What are you planning for 2003? Aggressively adapt to the trends transforming the industry and regardless of the economic tremors, within six months to a year, your practice will soar.
Each year in January we look ahead to imagine the next 12 months from a strategic and economic viewpoint. These articles have generated quite a lot of discussions in the past between firm partners and around the boardroom tables in some very progressive A/E/C organizations.
We have granted hundreds of permissions to reprint past issues of our “Unfolding” articles to be used in staff retreats and partner meetings.
Any forecast of the future should come with a warning label: “Subject to Change.” I say this because of pending wild card issues such as war. Still, we are fortunate to work with some of the very brightest thinking design firms in the world and we get daily doses of new research from Greenway Group’s Counsel House research team. We hope DesignIntelligence will help you create your own success story this year.
Use your judgment on each of the issues discussed here. Our analysis should prove to be quite useful but the value to you will be in the details—your own personal behavior included. You can imagine and create your own custom initiatives based on the collective information that we provide. Your future can be invented for success even when the economy is down.
Year after year we interview firms who are growing by hundreds of thousands of dollars in fees even when the building sectors that they specialize in are shrinking. The fees in corporate interior design for instance, have seen nearly a billion dollar decline over the past three years. However, dozens of agile firms have weathered the storm quite well and some have even grown by developing compelling value propositions that separate them from the pack.
Clients see most firms bundled together—offering commodity services with little differentiation from each other. Your organization can distinguish itself. Your firm can become an innovator if it has the methodology and attitude to do so. Here is a story we hear each year: “Our firm is likely to take in 10 percent less in net service revenue fees next year because the markets we are in are expected to decline by about that much.” When I hear this statement I hear “victim,” not “leader.” Your response to an economic downturn can be: “There is a recession predicted in our building segments. We are not in denial; but here is our game-plan for winning more, losing less, and finding ways to sustain our enterprise.”
Your ideas can be unorthodox and connect to innovation and creativity in zones of the design business that are driven by the new economy. Design and related areas will drive the new experience economy. Who defines design’s new value? Why not you?
The picture of the economy in 2003 appears mixed for most in architecture, engineering, and design. Here is how we see each sector changing in the near term:
For a Few, Domestic Opportunities Will Expand
When we look into the rear-view mirror we see remarkable growth in the 1990s for architecture, engineering, and design firms. Since then, however, the markets have slowly receded in many sectors. Here is what we forecast for each market sector for the next 12 months. We have taken into consideration the 2003 Construction Outlook by McGraw Hill, the 2003 North American Consolidated Forecast by Reed Construction Data, and now contrast this with our own interviews of firms in each market sector. Leading firms have provided us their backlog reports as to type and duration, and we have examined the latest reports from the Federal Reserve Regional Reports (the Beige Book). Government projects include local, state, regional, and federal. (In education, both public and private are combined.) Greenway Group’s Counsel House Research Reports have been used when relevant to market sector.
Designers have already been selected for much of this work, and there is healthy current work in progress and backlog scheduled. However, keep in mind that even when there are contracts some projects can (and will) be put on hold. The range from low to high was established by consensus at the Greenway Group, but each firm should put in place a marketing game plan to outperform averages in an up or down economy.
While some organizations will experience moderate increases during 2003, others will struggle and the total workforce is expected to decline by 2-4 percent in firms—for reasons ranging from the soft economy to increased productivity. Employees in architecture, interior design and related firms will decrease by 4 percent to approximately 191,400. It is not known if the A/E/ID workforce will increase or shrink in corporate positions but layoffs have occurred at many blue-chip companies in each market sector. Organizations such as IBM and Disney Imagineering report recent downsizing. No change is expected in government positions nationally.
Core Values Will Redefine the Firms to Watch in 2003
Almost all firms say top talent is hard to find—in any economy. Psychological studies have revealed that cash compensation is not the prime motivator, but its absence is a de-motivator when recruiting top talent. This has been borne out once again by reports from design firm employees. Firms that create happy employees are not only keeping their talent but also increasing their value proposition to clients. When a discontent employee is given more money, you merely create a wealthier unhappy employee.
Firms that live by strong core values always make for a more motivated workplace that is a pleasure to come to each day. Productivity can increase by 15 to 35 percent in such well-managed firms. Young architects are increasingly concerned about life-balance, safety, and “a great work environment”: flex schedules, good internal communications, non-hierarchical organization and advancement, and personal and professional satisfaction as a life-style issue. Thus, non-compensation issues are often your best recruiting tools.
Your firm’s brand repute, combined with fair compensation and above average non-compensation will attract, retain, and develop future talent. Compensation matters, but don’t stop there.
Make Your Strategic Investment in Training and Education
Most organizations do nothing to measure the impact of training and continuing education in terms of business results or improved performance, but it’s surprisingly easy to do. If you’re not getting improved performance what are you getting? Create a sense of urgency about quality in-house programs as well as attendance at association education and training experiences. Keep in mind that there is both strategic and non-strategic education. Non-strategic time is a type of “failure-expense” that firms unknowingly pay for month after month. Strategic time produces true professionalism and profits. Non-strategic time keeps people busy but does not contribute to building up professionalism or profits. Every action of the firm should underscore that training and continuing education should always be strategic.
Don’t Get Burned
Cut out and eliminate those average-learning experiences unless you actually want an average firm. And when you send people off to AIA, ACEC, NeoCon, and other events and conventions, plan ahead for the best courses and then ask your staff to monitor courses and instructors. Time at these events should always be strategic, to produce consistent positive results that meet the firm’s objectives. Many of the best firms plan conference attendance beforehand and organize to attend programs that offer the best return on investment.
Who are Your Exemplars?
How about your own time? What message are you sending to your staff? Are you tolerant of wasteful, aimless activities? Your statement on the importance of training and continuing education will only be credible if it is reflected in your actions. Education and training can truly be an investment in excellence for your firm. Too many firms have not yet achieved this. According to Counsel House Research, the current percentage of value in
training and continuing education sorts out as follows:
Highly strategic — 15 %
Strategic — 20 %
Acceptable for Average Firms — 30 %
Fair, but Non-Strategic — 20 %
Poor and Non-Strategic — 15 %
Make someone accountable for examining education and training for your organization. What are you doing to stress that attendance be limited to courses involving strategic time only? The large number of programs that you will eliminate (approximately 35 percent) will alarm you.
Learn from The Failures of Latrobe
Every architect and student should be aware of the failures of great architects like Benjamin Henry Latrobe and Augustus Wellby Pugin. I’ve used Pugin’s example in my recent workshops because of his insistence on a particular vernacular that was going out of favor and his lack of willingness to change. In addition to significant work on the Houses of Parliament, Pugin designed hundreds of schools, colleges, and churches. But no matter what Pugin’s clients asked for he insisted on his own independent Gothic solutions. He went from being one of Britain’s most celebrated and prolific architects to the marginalia; impoverished, he went on public welfare toward the end of his life.
While architectural historians and enthusiasts recall the works of Benjamin Latrobe (such as the Catholic Cathedral in Baltimore, The United States Capitol, The Old Supreme Court, and Decatur House and St. John’s Church in Washington, D.C.) his failures have almost been forgotten. Latrobe, who at 6’ 3” literally towered over the field, was a financially ruined man when he should have been at the height of his career. Latrobe’s life is a tale of rise and decline—and finally and tragically, his fall. It all could have been avoided.
In 1814 he wrote to his son Henry:
“My industry has indeed been unremitting—my talents sufficient for their employment, but my habits, my habitual sentiments and mode of acting as well as of thinking, have been altogether ruinous … and has prevented me from amassing a fortune even in this place … Learn, my dear boy, by my example, and don’t talk of unfortunate stars. Remember that among the leftovers of self-denial, which are necessary to virtue, not only the restraint of passion but of benevolence is to be learnt. ‘Speak truth and keep out of debt,’ are precepts which include all the other virtues; the others will follow.”
—Benjamin Henry Latrobe
Sadly, Latrobe died penniless of Yellow Fever in New Orleans in 1820 and his burial place remains unknown. The irony of all this cannot obscure Latrobe as one of the most creative architects and engineers of his time, but it is sad that the fruits of his creativity did not result in holistic financial nor physical health for him or for his family. Needlessly, there are architects, engineers, and designers who are repeating the same mistakes nearly two centuries later.
Why Clients Will Fire Professional Service Firms in 2003
Some time back, Greenway Group’s Counsel House Research conducted a survey for an organization that wanted to know the primary reasons that clients stopped buying services. In each instance, the client had recently fired their design firm. While the full report is long and insightful on many overt details and subtle points we can summarize in four key points why clients let them go:
1. The client no longer has a need. (This could be temporary)
2. The client believes another firm meets needs better.
3. The client has had a bad experience with an employee(s) in the firm.
4. The client believes that inertia has set in and wants a fresh start.
When clients were interviewed about their experiences with firms they fired, most believed that no matter how talented the professional design firm was, it was out of touch with their needs. Firms did not have a contact strategy. Over time the relationship drifted and clients forgot what the unique value proposition of the design firm was. The unique branding engine that drives your marketplace positioning must be constantly reinforced. Failing to continually educate your clients and stay in touch with them will produce a lack of chemistry and rapport. Once this has been lost, it is often hard to rekindle.
A Revolution in Professional Services
Over the last few weeks we’ve called leading architects, engineers, and designers for a quick sounding board for some of the ideas in this issue and to provide an update on what is new and noteworthy. As one might expect, there is deep concern about the potential of war with Iraq and the nuclear crisis that is emerging in North Korea. But excluding those considerable factors, there remains underlying optimism within these pacesetting firms. Here’s a sampling:
Higher Education … Decline For Some, Huge Gains for Others
All around America, firms are doing as much college and university work as ever. Even firms without higher education experience have entered these markets. For instance, Pickard Chilton Architects, a 24-person firm located in New Haven known primarily for its corporate office facilities, was recently selected for a major Colgate University project—their first such undertaking in the higher education sector. Other firms are going outside their traditional regions. Jova Daniels Busby Architects of Atlanta, known mostly for their projects at Georgia Tech and among deep South projects, have expanded outside their region; in late December they were named architects for the new Veterinary Medical College at North Carolina State University. In both instances the firms beat out favorites. Other firms are entering higher education because they have unique talents in housing (dormitories) or science and technology (labs). A number of long-established firms are expected to have strong years in the college and university segments including: SOM, Perkins and Will, Bahr Vermeer Haeker, Bohlin Cywinski Jackson, Carter and Burgess, Hardy Holzman Pfeiffer, CUH2A, Hammel Green and Abrahamson, Flad, Stubbins, HOK, Michael Graves, NBBJ, and Shepley Bullfinch Richardson Abbott.
But many firms report reduced backlogs, and universities themselves report fewer dollars for capital projects due to endowment plunges. Rehabilitation and restoration of campus buildings is expected to increase steadily for the next three to five years. However, there will be a decline in funding for buildings at both state and private schools that will take a significant toll on firms not resilient or ready to adapt.
Corporate Offices: Costs Per Square Foot Plummet
Not only are corporations not expanding facilities anywhere close to past levels but they are also redefining building standards. The new generation of corporate architecture includes taking shortcuts on design and materials as corporations run toward short-term bottom line profit reports. They will regret this for years to come. Costs per square foot will hover around $118 in many cities and pressure points as low as $70 per square foot have been reported. Architects and designers who can coach their corporate clients into measuring the value of good design (DesignIntelligence will have a new report on the Metrics of Value later in 2003) will create resiliency for their clients long term. Watch for a new interest in green and sustainable design, which corporate governing boards are now asking their management to be accountable for. William McDonough + Partners, SOM, HOK, Gensler, HDR, CH2Mhill, Vanderweil, Mithun, Jacobs, NBBJ and OWP&P are current frontrunners in large-scale green design. Then follows a few hundred firms who are getting LEED-certified staff and putting notices on their web sites. A number of corporate clients will seek to alter the way they use space and will look for designers to help them with flexibility. In 2003 we expect to see corporate space innovation at such corporations as: Cisco, Pathmark, Allegheny Energy, Tenneco, Dell, JP Morgan Chase, BP, and others.
DesignIntelligence Top 12 Global Markets for Design Services
Significant growing international markets for architecture, engineering and design in 2003 follow. This list takes into account the gross domestic product growth rate in each country, projected capital expenditure growth, projected demand in building sectors, adjusted for economic risk as well as for population and demographic changes. Even if you are not currently practicing internationally, this is still relevant as there will be considerable investment made by these countries into the United States; e.g., you may have an opportunity to work for an Australia corporation in Colorado. Today, almost 20 percent of firms have foreign clients or are working abroad for U.S. clients.
United States: 1.9 %
China: 8.2 %
South Korea: 5.6 %
Australia: 4.8 %
Russia: 4.4 %
United Kingdom: 2.3 %
Greece: 4 %
Canada: 3.9 %
Turkey: 3.8 %
Mexico: 5.8 %
Vietnam: 5.1 %
Onward and Upward
Overall, we see 2003 as a more normal year for many firms. For entrepreneurial firms we expect to see a prolonged period of growth (3 to 8 percent) and well-managed firms will be able to eke out a 10 to 15 percent profit. Despite our concern over “cheapening” trends in corporate offices, we expect “gourmet architecture” to grow and provide a zone of less fee pressure for the best firms.
On fees: Smarter clients consistently pay lower fees when it comes to commodity services. Today, clients regard more than 65 percent of architectural services as generic services. The good news is smart clients also create smart opportunities for architects and designers. Cost-effective creativity and integration are much sought after today. And as for technology in professional practice, the more that architects, engineers, and designers know about technology, the more valuable the tools become.
Wherever there is innovation there is also increased profit potential. Innovation boils down to knowing more than other firms, and often, knowing more that your clients do. It leads a firm away from being a commodity provider. Information asymmetries play a significant role in separating firms today—rarely is this talked about at association events because the truly innovative firms are not sharing their competitive secrets. There are closely held intellectual property secrets in the top 20 percent of architecture and design firms. The Nobel Prize in economics won by Joseph Stiglitz, George Akerlof and Michael Spence confirms that when sellers know far more than buyers, unusual opportunity for great profit can arise. In past issues of DesignIntelligence we have reported on the reasons that tier-one and tier-two design firms typically make more than a 20 percent profit. Often it’s more than 30 percent. This kind of design innovation cannot be commoditized easily, but technology makes the “fuse” of innovation much shorter.
Five Characteristics of Innovative Firms
They understand commoditized design can be turned inside out.
They realize there is no success without controversy.
They often seek alliance partners to counterbalance their weaknesses.
They are never satisfied and can often be tough work environments with high turnover.
They have a tendency to either burn bridges with clients or have breakaway positive experiences with them.
A highly innovative culture also contains considerable mythology and confusion. In fact, we have found a mythology associated with top-tier design firms creates a silent and seldom-discussed type of incentive within the culture that can confuse and complicate issues, rather than inform and educate. Often, an educated client provides an opportunity to do better work up to a point—then the reverse often happens. Differentiated services embedded with innovation create their own puzzlement and then . . . new value. Strong brands have their own mystique, which must be protected, or fee levels will revert to average and multiplier rates shrink.
Watch for “Strategic Partitioning—Modular Processes”
Owners and clients are quietly discussing the future standardizing for the architecture of buildings and processes to allow the mixing and matching of different components comprising a whole building. At the residential level, pre-manufactured and modular structures are expected to make significant inroads as top designers specify “faster and leaner” design to achieve both good design and high-quality buildings. In 2003 we expect a significant increase in strategic partitioning in producing both residential and commercial buildings. Architects and designers will need hybrid contracts, which provide initial fees as well as royalty fees (not unlike many industrial design firms employ). The benefits of modular thinking (including your firm’s proprietary knowledge, and information management strategy) extend well beyond architecture. Just as buildings are composed of functional parts, these can be mixed and matched by design to create a multiple of satisfying solutions. Traditional firms will reject this notion for several more years but make no mistake, it’s an idea right around the corner in the building segments of health care, K-12 education, industrial buildings, medium scale retail, corporate office and residential.
So for Return on Your Investment—
“Bank on the long-term trends, and ignore the tremors.”
J. Paul Getty
What are you planning for 2003? Open your mind to a changing world and don’t be afraid to try something new. Aggressively adapt to the trends transforming the industry and regardless of the economic tremors, within six months to a year, your practice will soar.
—James P. Cramer