 9001 certification.
The contractor also is working constantly on ways to improve its bidding and estimating processes, productivity measurements and change order management. Project managers are compensated based on jobsite safety and customer satisfaction, further reinforcing the need for continuous improvement.
Dealing with change
The semiconductor industry today is very different than it was even just a few years ago, and the biopharmaceutical industry largely didn’t exist a decade ago.
When Bill Bianco and two partners founded Kinetics in 1971 in Mountain View, Calif., its customers were in the semiconductor and food-processing industries.
“Our garage was behind Intel’s first plant in Mountain View,” Bianco recalls. “We rode with them around the world. When people ask me how we wound up in so many places, I tell them it’s because we followed Intel. Right spot, right time.”
Bianco eventually sold a majority of Kinetics to Houston-based Emde Co. until that contractor went out of business in 1986. Bianco bought Kinetics back from Bill Emde in 1986.
At that time, David Shimmon worked in the private equity sector in Silicon Valley. Bianco brought him on as a consultant in 1988 and hired him full time in 1990 when he offered him equity in the company.
USFilter acquired Kinetics in 1998, and Shimmon subsequently became president and CEO of USFilter. Not long thereafter, France’s Vivendi bought USFilter, mostly for the water purification business, and spun off Kinetics. Shimmon, other managers and employees and private investors bought Kinetics from Vivendi in a management buyout.
“Great people allow Kinetics to shift gears,” says Shimmon, who adds, “culture change is good.”
One example is Kinetics’ Celerity unit. Celerity, which eventually will be spun off in an IPO, builds manufacturing equipment (mostly piping) that delivers gases, water and chemicals in a semiconductor fabrication plant. Celerity started as a focus group, Shimmon notes, and Kinetics realized it had a business opportunity.
It’s much the same situation with TRiMEGA, a joint venture between Kinetics and manufacturer Air Products & Chemicals (the “tri” refers to gas, water and chemicals). TRiMEGA was put together as a seamless, bundled solution that reduces customers’ costs and provides engineering and design, construction, life safety, plant commissioning and startup, says President John Yale. Most importantly, Kinetics has one significant customer who wants to buy its construction that way.
Customers are trying to strip away infrastructure and cut staff, but the work doesn’t go away, Yale notes, so TRiMEGA offers customers a way to reduce the number of engineers and technicians they need on staff.
Yale is a mechanical industry veteran who was a partner with Ron Rodgers in J.B. Rodgers in Tempe, Ariz. Kinetics bought J.B. Rodgers in 1998. Yale started out with Kinetics as a customer advocate, visiting key customers and then reporting back to management what they really thought.
When Ron Rodgers became president of the Sheet Metal & Air Conditioning Contractors National Association, he had been president of Kinetics’ Southwest region, which Yale then took over. Yale became president of TRiMEGA in April 2002, succeeding a 30-year Air Products & Chemicals veteran who retired.
TRiMEGA bills $130 million a year but only has 24 people on staff, mostly engineers and salespeople. It serves primarily as a sales agent for its parent companies.
Yale absolutely believes in bundling services such as the joint venture with Air Products.
“Companies that master collaboration will be successful in the future,” he says.
There’s still much work to do, such as making the bundling concept sell in Asia. Yale also spends much of his time teaching his smart, young technical people how to be business managers.
Gilson points to TRiMEGA and Celerity as examples of letting the customer lead the contracting business. It may be the same pipe and the same procedures, but customers have different needs, so Kinetics split its sales organization a year and a half ago. The company realized that its customers were divided among OEMs such as Applied Materials and semiconductor manufacturers such as Motorola with different needs.
“TRiMEGA came about because there was duplication and double markups in buying critical utility systems, so we put together the joint venture in a way that doesn’t put one above the other,” Gilson says. “BioKinetics is another example of the way customers buy process equipment and facility infrastructure. Our biotech customers want to make a facility simpler to build and BioKinetics makes it modular. BioKinetics modularizes the delivery method and Kinetics builds the facility under, say, Fluor Daniel. You have to listen to the end customer.”
If you accept the fact that change is constant, then change is easier, he says. A year ago the company had five regions and now it has three. Divisions reorganize themselves around the way customers want to engage them.
Part of the change process is driven by continual self-appraisal. Kinetics as an organization is so self-critical that its managers sometimes make it sound more like a failure than our Mechanical Contractor of the Year.
The firm gathered its key managers from the United States and Europe in December at its Santa Clara headquarters. The managers wanted to know what Kinetics is doing wrong, what it’s doing right and how can it improve.
When they asked themselves what’s wrong, the suggestions included: too big, too much inertia, inconsistent performance, arrogance, don’t listen, not proactive. They filled up a sheet of a flip chart with negatives, although the discussion that followed was surprisingly constructive.
The self-appraisal stems from the fact that the company’s business is dynamic, complicated and global, so they need to respond quickly, Gilson says. The best way to do that is through feedback from employees, suppliers and customers and by responding to market intelligence.
Kinetics surveys all its people, even field employees, and Gilson told the other managers at the meeting that he doesn’t think employees are happy enough. Being a preferred employer will be a priority in 2003, he said.
Kinetics knows that satisfied workers make satisfied customers. Management never refers to field employees as the workers, the union, plumbers, fitters or the trades. They are The Crafts. They are people who make millions of perfect welds in stainless steel pipe.
Fortunately, customers seemed happier on their survey, reported Bob Pragada, president/Eastern region. But some of the managers said the survey showed too narrow a gap between Kinetics and its competitors in terms of differentiation. Such introspection is driven by the fear that competitors are breathing down their necks.
“Three guys in Asia said to me, ‘You guys defined bundling services and now in 2002 you are one of several choices,’” Pragada told his peers.
The competition may be jumping into the high-tech market because other markets have temporarily declined as well, Gilson says. Competitors are not global, however, and they often aren’t national.
Other contractors will have to keep up with a company that will do whatever it takes to remain 18 to 24 months ahead, says Gilson, a marathon runner in his spare time. In Kinetics, contractors have a formidable competitor.
“We’re fearless and relentless,” Yale says.
Still, Kinetics shares with its colleagues the same objective, Shimmon notes. “We’re a mechanical contractor with a specialty niche where we think we can deliver the best value, like utilities and support systems,” he says. “But we’re still about the same things that every other contractor is facing — we’re doing the infrastructures that are the dreams of our customers.”
Safety is not just a buzzword
KINETICS CEO David Shimmon and President Kurt Gilson actually do safety walk-throughs of construction sites. Gilson conducts quarterly safety reviews, and both executives have conducted field safety audits and attended field safety recognition and training functions. Shimmon is a member of one of Kinetics’ major customer’s Safety Leadership Executive Team. Safety isn’t a meaningless buzzword at Kinetics.
Kinetics has had a successful safety program because top management has led by example and given Paul Thomas, vice president/safety, the tools he needs to do the job.
The numbers Thomas tracks are the SIR, the recordable Serious Incident Rate, and the LTIR, the number of cases that make up the Lost Time Incident Rate. When Thomas joined Kinetics in July 1999, the Construction Division’s SIR was 7.9. It fell in October 2002 to 3.8, which works out to approximately 31 OSHA recordable accidents that didn’t occur.
In the mechanical trades, SIC 1711, the average SIR in 2000 was 9.2, according to the National Safety Council’s “Injury Facts, 2002 Edition,” Thomas says. The average LTIR for the industry is 3.2 and is about 0.46+ for Kinetics. That success has won Kinetics safety awards from Mechanical Contractors Association of America and from the State of North Carolina Department of Labor.
Although the company has been inspected on a number of occasions, it has not had an OSHA citation since 1998, and Thomas plans to keep it that way.
“I’m looking for world-class safety,” Thomas says. “We’re better than average now, but I want to be on the leading edge.”
It’s going to become more difficult to bring down the SIR and LTIR incrementally, he notes, now that the company’s safety record has improved so much.
Thomas has been in safety for his entire working life, starting at Martin-Marietta in 1962. His experience includes a 10-year stint at OSHA in the 1970s.
Kinetics’ record has been good, although Thomas was dismayed at November’s performance. At the contractor’s December management meeting, Thomas told his peers that the company had 10 recordable incidents in November, eight of them in the company’s Eastern region.
“Some project managers may have lost their focus on safety because of low hours,” Thomas says. “They’ve lost some of their fervor; we need senior level management support to ensure that we regain the safety momentum.”
Thomas is planning for a significant reduction in both SIR and LTIR, he told the regional presidents and vice presidents, as part of Kinetics Continuous Improvement Plan that focuses on back injuries and soft tissue injuries of the hand. The two injuries have a history of recurrence at Kinetics and were identified to receive special attention.
Gilson responded that he wanted an SIR of 3.5 and an LTIR of 0.7 as the minimum acceptable targets.
Thomas’ presentation at the December meeting grabbed the attention of Kinetics’ assembled top managers.
How are new people trained when the company is ramping up for a job, Thomas was asked.
“It’s got to be a significant part of our new-hire safety orientation,” he said. “If you don’t take the time to properly train our employees at the beginning of a project, and instill a positive safety culture when our employees first come onto a project, it’s extremely difficult to change the safety mindset once project safety goes south.”
Kinetics’ management is pushing to have more work prefabricated in shops. Gilson told Thomas that he wanted SIRs reported separately for shops in 2003. Shops also have unique safety issues, such as welding fumes and indoor air quality.
Because the company has a significant workers’ compensation insurance deductible, Thomas notes, any reduction in accidents is money that goes right to the bottom line. He urged his fellow executives to embrace safety as an employer value and to drive their local safety programs.
“A low accident rate is a discriminator that gets you jobs,” Thomas says. Moreover, safety is a pay-me-now-or-pay-me-later proposition — a contractor cannot cut safety programs due to poor economic conditions.
As with everything at Kinetics, customers have a lot to say about safety — both positively and negatively. Customers always want their contractors working safely, sometimes demanding an exemplary safety record, yet they put economic and time pressures on contractors that make safety a challenge. Working time has to be limited to avoid fatigue, but that affects the schedule. A proper ratio of workers to supervision has to be maintained, but that increases labor costs.
During the management meeting, John Yale, president of Kinetics TRiMEGA division, mentioned that customers are talking about retrofitting semiconductor fabrication lines while they are running. It’s called “chasing the wafer out the door,” Yale explains. Nobody has yet tried the conversion from 8-in. wafers to 12-in. wafers and it would be expensive and inherently dangerous. One of the gases used, Silane (SiH 4), is a pyrophoric gas, and ignites and burns when exposed to air. Such conversions are possible but would require a lot of training and exact task pre-planning.
Thomas oversees three regional safety managers in Brussels, Belgium; Durham, N.C.; and Wilsonville, Ore. That includes providing technical support to a number of regional, branch and project safety managers. Each project has as many as three safety personnel on site. The branch and regional safety managers are directly responsible to their regional presidents with dotted line responsibility back to Thomas.
It makes Thomas’ jobs easier that Kinetics is safety oriented from the CEO down to the foremen. The safety training is also of high quality — for example, Thomas believes that Kinetics has the safest line-breaking procedure in the country. It requires that a very rigorous set of procedures be followed that features a number of individual safety sign-off elements. These elements ensure that the typical line breaking activities are safely followed (e.g., identifying the correct line, blocking, bleeding, and tagging the system and having two people verify that the entire procedure was followed).
Thomas also runs an incentive program, but he emphasizes that incentives enhance a safety program; they are not the program itself and they are not an entitlement. The rewards include barbecues, jackets, “bonus bucks” and hockey tickets.
But money may be the best incentive. CEO Shimmon designated that a full 50% of all incentive dollars for all executives and managers be based on the company’s effective safety performance.
Network provides global touchstone
KINETICS is still the in the process of pulling itself together. It already was a large operation before it purchased J.B. Rodgers in Tempe, Ariz., and Fullman Co. in Wilsonville, Ore., in the 1990s. And because it has followed its customers around the country and the world, it has to manage projects in places such as Germany and China.
At the contractor’s top management meeting in early December the regional presidents and vice presidents discussed a wide range of forms and procedures that have to be standardized.
Some of the forms and procedures are specific to semiconductor or biopharmaceutical construction, such as bid execution strategies, project planning and scheduling, mobilization checklists, change order management or contract review.
Many of the forms and documents are out there, but they are not being used consistently, said John Klinestiver, vice president/human resources and labor relations. Senior managers and branch managers have to embrace them, he added.
Shimon Bart, regional president for Europe, noted that some project managers were using documents and procedures that they had used for years and Kinetics has yet to persuade them to change.
President Kurt Gilson told his team that he plans to pull some of the company’s best people into Arizona in 2003, sequester them for several weeks and have them straighten out all the management tools — what exists now, what needs to be modified and what needs to be developed.
Chief Information Officer Richard Smoke has probably done as much as anyone to unite the company through company-wide implementation of an Oracle-based financial system and company intranet.
Smoke is a 30-year industry veteran who came from Fullman Co. with stops along the way at A.O. Reed and University Mechanical. He worked his way into the computer business by writing estimating programs.
Four years ago when Gilson was Kinetics vice president/ strategic planning, he started putting Oracle in place to replace a system that was not Y2K compatible. Because Kinetics has a contracting business as well as a manufacturing operation in Celerity, Gilson felt the Oracle platform was the best one for the company. It is also robust enough to handle complications such as different languages and currencies.
Smoke layered customizations on top for industry specific functions such as forecasting, job costs and scope changes. All the customized software was written by Smoke’s IT staff members because, he notes, they couldn’t support the software unless they had written it themselves. Smoke has an Oracle Support Group - Enterprise Team, people who are experts in each area such as accounts receivable or human resources, who develop new software and train users.
Smoke also built a company intranet that links with the Oracle system. The branches had separate intranets as recently as six months ago. Some of them contained forms, templates and news items. Smoke wanted to create a global resource center, “a touchstone for everybody around the world,” he notes.
Because the intranet is quite large, Smoke assembled it as a database called an Oracle Portal containing 100-150 HTML pages. Some of the HTML pages contain links to other information such as manuals.
The home page of the intranet has Gilson’s column and company news, plus it contains a key indicator table of financial data from the Oracle system that shows year-to-date revenue, EBITDA, sales, backlog and net over 60 days. Every piece of data is a link so an employee can click into them and get all the way down to the details of a project.
The network can recognize each employee from his or her log in, so different people have access to different information. A project manager in the Pacific Northwest, for example, would be able to compare the financial performance of his projects with that of other project managers in the Northwest.
Smoke loaded the intranet with all sorts of reference tools, such as organization charts, and a directory that not only gives address and e-mail information but also links projects to the employee and branch.
Smoke’s big challenge is to keep several hundred key people trained on all the tools that he’s loaded onto the intranet.
“You don’t know what you don’t know,” he says.