My services are often requested from mid-sized professional services firms desiring to add management control and internal synergy, as their companies grow in multiple directions. Most of those firms started with several good content centric consultants and succeeded in growing by serving their clients well. With that success they wanted to add new growth streams and had internally found numerous advocates for new approaches. They embarked on a series of growth initiatives of various success levels. They observed larger firms and have tried several, if not all, of the following:
- Add geography (more cities and even more countries)
- Add new practice sectors (transportation, energy, water, environment, buildings, public relations, information technology, etc.)
- Add new service offerings in both the upstream and downstream approaches (construction, CM at Risk, PPP, procurement, manufacturing, management consulting, asset planning, and operations and maintenance)
- Add new client sets (different industrial sectors such as oil/gas, pharmaceuticals, tires, forestry, defense, etc.) or the Federal Government or state and local governments)
When I work with them and discuss their frustrations, they complain about increasingly having a complex set of “tribes” with different pricing concepts, skill types, risks, compensation expectations, client sales points, and wildly different superiority complexes. The CFOs are usually in a daze as to how to account properly to give everyone credit, but have one auditable set of books. Organizational design is especially a problem and no one is happy with the current design. Designs are complex requiring a three- or four-dimensional matrix. Sometimes they even have a few independent companies that each require different levels of support. No matter how they organize they may solve one issue, but soon create new flaws. These new flaws irritatingly grow over time, suggesting another re-organization. At the same time corporate structure and brand are still trying to function like one company.
The CEO knows his business is getting away from his control. He or she knows that the parts have widely variable risk, compensation requirements, client expectations and required management styles. Many internal cliques and strife exist to the extent that the enemy seems like it is more inside the tent, than outside! People compete over client ownership and revenue/profit credit. Some companies implement double or triple book overlapping accounting with challenging eliminations that, frankly, blind their overall business performance. Top-level succession planning is nearly impossible with no one person knowing enough about the whole scope of the business to manage it in the future because everyone belongs to one tribe. C-Suite staff worry that the company is no longer one company, but ten or fifteen siloed divisions. At the same time, they begin several new initiatives to grow into yet more new departments with more new people. New businesses pop up like viruses.
These top-level executives ask, “How do we best manage this?” My usual answer is, “Reduce the number of parts and focus on doing three to four things well. Stop trying to grow in every direction and dimension. Decide your corporation’s purpose and how you would describe what you should have accomplished ten years from now. More than anything, stop future diversity spread on multiple fronts! Let’s simplify your business and get good at something.”
This advice is unpopular because I recommend culling past initiatives and combining existing tribes. I am discouraging many advocates of newer businesses that have a stake in running them. New business leadership is often a form of promotion. So after my advice, the top executives realize that it is harder to break out of old ways than to stay the present course of expansion in multiple directions. They then usually look to me and say, “If we don’t do that, how would you then organize the business?”
In my own career my company approached all of the four different growth approaches stated above with the exception of one. We decided to focus on only one market sector, water, and discipline ourselves against the temptation of adding more. In retrospect, this made our management job at least four times simpler than any of our multi-sector competitors. In our instance, water, or ‘wet infrastructure,’ was so large, stable, in demand and global, we felt no necessity to add sector diversity. Water had a unique characteristic that almost made it recession proof. We found we could keep defining water into wider applications like harbors, canals, groundwater, water storage, water energy, fracking fluid, industrial use and boat transportation. I felt the company could easily grow to $3 to $5 billion in volume while still focusing on the single sector of water. By homing in on this single technology sector, everyone from the CEO to all employees knew the worldwide sector’s market habits, thus reducing tribal separation in our knowledge management. The logic behind this strategy was if a single sector allowed diversity enough to meet our growth goals, why add the complexity of more sectors, tribes and clients? That focus was a struggle every day as everyone continually saw a ‘greener sector opportunity’ than water! The natural trait of companies is opposite—they go in many directions without a specific identified focus.
Regardless of our single sector discipline success, admittedly, we did fall into the temptation of all of the other growth approaches (geography, client sets and service diversity.) Each has a story and set of lessons learned that I could write a chapter on, especially on the mistakes that came from ‘not knowing what we did not know, but being confident we did.’ We never pre-understood the complexity of adding growth initiatives to our existing business while holding it together as one company.
In this article, I want to focus on the aspect of “service diversity in the upstream direction.” When we think about service diversity, there are potential service offerings both upstream and downstream from the core content skill of the original practice. It may be helpful to better define what I mean by “moving upstream and downstream’” in service offerings from the original practice, in my case, engineering. There is a value curve of services across any business and certainly one in the infrastructure business.
Downstream services in the engineering industry are construction management, procurement, construction and outsourced operations and maintenance. Generally speaking, each of these services are valued more as a commodity than engineering, and suggest a lower labor multiple and resultant profit margin. The best strategy to reduce margin erosion while moving downstream is bundling services with the hope of maintaining the margin of the higher service value.
An engineering company’s upstream services can include planning, sustainability, program management, asset management, financial advisory services, IT and cyber security, and strategic management consulting. For the client, these services are generally regarded as more impactful to their overall enterprise, resulting in a willingness to pay higher labor multiples and resultant margins. When you move upstream in services it often allows application across sectors. Bundling these types of upstream services with engineering can combine the benefits of process expertise with content expertise that, in turn, add to margin growth and provide much larger and longer jobs.
Very few engineering companies are truly successful in establishing themselves as quality providers of these upstream services. Attempting to accomplish this goal becomes an internally destructive war caused by completely misunderstanding the qualities it takes to attract different talent types, manage clients differently, distribute internal power with flexibility, value intellectual property, create different management styles, and understand the difference between process and content businesses. This last issue is most critical for engineering firms whose rank and file (and most tenured people) are convinced that content is always the superior skill.
An example of this later point is Program Management. Program management is best defined as a service to manage a large population of complex projects, phases or consultants that require coordination, scheduling and coalescing into the client’s macro-solution. These jobs are highly attractive due to their length and labor demand consistency over years. But many companies cannot obtain these lucrative projects because they are their own worst enemies. A major disagreement emerges over the question: Is the essential skill of Program Management services content knowledge (like transportation or water) or is it processes knowledge (scheduling, coordination, communication, politics and sequencing)? For most engineering firms this dispute creates internal struggles over the client control and the revenue credit. These conflicts are visible to the client and if the content clique wins, there is no learning curve in process lessons for the next job.
In my opinion, Program Management is primarily a process control skill requiring supporting subordinate content knowledge. It is a blend that should be controlled by management consultant types with process-based repeatable intellectual products or templates that draw on content (engineers) as required to understand the nuances of coordination and imposed standardization.
A set of positive and negative lessons I have learned in trying to move to upstream services are identified below. I readily admit I have failed as many times as I have succeeded, but I have learned each time.
- It is not recommended upstream services staffing be provided by engineers or core practice personnel. Certainly, some engineers can adapt, but for the most part hire outside staff that really believe that process approaches are superior to content.
- When starting an upstream service offering, don’t assume that the existing client base should be your starting target. Existing clients are ‘owned in relationship’ by the content engineers who do not believe in process superiority. In addition, engineers don’t possess the correct ‘point of sale’ elevation to access the right purchasing level of the client. Upstream services are usually bought by the client’s ‘C-suites,’ versus the engineering departments. Your existing client contacts at the engineering department level will usually block your access to the upper management tier. Separate sales staffs are necessary to sell to the proper level. I strongly suggest you throw out the ‘Z’ theory of marketing (i.e. new services are most easily sold to your trusted existing clients) and market upstream services to new clients who don’t brand you as engineers or will prevent your ascension to higher level relationships.
- Pricing can never be optimized if the engineers handle or negotiate the sale of upstream services. They will not sell a high multiplier even if the service has a higher value to the client. It is almost a point of ego. Engineers will only replicate the price point of their own engineering pricing.
- Upstream services require establishing a strong intellectual property development center to capture and reuse proven process and algorithms. There needs to be a corporate level knowledge library maintained so each job is a process replication of the last one. Whether this is program management or strategic planning, the processes of approach can be codified and replicated. You need to discipline your upstream service from re-inventing process for each client. This concept is totally opposite from a content centric business like engineering, and will be opposed. Engineers pride themselves on re-inventing and improving solutions, not replication and implementing standard “best practices.”
- Brand your upstream services differently than your core engineering services. A ‘light brand’ might be a separately named division while a more heavily branded approach would be distinguished by creating a separate company. The longer I see the repeated failure in firms trying to move upstream, I favor heavier branding differences. Company name separation also more easily allows different pricing structures. Non-engineering personnel compensation systems are often required to attract consultants and can be better enhanced by brand separation.
- Don’t retread engineers into management consulting. It might be more possible in closely related upstream service to engineering, like program management, but even then, it is unusual to find an engineer who respects repeat process over content. In asset management or strategic management consulting hire MBAs, accountants or planners.
- Lead upstream services with a management team from the management consulting industry. The top management sets the tone of a process centric business, which must be different than a content business.
- Separate the upstream service as much as possible from the engineering services units to prevent the more mature business from killing the upstart new business due to misconceived fear of competition. Refrain from co-locating your upstream business with your core content centric business. Usually the core business dislikes and wants to control the younger and less developed upstart. The very common business term ‘upstream’ or ‘higher value’ services can be offensive to the core business. The core business often refuses to use the new internal service in favor of competitors or more developed outside companies. One manager once told me, “Bob, when you really develop a very capable asset management group, we will start using it.” I used to fight that, but now I would favor replying, “Fine, they will market their own clients that won’t be yours, now or in the future.” You need to protect the new business for several years until they can grow, stand on their own and develop the capability to fight back. Co-existing divisions can actually be meaner than the competition, and you are liable to lose great talent due to discouragement if you don’t isolate them.
- Start pricing policies for upstream service on day one by using lump sum approaches to the maximum discipline as much as possible. Shy away from core content’s hourly rates pricing. Upstream services should not be priced by a factor of the value they create.
When reading these recommendations, you start to realize how difficult they are to execute and why so few companies are successful in accomplishing them. They are business concepts that are foreign from the great ‘we are one company pitch’ you have been giving for years. It requires visionary, disciplined and philosophical top leadership to direct and nurture the new business’ progress. Much of this convicted leadership must come from the CEO, who needs to be tenaciously protective of the newer businesses from the core business. Upstream services will never live and develop without a ‘Godfather.’ Yes, it is really tough to be successful moving upstream, but remember, hard things to do are hard to replicate by others.
© 2015 Robert Uhler and THE UHLER GROUP. All rights reserved.