A new business model helps realize significantly higher levels of revenue at a substantially lower cost of sales
Most electrical engineers are stymied by two seemingly insurmountable business truths. First, projects are usually contracted by architects or building owner subordinates. Second, aggressively negotiated contracts are typically limited to design and construction administration — if you're lucky. So once the building is complete, there is no longer a need for an electrical engineer to remain under contract. Unless the architect has another project available or the building owner is moving to complete another edifice, the customer relationship is over — until the electrical engineer is called upon to bid on another specific project opportunity.
Today, electrical engineers are basically just another vendor — often, but not always, selected for project participation based on the commodity attributes of price and schedule. Accordingly, organizational growth is achieved through developing a large contact database of architectural firms and constantly searching for ways to reduce costs. But is this the right approach?
A better solution involves the ability to displace the architect or building owner subordinate from the decision-making process and work directly with the end-user. However, until a specific project is completed, the ability to create such an environment may be hampered by the established hierarchical relationship between the end-user, architect, engineer, and other product and service providers. One answer to this dilemma focuses on creating service offerings that allow the electrical engineer to remain vested with the operations of the building throughout its life cycle — a period often exceeding 15 years. It is this ability to create a comprehensive services life cycle that will yield the most significant return to the electrical engineer. This is the objective of the AIM model, which categorizes product and service offerings across three disciplines (assessment, implementation, and maintenance).
AIM defined. The AIM model provides electrical engineers with a method to capture and control customers in a way that ensures significantly lower costs of sales as well as exponentially higher levels of per-customer revenues. It provides the impetus to be a chargeable partner through all phases of the natural building systems cycle — effectively precluding the introduction of any outside competition and ensuring customer relationships endure beyond the current project.
“A” for assessment: Most electrical engineering firms have conducted special studies for their customers or, at a minimum, gained unique knowledge of the industry. Projects associated with power system availability or fault current analysis are often resident in service portfolios. Information regarding industry and manufacturer trends, competitive positioning, and logical market shifts also are resident in the firm's knowledge banks. The objective is to offer this specialized knowledge to the end-user, thereby establishing a paying, low-risk relationship. In a very short time, you can earn this customer's trust, setting the stage for you to participate in the more traditional design and construction efforts.
“I” for implementation: For most electrical engineering firms, the implementation component represents approximately 70% to 80% of the total revenue of the firm — the remaining 20% to 30% being recovered from the “A” and “M” components of the model. This is the primary offering of the firm, usually associated with traditional design and construction administration services. By already providing chargeable customer work under the auspices of the “assessment” offerings, the electrical engineer is perfectly positioned to influence the timing, character, and pricing of the larger implementation prize — and do so in a way that minimizes the impact of the architect and excludes other service providers from eclipsing the already-established customer relationship.
“M” for maintenance: Once construction is complete, the goal of the electrical engineering firm is to justify its existence for the life cycle of the building. For many firms, the development of outsourcing offerings provides the best means to ensure a continuous, unbroken customer relationship, thereby allowing the firm to remain a visible and positive contributor to the customer for an extended period of time. Take any commercial, institutional, or industrial project as an example.
The intent and purpose of electrical systems change throughout the life of the building. Where tenant occupancy cycles may be seven to 10 years, full-term business lifecycles are usually of a shorter duration — 18 months to five years, depending on the industry and organization type. Regardless, where an electrical system has a useful life of greater than 15 years, the electrical engineer is of paramount importance to the building owner as a reviewing authority for any contemplated changes in the building systems. Whether the focus is on an outsourcing maintenance solution or serving as the reviewing authority, the electrical engineer can be an ongoing participant in the “maintenance” effort.
Leveraging the building asset. To secure a position with the owner for the life of the building, it's important for the engineer to figure out what keeps him awake at night. While system failure is usually the most common answer, there are often other aspects associated with the power system operation and utilization that may be forefront in your customer's mind. Your objective is to identify those specific “hot buttons” and develop services to mitigate such fears.
The initial impediment to accomplishing this objective is often the architect. It's important to remember architects are not customers — they are conduits to the building owner. As vendors themselves, architects seek to contain their project costs and build in reasonable levels of profitability through “loading” profits to the other contractors working under their direction. Under this arrangement, electrical engineers suffer a far greater indignity — operating as subcontractors far removed from the legitimate end-user and confined by the scope of services offered by the architect.
Where design and construction, particularly for new buildings, may be the primary focus for many electrical engineering firms, the real value is contained in addressing the immediate and outstanding issues of existing buildings and creating a logical series of work steps that lead into design modifications and, subsequently, some level of corrective construction. Although many electrical engineers view design as the first step in the building cycle, the more appropriate starting point is to address building owner fears — resolving outstanding risks that already are lurking.
By stepping in front of the design phase, electrical engineers have an ability to displace the architect as the primary point of contact for future building opportunities. In this case, the customer relationship is established and the electrical engineer — not the architect — becomes the trusted advisor and recipient of the “spoils” associated with a longer-term, building-oriented relationship.
The real performance barometer. Electrical engineering firms, like most businesses, determine corporate success on their ability to increase revenues and associated profits year after year. Although these financial indices provide a historic benchmark for comparison, they fall short in terms of determining real corporate value. A better measure of corporate effectiveness is revenue per customer.
To understand the importance of the revenue-per-customer metric, it's first necessary to understand the larger concept of potential value. Defined as the optimal revenue value of any organization, potential value is calculated by multiplying the number of active customers by the total value of the firm's portfolio of products and services. This amount represents the total potential revenue of the firm if every customer were fully using the total suite of available products and services. When this amount is compared to the actual revenue amount, a substantial gap of potential upside opportunity is apparent. In fact, the majority of service firms realize only 6% of the their total potential revenue — leaving an upside opportunity of 94%!
This calculation is important because it focuses on a very visible corporate effectiveness metric: revenue per customer. In short, if you divide the number of active customers by the annual revenue, the resultant amount indicates how much revenue, on average, your firm is receiving at a per-customer level. For most engineering firms, the resultant amount points to a very disturbing trend: There is a very wide range of revenue per customer, and the overall average per customer is far lower than desirable.
The key to effectively growing any service firm is the ability to exponentially grow the revenue-per-customer metric. Too often, electrical engineering firms take on less than desirable customers and, at the same time, short-change the longer-term opportunities associated with larger, more qualified customers. AIM provides the basis to ensure that revenue-per-customer results increase substantially almost from day one. Because customer retention is one of the primary characteristics of AIM, this approach significantly decreases the cost of sales, thereby increasing net profits.
Creating offerings to match the model. Most electrical engineering firms already have offerings that match the definitions of assessment, implementation and maintenance. By conducting an analysis of customer projects over the last 36 months, corporate leadership can determine which projects fit the AIM model as well as identify where product and service omissions exist. In our experience, the maintenance component often needs the most attention, as most firms — relieved to have completed the design and construction phase — look no further for future immediate work.
Although pricing and profit margins of service offerings can fluctuate, our studies have found that electrical engineering firms gain their most significant levels of profitability from the “assessment” offerings and the highest levels of overall revenue from the “implementation” offerings. The “maintenance” offerings typically reflect strong profit margins, and are most often used to ensure effective positioning for electrical system changes that may need to be updated over the life of the building.
It is imperative that every member of the firm be able to substantiate an offering in each of the AIM components. Omissions in offerings create gaps in the customer relationship and open the door for possible competitive encroachment as well as the erosion of the perceived customer partnership.
AIM advantages. The business rationale for AIM is straightforward — constant customer interaction provides the electrical engineering firm with the very best opportunity to identify, win, and deliver on the large design and construction administration projects. Attempts by competitors are thwarted; changes in corporate culture and political power bases are immediately leveraged; and constant visibility provides the firm with the ability to “walk the halls” and be viewed as a true corporate partner.
The goal of AIM is to develop an array of service offerings that lead a customer down a logical preconceived path that maximizes the revenue-per-customer metric. Too often, electrical engineers rely on the customer to dictate the direction of the relationship — a practice that presumes the customer has a greater knowledge of electrical systems. AIM focuses on a destination orientation that is driven by the engineer. This focus ensures your customer funds all business development efforts, and the relationship remains vibrant for multiple customer cycles.
Conversely, many firms that sell disparate or one-time projects are excluded from ever accessing the real customer power base. These firms are viewed as vendors. As such, they're forced to follow the corporate procedures for project procurement and delivery. They are never afforded the luxuries or the tolerance that often is required to achieve success during a long-term project. As a result, these firms spend countless business development dollars to replace customers as opposed to leveraging existing customer relationships.
Dawson is managing director of LTV Dynamics, an international sales management and business-consulting firm located in the suburbs of Washington, D.C.
Sidebar: Profitability Pitfalls
Many engineers fall into the “design, construct, stop” mentality. Electrical engineers constantly seek new design projects. Strategically, some may go after jobs that allow for a participatory role in the construction phase. As design and construction efforts have a contractual termination point, a constant flow of new business opportunities is necessary to ensure the ongoing nature of any electrical engineering firm. Accordingly, electrical engineers are in a constant state of customer acquisition — even with customers where long-standing relationships exist.
The problem with being focused so intently on customer acquisition is that engineers must always be highly reactive to new opportunities that appear on their doorstep. Ask yourself some simple questions: How often do you need to “reassign” chargeable resources to react to a request for proposal? In periods of low chargeability, does your firm take on assignments that are inconsistent with the stated goals of an ideal project? Do you use a variable discount-pricing plan based on the availability of your resources?
If you answered “yes” to any of these questions, you are reactive selling — the practices of a commodities vendor, not the purveyor of specialized and valuable services. Reactive selling is inefficient because it wastes resources and focuses on price sensitivity as opposed to providing more comprehensive life cycle solutions to the legitimate end-user.
The key is to move away from the project mentality and focus on the actual asset being served — the building and its electrical systems. With electrical systems having lifecycles of 15 to 20 years, the larger question evolves around the needs of the building owner over this time frame. It is this extended asset life cycle that is the basis for the assessment, implementation, and maintenance (AIM) model — and the best way to extend the customer relationship and associated revenue exponentially as well as stop the current inefficient customer acquisition process.