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#1 Priority for Design Firms – Profitability

The last six months of 2021 design firms continued to see continued growth and project opportunities. Design firms have also reported a very strong amount of work in the pipeline, with inquiries and the value of new design contracts remaining near all-time high levels. However, with this growth has come new challenges in this evolving business environment. Based on a survey conducted by AIA, the top issues and concerns for design firms:

  • Increasing profitability
  • Volatile construction/building materials costs
  • Finding candidates to fill key positions

Increasing Profitability

Regarding addressing the #1 item increasing profitability – based on industry surveys and guidance from numerous sources including industry leading consulting and tax advising firms Price Waterhouse Coopers (PwC), Accenture and other risk management firms, the solution – an effective risk management program. Survey results have shown that in addition to managing and mitigating risk and litigation, firms that implement an enterprise-wide approach to risk management are more profitable than other firms. On average these firms have shown an increase of ten percent (10%) or more over their peers.

PwC – Front Liners

Following the 2008 financial crisis, risk management has evolved. Besides taking a defensive position – the more progressive, profitable firms have incorporated risk management decisions into the overall business strategy, operational units, practices and business development efforts of their organization – with great success. Companies taking this approach have shown higher revenues and profitable growth. PwC surveyed across 30 industries in over 80 countries had shown that thirteen percent (13%) qualify what they call “Front Liners” risk management organizations. PwC’s stated, “the key to growth isn’t in avoiding risk – Front Liners make risk management a mandate for the organization, the board, and most importantly, among business unit decision makers.” Risk management must be a more collaborative, measurable and strategic function within an organization, not a defensive position. 

According the PwC survey report – companies that put a premium on risk management are seeing better growth and increased profit margins. Fifty five percent (55%) risk management leaders recorded increased profit margins and forty-one percent (41%) achieved an annual profit margin of more than 10 percent (10%). The PwC report identified the following twelve (12) risk categories in an effective risk management program:

1) financial
2) regulatory and compliance
3) earnings and volatility
4) operational

5) reputational
6) strategic
7) environmental
8) cybersecurity

9) technology
10) human capital
11) third- party
12) culture and incentives

Accenture – Risk Masters

Accenture Global Risk Management conducted a risk management survey report. They called the more effective risk management organizations “Risk Masters”. About ten percent (10%) of the 400 companies surveyed – their risk management capabilities were superior to their peers. The study indicated these companies create a competitive advantage from their risk management capabilities, enabling long-term profitable growth and sustained future profitability. Risk management is closely integrated with operations and strategic planning. These organizations use risk management capabilities to adjust capacity to make more prudent and successful investment and business decisions. Accenture indicated a firm’s enterprise risk management framework can, “turn the process into a competitive advantage for the organization.”

Accenture risk management study identified the following eight (8) capabilities in the higher performing, profitable Risk Master organizations:

  1. Intergrade risk management in key decision-making processes. Activities such as strategic planning, objective setting and incentives, financing decisions and performance management processes and procedures.
  2. Incorporate methods to measure and the analysis of risk within and external to the organization.
  3. Change the compliance mindset to deliver better business solutions that drive a competitive differentiation. Top-performing manage regulation and compliance and develop productive relationships with regulatory agencies.
  4. Integrate risk management capabilities across business units and evolving organizational structures over multi-year programs including considering the potential change(s).
  5. Establish a dedicated, C-level risk management executive with oversight, visibility and leverage across the organization to influence risk management capabilities.
  6. Incorporate risk management across the entire organization, into its culture with risk knowledge, detailed training and methods applied by the organization for managing and mitigating risks.
  7. Invest in continuous improvement. Risk management is an ongoing, evolving capability. Changes occur rapidly and companies must be nimble in terms of staying ahead of the curve in meeting the risks and challenges ahead.
  8. Commit to driving shareholder value (internal and external) with risk management capabilities. In doing so, the organization will be in a better position to achieve long-term competitive advantage, higher performance and profitability.

SmartRisk Risk Profiles

Through firm specific risk assessments (SR Risk Profiles) specifically conducted on design firms, SmartRisk has found approximately ten precent (10%) of design firms implement a more enterprise-wide approach for managing risk. Similar to the results from PwC and Accenture, these design firms routinely have higher profit margins – ten to fifteen percent (10-15%) over their peers. 

Risk continues to evolve, change in all industry and market sectors. Companies that put a premium on risk management, implementing an enterprise-wide approach are seeing better growth and increased performance and profit margins. By integrating risk management into the business operations, the payoff and competitive advantage can be very beneficial.

Written by: Timothy J. Corbett, BSRM, MSM, CERG, LEED GA
SmartRisk is a leading risk and performance management consultancy for design and construction professionals. Through firm specific risk assessments, training and consulting, services focus on improving overall performance, profitability and reducing insurance costs through tailored risk management solutions.
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