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.

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.

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.