what 

happens if we type these here

Responding to a Commodity World

We have long commiserated about the growing commoditization of our business and wondered how best to respond. The focus of this publication (and my consulting practice) has been to help clients avoid the commodity trap by adding value to what they do. That is the best response, in my opinion.

Still, we must face the fact that value-adding strategies are swimming upstream against a powerful trend that encompasses not only our profession, but all business sectors. People today expect to pay less for routine products and services. No surprise that the fastest growing retail businesses are the large discounters. Last year's power computer that cost $1,200 can now be had for $300. Internet shopping bots allow us to quickly determine who sells a particular product at the lowest price. It's never been easier to find a great bargain.

In this environment, even lawyers and accountants are starting to feel the price pinch. So while we continue to seek ways to curb the value erosion, we are wise to define how to deliver more for less to our clients. Let's assume that perhaps 20 percent of our clients provide 80 percent of the profits. What about the other 80 percent of our clients? How can we meet their needs without sacrificing our own? A few suggestions, some of which probably will generate some disagreement:

u Streamline project delivery processes. While some design firms have made significant strides here, most still have much room for improvement. As I noted in the earlier article "The Productivity Paradox," productivity gains in our business have substantially trailed that of other industries over the last 25 years. This despite the influx of several time-saving technologies. There are multiple causes, including weak project management, inadequate coordination between different disciplines and stakeholders, the "excessive perfection syndrome" suffered by many designers, the lack of proactive quality assurance practices, etc. Yet many firms have realized dramatic cost and time savings by leveraging technology, reducing rework, and streamlining their project delivery processes, enabling them to meet client demands for lower cost while maintaining profitability.

u Control overhead growth. According to PSMJ, the median overhead rate reached 162.8 percent in 2004, a 20-year high in our industry. Much of the increase was attributed to rising insurance costs. With increasing pricing pressures, successful firms will find ways to attenuate overhead growth. The first place to look is at labor costs. Are you meeting utilization goals? Do you have too many people in nonbillable positions? Many firms are overstaffed for the available workload. Another key area of concern, as noted, is the growing cost of health and liability insurance. It's recommended that you shop for better rates every three years, but evaluate your coverage annually. The unavoidable trend seems to be shifting more costs to employees or reducing coverage (or both). Alternatives like Section 125 ''cafeteria plans'' can help soften the blow by allowing employees to make contributions with pre-tax dollars. Overall, you should make overhead control a management priority in the coming years, seeking multiple approaches to rein in costs.

u Outsource select services to boost profits. Not a popular choice, but a strategy that might be 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 concluded that they can be more profitable by outsourcing certain specialty services, price-sensitive services such as surveying and laboratory analyses, or administrative functions like accounting. At the very least, you should consider some outsourcing for overflow situations, versus carrying excess capacity for the few times you need it. 

A still more controversial option is outsourcing services such as some design to overseas firms. There is a small but growing number of firms in our business that have resorted to this. Despite the apparent inconveniences, this strategy can pay off substantially. According to one survey of A/E firms, the average savings in per-employee costs was 45%. Moreover, the outsourcing firms reported that the overall experience had been positive. This is a trend we can expect to see grow in the future, with more of our competitors capitalizing on the cost savings and ability to maintain production 24 hours a day.

u Hire more paraprofessional staff. As budgets contract, it becomes increasingly imperative that we fit the right people (hence billing rates) to the assigned tasks. In our business, we are prone to having senior professionals doing work that could be adequately performed by less expensive personnel. So a key to meeting tight budgets is to maintain the appropriate balance of senior and junior professionals on project teams and to delegate tasks to lowest practical level. This practice is difficult for many firms because their staffing is top-heavy.

One strategy to consider is hiring more paraprofessionals, individuals who have related associate or vocational degrees, or simply have relevant experience with no degree. Other professional service firms—such as law and accounting firms—are well ahead of us in this regard even though they haven't faced a much pricing pressure. It just makes good sense in balancing the staffing mix. There are many schools providing associate degrees in engineering, architecture, and science from which we can recruit.

u Employ some hoteling to reduce office space needs. On any given day in many technical consulting and design firms, a large proportion of the offices and cubicles are unoccupied. Firms that perform extensive field services, for example, may have most of their employees out of the office most of the time. Do we really need to provide personal workspace for every employee when they spend much of their time away from the office?

The practice of "hoteling" is a growing trend across all types of business, including many professional service firms. This involves setting up shared work stations that employees use periodically when they are in the office. Advances in technology and the growth of telecommuting have made this a practical alternative, enabling many corporations to save millions in office costs. Does it work in our industry? Given the collaborative nature of our work, there are limitations (see this ZweigWhite article on telecommuting). Still it's a viable option for helping us compete in a commodity marketplace.

u Offer more standardized design products. Why do cash-strapped clients like smaller municipalities need to pay for unique 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 look through house plan books? (Obviously, these plans can be modified to meet specific client needs and site conditions.) This is not a popular concept with architects and engineers, but would seem to be a way to serve cost-conscious clients who don't really need custom designs. There would seem to be similar opportunities in other areas of our business as well. Customizing every design or solution is difficult to do profitably when clients are seeking the lowest cost.

u Focus on strengthening client relationships. Okay, so this is a value-added response. If the cost-cutting measures above are unappealing to you, this is your first line of defense. The problem here is that most technical professionals think they're doing a better job at client relationships than their clients do. One consequence of this is the devaluation of our services. Relationships differentiate. Undifferentiated services become commodities. Think about your most profitable clients. Are they not also generally the ones with whom you have the strongest relationships? 

You can't build a great relationship with every client. Some will always buy on price. But for the others, the investment you make in giving them superior service will help you stall the advance of commoditization. For the rest of your clients, swallow hard and give some thought to the ideas outlined above. Got some better ideas? I'd love to hear from you.

Copyright © 2005, The Business Edge, all rights reserved  

Home    |    Experience    |    Articles    |    Links    |    Contact