Tuesday, September 30, 2014

If Not Differentiation, What Then?

"How concerned are you about the commoditization of your services?" I posed that question to a room full of consulting engineers at a conference session I conducted last week. Almost everyone present indicated that it was a significant problem. "Enough to make significant changes in how you do business?" I asked. The group was much less sure of their answer to the second question.

Thus we have the conundrum of the commoditization trend in the A/E business. It's a problem we all like to complain about, but few are willing to try to do anything about it. And that's perfectly fine, because the consequences of commoditization are probably less painful for most firms than changing in response to it. As I see it, there are three basic responses you can make:
  1. Stay the course, continuing to do things much as you have been
  2. Become more efficient, enabling lower-cost delivery of your services
  3. Differentiate, adding value to your services that clients are willing to pay for
Most firms, by far, stick with option #1, even as they talk about the need to differentiate. Some firms have embraced option #3, finding ways to distinguish themselves from the competition (I addressed possible differentiation strategies in a previous post). A much smaller number of firms settle for option #2, because most don't want to admit they've become a commodity.

But that reality is inescapable for several firms I've worked with over the years. While they admit that clients treat them like a commodity, they resist the characterization and continue to operate as if they offered differentiated services—putting themselves at a competitive and financial disadvantage.

Of course, my focus is on helping A/E firms differentiate. But if they can't or won't, isn't option #2 worth considering? There's nothing wrong with embracing a commodity market (such as most private land development) and redesigning your firm to succeed at it. It requires some hard choices, but the benefits go straight to your bottom line. Some possible strategies to consider:

Streamline project delivery processes. In most firms, there's much room for improvement here. For example, rework in our industry seems to consume between 15 to 20 percent of project budgets. That's unacceptable. Design-related change orders contribute about 4% of construction costs. Half of those change orders are attributed to coordination errors. See a trend? The first place to start in lowering the cost of your service delivery is improving how you manage projects.

Control overhead growth. The good news is that overhead is declining across our industry, reaching the lowest level in 2013 since the recession began. But many firms are still running lower utilization due to inadequate work load and a reluctance to further pare back overhead positions. The hope is that growth will soon return, but high overhead makes that more difficult in a commodity market. Alas, these firms may face some tough decisions to remain competitive.

Outsource select services to boost profitability. This is not a popular choice, but it may be a strategy worth considering. Start by evaluating the performance of the different departments and disciplines in your firm. Do some routinely lose money or otherwise hamper your firm's competitiveness? Some firms have realized they can be more profitable by outsourcing price-sensitive complementary services such as surveying or laboratory analysis. Certain overhead functions might also lend themselves to outsourcing.

Hire more paraprofessional staff. As budgets contract, it becomes increasingly important to fit the right people (hence the right billing rates) to the assigned tasks. Many of the tasks we perform can be adequately handled under appropriate supervision by less experienced professionals, non-degreed personnel, and even administrative staff. Other professional service firms—such as law and accounting firms—have cultivated the role of paraprofessionals. These are individuals who have related associate or vocational degrees, or simply relevant experience with no degree. Couldn't this approach work for our industry?

Employ some hoteling to reduce office space needs. Besides indirect labor, the biggest overhead expense in most firms is office space. Yet in many firms on any given day, a large proportion of offices and cubicles are unoccupied, particularly for firms that perform field services. The practice of hoteling is a growing trend among all types of businesses, including many professional service firms. This involves setting up shared work stations that employees use periodically when they are in the office. The growth of telecommuting has made this a practical alternative for many companies, saving millions in office costs. No doubt this suggestion will be greeted with skepticism in our industry, but might be worth considering as a commodity provider.

Offer more standardized design products. Why do cash-strapped clients like small towns and rural counties need to pay for custom designs for buildings like fire stations or community centers? Could they not shop for the design of their choice from a catalog of standard models, similar to how home buyers use house plan books? Obviously, this is not a popular concept with architects and engineers, but I've heard owners express interest in such low-cost options. Customizing every design or solution is difficult to do profitably when clients are seeking the lowest cost.

On second thought, maybe differentiation deserves more attention! Any of the efficiency measures above have merit, but are likely very difficult or distasteful to the vast majority of A/E firm leaders. That leaves two choices—stay the course or differentiate. If you're tired of more of the same, this blog is full of ideas on how to stand out in the crowd. 

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