Systems, value creation, simplicity, and granting authority to the most local level.
The power of a purpose-driven, legacy-building strategy for your organization is widely recognized. With the myriad of frameworks, processes, and approaches, however, it can feel overwhelming. Have you ever left a strategic planning session feeling overloaded by the sheer multitude of goals and actions you’ve now committed to accomplishing over the next three to five years? Furthermore, you now have talented people working on a long list of urgent initiatives that all seem to have a due date of Q1 in the first year of the plan. After all, as Elbert Hubbard said, “If you want anything done, ask a busy person to do it,” right? It may feel like you need a strategy just to implement your strategic plan. A return to simplicity, an eye on what is truly strategic, a focus on value creation, a system to implement your strategy, and granting authority to the most local level will allow you to select fewer initiatives with the power to have a significantly greater impact.
In this article, I will focus primarily on the value creation component of the list above as a framework to evaluate and narrow your strategic initiatives. I will, however, give a brief nod to our partner, OnStrategy, that now enables us to provide a system to our clients in the form of strategic planning performance management software. Now, we also need to at least acknowledge some of the nuance and complexity of the space that we compete in. When you are looking to succeed, you must design strategy that carefully targets a defensible market segment and ensure you have the right business model to dominate there. Certainly, when talking about building a high-profit model, there are only a few choices. You can either increase your client value or lower your cost to serve those clients, perhaps both. Creating the right business model to accomplish these goals is highly dependent on which category your clients fall in across three broad profit segments. According to research done in conjunction with MIT and a SaaS profit analytics software firm these three segments are defined as:
- Profit peaks: High-revenue, high-profit clients (20 percent of clients generating 150 percent of profit)
- Profit drains: High-revenue, low profit/loss clients (30 percent of customers that erode 50 percent of profits)
- Profit deserts: Low-revenue, low-profit customers (minimal profit, but consume about 50 percent of the company’s resources)
In my experience, many firms do not analyze this type of information and rather take a “pursue all RFPs/opportunities” approach, much like they do with the “pursue all ideas for strategic initiatives” leading to a median pre-tax, pre-bonus profit on NSR for AEC firms of 15 percent according to Zweig Group’s 2020 Financial Performance Survey. It is extremely difficult to engage more than one of the three profit segments above, further necessitating a focus on the value creation framework.
If you asked business leaders in general, many would share that they are focused on shareholder/stakeholder value creation, yet they struggle with falling fees and a commoditization of their services while simultaneously struggling in recruiting because, “We can’t compete with what other firms are offering in compensation.” Therefore, when evaluating strategic initiatives, they are only worthwhile if they do one of the following:
- Create value for clients by raising their willingness to pay (WTP). This shouldn’t be confused with price or fee. WTP is the most a client would be willing to pay for your services. If we are only focused on revenue growth, you’ll likely ask questions such as, “How can I sell more?” If we are focused on increasing value and WTP, however, the goal is to delight and excite customers with the service provided. We are focused on increasing trust and loyalty at every interaction and stage within the client experience. It has to be every interaction with every client. Additionally, when putting this into action, these firms are not overly concerned on short-term profitability in sacrifice to the longer term value creation.
- Create value for employees by making work more appealing. This one has nothing to do with compensation. According to Zweig Group research, people are significantly more concerned with interesting, purpose-driven, motivating, and flexible work than they are industry-leading compensation. Perhaps you feel it is counterintuitive, but pursuing these ideas not only generally leads to the ability for a firm to pay more compensation, but as a Best Firm To Work For, you simultaneously lower the minimum compensation you’ll need to offer to attract talent. As you know, this is not an easy feat and requires leaders to think holistically about the needs of their employees.
- Create value for suppliers/subcontractors by reducing their operating cost. A relatively simple idea, your suppliers/subs expect a minimum level of compensation for their efforts as well. If you can find ways to increase their productivity, they will often share the increase in profitability with your firm indirectly.
These ideas can be visualized in the following graphic:
In conclusion, leadership that is focused on creating value and using that as a framework in which to narrow their focus on strategic initiatives view everything through the lens of creation of that value. Anything not creating value for clients, employees, or suppliers/subs isn’t worth doing.
Phil Keil is director of strategy services at Zweig Group. Contact him at firstname.lastname@example.org.To read the rest of this week's issue, click here.