Fee Trends Not Always What You Think

“Recent interviews and fee negotiations have convinced me that it is a race to the bottom on fees,” a client just told me during a phone conversation. I know this is a very real feeling among many in the design professions. The truth is that it is increasingly common for professional practices to lower their fees to get scarce work. While it is a legitimate business model used to survive the economy, it is not fun. It is often not sustainable, either.

Regrettable quality problems often follow these hastily put together fee models. There are limits to how low fees can go and still serve clients’ needs responsibly. The good news is that there are tools and attitudes to adopt when you find yourself in this situation.

One of the DesignIntelligence benchmarks in real-time productivity, for example, measures best practice revenues per full-time staff. It is currently in the $172,000 range. But some firms are getting that number today. Others are still hovering around $100,000. The difference is in categorical commodity services provided by firms that range from high to low.

Those at the lower ends are feeling more squeezed and threatened. They know that it is difficult to deliver quality results to clients without resources. Moreover, it is common for firm partners to settle on low fees before negotiating tangible benefits to clients. There is measurable value in such overt services as schedule acceleration and reduced risk of project delay, optimal construction sequencing, and reduction in errors resulting in unbudgeted change costs.

The irony here is that fee trends are not always led by clients. Too often it is the practice leaders who panic and forget the value of their services, their brand, and their long-term measurable benefit.

Iceberg Logic

Like buildings, icebergs come in all shapes and sizes. They can be beautiful and also a little mysterious. On average, only about 12 percent of an iceberg’s volume sits above the water line. What’s visible is quite small compared to the whole. The part that really matters, the part that provides buoyancy, is hidden from view, though we can sense its presence.

This is not a bad analogy for how design is often perceived. Architects tend to focus most on form and aesthetics — what you see is what you get. But a building is so much more than that. It’s impossible to tell just by looking at a building what it cost to construct or how much it takes to operate or how efficient it might be in terms of space utilization. Unlike cars, buildings don’t come with dashboards that provide real-time feedback about speed, fuel consumption, oil pressure, and so forth. But perhaps they should.

Studies have shown that over a building’s useful life, the original capital cost accounts for only about 12 percent of the total — just like an iceberg. The true cost (and the real value proposition) lies below the waterline  — out of sight and out of mind. It’s territory worth exploring.

Capital cost matters a great deal, of course, because it’s most often the gating issue that determines whether or not a project gets built in the first place. But it’s only a small part of the overall picture and, considered by itself, tells us relatively little. Capital expenditure reflects market dynamics at a given point in time. The cost of labor and materials can vary significantly over a relatively short period. To be meaningful, first cost must be measured against something. When considering the location, size, and program of a building, savvy owners understand that it’s not what you spend up front, it’s what you get back that counts. That’s why building lots in prime locations cost more and why zoning regulations matter so much. The largest possible structure built on the best available site will naturally generate the most cash flow and hence create the highest value. It will also consume more energy to operate and cost more in staffing, taxes, and maintenance. All these factors and more go into calculating the underlying value stream of a project. And it’s this underlying value — the part below the waterline — that provides the buoyancy needed to float the project.

Design matters, and of course this includes form, function, and aesthetics. But there’s more to it than that. For too many years, true value creation has not been part of the design dialogue between owners and architects. Remember that design can be both a verb and a noun — a process as well as a thing. The how is often just as powerful as the what. Great designers are always on the lookout for hidden meanings and new ways to inject something extra into the equation. For example:

• For a new office building, an architect managed to design a floor plate that was 90 percent efficient compared to the expected 84 percent, delivering more useful area (and resulting revenue) per square foot.
• For a new dormitory, an architect managed to include one additional floor while still respecting the height limit imposed by zoning. This created space for 50 additional beds, making it possible to finance the project.
• For a new hospital, design for nursing unit that required fewer staff to run efficiently saved $1 million in staffing and operational costs annually while still improving overall outcomes for patients.
• For a new hotel, compelling design helped raise the average occupancy from the normal 75 percent to nearly 85 percent. This increased sales in the restaurant, lobby bar, and shops.
• For a multi-tenant research lab, sophisticated metering systems allowed the tenants to monitor their individual energy use, saving more than 10 percent each year.

You get the idea. These are all real stories from real projects that have won multiple design awards. They were successful in unexpected ways because the design teams took pains to truly understand the owner’s underlying value proposition and roll it into their design approach. By considering all these factors, they were able to create more thoughtful, sophisticated solutions.

The lesson is clear: Focusing only on form, function, and aesthetics is forgetting the 88 percent of the iceberg that sits below the waterline. Ignore it at your peril.

How Long from Intern to Architect?

Today’s guest blogger is Matthew Arnold, who has been examining the duration and success rates of the Intern Development Program.

How long does an architectural internship actually take?

Official estimates range between three and five years, but that didn’t seem to be the case for any of the interns I knew or for that matter, any that they knew. I couldn’t find any hard data published anywhere, so I sent an e-mail to each of the U.S. NCARB-member boards asking what they could tell me.

Three boards — New York, Nebraska, and Oregon — furnished hard data in response to my request. New York provided records for all 15,088 actively licensed architects there. Nebraska and Oregon provided data for the actively licensed architects who had taken and passed the exam in their states, 626 and 800 individuals, respectively.

I made graphs of what they sent me, which you can fine here along with explanatory notes:

http://www.stairwaytoarchitecture.com/images/NY_STATE_REPORT.pdf

http://www.stairwaytoarchitecture.com/images/Nebraska_Report.pdf

http://www.stairwaytoarchitecture.com/images/Oregon_Report.pdf

The data show that the average time elapsed between graduation and licensure for architects licensed in 2009 exceeds public estimates. In New York it was 11.06 years; in Nebraska 10.89 years; in Oregon 8.96 years.

So as best as I can determine, the answer to how long it takes to become a licensed architect is 9 to 11 years. It is a rare intern who finds this surprising.

The trends in the data are disturbing, in particular the percentages of licensed architects whose internship was 5 years or less, between 5 and 10 years, and over 10 years in New York, as shown in this graph:

In New York in 1980, about three out of four internships took less than 5 years; today this is true for less than 10 percent of aspiring architects in that state.

Before 1980 it was rare for an internship to extend a decade or more in New York, but in 2009 it has become the rule: Half of all internships last at least that long. The trends are similar in Nebraska and Oregon.

There are still some states (New York among them) that do not require an NAAB-accredited degree in order to sit for the exam. These states typically require an (ostensibly) longer period of internship in order to compensate. If the duration of average internship for those with NAAB-accredited degrees is indistinguishable from those without one, the question as to the benefit of the degree in this regard is not an unfair one to ask.

Are three states a sufficient sample to enable us to draw any conclusions?

I’m an architect, not a statistician, but I think it is. These charts depict the professional records of slightly more than 16 percent of all currently licensed architects in the United States — about 1 in 6 of us. New York, Nebraska, and Oregon are distinct in population, geography, and economic characteristics.

I welcome additional hard data on this subject and expect it to support rather than contradict what shows up in the statistics from these three states.

Most states appear to rely on NCARB to maintain these records and are unable to provide them. NCARB tells me it cannot provide any information beyond what is posted on its Web site.

Is such an attenuated internship — amounting to more than 20 percent of a typical career — in the best interests of our profession? Why the discrepancy between what is necessary and what is (apparently) sufficient? Is this system functioning as designed? If so, why isn’t it functioning as advertised? Should we make any changes? What should we change? Are we really doing our best in this regard? Can we in good conscience as a profession continue to create false expectations in students and young professionals about their careers? These are only a few of the questions that the facts compel us to ask and answer.

There are more charts and a nascent discussion on this issue at my Web site. I will be happy to provide the raw data at cost to anyone upon request, and you can perform your own analysis.

Early next year, I’ll be asking the architects who sit on our state boards to obtain an accounting on this subject from NCARB. It’s time to take the future seriously. At the very least, we owe the next generation some honesty.

What’s Unfair about Competition?

Lunch at the Hyatt Regency Dehli, New Dehli, India

A few weeks ago I was in New Delhi, India, where architectural services cost about a fourth as much as they do in North America. This low-cost option has been perceived as the driving reason for the outsourcing phenomenon of the past decade. Some view this as unfair competition.

North American firms have contracted for parts of their technology services to be accomplished overseas. This has created an around-the-clock service model. China and India have become the global leaders and the preferred choice for outsourcing services. Today, some North American and European professional practices have their own captive “insourcing” operations in India and Asia to support their other offices where labor and overhead are often much more expensive.

There are parallels in other professional practice areas. In the management consulting and technology field, U.S.-based management consultancy Accenture says that its firm in India will grow by more than 5,000 staff this year and will surpass 55,000 in India alone. And it predicts continuing growth that will not only serve the growing needs of India but significant parts of the developing world and developed world as well.

There is much more to this story than low cost/high quality talent, however. And this difference is not just about low cost. It is the high level of diligence and work ethic among professionals in India. Little waste in process, focused attention, lean overhead, very latest technology, and speed. Executives travel to client offices via coach class, even for a 15-hour flight. When they book their hotels, it is two to four people per room. They are eager to please, and their enthusiasm for the future of the design professions is contagious. This lean overhead, high work ethic culture has redefined outsourcing of architectural services. We believe it will continue to do so.

While the building information modeling skill levels in India have become legendary in just a few short years, the innovative nature of Indian professional practices is not just a story of technologically advanced practitioners in architecture and engineering.

Indian professionals have catalyzed fundamental change during the world’s recession. They have found new ways of meeting client needs, including meeting those that clients didn’t even know they had. They are eager imagineers of the future of professional practice.

Global innovators see opportunities that others are missing. They find service niches that are changing the face of the architectural and engineering business. Furthermore, they are matching their capabilities and quickly adapting to the world’s changing markets.

An Exceptional Book

We were delighted to read the December issue of IOMA’s Principal’s Report, which contains the first published review of our new book Change Design: Conversations About Architecture as the Ultimate Business Tool (2nd Ed.).

“Every so often a publication comes along that completely transforms your idea of what a book could be. Change Design: Conversations About Architecture as the Ultimate business Tool (2nd Ed.) is just such a book on several levels,” writes editor Ernie Burden.

He goes on to praise it as “an exceptional example of graphics and photography” but notes that it “transcends being simply an exercise in design and photography.”

The book highlights the role of design and innovation in transforming businesses and organizations. We couldn’t agree more with Burden’s assessment that it makes a great addition to your library.

The War on Talent 2.0: Are You Ready?

It is hard to believe that just a few years ago, one of the biggest conversations within the architecture and design profession was the war for talent — or a shortage of talent. Firms couldn’t find enough workers to fill seats much less enough talented staff. Leaders were in short supply. A very limited supply of H1B visas were accessible to architecture and design firms. Times have certainly changed.

The conditions of today don’t need to be explained in detail. Unemployment in the profession is over 15%. Firms are struggling to keep even talented staff. Backlogs are shrinking or in some cases evaporating. Competition for new projects is fierce. Each situation is unique, but common pain is felt by all. However, it becomes increasingly clear that we all have two choices: We can be the victims of these economic and structural shifts or we can be inventors of strategic success and satisfaction.

A part of this success must be setting a vision and developing strategy for the new world of architecture, whatever that may be. The future condition is unknown, but we can control our attitudes and develop scenarios to allow for our success in whatever this condition holds. One future condition that is certain is that the role of talented design professionals will be even greater. And yet where will this talent come from?

The share of the U.S. workforce that has a post-high school education is not expected to rise in the next 20 years. This is a scary fact given the national high school graduation rate hovers around 50% in the nation’s fifty largest cities, and rises only to 71% in the nation’s suburbs. In some of our more diverse urban areas, where much of the diversity needed for the relevancy of our profession resides, the graduation rates drop to nearly 30%. According to 2007 Department of Education Statistics, only 31% of 8th-graders in the United States are at or above proficient levels in standardized math testing. These are just a few of the frightening trends surrounding the struggles of education.

In a Journal of Business and Psychology article titled “Attracting Applicants in the War for Talent: Differences Among Workplace Preferences in High Achievers,” the authors state, “Students with very high cognitive abilities and strong records of extracurricular activities prefer ‘investigative’ occupations involving analytical or intellectual activity aimed at problem solving and the creation or use of new knowledge.” This is terrific news for architecture and design. However, the fact is that only 10% of people are in the top 10%.

Rather than spending all of our resources chasing the top 10%, I recommend we spend more of them chasing the other 90%. We all want a slice of that top 10%. But by developing a vision and strategies that embrace new paradigms and dynamics within our profession we can begin to develop effective ways of recruiting from the 90% and developing them into the top 10%. If we don’t, competitors will. If we wait for the future to happen, it won’t be desirable. This is the opportunity to affect the future health of our organizations that we have been looking for.

Doing Small Things for Small People

When I began my architectural internship many years ago while an undergraduate at the University of Minnesota, I worked for a talented architect named Tom Gardner. His firm, Gardner Architecture, was located in Strawberry Point, Iowa, a small town in the northeast corner of the state. Like 79% of the members of the AIA, the firm had less than 10 staff. Tom was the sole architect. The firm is in a small barn that Tom renovated on his rural property — a really spectacular and inspiring place to practice architecture. Gardner Architecture developed quite the reputation for producing terrific buildings for small rural communities — libraries, fire stations, community centers, school additions, day care facilities, and visitor’s centers, just to name a few. The firm’s work might be described as simple or unassuming, much like the communities in which it practices. The spaces and buildings that the firm designed were not elaborate, they did not make you feel uncomfortable or make you question your surroundings. Rather, they made you feel comfortable, they were warm and welcoming. Tom had a unique ability to relate to clients from all walks of life who were sophisticated in their own ways but were involved in perhaps their only interaction with an architect in their lifetime. Tom once told me, “I do simple things for simple people. That is what architecture is about.”

I often think of Tom and my time with the firm, but upon receiving word this morning of Tom’s passing, at a much too young age, I have found myself again pausing to reflect on the lessons he taught me, and the lessons that our mentors taught us every day. Firms like Gardner Architecture create incredible insertions into the fabric of our small towns, creating communities that are enlivened and hopeful for their future. Working with communities of just a few thousand people — if that big — to raise funds for a new public library that might cost $1 million dollars. This may not seem like a lot of money, given the scale at which some practices work. But to a community of 2,000 people, that impact and sense of pride and accomplishment manifest in a building created an energy and hopefulness for the future.

Tom was also a firm believer in the power of the mentorship. He trusted his staff and challenged them to reach higher. My second day working at the firm he sent me to work with a group of community members who had formed a non-profit to create an African American historical and cultural museum. These hard-working men and women were passionate about preserving their heritage and yet for years had struggled to secure funding and support for their project. And Tom was their architect. They didn’t have the money to pay the firm, so we didn’t bill them. It wasn’t seen or thought of as pro-bono work — it was simply the right thing to do. During my two years working with the firm, this group became my client, and I worked with them on the most basic of ideas and struggles to strive toward success. I had Tom’s unwavering support and counsel. His passion for his work was remarkable.

Sometimes we get caught up in the struggles of the profession or the affect on globalization, issues of mergers and acquisitions or the effect of the economy on our practices. We wonder, dream, and hope for new models of practice in a sustainable, carbon-neutral world. And yet, there are small communities across our country — much less globally — that need the most basic of architectural interventions.

The loss of Tom to the communities he served is significant. And yet, he transformed the lives of thousands of people, one small project at a time. “Doing small things for small people. This is the power of architecture!” Thank you Tom for your mentorship - you will be missed.

Problems with Pricing

One inevitable effect of the recession is that more firms are chasing fewer projects. Hence, the odds of success are greatly diminished, and those firms that do win new commissions often have to discount their fees, sometimes substantially, in order to secure the work. To compound the problem, firms that have shed staff are spawning their own competition. The same qualified people who used to be employed can now compete on a much lower cost basis, which further drives down prices.

Since most projects have a lifespan of several years, this not only affects profitability in the near term, but it has long-term consequences as well. When the recession subsides and work becomes more plentiful, projects that suffer from low fees run the risk of becoming orphans. To recover financially, firms will be tempted to concentrate on the newer, more profitable projects at the expense of the older losers. This can cause quality problems, ultimately affecting the overall reputation of the firm.

In this challenging economic climate, careful consideration of fees is critically important. If you are forced into taking deep discounts to secure new work, don’t just give up the ship. Instead, the prospective loss must be well managed. Decide in advance how much you are willing to risk — and lose — in order to do the work. Budget the loss just like any other cost, and then stick to the budget. Don’t let the losers get out of control. Remember that each dollar of loss must be earned back later with profits from new work, so every loser places a very heavy tax on your future.

Despite low fees, never stint on quality. Whether or not a project eventually makes money, it must be done well. Each job done is a brick in the wall — it becomes a permanent part of your professional reputation. You cannot afford to install any defective bricks because they will be there for all to see for years to come.

Finally, and most important, avoid competing on price wherever possible. Every firm has a value proposition. What’s yours? Be able to communicate it clearly and convincingly to clients as well as your own staff. Demonstrate why choosing your firm is a smart decision and how you can deliver more value than the competition. Be specific. Remember that a low price is not always a bargain … it’s the results that count.

Let’s Believe in Our Own Future

Scott Simpson

While no prediction is ever 100 percent correct (including this one!), we do know this: Sooner or later, the current recession will subside. When it does, things will be different. The conditions that existed between 2003 and 2007, which created unprecedented prosperity worldwide, will not be returning. It follows that the successes of the future will not look like the success of the past.

Over the next five years, the A/E/C industry will undergo a profound transformation, powered by the three primary game-changers of building information modeling (BIM), integrated project delivery (IPD) and Leadership in Energy and Environmental Design (LEED). BIM is a technology, IPD is a process, and LEED is an attitude. Individually, each is very powerful.

Together, they combine to exert huge leverage for change. All three are at the tipping point; there is no turning back.

BIM provides a way to connect the silos of expertise that have traditionally divided the design and construction process. The increased transparency of who does what makes the interdependency among all the key team members painfully obvious. The traditional model of design/bid/build promotes a culture of self-defense, with each player on the team incentivized to consider individual interests first and team success second. With BIM, this is no longer possible; it creates a whole new sociology of design. Ironically, BIM promotes both creativity and predictability in equal measure. It’s a powerful design tool yet equally adept at demystifying design documents, bridging the gap between design intent and project execution from conception to creation.

IPD takes this a step further, substituting a single, inclusive contract that aligns the interests of the owner, architect, and construction manager. What a concept! The benefits are as obvious as wheels on luggage. IPD invites a whole new approach to decision making. Since IPD represents a truly integrated team, all the key players are at the table from day one. The traditional sequential approach no longer applies. With IPD, all the brainpower in the room can be focused like a powerful lens on the problem at hand (much as parallel processing does for computing), which leads to better, faster, and more creative solutions every time.

LEED symbolizes a profound social and political shift from an economy based on consumption to one based on the wise stewardship of shared resources. In the past, the winners were the ones who made the most or consumed the most. With sustainable design, values have shifted 180 degrees, inspiring us to ask how we can do more with less. Over the useful life of a building, even small improvements in energy use, water consumption, and air quality create huge benefits. Sustainable design is like BIM and IPD in that it forces us to recognize our interdependency — no one can win unless everybody wins. It creates an unbreakable bond of mutual interest.

As we consider what’s next, it’s important to keep in mind that design is both a noun and a verb — a thing as well as process. It’s also about creating value. As currently configured, the A/E/C industry is acknowledged to be hugely inefficient. About 37 percent of all construction materials end up as waste, some 30 percent of all projects do not meet budget and schedule, and more than 90 percent of clients believe that design documents are insufficient for their intended purpose.

A conservative estimate is that of the $1 trillion spent on construction each year, $300 billion is wasted. But here’s the good news: We can view that waste as a resource. By using new technologies, processes, and attitudes (BIM, IPD, and LEED), the waste can be re-deployed, funding innovation. The result will be better, healthier buildings, constructed faster, for less. Everybody benefits — owners, architects, constructors, and the public.

This is a natural and inevitable outcome of the post-recession economy, which will demand a new accountability for value creation. The downturn imposed a certain discipline. It made us much more cognizant of what we do, how we do it, and what we spend. Viewed correctly, this discipline, which seemed harsh at first, is actually refreshing. It opens the doors to new ideas, and as designers, ideas are our stock in trade. Going forward, we should behave as if we believe in our own future. The rest will follow.

Ralph Hawkins Interview

Heads-up on what sounds to be an interesting television interview next week.

As Chairman and CEO of HKS Inc., Ralph Hawkins leads one of the top three architectural firms in the country. The Dallas-based company boasts a diverse portfolio, and its brightest star right now is the new billion dollar-plus Cowboys Stadium in Arlington.

Next week, KERA, the public radio and television station for north Texas, features an conversation with Ralph Hawkins, CEO of HKS. The interview, which will air on the station’s monthly half-hour business program “CEO,” will include a tour of the new stadium. Hawkins will also discuss how HKS is confronting the troubled U.S. economy by expanding globally and working on projects funded by the government.

Hawkins is a Senior Fellow of the Design Futures Council and a member of its executive board. Needless to say, this should be an illuminating and fascinating conversation.

“CEO” airs at 7:30 p.m. Friday, July 31 on KERA-TV and at 5 p.m. Sunday, Aug. 2 on KERA-FM. Those of us outside the reach of north Texas signals can find it streamed online after the broadcast at www.kera.org/ceo.