Re-engineering the engineering consultancy of the future
Aug 24, 2016 12:49
How crowdsourcing is redefining the age-old model of an engineering consulting business
They call it the “Jaws of Death”. And if you’re an executive in an engineering consulting firm I’m sure you’ll understand the concept – even if you haven’t heard of the term before. It will have been the cause of more sleepless nights than you care to admit. It’s ruthless, indiscriminate and challenges the long-term sustainability of many consulting firms across a whole suite of industries.
Put simply, the “Jaws of Death” is the phenomena where the long-term trend of reduced margin and increasing costs mean you need to sell more hours to make the same profit. The reference to the “Jaws of Death” comes from the converging lines of lowering of margin and increasing of costs which squeeze profitability to the point where the business is no longer sustainable.
Take a look at your P&L over the past 5-10 years. Are you margins constant or have they been slowly eroded? Are your costs also slowly increasing a few per cent each year? If so, to offset this you are now working out ways to reverse this trend and save your business from a very scary outlook. The harsh reality is that it’s a slow, painful and inevitable trend that many consulting firms will face. Particularly when there is an element of commoditization of the services they offer.
Now for the tricky part – finding solutions.
When you distil it down to its most basic forms, the typical solution most consulting companies adopt to address the Jaws of Engineering Death is to follow two paths – drive efficiency into the business or develop a decoupling strategy.
Efficiency is pretty simple and common. It’s about reducing the cost of delivering your services. Cut costs, reduce overheads, get faster at delivery or set up low-cost engineering centers. But improving efficiency is not a long-term sustainable solution - rather it will only help delay the inevitable. Don’t take this the wrong way, efficiency drivers are an essential part of any business strategy. But this path only allows you to buy time.
The decoupling strategy is very different and embraces more innovative thinking and direction. It’s about decoupling the hours worked from the revenue generated. You’re thinking about innovative products/services, leveraging and gearing others, new technology and new business models under a decoupling strategy. The end goal is to make money when your lights are turned off.
What if there was a new way that’s a hybrid of these two strategies? A strategy that could transform your engineering consulting firm so it can deliver a step change in efficiency whilst generating revenue while your lights are turned off? The new hybrid strategy embraces business agility and flexibility. This agile strategy redefines your resources, utilizes more efficient methods to resource your firm and shifts your business and economic model to one that is far more sustainable.
I’m sure you’ve heard of Uber, AirBNB and Freelancer. These businesses have utterly disrupted their respective industries - Uber for taxis, AirBNB for hotels and Freelancer for creative and web talent sourced through the crowd. They have each turned conventional procurement channels on their heads by harnessing the enormous potential of a globally dispersed crowd of people, with each person operating as an independent seller with very low operating costs. And they’ve proven that low operating cost has nothing to do with diminished value or quality. Well, the same is now happening to the engineering market with the new start-up kkooee. It’s the world’s first crowdsourcing marketplace for the engineering industry and its related sectors.
kkooee’s business model allows firms heading towards the Jaws of Death to realign, refocus and adopt a more agile business strategy. To see how kkooee’s crowdsourcing potential can be a game changer against the Jaws of Death, you first need to step back and take a look at conventional engineering consulting firm models before rebuilding to a future-proofed agile model.
Traditional engineering consultancies typically work on a simple economic model. Employ people (typically permanent/consultant/part-time), put them in an office, sell their capacity and keep overheads under control. It’s slightly oversimplified, but bear with me on this. The earning capacity of the engineers employed in a firm is typically based on a multiplier of salary (typically 1.5-2.5 times the total cost of the position). A utilization target of the firm, and its engineers, is set at around 80%. This requires management to constantly balance multipliers, utilization and overheads so the business remains profitable - a real challenge for smaller engineering consulting firms.
The Achilles heel of this economic model is that the traditional employment model is relatively rigid. This makes it difficult for firms to flex the resources required to respond to increased workloads or new business opportunities. It takes too long to hire additional people under traditional employment models (and inherently encompasses high costs and high risk). In the world we now live in, agility is essential to a future business model, and there is little agility in this highly constrained approach to resourcing.
Now what if we were to rebuild a new business model that incorporated a portion of highly agile resources sourced from the crowd through a business such as kkooee? What would this look like? And how would it help safeguard your firm from the Jaws of engineering death?
Let’s take an example of an engineering consulting firm with 100 billable employees (exclude corporate support for now). The firm is running at 80% utilization on average (but oscillates between 70% and 90%, based on available work). An average 2x multiplier is applied. The business generates a tidy profit when running at 90% utilization, but just manages to break even at 70%.
Now we’ll rebuild the firm with only 70 of the highest-value billable employees. To pick up the resource shortfall, the firm sources the additional capacity required (between 0-30 people depending on workload) using the highly agile capabilities of engineers on a site like kkooee. The firm can search through thousands of highly skilled independent/freelance engineers that can be contracted on a fixed-term or hourly basis. They can be contracted for hours, days, weeks or months (as the need requires). Sourcing and contracting the engineer is done within hours and days – not weeks or months.
This new business model makes the consulting firm highly agile. A new opportunity arises and they can flex – quickly. New skills are required and the can source them – expediently. The agile firm is profitable, and remains profitable, as the variable workload is filled through the crowd. The firm contracts engineers only when needed and for how long they’re needed. Benefits to the agile firm include:
- The ability to operate at between 90-100% utilization;
- Operate 24 hours a day using globally available talent to deliver projects faster.
- Multipliers can be applied to crowd-sourced engineers – and with little risk of them being underutilized.
- Reduced overheads, with no need to provide office space and technology for crowdsourced engineers.
- Greater competitiveness for highly cost-sensitive work due to the flexibility to source engineering talent from lower-cost locations and individuals.
- Greater ability to flex up and down size to respond quickly to market demand.
What you see here is a gamer-changer for small- to medium-sized engineering firm. Overall, this business model is far more agile and profitable than traditional economic and operational models. It provides a significant cost and value proposition against competitors. Importantly, it would somewhat safeguard against the Jaws of Death by driving efficiency and decoupling some components of revenue from the hours your employees spend at work. Business strategy is no longer just about efficiency and decoupling, it’s about agility.