“Cut out dead weight and toxic people, not just low level workers, marketing expenses, healthcare, and free Cokes in the lunchroom. Those kinds of cuts won’t do much for long.”
I have worked in the AEC industry for 39 years. And as a professor teaching entrepreneurship for 15 years, I have seen the financials of as many as a thousand privately-held companies. And you know something that I have learned? No matter what business you’re in, it’s hard to make a profit.
Yet, even if monetary rewards were NOT your goal – and that IS the case for many architects and engineers I have known over the years – making a profit is essential to your survival.
It’s conventional wisdom that a “lack of capital” kills more businesses than anything else. I always thought that was an absurd statement. If you had just enough money to lose forever you could stay in business indefinitely. A shortage of capital isn’t the problem. It’s a shortage of profits. When the firm is profitable, it generates its own capital.
It’s interesting to me to see what my students do with their small business consulting projects when one of their charges is to increase profitability. And they aren’t much different from the AEC firm owners we have worked with over the years. They think the only way to increase profitability is to cut costs. I had one student tell me this past semester that cutting costs was a requirement of the project. When I asked him where I said that in my syllabus, he pointed to the requirement of recommendations to increase profitability. The implicit assumption of nearly everyone is the way to do that is by cutting costs. But that’s rarely the best way to be profitable on a sustainable basis.
What, then, does it take for an AEC firm to be profitable? Let’s take a look at some fundamentals here:
- Have demand that exceeds supply. The best way to ensure profitability is to make sure demand exceeds supply. Cost cutters think the way to achieve that is to curtail supply. But that doesn’t work for long. A better, more positive approach is to increase demand. That takes an investment in marketing. And that flies in the face of cost cutting – especially overhead-related cost cutting where everyone tends to focus their energies. I always call marketing an “off balance sheet investment” in the firm. Grow revenue versus reducing costs (and capabilities).
- Raise prices. Do you know how many AEC firm owners we talk to who tell us that demand exceeds supply, yet who won’t raise prices in spite of that? It’s crazy. When demand is greater than you can meet, you have to raise prices to increase your margins and reduce demand. Your alternative is non-performance. Never a good one!
- Differentiate. If you want to be able to raise prices, you have to be providing something people can’t get anywhere else. That’s the problem a lot of businesses have today. Think about it. You want to buy a new leaf blower. If two dozen online suppliers can all supply you with the same Black and Decker leaf blower in a day or two, which one will you buy it from? Odds are, whichever one has the lowest price. AEC firms are much the same way. Their services, pricing, and capabilities are perceived (and this is a critical word, “perceived”) by their clients as being more or less the same. If that’s the case, why pay a premium? If you want a premium price, you cannot say and do and act the same as your competitors. You have to be different.
- Specialize. The best way that I know of to differentiate the services of one AEC firm versus another is to specialize. Be really good at doing something specific or at serving a particular type of client – so good that it makes you the obvious choice. Our own firm, Zweig Group, is a good example of that. We are experts in one industry. It makes it easy for us to win a strategic planning consulting job, or merger and acquisition job, because it’s all we do and clients can’t find anyone with more experience than we have at doing these things. Price is less of a consideration when you specialize because clients know you aren’t learning how to do something at their expense. You’ll be more efficient, anticipate problems, and do a better job in the end than a non-specialist would.
- Inspire. Getting everyone to care more and work harder always makes it easier to be profitable. You get more productive capacity out of less people. And work is done right the first time. The best way to accomplish that is through leaders who can inspire people. You have to “sell” your special Kool Aid. You need to stand for something. In short – you need to have a higher purpose than just making a profit, and you need to effectively communicate that to everyone in the organization to inspire them.
Of course, if all else fails you can always fall back on the fundamental idea that making a profit requires revenues greater than costs. This seems so obvious yet it is often forgotten. I never understood how a company doing $20 million a year in revenue couldn’t be profitable when all that was required is revenues greater than costs. This does mean cost cutting. But my version of cost cutting and that of most firm owners isn’t the same. Cut from the top. Cut owner pay and benefits. Cut out dead weight and toxic people, not just low level workers, marketing expenses, healthcare, and free Cokes in the lunchroom. Those kinds of cuts won’t do much for long.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at firstname.lastname@example.org.