Most AEC firms are a complex mix of services, markets, and geographic reach. Amalgamated through time, with creativity, optimism, and a can-do spirit – and driven by an opportunistic (rather than strategic) business model – these organizations have today a very diverse set of clients, projects, and expertise. And most leaders in these firms value highly the diversity they’ve achieved in their business.
Still, there is a cost to this diversity (in the operational challenge and complexity of the organization) that is often overlooked. For example, note that a multi-discipline or multiple studio firm built around five market groups, five service disciplines, and five office locations will have 125 nodes on the segment-service-geographic matrix. Ten markets, services, and offices boosts this complexity to 1000 nodes. A larger (1500 person) client I worked with last week boasts today almost 40 market segments, 50 distinct service offerings, and 40 offices – an astounding 80,000 market-service-location nodes. (Suppose that client penetration and cross selling is an issue in a business like this?). Strategic focus (for instance, working only in healthcare, providing nothing beyond structural engineering, or covering only the northern Texas market) can bring laser clarity to strategy, operations, and people – but of course also comes with a different risk in market concentration. If the healthcare market tanks, or budgets for new structural projects slide, or the Texas economy stumbles along with oil prices – then focused, specialist firms pay a much higher opportunity cost.
There is another facet of business diversity I see as even more problematic for many organizations – namely, the role the firm has in its client’s business; and, specifically, how the client sees the primary value of the provider. At the two end points here are the ‘head’ and ‘hands’ roles. Is the client using your firm primarily for smarts, expertise, ideas, thinking – the head work – or is your primary value as a laborer, an extension of the brute force of the client organization – a pair of hands needed to get something done?
I’m not judging here – a strong case can be made for value in either the headspace ‘consultant’ or the hands work ‘contractor.’ The issue at hand is focus and the question: which is it for you, and can you do both well, on a project, for a client, and in the business overall.
In his rubrics on business choice, strategy guru Michael Porter argued that organizations could purse their cost advantage or their differentiation advantage to success, but when they tried to do both they often failed – complex operations, market confusion, poor strategic decision making. The consultant verses contractor tension is I think similar. Either choice alone is viable, but mixing the two will often lead to a substandard blend of decisions and outcomes (for example, offering high level, high value-added work for a commodity price … or a slimmed down, productized, off-the-shelf answer to a client who really needs a one-off, customized solution – and at a much higher fee).
Now, layer in the Fast Future disruption that we see more clearly ahead: faster, and constantly accelerating change; increasing commoditization and competition of industry; entry of highly disruptive players in the core business of design, construction, and infrastructure; scarcity of core talent and loyalty in the technical workforce; and more and more uncertainty, volatility, and loss of predictability (got it?) – and then ask how the firm and its leaders must change to meet the demands of the new order ahead. More diversity – or more focus?
What I see on the horizon is a strong bifurcation into one of two paths: on the one hand a larger group (perhaps 70-80% of the market) of primarily contract-oriented ‘body shops’ – aggregations of talented folks, focused primarily on doing stuff – executing projects, providing basic technical services, and earning a lower, commoditized, competitive wage … and, on the other hand, a smaller (20-30% of the market) group of highly specialized, focused, thinking-oriented ‘head shop’ consultants who deliver most of the creativity, ideas, and solutions executed by others – and who, for their distinctive value, earn much higher fees. [The first of these types will be a 75% utilization, 2.7 multiplier business, the second a 45% utilization, 5.0 multiplier model.] Many professionals will instinctively lean toward the latter, higher value choice, but both lanes will be profitable for successful firms. The head-oriented organizations will maintain a seat at the table, in designing the world and society of our future, but the hands-focused firms likely will not.
As I have argued here before, business strategy is about choice (and about hard choice) – what not to do tomorrow, even though we’re still good at it. So, what is it that your firm should stop doing now, a choice that would put your organization on a stronger path to sustainable, Fast Future success?
Work with your heads, work with your hands, or no work at all?
John
