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The 3 Characteristics of Project-Based Companies

The 3 Characteristics of Project-Based Companies

Is your company often involved in proposing solutions and undertaking projects? Does most of your work revolve around individual projects?

If so, it’s highly likely that your company falls into the category of a “project-based company.” So, what are the characteristics of project-based companies, and what should be considered when conducting business in such a context? I’d like to share my thoughts with you boldly in the hope of inspiring you.

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Regarding project-based companies, I’ve summarized three distinct characteristics that are often evident:

  1. Differentiated Demands
  2. Limited Talent Resources
  3. Dispersed Relationships

What do these mean? Let’s explore each one step by step, starting with demands.

01- Differentiated Demands

Working on projects is more like “cooking at home” compared to running a restaurant. What does that mean? In a restaurant, I have a fixed menu, and the dishes are prepared as they are. Customers can choose to come or not. However, when you cook at someone’s home, it’s different. The chef who comes to your home prepares the dishes you want based on your menu choices.

The question of “What do you want to eat?” represents differentiated demands, while “I’ll cook what you want” is the kind of service that most project-based companies provide. The client demands faced by project-based companies often tend to be diverse and personalized. This situation has both advantages and disadvantages.

What are the advantages? Well, differentiated demands require a significant investment in human resources and can be quite troublesome. Why is this considered an advantage? Because it’s so troublesome and costly, large companies are usually not interested in these types of projects. Instead, this becomes a significant source of business for many small and medium-sized companies.

For example, we rarely hear about Microsoft providing customized Windows services for specific companies. Even though there might be clients interested in having their own unique interface, Microsoft doesn’t engage in this because it would require a substantial investment in custom development and significantly increase labor costs, making it too troublesome and unprofitable for them. However, this business of software customization has genuinely supported the survival of many small and medium-sized enterprises.

At this point, you might be getting the picture. The downside of dealing with differentiated demands is that it’s challenging to improve your efficiency.

Let’s consider an example. Suppose you’re embarking on a project that’s planned to take 10 months with a team of 5 people. For any project, you need to provide an estimate and sign a contract. So, you calculate the total cost by multiplying the average labor cost by the duration and adding some other expenses. This calculation forms the basis of your quote, which is included in the contract.

You might expect the client (Party A) to strictly adhere to the terms of the contract. However, unexpected demands keep arising. The 10-month project is extended, and more resources are required. Whenever you raise objections, Party A brings up the final payment as leverage.

You reluctantly realize that it would be a significant loss if you withdraw from the project now. What can you do? Continue with the project.

This scenario is a true reflection of the reality faced by many project-based companies, where each project is highly customized and non-standardized. Every time you attempt to improve efficiency, additional costs are incurred due to Party A’s various demands, often leading to failed efforts.

It’s painful, and it’s troublesome. Is there any way to standardize the personalized requirements and reduce costs?

However, please don’t find it too troublesome.

The “trouble” could actually be a form of your defense. Because it’s troublesome, large companies may not find it cost-effective, so they stay away from it. Once certain aspects or most of a project can be automated and no longer troublesome, these large companies may take a step forward and use their automation capabilities to replace your customized services.

This is the essence of differentiated demands. While it may be the reason you sometimes struggle to make money, it’s often the very reason you stay afloat.

So, how can you strike a balance?

Perhaps you can continuously build on your project experience to develop valuable assets for your company. For instance, you can crystallize the best service practices from each project and establish your own standardized system of procedures to ensure a baseline of service quality. By standardizing different phases and modules of your projects, you can improve efficiency, enhance service quality, and generate profits.

However, you might quickly realize one thing: even though my project experience is well-accumulated, I still never seem to have enough manpower. What does that mean?

02- Limited Talent Pool

Some project-based companies often find themselves short-staffed. Why does this happen? Let me give you an example that might clarify the situation.

Imagine a project-based company that plans to allocate seven technical personnel for a particular project during the bidding process. However, in reality, there may not be any extra technical personnel available to assign to this project. Why does this occur? Why not have some reserve staff?

Well, it’s not because they don’t want to have more employees in reserve; it’s because it’s genuinely challenging. They don’t know for sure if they will win the project bid. They also don’t know how many projects they will be able to secure next quarter or next year. So, they choose to maintain as few employees as possible and only hire when they genuinely win a project, even though this approach doesn’t align well with contract principles.

For instance, they may quietly withdraw two personnel from ongoing projects, then recruit five more from the job market to meet the planned team of seven.

But is that all? Does it work seamlessly once these seven individuals are onboarded? It’s more complicated than that. The two personnel temporarily reassigned might adapt fairly well since they already have experience within the company, but the five newly recruited individuals would likely be unfamiliar with the company’s operations and the project itself.

As a result, project progress tends to be slow, and the client (Party A) often assumes that the delays are due to inadequate staffing. Therefore, Party A may frequently send letters demanding additional personnel as per the contract terms. They might even consider imposing penalties or withholding final payments if additional staff isn’t provided promptly.

What can be done? The company might need to hire more personnel or relocate staff from other projects, perpetuating a cycle of continuously allocating additional human resources. However, despite these efforts, the project’s progress still falls short of the initial plan, leading to a vicious cycle.

At this point, you may have realized that project-based companies are highly dependent on their employees, yet they can’t afford to hire too many in advance. The revenue of project-based companies is often unpredictable, closely tied to the number of projects secured and the contract amounts. Unlike larger companies with a stable quantity of projects and clients, many small and medium-sized enterprises find themselves in this predicament.

In a prosperous market, an abundance of projects is generally welcome, but when staff resources are limited, it can lead to overwork. During challenging times when the market isn’t doing well, the workforce may feel excessively large compared to the project volume, making it difficult to distribute the cost of labor.

So, what’s the solution? You can’t afford to hire too many staff members upfront, and you can’t always predict project volumes.

Aside from establishing more stable client relationships to make project volumes more controllable and predictable, you might consider building a long-term outsourcing system with flexible yet long-lasting contracts.

Alright, so we’ve covered differentiated demands and limited talent pool. These are some of the challenges project-based companies often face in their early development. Now, if you want to expand your business scope, you might encounter another issue: it’s challenging to expand your business beyond a certain geographical area. Why is that?

03- Decentralized Relationships

In every region, there are distinct networks of relationships that are decentralized from each other. These decentralized relationship networks are one of the critical reasons many project-based companies continuously secure projects and survive.

What does this mean?

Project companies often engage in business-to-business (B2B) dealings, which require them to build sufficient trust to win clients over. This isn’t an easy task because the decision-making cost for B2B businesses is notably high. If a company’s factory purchases an expensive piece of equipment but later finds it unnecessary, the budget and money are gone, and the expected benefits are not realized. The cost of such a decision can be extremely high.

After putting in immense effort and finally securing a few local businesses as clients, you might think you’ve achieved something. However, when you venture into the neighboring city or region, you might find that the same methods don’t work at all. The client there might be surrounded by local project-based companies, making it challenging for you to compete.

In essence, many project-based companies are engaged in what you could call “local kingpin businesses.” This isn’t meant in a derogatory way. Years of collaboration and communication with clients have allowed them to accumulate trust, maintain numerous relationships, and naturally establish a protective moat around their business. However, there might be a slight misunderstanding on their part.

What does this mean?

I’ve encountered some project-based companies that, when they are doing well in a specific area, tend to believe that their success is due to their products and services (80%) rather than relationships (20%). But is that really the case? If your products and services are truly that exceptional, why not serve clients nationwide?

So, when you try to enter markets in other regions but find it challenging to gain a foothold, you should have a rough idea that relationships play a significant role in your company’s growth.

It’s precisely these decentralized relationships that provide regional protection, making it difficult for other businesses to enter. This is the third characteristic of project-based companies.

However, if you’re determined to expand your business, what can you do?

This is the difference between running a flour mill and running a bakery.

A flour mill produces standardized products like flour, allowing for a large-scale business. But at the same time, these products have high substitutability, making it less secure. As soon as customers discover a cheaper or better alternative, they are likely to switch brands.

A bakery, on the other hand, focuses on service attributes and offers greater security. By providing excellent service to customers within a few kilometers, you can sustain your business. However, this approach limits the size of your operation.

In some sense, the local bakery represents project-based companies. If you want to scale up, you need to move toward the “back end,” towards products and production, seeking more standardization. This way, you can gradually break free from the limitations of being a project-based company and access larger markets.

However, this path comes with more intense and fierce competition.

Conclusion

Everything in the world has two sides. There are advantages and disadvantages to every situation, and even weaknesses may have their own benefits. The three characteristics of project-based companies that have been discussed today are no exception.

Because of these characteristics, it may be challenging to achieve large-scale growth or go public. However, on the flip side, it might be precisely because of these characteristics that you can safely survive in the business world.

Certain aspects that may cause you discomfort could, ironically, be the reasons you make money. For instance, dealing with diverse client demands while having to meet them or the constant misalignment between employee numbers and project requirements.

Furthermore, the decentralized nature of relationships can make it challenging to expand and achieve growth.

In such situations, you will have to make choices again: whether to accept the current situation and excel in your niche or to shift to a different niche, move towards standardized products, and aim for larger-scale business.

Regardless of your choice, the essence lies in continually seeking your competitive advantage and building your core competencies.

I hope this provides some inspiration for those who are contemplating these decisions. Best wishes on your journey.

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