In the land of consulting, ROI is a mirage

We want a good return from our investment in software tools and automated processes, but the language of ROI is foreign to design firms and the returns are elusive and hard to capture

Welcome to A Bicycle for Design, a newsletter that explores how architectural and engineering design is being transformed by software and computers! My ambition is to write one newsletter per week, but I will be on a much less regular schedule through the northern hemisphere’s summer. I hope to get back to a regular weekly schedule in September.

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Architecture and engineering consulting businesses have a hard time making investments in process improvements or software development across their practices. This is old news! “Digital visionaries” can see a future with designers are happier, better buildings are designed, work is delivered more quickly—but this version has a hard time becoming a reality. Consulting firms generally consider all non-project (and therefore cross-project) spending to be an overhead that should be reduced.

As the need for, and benefits of, these tools becomes obvious, firms do start looking for ways to make these investments. Their first step is often the preparation of the dreaded ROI calculation.

Dreaded? It’s perfectly reasonable to ask for an estimate of the expected return! Unfortunately, the context of a consulting firm makes the calculation of an ROI a very ambiguous task.

ROI Challenges

There are two features of a consulting business model that affect ROI:

First, consulting is a low capital business. Professional and mature management system for consulting firms focus on the return on staff costs, not return on investment capital. It is very unlikely that your firm’s financial system can track or report the ROI of a particular investment.

Secondly, consulting projects are managed to a target profit percentage. When preparing a proposal, the anticipated profit as a percentage of fee must meet the firm’s target. During project delivery, the financial tracking systems will watch the profit percentage – as long as it stays on target, no particular attention will be paid to how much time the project team spends.

The Mirage

The first feature means that we need to find a proxy metric for the return, since a consulting firm’s accounting system does not have the built-in vocabulary for this. The most common proxy is the financial value of the time saved.

The number of hours saved by a software tool can be easily and (relatively) credibly estimated. Then simply multiply by an average breakeven hourly rate – readily available in a consulting firm — and, hey presto!, we can estimate our return.

Not only is this approach straightforward, it also generally shows an incredibly high return on investment. Credible estimates of time saved can easily show ROIs of 10 times or more.

And yet, consulting firms do not regularly make these high return investments. This is because the second feature guarantees that any time savings is never captured as profit.

When a project is being planned, competitive pressure says that if a project can be delivered at a lower cost, a lower fee will be proposed. During a project, any time saved will organically translate to more design iterations, more detailed analysis or some other activity that will increase the designers’ confidence or perception of quality.

Barring a management intervention, any time saved by investing in software tools or automated processes will go through an ad hoc, uncontrolled transformation into either higher quality work or increased financial competitiveness. The dollars and cents that we calculate in ROI spreadsheets never make it to the bottom line and are never available to support further development of the tools or processes.

New approaches

Here are two responses to the situation - two possible interventions to capture the benefits of working with computers.

Acceptance: higher quality work and higher competitiveness are both good things, so why not just accept them? Redefine the return as profit from work won as a result of the investment. Higher quality work should be to more profitable and lower fees should lead to a higher volume of work.

There are two implications to this approach:

First of all, it will focus your investments on initiatives that lead to better or more work. “Will this tool or process allow us to win better work or a higher volume of work?” is a very specific question that can be quickly tested by picking up the phone and speaking to clients. Digital initiatives can sometimes be very disconnected from the day-to-day pressures in a consulting firm – this approach applies pressure to keep them aligned.

Secondly, the estimated ROI will drop by an order of magnitude. Given typical profitability in the design sector, the return will be approximately 10 times (or more!) lower. While might be discouraging, it does make the many decisions to not invest in tools appear to be much more rational.

Inversion: Michael Collins, my professor at University of Toronto, taught three rules of engineering: one of them was “it’s good to know the answer before you begin.“ Applying this principle here, we know that the answer is that digital tools reduce costs, and should increase profits and quality. Instead of embarking on digital initiatives and hoping that we will become more efficient, firms can simply raise their target profits or impose stricter quality requirements. If they also provide resources such as training, developer teams, budget dryer programmers, etc… project teams can figure out what digital tools are needed to achieve these goals.

This may sound brutal, but a firm’s management can choose to double targets all at once, or phase in changes gradually. It does take conviction to make such a decision, but it does fit cleanly into the existing consulting business model. There is no need to worry about proxy return on investment metrics and adjusting your accounting system. Like the first option, this approach also puts pressure on digital efforts to align with the firms day-to-day work and objectives.

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As the engineering and architects experience with digital tools increases, we will get better at not only using and writing software, but also at managing it. I hope this overview will help you think through what your most valuable investments will be and provide some new ideas for how to convince your leaders to adopt them. If you have found this newsletter provocative, please pass it on to your colleagues!