Chapter 15
This chapter may be new for your supervisors, mentors, and even senior engineers in your enterprise. It came from our most recent research findings: most engineers today find it hard to describe the commercial value created by their work, beyond simple efficiencies.
Understanding how value is generated through engineering work will help you prioritise your work in ways that are more likely to align with commercial objectives and build social value in the communities you serve. It will also be easier for you to gain support for your ideas from senior decision-makers, and your career will be more rewarding.
A young civil engineer I met recently was working on a major expansion project for his employer, a large multinational corporation. He felt frustrated because he was not doing any ‘real engineering work’ and was thinking of giving up engineering.
I asked him what he was doing.
He said,
They just send me out to check whether contractors have installed electrical junction boxes in the right places or put the right culverts under the roads where they were supposed to. When it rains, I have to go and watch to see if the water flows through okay and take photos. Then, I have to fill out a stack of paperwork back at the office. It’s not engineering work at all, definitely not what I expected. I’m also not learning anything that’s going to help me in my engineering career.
I explained that the work he described was engineering work. In engineering, it is vital to check that the contractors have completed all their assigned work in compliance with the requirements in the contract documents before they’re paid.
I said, “It’s just that your engineering lecturers didn’t tell you about many important elements of engineering work, elements that are often just as important as performing structural design calculations.”
Once the contractors have been paid, it can be very difficult to get them to come back and fix mistakes without additional payment. It can be even more expensive to pay someone else to fix the mistakes, and it usually requires high-level engineering knowledge to spot those errors.
This young engineer was contributing value by reducing the chances that mistakes had been missed, as well as avoiding the risk that extra money would be needed to fix them. He saved hundreds of thousands of dollars in just a few days by spotting mistakes.
In this chapter, I explain how engineers generate value for their firms and clients. The ideas in this chapter arose very recently in our research: you may not find them anywhere else right now. It was somewhat surprising to find that there is so little written about how value is generated from the contributions of engineers.
Engineers generate value in three ways.
Value creation: engineers plan projects and create sufficient confidence that investors will provide money for projects. The value created is equivalent to the amount the investors provide.
Value delivery: using money from investors, engineers convert plans for projects into real objects, systems and services that provide value to end-users who pay to use them. In other words, engineers deliver the value that was potentially created when the project was planned.
Value protection: engineers protect value represented by objects, systems and services, which would be lost without the efforts of engineers that sustain them. Energy, water, transport, communication and sanitation services are critical for the functioning of all human societies: inadvertent failure can lead to enormous value destruction, disease and loss of life, far beyond the replacement value of the engineered systems themselves.
A productive enterprise generates more commercial value than its operating costs. Value, in this chapter, means much more than money, even though most engineering is constrained by the availability of finance. Value is a subjective perception, and has been described as having two distinct ‘flavours’:
i Exchange-value: an amount of money that a buyer is prepared to exchange for an object or experience, and
ii Use-value: perception of an experience, or the feeling of entitlement to an object.
Therefore, given that private and government investors provide most of the finance for engineering work, much of the value generated by engineering work arises from the ways that engineers influence perceptions in the minds of investors, as well as end-users.
Furthermore, value generation must be seen more broadly than the economics of the enterprise alone. An enterprise can only flourish because of the community that supports it; therefore, an enterprise must also generate social and economic value for the community.
It’s a good idea to understand value generation. Here are three good reasons:
a Rewards
Research shows that engineers who learn how value is generated through engineering tend to earn higher salaries, as their employers see them as being more valuable for the firm.
b Reputation
Engineers who understand value generation know that the seemingly non-technical, human aspects of their work, and mundane jobs like checking and inspections are critical for delivering commercial value and protecting existing social and economic value. They will be more likely to exceed investors’ and users’ expectations for on-time delivery and service quality—factors that build reputation.
c Security
Engineers who can explain how they generate value are less likely to be laid off when business conditions deteriorate because they can more easily explain why they should remain employed by the firm in ways that make sense for decision-makers.
It may take time for you to appreciate that ‘value’ is mostly a subjective perception that drives human decisions. Most of the time it cannot be measured and is often hard to quantify until after decisions have been made. It can be easy to lose sight of these ideas when you’re working through the details of a project on a fixed budget. However, value perceptions ultimately drive the decisions that provide the finance you need to work as an engineer; for that reason alone, this chapter is essential reading.
Here are some of the ways that engineers create, deliver, and protect value. Figures 15.1 and 15.2 illustrate how these performances help to influence investors’ perceptions that, in turn, drive investment decisions that provide the money needed to do engineering work.
Figure 15.1 Influencing investor decisions. (‘risk+’ indicates additional risk perception; ‘risk≈’ indicates risk assessment.)
Figure 15.2 Influencing investor’s experience and protecting value. These aspects of engineering help to ensure that investors, end-users, and communities see the promised benefits.
Innovation, research and development (1)
Engineers create value through innovation, research, development, experimentation, and intellectual property such as patents and designs. Most innovation creates improvements to existing products. Some lead to completely new products or services that create new markets and business opportunities. The value can be quantified only when investors contribute money to turn ideas into reality.
Product differentiation (2)
Engineers create value by designing products that provide improved buyer and end-user experience (product differentiation), since people will pay more for these. For example, an attractively designed and packaged product can improve the appearance of the retail outlet in which it is displayed, adding value for both the retailer and product manufacturer. The value created can be evaluated from increases in prices paid and sales volume.
Efficiency improvements (3)
Engineers create value by minimising human effort, material usage, energy consumption, health risks, and environmental disturbance, reducing the cost of engineering work.
Reducing technical uncertainties (4)
Engineers use extensive analysis, calculations, and experiments to reduce technical uncertainties. By doing so, they reduce the additional human effort, materials, energy, and environmental disturbance needed to ensure a given outcome with a given probability of success. These additional provisions are often referred to as a ‘design margin’, ‘design factor’ or ‘safety factor’. Consider, for example, an improved material manufacturing process that provides a material with reduced defects. A smaller design margin could be adopted by using this material, as less material is needed to provide the minimum required strength. Reduced material consumption then leads to commercial benefits such as reduced transport costs, creating additional value.
Performance forecasts (5)
Engineers use analysis methods to forecast technical and commercial performance with sufficient apparent certainty to justify the financial investment. Engineers also use analysis methods to identify the relative significance of risks and uncertainties, thus reducing uncertainty in the minds of investors. Again, the value can only be quantified (if at all) after a subsequent investment decision.
Much of the time, engineers are expected to provide forecasts with quantified uncertainties to account for significant data gaps. Remaining data gaps must be identified and replaced with justifiable assumptions.
Inspection, testing, and design checking (6)
Engineers help to deliver value with inspections, checking, and quality assurance systems. External auditing can be critical for reassuring investors and reducing their perceived risks. The value delivered can only be appreciated once the project is successfully completed, by comparing it with projects that fail due to inadequate checking and quality assurance.
Project and design reviews (7)
Engineers help deliver value by arranging external reviews by experts who examine project plans and designs. External experts can often spot potentially expensive omissions. The reviews will often recommend that engineers perform additional work, such as checking the accuracy of earlier predictions. These checks are in addition to internal reviews and formal document checking required for quality assurance. Again, the value can only be quantified (if at all) after a subsequent investment decision.
Compliance with standards (8)
Another way that engineers deliver value and reduce uncertainty is by following technical standards. Technical standards guide engineers towards error-free solutions more quickly. For investors, this also reduces risks, helping to create greater value. Again, the value can only be quantified (if at all) after a subsequent investment decision.
Reliable technical coordination (9)
Engineers also deliver value by aligning the collective actions of many different people with the original technical intentions, reducing misunderstandings and misinterpretations. They do this sufficiently well to achieve the expected level of technical and commercial performance, within time and resource constraints.
With so many people involved, there are many uncertainties in the delivery of large engineering projects.
Therefore, reliable technical collaboration not only creates value by reassuring investors before they make the final investment decision but also helps to deliver the anticipated value represented by that investment decision. Evidence for this comes from industry evaluations of large engineering projects where, for example, typical projects fail to meet completion expectations two-thirds of the time, providing less than 50% of investors’ expected financial returns. Therefore, it is not unreasonable to quantify the gains from effective collaboration at, potentially, about 30%–50% of the investment value of a project. A project that fails to deliver investors’ expectations not only destroys value but also damages the reputations of all involved.
The value delivered can only be appreciated once the project is successfully completed by comparing it with projects that fail because of collaboration failures, one of the most common causes of project failures.
Teaching, building skills (10)
Engineers help deliver value through teaching and building skills. Most large project failures stem from human misunderstandings or misinterpretations that can be avoided with appropriate teaching by engineers. Investors value a project more highly if they can see high levels of skill in the enterprise.
Social licence to operate: co-creating value with communities (11)
Engineers help deliver and protect value with comprehensive safety and environmental monitoring practices. In essence, these engineers are creating and maintaining a ‘social licence to operate’: a high level of trust from the local community and government regulators. Without such trust, a company will either encounter significant regulatory obstacles or, worse, face the prospect of being closed down in response to what may be ill-informed community protests. Of course, engineers are also helping to maintain safety and protect the environment. A social licence helps investors value a project or enterprise more highly.
Engineers who engage with the local community, build skills, and even empower people to take an active decision-making and monitoring role are co-creating value. Long-term success for an enterprise depends as much on nurturing the community that hosts it as it does on commercial performance.
Sustainment: operations, asset management, and maintenance (12)
Engineering operations, engineering asset management, and maintenance engineering (collectively known as sustainment) are critical for protecting the value embodied in engineered products, systems, and business processes. These require elaborate technical coordination and other collaboration performances by engineers. For example, a gas pipeline needs carefully planned and implemented inspections and maintenance. Without these measures, the condition of the pipeline can deteriorate, resulting in considerable value destruction.
Environmental protection (13)
Engineers protect naturally endowed value by conserving the renewable and non-renewable resources of our planet—our home—and by minimising other environmental impacts. These performances also protect value represented by a social licence to operate.
Defence and security (14)
Engineers provide many products and services that limit or prevent destructive behaviour by other people, thus protecting accumulated value represented by our society and its various cultures and civilisations. Value is created even if a conflict never occurs. First, defence systems have a deterrent value, reducing the likelihood of destruction caused by actual conflict. Second, in the event of actual conflict, good defence equipment limits destructive behaviour and reduces the extent of destruction sustained.
Small and medium enterprises
Let’s see how value can be generated in the context of a small engineering company that manufactures and installs electronic fire alarm systems in buildings. Electronic smoke detectors and other fire sensors are all wired to a fire alarm control system panel. A microcomputer in the panel responds to a smoke alarm and causes a fire alarm to sound as a warning to people in the building. It also sends a signal to the local fire brigade, automatically providing the address and directions so help is able to reach the building quickly. The panel contains a public address system with a microphone, enabling the fire brigade to make announcements throughout the building when they arrive. The panel provides internal wiring connectors for the smoke detector sensors, a public address amplifier, switching circuits, and communications circuits.
The company manufactures the panels using locally sourced and imported components. The owner started the company by utilising his practical electrical wiring and circuit board assembly skills. Other members of his family work for the company in administrative and accounting positions (Figure 15.3).
Figure 15.3 Fire alarm panel.
Here are some ways that engineers can generate value for the company.
Product and process improvement, research and development, and anticipating future developments
Engineers prepare designs for an upgraded or lower-cost product that could be manufactured in the event that a competitor enters the market with a better-quality product at a similar price or a similar product at a cheaper price and evaluate the likelihood that this might happen. They generate value by reducing the risk that a competing product will take a significant portion of the existing market share.
Collaboration
Engineers improve collaboration and technologies in the company to provide better service quality. They generate value because improved client satisfaction and customer loyalty help to grow the business.
Business development research and understanding customer needs
Engineers work with fire insurance companies and demonstrate the company’s product compliance with international and commercial fire safety standards. With appropriate certifications, the company can generate value by opening new market opportunities because certified fire protection equipment can reduce customers’ insurance premiums.
Cost monitoring, control, and reduction
Engineers investigate and, if necessary, help to rearrange the company’s accounting systems to ensure that the different costs of manufacturing electronic panels, the costs involved in servicing and maintaining products installed at customer sites, and the costs of maintaining or replacing production and service facilities and equipment can be accurately monitored. They generate value by accurately monitoring costs, enabling the company to identify where technical improvements could provide additional value, and demonstrating which previous improvements have provided real benefits in order to improve cost-efficiency.
Risk management and reducing uncertainties
By demonstrating compliance with international standards for all aspects of the product, as well as company operations, engineers can increase the likelihood that future company expansion will be financed by the company’s bank (rather than family capital) with a lower cost of capital. Banks closely inspect a company’s operations when a company requests bank financing, often employing engineers to perform these investigations. This work generates value by reducing the cost of finance.
Balancing value generation with cost
I have explained how perceptions of value motivate investors (and end-users) to provide finance for engineered products, services, and information. Engineers can strongly influence these perceptions and thereby generate value, which translates into a willingness to pay.
In the end, of course, a firm must be financially sustainable; it must influence investor perceptions to attract sufficient finance and earn enough income from end-users to cover the cost of running the business.
Therefore, engineers must be able to predict and ultimately control expenses to ensure that investor and end-user expectations are met. Therefore, the next important aspect to learn is cost estimation.
Quantifying value generation
First, recall that value, in essence, is a subjective perception, and everyone has a different perception that depends on time, circumstances, and context. Therefore, most aspects of value cannot be quantified readily until, as a result of subjective perceptions, a sponsor or investor makes funding and tangible resources available in response to those perceptions, or parties agree on an exchange-value. Therefore, how the value is portrayed to the sponsor, buyer, or investor is as important as generating value in the first place. This can only be assessed through conversations with people, listening carefully to indications of their attitudes and perceptions, and noting subtle changes in word choice as their perceptions change.
Risk, in particular, is one such perception. Notice how rare it is for a passenger not to fasten their seatbelt in an aircraft, compared with riding in the backseat of a car, for example, even though the risk of accident in a car is far higher than when riding in an aircraft. Quantitative risk and perceived risk are completely different in identical circumstances.
Of course, performance forecasts in engineering must be quantified. However, perceptions of value may influence the reader’s assumptions, thereby influencing the reader’s interpretation of those forecasts. Trusting personal relationships also influence value perceptions; indeed, without them, most investments would never happen.
It is no accident that financial centres tend to be in cities with office and residential towers that enable a large number of people to meet each other and spend time building the trusting relationships upon which financial investments depend, all involving differing perceptions of value.
To keep it simple, therefore, forecasts are expected to be quantitative, bracketed by semi-quantifiable expressions of likelihood. Value perceptions strongly influence the way those forecasts will be interpreted, and ultimately, that is what determines the level of investment or the exchange-value.
Learning more
Reading financial news will help you appreciate which industries and companies are creating more commercial value in your country, and therefore could offer attractive career prospects. You will learn some of the language of finance by doing this as well.
Reading the annual reports of companies operating in your industry will also help you appreciate how commercial value is described and generated, and this will serve as a basic introduction to accounting. Reading a basic accounting text will help you understand more about annual reports.