Prepared for the New Normal

According to official statistics, the deepest recession of the past 40 years is now behind us. The GDP is growing, the Dow has cracked 10,000, and interest rates remain at historic lows, keeping inflation in check.  Wall Street is even paying big bonuses again.

Yet to most people, the tangible effects of the recovery remain elusive.  Unemployment has increased over the past six months, the dollar has lost significant value on the currency markets, and many sectors of the economy (especially commercial real estate) remain fragile.  Is this what a recovery is supposed to feel like?

Unfortunately, yes. The economy may have bottomed out and experienced something of a bounce, but it’s certain that the boom years of 2005-2007 will not be returning any time soon. While it’s true that panic has subsided into caution, the credit markets remain deeply chilled, if not frozen. While some clients are doing planning new work in anticipation of a more robust recovery, very few new projects are getting the green light, and this state of affairs is likely to pertain for the foreseeable future.  Under these circumstances, a slow-growth, cost-sensitive economy is beginning to look like the new normal.

What’s a design firm to do?

Like it or not, get ready for increased competition. Significant layoffs in the profession have spawned a new generation of small, nimble design firms with low overhead. These new firms, often headed by well-regarded professionals with significant experience, can be formidable competition.In the past, perhaps a dozen or so contenders would be chasing any given project; these days, that number can easily double or even triple. Clients are increasingly price-sensitive, so expect significant downward pressure on fees. You will have to price your proposals accordingly, and when successful, execute the work with relentless efficiency. There will be little if any wiggle room.

This will almost certainly require a leap in technology, and specifically BIM, which can be used for all phases of the work from design through construction administration. Sophisticated users of BIM have found ways to create significant efficiencies in the documentation process and have even been able to eliminate the need for shop drawings during construction. Now that the GSA (as well as several states, including Texas and Wisconsin) have mandated BIM deliverables for all projects, the tipping point has clearly been passed. If you have not already done so, it’s time to get on board. Make use of your downtime to acquire the software and institute a firm-wide training program, as BIM capability is fast becoming a gating issue during the selection process.

This is also the time to invest in personal client contact. Brochures, mailings, and press releases about design awards have their place, but nothing beats a face-to-face discussion between real people. Remember that your clients are in the same leaky boat as you are: They are worried about volume, cash flow, and expenses, so anything you can do to ease their burden will be appreciated. Sometimes this is as simple as clipping an article about how to save on energy or maintenance cost and sending it along. Let your clients know that you are thinking about them and that you are a source of good ideas — both now and for the future. When they are ready to build again, they’ll remember this courtesy.

It’s also a good time to review and refine your value proposition. What is your firm really good at? How can you demonstrate that with hard data?  Which clients can benefit most from your particular skill set? Those are the ones you should be talking to. Put away your shotgun (though it’s tempting to go after any project that comes up, regardless of fit), get out your rifle, and take very careful aim. Your marketing dollars are precious, and you can’t afford to waste them. Think high impact:  What are the things that clients need to know that you can provide? What sets you apart from the competition? How are you going to communicate this clearly and convincingly to each and every prospect? Get in the habit of doing this, because it’s the best way to position your firm for long-term success, regardless of the state of the economy.

Above all, remain optimistic. Nobody likes a complainer. Don’t focus on problems — anybody can do that.  Instead, insist on finding solutions. Design is inherently about value creation, so make that part of your brand.  nd stay patient. The recession may be technically over, but its effects will linger for a while . Eventually, pent up demand will create more opportunity than you can handle. The U.S. economy, despite its recent bumps and bruises, is still more than twice the size of Japan’s (No. 2) and four times the size of China’s.

Like a good sailor, you need to position your sailboat to take advantage of that next puff of wind.

The Journey We Face

I just got off the phone with a reporter asking for my take on Foster + Partners laying off 300 employees. This is a huge reduction of nearly 25% of their work force. In recent weeks we have seen other firms such as TVS Design, Smallwood, Reynolds, Stewart, Stewart, and others of all sizes reduce staff due to the world-wide slowdown in architecture and construction. This is happening with world-class firms and regional firms including those of highest repute. Often the percentage has been in the range of 15 to 20 percent RIF.

In less than one year we are moving from full employment of the creative class that includes architects and designers to an unemployment rate of perhaps 15%. Some scenarios and business model simulations anticipate even more. A Design Futures Council roundtable reports that dozens of firms now have contingency plans in place to reduce their work force by perhaps 40 percent. Firms with the strongest brands will most likely experience less pain, but no firm will be completely immune unless they are a big player in infrastructure, sustainable design solutions, health care, adaptive re-use, or of course school remodeling and additions. It appears that the new educational facility package did not get through the U.S. Senate this week.

The Foster + Partners layoff is putting some very talented people out on the street. The firm will close its offices in Berlin and Istanbul. Some of the departing staff will pick up other assignments within a few weeks, others will form new firms, others will languish for a month or so and then adjust to options, including going back to school, learning a relevant specialty within architecture or engineering, or even pursuing related career options. No professional category is immune to this recession. But few economists in the real estate arena forecast such a bleak and fast moving downward cycle.

What is one to think? The decisions by Foster + Partners (a part of 3I Group) are an unfortunate but necessary response to the economic conditions we are in. I expect more projects to be delayed or cancelled over the next 12 to 18 months. It is a professional responsibility of firms to keep their professional practices healthy in both good times and bad.

The heart of the profession is being tested. Architects and designers — indeed the construction industry — will come out of the recession/depression stronger. But it will be a journey none of us have wanted to face.

Never Waste a Crisis

Charles Dickens had it right: this is the worst of times, but also the best of times. The effects of the current economic crisis have been sudden, broad and deep. Construction financing is as scarce as hens’ teeth, and many projects have been put on hold or cancelled outright as a result. Design firms across the country are facing rapidly diminishing backlogs and scant prospects for new work. Collecting fees has become more difficult. The first round of layoffs predictably affected primarily younger staff, but now the staff cuts are beginning to reach into the senior levels. Before the recession ends (do we still call it that?), a wave of consolidation will likely sweep the industry: mergers, acquisitions, and perhaps more than a few bankruptcies. One thing is clear: we know that the widespread prosperity of 2003-2007 (when the stock market reached an all-time high) cannot return to “normal” because it was built on false premises: loose lending practices, exotic investment derivatives that not even Wall St. experts fully understood, huge deficit spending by Congress, and in some high profile cases, outright large-scale fraud. Those conditions cannot be repeated, nor would we wish them to. Instead, the time has come to examine the lessons learned, clean up the mess, and re-tool. A sustainable future can only be built on a sound economic foundation.

While it might sound counter-intuitive, this is a period of unprecedented opportunity for savvy design firms. Clients will be looking to save money, both on capital cost and operational cost, and to find ways of getting more productive use out of the space that they already own. They will not tolerate sloppy design or inefficient practices. Those who are building will be looking for ways to speed up the process, build wisely, and eliminate waste. Best-of-class firms will respond accordingly. Fortunately, there are three compelling value propositions that the design profession can bring to the table: BIM, IPD, and green design.

Over the past several years, the imperative to embrace sustainable design has clearly passed the tipping point in the mind of the public. More importantly, it has also been embraced by the business community. Some of the smartest firms on the planet (such as Kleiner Perkins in Silicon Valley) have recognized the potential of an emerging market in “green tech.” They see huge opportunities and big profits ahead. With the equity and real estate markets in a steep decline, investors will be looking for growth in other areas, and green technology can provide it. Expect an explosion of innovation in the coming years. Because each dollar of energy cost saved goes right to the bottom line, much of this new technology will be “self funded.”

BIM is another idea whose time has come. It’s more than a clever piece of software; it has the potential to actually change the “sociology” of design-the fundamental way that individuals and teams deal with one another during the course of a project. By providing a common place to store information, by providing a platform for “multiple authorship,” and by providing for the transparent sharing of information that bridges the traditional professional silos, BIM has the potential not only to greatly enhance overall design quality, but to control budgets and schedules in the bargain. With BIM, the old saw of “time, money, quality…pick any two!” no longer holds. Clients want all three, all the time, and with BIM, designers can deliver the goods.

The third important innovation is IPD, or Integrated Project Delivery. This is not a warmed-over version of fast-track or design-build; it is a fundamentally different way of engaging the Owner, Architect, and Construction Manager to work together collaboratively in producing a project. It takes better advantage of all the brains at the table, aligning the disparate interests with the mantra that “we all work for the project.” IPD has the potential to reduce or eliminate much of the repetition and waste that is endemic to the design and construction process. Imagine, for example, building without the need for bidding, shop drawings, or submittals. In an economy that spends better than $1 trillion per year on construction, gaining efficiencies of only 10% (well within reach), will produce $100 billion in savings each year, which is triple the amount paid in architectural fees. Think about it.

The good news is that all three of these process innovations are readily available. The bad news is that it seems we have to be in crisis mode before we’re brave enough to take full advantage of them. By nature, architects are pretty good at inflicting change on others, but remarkably reluctant to embrace change in their own profession. The current crisis has brought its share of hardship, but it also presents an unprecedented opportunity. In today’s economy, design firms either re-tool or they risk going belly up.