How Do Engineering Firms Make Money

Engineering consulting firms often believe that adding value by bundling their professional services with intellectual property (IP) will provide a competitive advantage in a highly labor-intensive and commoditized industry. In fact, this practice is seen as an unavoidable cost of doing business. If history is any guide, they will most likely struggle to turn a profit from their new combined offerings, and even the best will stumble. But if they get the strategy and the management side right, they can turn their IP into a license to print money.

Engineering consulting firms price their professional services based on hours expended, i.e., selling staff hours (tracked by time sheets) and expenses, with an appropriate markup. These hours can generally only be sold at competitive industry rates, and it's difficult to differentiate or sell based on value. Revenue and profit are constrained by the number of professional staff. The sameness of services fuels commoditization of their business, since the only thing left to compete for is price – and that further results in declining hourly rates. As a reaction to tight margins, many firms are offshoring their design centers in low-cost nations as a way to cut costs. They also face intense competition from firms in those same low-cost nations, which weighs on their profit margins and leads to further commoditization and value destruction.

To break out of this vicious cycle, many engineering firms have turned to IP. Their IPs are designed to create competitive advantage — built internally (usually through an internal cost center funded by a heavy "corporate tax" on all profit-and-loss businesses within the firm), used internally, and brandished in proposals and interviews to ward off and defeat competitors. However, this IP investment model quickly proves to be increasingly difficult and costly to support and sustain and is eventually abandoned, sapping valuable resources and energy. Funding for these IP initiatives may also eventually be cut simply because the core business is not performing as expected and all company resources are needed to recover. These companies found themselves in terra incognita, caught between the allure of a perceived sustainable advantage and the reality of high-maintenance and support costs and fast technology duplication. (It's tough not to copy competitive moves in an overcrowded marketplace).

However, armed with the right strategy (right organizational structure and fit), the payoffs are impressive, and you may even discover that your new IP business can potentially generate more profit than your consulting business. The objective is to disconnect revenue potential from labor hours. The two-pronged strategy below can be readily implemented by many engineering consulting firms to help them expand into an IP-selling business and increase chances of success.

1. Monetize Your IP and Sell Services and IP as Two Separate Businesses

Make your IP non-proprietary (non-exclusive to the core business and available to all potential buyers, including your competitors). Set up an autonomous organization with a unique identity, culture, norms, commercial model, leadership team, talent pool, people management, project and risk management practices, and accompanying metrics to develop and commercialize IP and to become an active seller of IP. This requires an entirely different mindset: instead of managing your IP to exclude competitors, you manage it to profit from their and others' use of it. And you are dealing with a very different set of competitors. Independence is critical. At the inception phase, let the IP business borrow capabilities from the core business, including key resources (e.g., legal, HR, IT, finance, etc.); existing client relationships; and the physical distribution network of offices needed to enter the international market. Benefits (sales compensation, short- and long-term incentives, etc.) must be based on the new business's performance, not tied to the core business's performance. The core business must also pay to play like any other client — no exception.

2. Set the Tone at the Top

Most companies, if left to their central tendencies, inhibit non-core growth; they are set up to protect the status quo. But IP-selling growth is not about the status quo. When you decide to pursue a new IP-oriented business, staff members are likely to stifle its growth, kill it, or at best, cooperate reluctantly if it doesn't support the short-term targeted numbers (net revenue growth, workforce utilization via direct time or the proportion of chargeable labor to total labor, overhead costs, total backlog, profit margin erosion on projects, etc.) anchored in what they are currently doing or selling rather than in what they could be doing differently or fit into their model of what it takes to succeed and ascend within your firm (billable time, large project pursuit, backlog, etc.). As a result, they will instinctively reject initiatives that don't immediately contribute to their goals. It is more valuable to your project managers to give away IP rather than build a business around it. It will seem illogical to them to squander a long, hard-earned competitive advantage by selling their IP to direct competitors. What is to prevent these competitors from using that IP to beat you on projects? A strong and dominant labor-selling core business culture is generally the antithesis of an IP-selling business culture, making it difficult for the IP business to thrive.

Only the CEO, the boss of all bosses, can drive the transformation, counterbalance the natural killing instinct and gravitational pull of the core business, and effectively design and separate the IP-oriented business model. The CEO helps the IP business succeed by communicating its significance; modeling the desired mindset and behavior, totally insulating it from the mother culture; and getting personally involved. If the leadership truly supports the new initiative, the rest of the organization will, too. It is important that the leader of the new business report directly to the CEO to make sure he or she gets the proper care and feeding, and have a chance to figure out the best long-term organizational solution.

For engineering consulting firms designed to sell labor hours, IP-selling businesses are new, they are different, and they should not be managed in the same way or under the same organizational and resource umbrella as the core business. A culture of great engineering projects can quickly become a handicap in launching the new business. While no single model guarantees success, the above key steps can help you improve the odds and build a sustainable, profitable new growth business for your company. There is always plenty of headroom to extract from your core business. The best place to look for it is in your project engineers and project managers doing real jobs for real customers.

How Do Engineering Firms Make Money

Source: https://www.linkedin.com/pulse/how-can-engineering-firms-add-value-increase-paul-2#:~:text=Engineering%20consulting%20firms%20price%20their,expenses%2C%20with%20an%20appropriate%20markup.&text=As%20a%20reaction%20to%20tight,a%20way%20to%20cut%20costs.

Posted by: hoveantur1978.blogspot.com