Tuesday, April 23, 2013

Can You Escape the Commoditization Trap?

Over the years, I've heard a lot of angst expressed about the growing commoditization trend in the A/E industry. Yet I've not seen many firms do much about it. Firm leaders are often quick to blame our profession for much of the problem ("we're too eager to discount our fees," etc.), but too many of them seem to think there's little they can do to escape the commodity trap.

The fact is that in every industry overtaken by commoditization, there are always companies that have found a way out. Take personal computers, for example. While most computer manufacturers have been grappling for their piece of a shrinking market by continually offering more for less, Apple has resolutely balked at joining the fray. They've charged significantly more than their competitors and yet have seen their U.S. market share grow from 4% in 2006 to almost 14% in 2012. And this while the performance differences between Macs and PCs have narrowed.

Commoditization occurs when a service or product is widely available and generally interchangeable with that provided by other suppliers. With few meaningful differences between them, buyers choose a particular supplier's service or product primarily based on price. Most A/E services are not in this sense real commodities as the majority of clients still use some form of qualifications-based selection. But most firms are feeling the pinch of increased pricing pressures and declining client loyalty, especially as strained budgets have pushed clients to shop for better value.

So the secret to beating the commodity trend is largely summed up in two connected strategies—differentiation and delivering added value. This is nothing new in concept, but has proven elusive for most A/E firms in practice. Indeed, I sense that most firm leaders believe these to be either impractical or beyond their reach. Rather than take commoditization head on, firms are more likely to seek relief in new services or geographic expansion, or simply to succumb to the pricing wars.

If you'd prefer to break from the pack and take meaningful steps to escape the commodity trap, here are some things to consider (most drawn from previous related posts, to which I provide links for more information):

Meet strategic needs. Most client organizations exist for other purposes than doing engineering, environmental, or architectural projects. The projects we do are ultimately driven by the need to achieve important business objectives. Yet technical professionals are prone to ignoring the business context and focusing on their areas of technical expertise. If you want to add value to what you do, solve business problems. Connect your work to meeting your clients' strategic needs.

Deliver exceptional client experiences. Evidence suggests that clients value the working relationship as much as they do your technical expertise. Yet the typical A/E firm gives far more attention to technical work than to providing superior service. Companies that excel in delivering exceptional customer experiences, one study found, do two things consistently: (1) they define a delivery process for ensuring quality customer experiences and (2) they solicit customer feedback on how they're doing and what they can do better. This becomes much easier when you create a culture of client focus.

Develop great project managers. You can't deliver exceptional client experiences without great project managers. These individuals are the primary conduit through which you serve clients. Unfortunately, mediocre project managers outnumber the extraordinary ones by a substantial margin. In one client survey, only 7% of clients gave their A/E service providers an A grade for project management. And in my own interviews with hundreds of clients over the years, the majority of criticisms have been aimed at project managers. Among the complaints: poor communication, slow responsiveness, broken promises, and failing to understand client needs and expectations.  

Master relationship building. Every firm I know touts its commitment to strong client relationships, but I've encountered very few that take the process of relationship building seriously. What this means is being deliberate about creating the kind of distinctive client relationships that add value to your work and keep you from becoming a commodity. Start by identifying the qualities that characterize your best client relationships. Then determine what specific actions are involved in building those qualities into your other relationships. Of course, not all clients are interested in having this kind of relationship. That's why you should consider screening prospective clients for relationship potential, and considering where you are in the relationship life cycle with existing clients and how you might take it to the next level.

Bundle and rebrand services. I was in the environmental business in the mid-1990s when firms were scrambling to take advantage of a promising emerging market—using insured fixed-price contracts to transfer environmental liabilities from responsible parties to companies interested in redeveloping contaminated properties. It involved a complex suite of services across several areas of expertise, which presented challenges in marketing it to clients. But one of our competitors, TRC, bundled those services and branded them with the trademarked name of Exit Strategy. They remain the market leader in this area.

When I've suggested a similar strategy to my A/E firm clients, I usually get push-back. "If we use different terms to describe what we're doing, clients won't understand it," is a common rebuttal. So educate them! As branding experts have long espoused, when you name it, you own it. I don't think TRC did anything different technically from what we and other firms did, but they became the market leader because they differentiated their service in the minds of clients.

Focus on a few target markets. In a tough economy, there are advantages in diversifying across multiple markets. But that can also lead to commoditization of your services. How? As noted above, you add value when you help clients solve business problems. But this requires that you are familiar with your client's business. A/E firms that offer their services to multiple markets often lack a deep understanding of those markets. That makes it much harder to connect their services to meeting strategic needs.

That doesn't necessarily mean you should exit the markets you're already serving. But I would suggest selecting perhaps two or three markets to really concentrate on. Get involved in relevant trade groups, become an advocate for those industries, write articles for their journals and make presentations at their conferences, and specifically tailor your services to their distinct needs.

These are but a few of the strategies you can follow to escape the commodity trap. The key is not to resign yourself to the status quo. If Starbucks can turn a commodity like coffee into a premium product, can you not do something similar with your services? It won't be easy, but neither is trying to stake your share of a highly competitive marketplace with an undifferentiated service offering.

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