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. 

Do Clients See You as an Industry Insider?

What expertise do clients value most? A deep understanding of their business. This answer will surprise many in the A/E industry who think that expertise in their various technical disciplines is what is most valued. Obviously, clients expect you to know your business. But what usually matters more to them is how much you know theirs.

Client knowledge is a critical competitive advantage that many firms in our business undervalue. They're too busy filling the pipeline with proposal opportunities to invest in learning much about the clients they pursue. If you're looking for causes of the commoditization of your services, start here. The value of your work is much enhanced when you can meet clients' strategic needs. That requires an understanding of their business.

When I work on proposals, I always ask what the strategic drivers are behind the project. What are the business results that we need to deliver through the project? I'm typically disappointed with the answers I get. It's apparent that most technical professionals (especially engineers) are more interested in the what and how than the why. Yet the why—the desired business outcomes—is what clients really care about.

So how do clients perceive your firm? Are you viewed as insiders or outsiders when it comes to their business. Of course, I don't expect you to have a deep understanding of all your clients and their respective industries. But the important question is: Would you be seen as as an industry insider for any of your clients' businesses?

An industry insider is not only knowledgeable of that business but actively participates in it. So let's say that higher education is one of your core markets. Do you simply design facilities for it, or do you know trends driving that market from an insider's perspective? Do you understand how demographics will change future enrollment? Or how slower tuition growth is fueling greater competition among schools? Or how the student loan debt crisis might impact them?

If you think these (and other similar trends) don't really matter to your business, think again. Moreover, if you want to stand out among the many firms serving this market, leverage your facilities expertise in helping schools respond to these emerging challenges and uncertainties. Become a recognized industry insider. How? A few suggestions:

Research your clients' businesses. Given the easy access to market information on the internet, I'm perplexed by how little research many firms do. Don't have time? Make it a priority, and delegate some of the responsibility to others (e.g., administrative and junior staff). Firms that give priority to market research are more profitable and grow faster.

Talk to clients about their strategic needs and concerns. Don't limit these conversations to technical issues and personal chitchat. Find out what defines success for your clients, what issues cause them particular concern, and how their business is changing. Then determine how your firm can better help them achieve their pressing business objectives.

Get involved in their trade and professional associations. By involvement, I don't mean simply attending events. Become an active participant in committee work, especially those that are most strategic to their industry. For example, my previous employer was a key player in working through client trade organizations to help influence changes in environmental regulations that would save our clients millions of dollars in compliance costs.

Share your expertise through targeted writing and speaking. These same trade organizations typically sponsor conferences, seminars, webinars, and publications where you can share your insights on issues of importance to their business. To become a recognized industry insider, you should have something interesting to say and do so on a regular basis.

Develop other resources helpful to those industries. You might prepare relevant articles, white papers, and ebooks and share them through your email list. Or publish regulatory updates or planning checklists. Or establish a resource website specifically targeting people in those industries who might be interested in hiring you.

Build peer relationships within your clients' businesses. Partner with other service providers to offer distinct integrated solutions, as well as to share knowledge and insights about those industries. Especially consider affiliations with experts outside the AEC industry, since these are less common and may offer unique value to clients.

Hire people out of those industries. There's real value in having people on your staff who can really see things from the perspective of clients. They've been there. They often have instant credibility that can take you years to establish on your own. But do your due diligence; confirm that they are known and respected in their industry. 

Don't confuse business development focus with becoming an industry insider. Market focus to many firms simply means seeking more sales opportunities within that market. But what I'm describing goes much deeper. Becoming an industry insider means being recognized as a contributor to your clients' business, not just another firm seeking to mine it for revenue. The core philosophy is this: Help clients succeed and they'll help you succeed.

How to Improve Your Firm's Project Management

There is probably no operational shortcoming more widespread in our industry than the need to improve project management. Managing projects is a demanding endeavor, and many technical professionals struggle with its complexities. The result is a host of problems such such as dissatisfied clients, budget overruns, missed schedules, quality defects, increased claims, lost profits, and general organizational dysfunction.

Perhaps your firm is among the many seeking to improve how you manage projects. Where should you start? Having worked with several companies in this area, let me offer the a few suggestions:

Don't start with training. This is a common response, but a misguided one. There are some good project management training programs available, but you'll not solve your performance concerns simply by giving your PMs training. You need to first take steps to ensure that your objectives are clear, that systems are in place to support changes, and that you're prepared to reinforce putting training concepts into action.

Determine your priorities. You likely won't be able to address every significant project management deficiency at once. So determine which issues most need attention. Evaluate the extent of each problem, its ramifications, the relative difficulty in solving it, and the anticipated benefits in doing so. I recommend ranking the issues, then determining how many of those at the top of the list can reasonably be addressed at once. Later, after you've made significant progress on those issues, you can tackle the others on the list.

It's important to get adequate participation in identifying priorities. This should not be strictly a top-down process. You're going to need the buy-in of your project managers, so at a minimum they should be consulted. I advise going still further, involving a cross section of employees at all levels who work on projects. This will give you a more accurate understanding of the issues than talking to PMs alone, which will lead to better solutions.

Identify internal and external best practices. In most firms, there are project management practices applied on a limited basis that are worth replicating across the organization. Perhaps it's the project planning process in the electrical department or the cost estimating approach used in one branch office or how one of your better PMs manages client communications. Sometimes there are a few clients that demand a higher level of project management competency, and those practices may deserve consideration firm wide.

Looking internally for best practices has some real advantages. You can see the benefits firsthand and the individuals who employ those techniques can help teach them to their coworkers—thus internal best practices are typically easier to implement than those brought in from outside. Recognizing internal best practices encourages more PMs to step up and set an example.

It's also wise to look outside your firm for best practices. Consultants and trainers, who work with multiple firms and see a variety of approaches to project management, can be good sources. You should also talk with PMs you've hired from other firms, asking them what their former employers did that might be worth adopting. The Ultimate Project Management Manual published by PSMJ is another good resource. Don't be afraid to look outside our industry either. There are many good project management practices from other industries that warrant consideration.

Plan to stage the rollout of changes. As noted earlier, you can't expect to improve everything at once. That's why you start with determining your priorities, which should guide your implementation process. You might consider a two-tiered approach, identifying which changes are mandatory from the start and which will be initially recommended but optional. This enables PMs to see where the firm is headed in terms of reforming its project management practices, but keeps the pace of change manageable. Some PMs will immediately embrace the recommended changes, which will facilitate the ultimate rollout at a later date. You might also choose to pilot certain changes on a limited basis, such as in select offices or business lines.

Define performance expectations. While all firms track some parameters of project performance, I'm often surprised how little these metrics seem to matter. I've encountered many PMs who repeatedly fail to meet budgets and schedules, who have unhappy clients and disgruntled project teams—and yet continue to manage projects with impunity! Many firms have simply never really defined what they expect of PMs. This is a vital step.

Typical PM metrics include budget and schedule performance, project profitability and cash flow, client satisfaction, and repeat business. You should also track project team satisfaction, because an unhappy or dysfunctional team will be hard pressed to produce successful projects. Implementing regular project reviews is a great step toward improving PM performance. I also advocate establishing a deliberate process for preparing people for the PM role; too many simply end up in that role by default.

Update your project management infrastructure as needed. With changed project management practices, you'll likely need to modify the systems and tools that support those practices. This may be as simple as creating a new form to something as complex as changing your accounting system. Here's an important point: If you wish to discontinue certain practices, eliminate any forms, reports, or procedures that support them. This is the equivalent of "burning the boats." If you give people the option of not changing how they do things, guess what they'll do!

Now you can start training. Having identified what changes you're making and having taken the steps necessary to facilitate those changes, you're ready to provide PM training. The training, of course, should be customized to your firm's needs. Beware of training programs that focus too much on the technical aspects of project management (e.g., budgeting, scheduling, scoping, estimating, etc.). While these are certainly important, it's likely that your most entrenched project problems are related to the softer skills such as communications, client relations, and coordination with the project team.

Remember that effective training is a process, not an event. Expect to make a long-term investment in coaching, feedback, and reinforcement if you really want to see performance improve. But it's worth it. If you were only going to excel at one corporate initiative, improving project management is probably the one with the biggest payback.
 

Best Way to Improve Project Performance?

Dave Burstein of PSMJ is one of the smartest guys I've met in this business. So when Dave speaks, I listen. Several years ago I hired him to conduct a client survey as part of a comprehensive project management initiative I was leading for my former employer. When we met to discuss strategies for improving project performance, Dave offered several suggestions. Then he said, "If I was only going to do one thing, it would be instituting monthly project reviews."

We took his advice and implemented a process of third-party reviews for all projects over $50,000 in fees. The payback was immediate. During an initial training session to teach our senior managers how to conduct the reviews, our role playing exercise identified a looming problem with a major client. The project manager, one of our best, had simply overlooked the danger signs. Catching the problem and addressing it early saved us an estimated $600,000 in project losses.

I've been advising clients to do project reviews ever since. Well, trying to. It sounds so simple in concept that I've had trouble convincing clients of the substantial benefits. But having administered the review program for a national firm and participated in several reviews myself, I understand Dave's advocacy of them. So why are they so effective?

• They provide an independent, expert perspective on how the project is progressing. Even the best PMs can miss developing problems, overlook solutions worth considering, or fail to be fully responsive to the client's needs and expectations. A review can avert a disaster, or help make a good project a great one.

• They force PMs to properly track the status of their projects, something that many are negligent in doing. Preparing for the regular reviews means the PM must routinely evaluate how the project is doing relative to meeting goals, budget, schedule, cash flow, etc. Thus reviews provide an early warning system to identify problems before they become more serious—and difficult to solve.

• Reviews are far superior to classroom training in helping PMs develop their skills. They are a great way to reinforce training, serving essentially as a hands-on coaching session. Done properly, reviews are welcomed by PMs. The tone of the reviews is crucial to their success. They are intended to be a collaboration between the PM and reviewer, not a fault-finding inquisition. The reviewer should serve more as coach than critic.

Review Content

I recommend keeping routine reviews to no more than 30 minutes unless problems are uncovered that take more time. In advance of the review, the PM compiles information on the following:

• Budget and schedule status
• Billing and collection status
• Status of deliverables
• Significant project changes
• Potential risks or problems
• Proposed corrective actions for variances
• Assessment of the client relationship
• Any other important issues

How Reviews Are Conducted

Typically, a senior manager is assigned to conduct the review. This is often the principal-in-charge or client manager. Ideally, the reviewer should not be heavily involved in the project so he or she can bring a relatively objective, third-party perspective to the review. For large complex projects, a review panel may be preferable. The reviewer and PM determine the optimum review interval, but monthly is suggested for most larger projects.

Dave recommended having the PM make a presentation to the reviewer, using a standard PowerPoint template to compile the typical review information. This provides regular practice for polishing presentation skills, plus it lends the review a bit more gravity. While the review should be supportive and comfortable for the PM, it's nevertheless serious business. Both the interests of the client and the firm are at stake.

How well your projects are executed determines how well your firm performs overall. Among the many elaborate tactics that your firm employs to try to improve performance, have you tried one of the simplest and most effective?