Diversification decision for a residential-dependent QS firm
A Colombo-based quantity surveying and project management firm has revenue of LKR 640 million and 180 staff. Seventy-two per cent of fee income comes from one residential developer, which has announced a 40% cut in new launches over the next two years. The firm has LKR 85 million cash, LKR 40 million term debt, and partners must agree major investments unanimously. Three options are on the table: (A) acquire a 20-person MEP cost consultancy for LKR 70 million; (B) open a Kandy office to pursue the central highway programme, costing LKR 28 million in year one; (C) launch a project management service line for renewable energy projects, using existing staff and LKR 12 million in training and software. The market is growing in renewables and highways, but the firm has no track record in either. A bank has offered a 24-month loan at 15% for one option only.
1. Evaluate the three options using strategic fit, capability, financial risk and execution risk. State which option you would recommend and why.
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Option A - acquire MEP consultancy. Strategic fit is high because it buys capability quickly and widens the offer. Financial risk is high: LKR 70 million uses most of the LKR 85 million cash, before integration costs. Execution risk is also high because the firm has no acquisition experience and must retain the acquired staff. The 15% loan would add debt service just as residential revenue is falling.
Option B - Kandy office. Strategic fit is medium: highways are public-sector and relationship-driven, and the firm has no central-region presence. The LKR 28 million first-year cost is manageable, but year-one losses are likely and the highway pipeline may be tender-based and cyclical. It does not reduce residential concentration quickly.
Option C - renewable energy PM line. Strategic fit is medium-high: it uses existing project management skills and diversifies away from residential. Financial risk is lowest at LKR 12 million, leaving a cash buffer. Execution risk is the lack of a track record and the need for experienced renewable-energy project managers.
Recommendation: proceed with C as a controlled pilot, not a full launch. Set conditions: hire two experienced renewable-energy project managers, secure one anchor client or EPC partner, and set a stage gate at six months. Do not take the bank loan yet. If the pilot reaches pipeline and margin targets, revisit a smaller MEP acquisition or a Kandy presence. This sequence protects cash and tests capability before committing LKR 70 million.
2. Set out the 12-month implementation plan and KPIs for your recommended option, including what would make you stop or pivot.
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0-3 months: appoint a service-line lead with renewable-energy experience; sign a teaming agreement with one solar or wind EPC contractor; complete cost-planning templates and training; agree a bid/no-bid rule with the partners.
3-6 months: bid for at least four projects; recruit one senior project manager; deliver two paid pilot assignments; establish a separate budget and monthly reporting line.
6-12 months: convert at least two pilot clients into framework or repeat work; build a pipeline of LKR 150 million; reach a gross margin of at least 28% on the new line; keep firm cash above LKR 50 million.
KPIs: pipeline value, win rate (target 25%), utilisation of the new team (target 65%), gross margin, fee concentration (residential below 60% by month 12), and cash headroom. Governance should be a monthly steering group with stage-gate papers.
Stop or pivot rules: stop if no paid pilot is awarded by month 6; pivot to a partnership-only model if gross margin is below 20% after two assignments; pause hiring if cash falls below LKR 45 million. The purpose of the gates is to prevent a low-cost pilot from becoming an uncontrolled fixed-cost commitment.