A Consulting Engineering Industry Paradox: The Value For Society Is Going Up While The Profit Is Going Down
“The business creates more value than it gets in return”.
This was a statement given at a recent roundtable discussion attended by large Engineering Consulting firms in London. Around the table there was full consensus about this statement, which was supported by the fantastic view of London from the top of The Gherkin building.
Let me explain: Consulting Engineering firms deliver true value again and again. Think about the London underground which has existed for over 150 years and facilitates around 24 million journeys on a daily basis, the Eden Project in Cornwall focusing on the interdependence of plants and people and the Thames Tideway Tunnel which will bring clean water back in to the centre of London to an extent where the natural inhabitants can live there again. Consulting Engineering and the results the industry creates affects our way and standard of living every day. So why is it that this industry, which clearly delivers value to our life, is struggling to return a decent profit margin on their projects?
Before discussing the aspects of margin under pressure let me first state a fact: In the Professional Services industry there is an operating margin of approximately 20% according to the CSIMarket.com Profitability Ratios. However the ACE (Association for Consultancy and Engineering) Benchmarking Report shows that in the Consulting Engineering industry this number is closer to 7%.
So what are primary margin influencers in the industry just now?
- “Number one issue is to find and attract talent”. A statement which is also backed by the Trends and Challenges in A&E survey published by Deltek. This condition puts salary cost under pressure and the cost will eventually go up.
- “Order outlook looks better but the sales prices we get are on the same level”. The conditions behind this statement is that the customers have got used to a sudden price level during the financial crisis years and in addition to this even the order outlook looks better there is still a fierce competition.
You don’t need a business degree to understand the impact of raising cost and flat sales price. Profit is under pressure or even declining in the industry. This means that successful Consulting Engineering firms – besides attracting the best talent and delivering great value to society – must have strong cost control and transparency into their margin by all kind of dimensions such as customers, geographies and service lines.
Recently one of the large Consulting Engineering firms in northern Europe described the result of their investment in cost control: “We win more deals because we exactly know our fully loaded cost per resource. When we are bidding we can set the right team from a cost perspective and thereby set the right sales price and still earn money. We have actually had our best year ever in 2013”. This is furthermore indicating that cost control not only keeps you profitable but also can win you more business.
I will round this blog off by looking at this situation from two persectives: The Consultant Engineer's and the average Citizen's.
Wearing the Consultant Engineer's hat:
So when you deliver more value than you get paid for, why not try to suggest your clients to go for value based pricing. There are some obvious arguments as to why this might not work such as cash flow impact, how you can value the work and if you do not deliver a large project should you then pay based on negative value? It would be interesting though to know whether this could actually work as there is a clear mutual incentive in this concept to understand what the value is for the client and get a higher price at the end.
Wearing the the average Citizen's hat:
Will a better margin mean more innovation because the companies have more money to fund research? Funny enough this might not be the case as there was an equal consensus around the table that low margins actually infuse innovation. So as a responsible tax paying citizen I want Consulting Engineering firms just to raise the price a little to ensure we still have the pressure on innovation but also to ensure that these great companies survive.