Everywhere I go, it seems, I’m privy to what is becoming a never-ending debate: whether A/E/C and environmental consulting services are becoming commoditized. In this issue of the The Friedman File, I want to explore this topic in a different way.
First off, when we say the industry is becoming commoditized, what do we really mean by this? Is it a perception that clients see firms and services as identical except for the price? Is this true, and if so, is standardization always a negative thing? More important, is this ongoing debate on whether we are in a race to the bottom helping — or hurting — the industry?
Dan Rowe, president of 95-person Treanor Architects (Lawrence, KS) doesn’t think it’s helping. “I think our industry’s preoccupation with commoditization has turned into a crutch for some firms,” Rowe says. “It’s an excuse for losing and a reason why they have not found a way to differentiate their firm.”
Every customer, no matter what they are buying, wants to get good value, and fees are an inevitable part of that discussion, says Rowe. You need to price your services competitively, based on the value that you provide.
“Commoditization is a red herring in our industry because it implies that the client gets less value by certain aspects of the marketplace being more standardized or cost-driven,” says Alissa Rupp, President of 50-person design firm The Portico Group (Seattle, WA). “I’m not certain that’s the case.”
Making commoditization work for you
There are highly successful firms that decide to play in so-called commoditized market sectors, and there are successful firms that leverage commodity pricing as a way to provide value to their clients.
For example, when designing a zoo, The Portico Group must meet clear standards for animal holding facilities. Sometimes, those elements can be achieved by a pre-manufactured building. “We might get less fee, but we spec that building instead of designing it, using our expertise to determine the specifications,” says Rupp. That frees up dollars for the client to focus on the segments of the project where a customized design will have greater value, she says.
There’s no doubt that commoditization is real, says Eric Nichol, president of 600+-person engineering and infrastructure firm Moffatt & Nichol (Long Beach, CA).
“Price matters. As more people can do the work, clients become more cost-conscious,” says Nichol. “Cash flow and capital budgets aren’t what they used to be, so I understand the client focus on price.”
However, that’s not necessarily a bad thing. Competing for price-sensitive work can help firms improve cost effectiveness and efficiency in all of their work, benefitting the firm as a whole, he says. It can also help a firm dig deep to discover which other professional services their clients are willing to pay a premium for. It’s a strategy that Moffatt & Nichol has employed in its work with ports and marinas, becoming one of the world’s largest specialized maritime planning and engineering firms and cementing their role as a trusted advisor to modern ports.
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.
Of course, providing multiple services can create conflicts, so it’s important to be strategic about your goals and about which work you pursue.
“It’s not typical for a heavy infrastructure firm to have economists or programmers, but the more services we offer, the more trust we build,” says Nichol. “If we do just structural engineering, we won’t be unique. Now, we’re often dealing with decision-makers beyond those who would hire us for straight engineering. We are no longer a ‘me-too’ firm.”
Ask a better question
As with many things in business, the experience you’re having — and the results you’re achieving- can depend on which questions you’re asking.
“Rather than asking how to avoid commoditization, we should be asking, ‘How true are we to our brand?'” says Rowe.
Do clients understand your firm’s brand? How is that being communicated to them? Where is your firm providing added value and expertise worth paying for?
Rupp suggests taking a hard look at why clients are choosing a lower fee consultant. Can the quality and service required be provided without a customized design? Is it because there is insufficient money to warrant spending on customized designs? Is it because there’s so much competition that the market is flooded and competitors will potentially undercut your price?
Nichol suggests listening to clients. What do they need? How can you provide a service that will solve their next problem? “If you listen to your clients, they are always telling you what they need,” he says. “You can’t be afraid to broaden the services you provide to them.”
If you’re gnashing your teeth about being in a market that’s cost-driven, it’s essential to analyze why, not spend your time bemoaning why someone else is charging a lower price. It’s time to look at what needs to change.
What’s been your experience with commoditized markets? I’d love to hear your story. Contact me at rich@friedmanpartners.com or (508) 276-1101.
