Engineering Strategic Value Part 1: Business Transformation from a Project-Focused Enterprise to a Product-Focused Business Posted

Challenges of the Project Model

By: Dr. Michael Wrinch
February 2017

Businesses constantly seek change and growth. But growth is rarely straightforward and presents challenges to any enterprise. Manufacturing design engineering firms are no exception. Most small design businesses, as well as consulting firms, begin with a project-focused approach. A project focus is the natural first step towards delivering results for clients. Although this time-honoured business model often leads to early successes, significant limitations eventually begin to surface. A purely project-based focus is difficult to scale and can prove unstable. To grow sales while simultaneously achieving higher margins requires a business transformation. A successful transformation involves significant shifts in both business strategy and corporate culture. The company must evolve from a project-focused to a market-driven product manufacturing firm.

Hedgehog - Strategy - Project Challenges

 

FIG 1: PROJECT COMPANY MODEL

Challenges of the Project Model
The critical success factors of a project-based company do not necessarily translate with ease into a product-based manufacturing entity. Project-focused firms are generally successful based on the following key factors: (1) they require low capital investment, (2) the accounting is simple, (3) they are sales-driven and offer customers highly customized designs, and (4) good project management practice is the prevailing corporate focus. The better the PMO, the more successful the company. So what’s the problem?

The drawbacks to project-focused work become apparent as the business attempts to scale. Moving from project to project is characterized by the following limitations:

The Sales Problem
The sales team, in order to close, will tend to sell a solution that may not be technically feasible or economically viable from a manufacturing point of view. There is a general belief that the engineers will be able to design anything the sales force can sell. Management is happy when the sales pipeline is full. Margins will be dealt with later. New and innovative technology takes centre stage. Every project is a custom one-off. The downside of this model is that costs are impossible to predict. If the project costs exceed the quote then there are pressures to cut corners or issue change orders – or both. This leads to unhappy customers and an unprofitable enterprise.

The Stability Problem
Project companies can be unstable. The company is only as good as the current project pipeline. Uncertainty about the future results in a reluctance to adequately resource a project. Over-commitment and under-resourcing are common themes inside project-focused companies. When projects come to an end and there is nothing left in the pipeline, the inevitable downsizing occurs. Project companies experience intellectual information leakage. As people come and go, institutional knowledge and know-how is lost – and difficult to replace. As well, there is the danger of losing IP that belongs to the company. When the pipeline fills back up, it is usually sudden and involves a scramble to add resources. Planning is often inadequate. Typically, decisions are triggered by the signing of much delayed contracts and recruiting is last minute. New staff and new project managers make it difficult to maintain a consistent culture and set of PM practices. Siloing occurs between projects, lessening the company’s ability to leverage and achieve economies.

The Retained Value Problem
Similar to the stability problem, the value in a project-based company tends to leak away due to limited value-retention. The project company’s value is based solely on its people, reputation, past performance and pipeline. And in the business world, although important, these factors are not enough. Companies require assets beyond just the people and their desks. It’s difficult to value a company based on an uncertain sales pipeline.

Stay tuned for Part 2: “Business Transformation from a Project Focused Enterprise to a Product Focused Business: How to Make the Leap”

 

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