Fee for Service is Dead!

Quality, Consequences and the Construction Industrial Complex (part 135).

Back in the day, fee for service was the way to make money. It went something like this:

• Go to college or university (with little or zero debt) and get a technical qualification i.e. develop advantage via knowledge power.
• Become licensed or certified i.e. have acknowledged technical power and become part of a monopoly club.
• Join the most august firm you can and work your way up.
• Join ranks of senior management / team leadership or even partnership and make professional i.e. high level salary, say greater than $150k USD.
• Save, grow old and distinguished then retire comfortably.

If for example, if you were a project manager, engineer or architect this was all based on a fee for service business model where your technical and monopoly power were acknowledged by the market and fees were at a level that could support a firms salary, training, marketing and business development costs plus make a > 5%-10% net profit year on year.

I have lived this well trodden business model myself. However, I have a sneaking feeling it is coming to an end.

When I started work in 1980, yes I am old or as I like to think, ‘distinguished”, the firm I joined was hierarchical, had a management team who worked under 40 hours per week and lived well. The firm had a distinguished, grey haired, elder statesman as managing director. It was all very Mad Men esq.

In 2018 I see:

• Low value, high cost college and university degrees leading to low salary jobs.
• Diminishing power of technical and monopoly advantages.
• Professionals in firms working way in excess of 40 hours per week.
• Professional services firms profit margins normally < 5% net profit and frequently < 1%.
• Flat management structures that push stress and workload down to front line staff resulting in high staff turnover.
• Importantly, firms and professionals are not making money.

Why is this? 

As someone who owned and sold 3 professional services firms, I think the following are key factors:

• Commoditization of professional services.
• Impact of technology and IOT, e.g. 24/7 availability via smart phones.
• Globalization generating competition, no country is an island any more.

Reality does not care about how hard you worked to get licensed or certified, or how many hours you work or how you feel. The only options are to adapt, change or leave the business.

Fee for service is a bit like Microsoft Office 2000, a flat fee product. I believe the property professional services industry need to somehow move to a subscription business model like Microsoft Office 365.

In 2018, fee for service firms are in a zero sum game, a race to the bottom. They are not making money and are  losing good people who are “tapping out” based on low salaries and work/life balance issues. The current response is business school 101, i.e merge and create large professional services firms to generate cost savings via scale and manage risk.

What to do as an individual?  

• There is still value in STEM and professional college & university degrees plus technical qualifications leading to certification. However, shop around or go abroad, no licensing board gives a dam if you went to MIT or community college to get your engineering degree.

• I would recommend avoiding years studying any degree beginning with “Business” or ending in “Studies”.
• Develop a skill stack that includes soft skills, data analysis, energy modelling and software proficiency.
• Get comfortable working in the “gig” economy because that is where things are moving. This is a life style issue that if done right, can be liberating and rewarding.

What to do as a firm?

• Over time, try and move out of the commoditized competitive bidding pool i.e. learn to say no and reduce your business to the 20% of high end credit worthy clients. Turnover is vanity, profit is sanity.
• Develop a subscription based business model around software tools that streamline design, testing and construction processes.
• Use data gathering and intelligence as a competitive advantage. This will separate winners from losers in the future.
• Once you have sufficient data gathered and analyzed, develop a business model selling this intelligence.
• Vertically integrate with other value add firms.

In my experience, private fee for service firms sell for ~ 3-4 times EBITDA assuming a years secured work in the pipeline and 3 year lock in’s for key staff post deal. Firms with subscription based business models i.e. reliable revenue streams and proprietary products plus intellectual property sell for multiples of revenue or ~ 6-8 times EBITDA. I know which business I would rather be selling.

Twitter: @BLDWhisperer

Related posts & links:

#133 – Tipping Point? ( https://bldwhisperer.com/tipping-point/ )

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