Who is in and who is out? Why does a client keep coming back to the same firms for proposals and project work?
IMHO, efficient market theory i.e. lowest price wins based on open market information, does not work in the property industry because of;
- vast range of client & bidding firms abilities;
- extreme industry disparity in levels of property design, construction and management knowledge.
How do firms repeatedly get on bid lists? Some will say price history is the only determinate. Whilst price is an important factor or maybe the significant factor, in professional services it is not everything. IMHO there are 3 interlinked factors:
Credibility is the cumulative outcome of a firms:
- Industry and workforce reputation.
- Unique skills & services.
- Calibre of industry and team leadership.
In the property industry the majority of firms are “price takers”. The market sets the price based on supply and demand. In effect, professional services firms (Architects, Engineers, etc.) are commoditized in a “hunger games” race to the bottom.
However there are firms that have pricing power. They have unique skills, services, people or proprietary tools (registered IP) that the market will pay a premium for. Property is a capital intensive, high risk business so firms that play to this by being faster, unique, better etc. to reduce clients risk profiles, develop pricing power and become “price setters”. Examples of price setters are the elite group of firms that design and construct skyscrapers or Autodesk CAD and BIM software.
There are two ways to effect pricing power:
- Organize in a similar way to the legal profession where barriers to entry (monopoly type restrictions) apply to qualifications and lawyers, without breaking rank, insist on a time charge business model. There are no bidding wars between legal firms.
- Be definitively in the top 5% amongst your peer group. Develop specialist skills and proprietary tools.
Delivery reinforces credibility in a virtuous loop. This is what it is all about. Some firms “talk a great job” but excellence is outcome based, objective and demonstrable. Beauty is truly in the “eye of the beholder”, in this case, the client.
Firms with one or two superstars and no depth behind them are all “shop front”. The firm as a cohesive team is what really delivers time after time. The sum of the parts has to be greater than the individuals. Great firms have pricing power, they survive and thrive even when strong and talented people leave. Think of Apple when Scot Forstall was fired (no one is bigger than the firm) or when Steve Jobs died.
Diagrammatically, these three factors can be summarized using a system approach.
Note: “Professional Services Bidding System” diagram can be downloaded in PDF at www.bldwhisperer.com
However, in my experaince, being a medium sized professional services firm is a difficult space to occupy. There are no benefits from scale or vertical integration and there is little innovation or proprietary technology development as R&D takes money and time. It seems to me, as a professional services firm you are faced with a strategic choice;
- try to scale then control market share and pricing via sheer heft (Stantec or AECOM) or via monopoly practice ( Autodesk or the lawyers business model);
- become a high value niche player, selling unique skills, technology or tools (RWDI or DOME).
A key performance indicator for any professional services business is client retention. Strategy aside, consistently delivering for clients and adding value at a price they perceive as fair is the only way to stay in the game. Price is very important but delivery and track record are equally important. If I had to pick one thing to focus on, it would be over delivery!
Related posts & links:
#67 – Whistle Blowing on Professional Services Fees ( https://www.linkedin.com/pulse/whistle-blowing-professional-services-fees-adam-muggleton?trk=mp-reader-card )
#75 – MEP Engineering is a Weak Link Game ( https://www.linkedin.com/pulse/mep-engineering-weak-link-game-adam-muggleton?trk=mp-reader-card )
#105 – Bad Projects? No, Only Bad Leadership ( https://www.linkedin.com/pulse/bad-projects-only-leadership-adam-muggleton?trk=mp-reader-card )