Investing in innovation

May 2006 » Feature Articles
How should our firm balance the costs of technology? You may wonder if this is a financial question or if it is a more primal question of competitive advantage or even survival of your firm.
Bill Amadon, CPA

Balancing the costs and value of changing technology

How should our firm balance the costs of technology? You may wonder if this is a financial question to be analyzed by the traditional numbers-based approach used by your CFO, or if it is a more primal question of competitive advantage or even survival of your firm.

Consider the following scenario: Your competitor across town is able to complete a topographic survey for the state department of transportation along 18 miles of freeway, including 22 bridges and associated topography, in just 40 calendar days.

In addition, the firm can do this work without any lane closures and without putting a single surveyor in the street by using new laser scanning technology.

Is your firm investing in new technology such as this, or is your strategy to continue to compete based on existing processes and methods? Have you ever wondered about how to balance the costs of new technology with competing demands for resources? Maybe it shouldn’t be viewed as an issue of "cost" at all, but rather a value proposition that allows you to generate more business, attract and retain valuable personnel, and ultimately create more value for both your clients and your firm.

But how can a civil engineering firm possibly keep up? Will the current model of practice suffice? What if we just ignore the changing world around us and let the next generation deal with it? In their new book, Value Redesigned, authors Kyle V. Davy and Susan L. Harris state succinctly the degree to which our world changes: "Computing power doubles every 18 months (Moore’s Law) and the bandwidth of telecommunications systems (wired and wireless) doubles or even triples every 12 months." They also point out that "in the space of a few short years, 1 billion personal computers worldwide" have been linked via the Internet.

Such advances are directly affecting the business of civil engineering. Firms must find a way to incorporate new technologies and continue to evolve to stay relevant. We don’t want to wind up like the horse whip manufacturers at the turn of the century who believed that their business would be unaffected by the horseless carriage. Their predictions were wrong, and their businesses were soon obsolete.

To compete, firms must differentiate themselves.—Although change is necessary for firms to survive, it is not enough to just "keep up" with technology. To compete successfully, we must differentiate our firms from the competition. Better, faster, cheaper—the search for differentiation often focuses on only one or two of these methods used to achieve distinction.

Today, advances in technology not only make it possible, but essential, for firms to focus on all three techniques to be successful and competitive.

The benefits of successful differentiation are well known: existing and potential clients recognize the increased value we provide; firms enjoy improved employee recruiting and retention; we’re able to get paid for the value we add, rather than the hours we charge; and we have more teaming opportunities.

For example, Fisher Associates, a 70- person transportation firm based in Rochester, N.Y., developed a computer application called Visioneering by Fisher Associates that brought a full range of benefits to the firm.

The application uses analytical traffic software to create detailed virtual visualizations of a proposed project to reflect actual traffic flows. Lorenzo Rotoli, P.E., P.T.O.E., a traffic manager with Fisher Associates, said he saw a need for a way to "communicate project impacts and benefits" with stakeholders and to facilitate a "collaborative design experience." He explained, "With virtual visualizations, the public stakeholders could actually participate in and see the end result in actual 3-D simulation, rather than traditional plans, sections, renderings, or detailed traffic analysis, which the lay person does not understand." Visioneering by Fisher Associates allows an interactive experience, placing the stakeholders anywhere in the proposed project as a driver, pedestrian, or bicyclist.

By building credibility through visualizations, Fisher Associates’ projects move quickly through the public participation process and gain public acceptance, thereby reducing costs. In addition, new teaming opportunities and project specific visualization requests have emerged since clients have discovered the availability of this innovative technology.

We need to get paid for the value we provide. Most engineering consulting firms determine the value of services rendered as a function of the time worked or the "rule of thumb" cost to generate required plans and specifications on a persheet basis. These methods focus on utilization, with the idea that the more direct labor the better. The contradiction with this mindset is that firms end up in a continuous loop of working harder, with little or no time for innovation or creativity.

This cycle not only limits the ability to differentiate ourselves through technology and other means, but also makes recruiting the best and brightest people a difficult and costly process.

For example, under the existing revenuegeneration model, if a firm invests in a new technology and allows staff R&D time to develop it, the benefit of using the new application creates value for the client with little or no financial gain for the firm. We end up providing our clients with better, cheaper, and faster services—sometimes saving them hundreds of thousands of dollars—for the same fee or even less than the traditional billing approach would have generated. What’s even worse is that staff utilization is down because the R&D time invested in the technology is not billable.

To deal with this contradiction, Tom Service, P.L.S., senior vice president of David Evans and Associates, Inc. (DEA), a 950-person multidisciplinary consulting firm based in Portland, Ore., uses an innovative cost recovery method. The firm segregates costs for specialized applications by capturing all costs of software, development, and maintenance in a direct project cost pool. These costs are then used as the basis for charging clients on a "per day" billing rate when such applications are used. This allows the firm to keep its overhead rate at a competitive level, and below the cap imposed by some departments of transportation, while recovering the cost of highly specialized technologies.

In addition, when these technologies result in efficiencies over traditional processes, savings often are passed on to clients, in part through lump sum contracts.

Client satisfaction is a key driver to innovation. Let’s face it, we all think we have the best relationships with our clients and, after all, that is the most important factor in client retention and satisfaction.

In addition, we believe that our services are exactly what the client needs and are reasonably priced, so there is no need for the client to consider other firms or waste their time requesting proposals. The only difference would be a few dollars, and the client knows they can count on us.

But what if your client is looking for you to provide better, faster, cheaper services? What if they heard from your competitor across town that they completed a topographic survey along 18 miles of freeway, including 22 bridges, in just 40 calendar days and without any lane closures by using a new laser scanning technology? If you can’t offer the same, your relationship may be in jeopardy. To maintain client satisfaction, firms must be willing to explore innovative approaches with clients and keep them in the loop of possibilities.

Doing the basics, or exactly what we think the client wants, will no longer suffice in our changing world.

The 2006 Consulting Engineers & Land Surveyors of California awardwinning SR 190 emergency roadway repair exemplifies this point. By using airborne GPS, a relatively new technology, the DEA team completed final design surveys in just five weeks. A more conventional approach would have required a minimum of two months to complete and would have required additional resources. The use of this technology resulted in a substantial cost savings to the client.

Project Manager Bernie McInally, P.L.S., said that "by working closely with an innovative client, we were able to suggest a new technology to them that they were not familiar with and could not afford to develop and learn to use on their own. At the same time, because we were prepared, the client received immediate benefits from both schedule and costs." In the end, the reconstruction of 18 miles of SR 190 damaged during massive flooding was completed in just eight months.

Under traditional methods, a project of this magnitude would likely have taken years to design and build.

Employees are central to technology decisions. Choices relating to the implementation of technology can have a positive effect on a firm’s staffing and employee satisfaction, creating a "culture pull." Since good people want good tools, using state-of-the-art technology can help maintain employee satisfaction.

In addition, much of a firm’s market value resides in the knowledge held by its employees. Knowledge management has become an essential function, and new technology is evolving to support "communities of practice" and the effective flow of knowledge within a firm. As Andrew Carnegie said, "The only irreplaceable capital an organization possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it."

Barriers to technological advancement exist. Even when a firm recognizes the advantages of using technology as a market differentiator, it must deal with a number of significant barriers to implementation.

Probably the most serious barrier is "culture drag," the opposite of "culture pull" previously discussed. Change can be a negative in many people’s minds, and changes in technology often require changes in business processes. It is rare that adoption of new technologies can be accomplished effectively without changes in behavior and business processes.

Changes in a firm’s culture are more difficult to make than changing the technology.

In the design world, many technologies extend beyond the firm to clients, suppliers, partners, and subcontractors, adding to the culture drag.

Another barrier relates to the technologies themselves. It’s not the lack of tools that is the problem; there is a continual flow of effective new packages and services becoming available. Rather, it’s the difficulty of building a true "enterprise infrastructure" with the available tools. The reasons for this include the delay in adopting standards that support interoperability and the difficulties in integrating existing "silos of information" within and among firms.

A third barrier deals with the ineffective management of unbilled time. With a focus on short-term utilization and chargeability, many firms fail to commit and manage adequate resources for R&D, training, and strategic technology planning.

Technology continues to be thought of as a collection of tactical, cost-related tools rather than a strategic value-producing market differentiator.

Conclusion Civil engineering firms must be aware of and continue to invest in technologies, or they are likely to become obsolete in this highly competitive and cost-sensitive environment. Further, the issue of balancing the cost and value of ever-changing technology is far more complex than a simple financial equation left to your CFO. It involves the basic competitive nature of your firm.

There can be no doubt that the world is changing. Innovation and use of technology is a great way to differentiate your firm from the pack for both clients and staff.

Sidebar: Best practice tips

  • Don’t try to be all things to all clients. Select a niche and become the expert in it.
  • Invest in research and development (R&D), as well as in specific technologies.
  • Set a budget at the beginning of each year and adjust utilization goals accordingly.
  • Realize that utilization is not the only indicator of profit.
  • Develop value-based fees that are fair to your clients as well as your firm.
  • Work with receptive clients that are early adopters of new technology.
  • Be sure your client clearly understands the value proposition—what’s in it for them—and how your firm can do it better, cheaper, and faster.
  • Specialize and develop technological applications so that your staff, as well as clients and competitors, will know your capabilities and areas of expertise.
  • Encourage the sharing of staff knowledge and support communities of practice within your firm.
  • Create a safe environment for staff to learn and experiment.
  • Invest in known technologies and integrated processes that clients and their contractors are trying to use today.
  • Consider that profits are an outcome of motivated employees who provide exceptional professional services to satisfied clients. Clients, in turn, recognize the value provided and pay accordingly so that firms can continue to have the resources to attract top talent and provide exceptional services.

Bill Amadon, CPA, is a senior vice president and CFO of David Evans and Associates, Inc. He can be reached at wha@deainc.com. King Nelson is a technology leadership partner in the Denver practice of Tatum LLC, an executive services firm. King can be contacted via e-mail at king.nelson@tatumllc.com.


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