Friday, March 16, 2018

Why Don't A/E Firms Talk About Value Creation?

As you would expect of a consultant, I read a lot of business literature. One of the prevailing themes in these publications is value creation. For example, when I enter that term in the search bar of Harvard Business Review online, I get over 7,600 results. But a Google search combining "value creation" and "A/E industry" yields just 481 hits. I doubt I've heard the term used 20 times in my 45-year career in this industry.

It's an odd oversight. Value creation is just as relevant to architecture, engineering, and environmental firms as to any other business. When speaking to groups within the industry, I seem to get universal agreement with the statement "the more value you deliver to clients, the more value is returned to your firm in the form of revenue growth, higher profits, repeat work, etc." So why aren't we talking about how to increase the value we deliver?

There are many reasons why value creation should be a strategic priority for most A/E firms. Let me highlight two:

(1) Commoditization—We usually focus on market maturity and lack of differentiation as the root causes of commoditization, but the net result is an erosion of value. Could it be that the best differentiation strategy is to deliver greater value to clients? That's what I would advise, and there are several examples that demonstrate the efficacy of this approach (see below).

(2) The talent shortage—This issue once again tops the list of concerns expressed by A/E firm leaders. How is it related to value creation? Well, for one thing, we are increasingly competing with other industries for engineers and other technical professionals. On average, they pay more. Plus, shortages typically drive up salaries. Expect to be faced with the need to raise billing rates to address higher labor costs. That's not easy if you don't offer more value for the higher price.

So, if we're talking about creating added value, what does that entail? Let's start by clarifying what we mean by value. My working definition is: Value is the perceived benefit received less the associated cost. A key word in that definition is perceived. Value is defined by the recipient. A common mistake is to assume that our perceptions of value are shared by clients. That's often not true. We have to carefully ascertain what clients value by asking the right questions.

Since value is ultimately a perception, it is personal and subjective (even what we think of as an objective measure of value—money—is only realized when it is spent on something the spender perceives as a fair exchange of value). Value is also delivered in both tangible and intangible form. This is what trips up many technical professionals who are inclined to think of value primarily in its tangible manifestations.

Author James Trevelyan astutely addresses this reality in his book The Making of an Expert Engineer: "Understanding notions of value creation takes us into the realm of subjective experiences and all the different ways that people anticipate these experiences. Then we can begin to appreciate the various ways that value can be created by engineers for their clients and humanity. Yes, it's difficult at first. Many engineers yearn for fixed objective truths, and shy away from fuzzy subjective emotions. However, our research shows that engineers who understand value creation enjoy more respect and far more rewarding careers."

To fully appreciate Trevelyan’s point, we need to recognize how much the subjective enters into our work as technical professionals. For example, consider two engineering design options: Option #1 delivers better system performance (a tangible benefit) but will be more of a hassle to operate and maintain (an intangible cost). Option #2 gains greater public acceptance (an intangible benefit) but requires several thousand dollars more to operate (a tangible cost). A proper cost/benefit analysis should incorporate both the tangible and the intangible. That better positions you to deliver added value.

Becoming better value creators requires that we enter the client’s world, doing our best to see things from the client’s perspective. Sounds like common sense, but it’s hardly common practice. One of my client’s projects serves as a recent example: They are the lead consultant for the design and installation of a deep injection well. When problems arose with the driller’s performance, they failed to notify the client because the driller was directly contracted with the client. They assumed it wasn’t their responsibility; the client assumed otherwise.

The driller’s problems have delayed the project by months. The consultant, without talking with the client beforehand, submitted a change order to cover their added costs with the extended schedule. The project manager and project engineer seem perplexed at the client’s unhappiness about all this. After all, they are convinced they’ve done an excellent job on the technical aspects of a complex project. Perhaps they’ve forgotten that the client has tenants ready to move into a new building that cannot be occupied until the well is operational!

Unfortunately, this kind of scenario is all too common in our industry. Maybe the reason we don’t talk much about value creation is because we often have a blind spot where value is ultimately delivered—in the realm of the client’s perceptions and experiences. In fact, I’d suggest we focus too much on the delivery process (what we produce) to the neglect of what clients expect to receive (much more than our work products).

There’s no question that our work creates immense value, both to clients and society at large. But our failure to fully recognize that value (and to see it as clients do) is a substantial factor in the commoditization of our services. A big part of the problem is our tendency to compartmentalize our scope of work. Clients need business solutions (“get this well constructed so I can start earning revenue from my building”); we deliver technical solutions (“yeah, it’s a little late, but it’s technically sound”).

As value creators, we must focus on how value is received, not just produced. This perspective will invite us to see our services in the bigger picture. It may well lead us to see opportunities beyond our normal limits of expertise. Consultant Richard Friedman writes about how Moffatt & Nichol, a 600+-person engineering and infrastructure firm, responded to the commoditization of one of their core services:
  • When wharf engineering services became increasingly price-sensitive, Moffatt & Nichol decided to move up the value chain by adding planning for ports. Soon, they recruited economists to their staff and developed an economics and financial forecasting group. More recently, as clients were asking how to make container terminals more efficient, the firm hired programmers to create specialized operations simulation software.
That’s not just an expansion of services; it’s an expansion of perspective, leading to the creation of added value. The firm saw what their clients needed and determined they would be a firm that would meet those needs. Value creation is rooted in client empathy, in recognizing what clients really need and want—not just identifying what needs fit our services. That narrow perspective limits the value we can create for clients.

In my next post, I’ll discuss the critical role of translating the value we produce into the value the client receives.

Wednesday, March 7, 2018

Does Your Firm Lack Strategic Capacity?

A minority of A/E firms regularly do strategic planning. A much smaller minority actually execute their strategic plans. Why do firms struggle so with follow-through? There are multiple reasons, but in my experience the main problem is firm leaders who are too busy and too distracted to adequately focus on strategic efforts.

That's why I am increasingly urging my clients to take steps to create what I call "strategic capacity." This involves clearing space in overloaded calendars to work on the issues that matter most. In the typical strategic planning meeting, the meaty assignments are given to senior managers whose plates are already full. Where will they find time to work on these critically important matters? Too often, they don't.

One of my recurring themes as a consultant is: Don't try to tackle important tasks with leftover time. This is often done with business development. Or mentoring. Or strategic initiatives. The result is that these important, yet non-urgent activities routinely get the short shrift. What's needed is a reordering of the priorities driving our time usage.

To create more strategic capacity, let me encourage you to have your firm's senior managers go through the following exercise:
  • Have each identify what 5-6 activities they perform that yield the highest value to the company. I'm assuming that implementing strategic initiatives will be included in this list. 
  • Ask them to estimate how much time (on average) they spend each week on these high-impact activities.
  • Have your senior managers identify what 5-6 activities consume the bulk of their time in the average work week (it's almost certainly going to be a different list than their high-impact activities).
  • Then have them determine how to shift more time from the second list of activities to their high-impact activities. This usually involves doing one of the following with their most time-consuming responsibilities: delegate, decrease, delay, delete. Each manager should develop a personal plan for shifting more time to high-value tasks.
  • Set up a "project" number for each strategic initiative and track time charged to the effort. This will enable you to confirm that appropriate management time is being redirected to your firm's most important activities.
Of course, simply delegating responsibilities down the organization can create other capacity problems. That means ultimately you have to delay or eliminate certain lower-priority activities. That's the crux of time management: We all have more things we'd like to be doing than we have time to do them. That problem applies to organizations as well. 

So you have to choose. Creating strategic capacity means that you are choosing to reallocate time from less important to more important activities. Research shows that this is a key attribute of the most successful companies. Will your firm be among them?