Recognizing threats and opportunities in an evolving industry
While backlogs in professional practices are holding up quite well in most market segments, there is an underpinning sense that today’s economy is most likely on the verge of slow down if not recession. Storm clouds are on the horizon.
This forecast was brought out in some of our interviews last fall (perhaps two in five) and it has now intensified to over 60 percent. Thus, while there is still optimism fueled by strong backlogs and pending commissions, there are serious concerns for the longer term. Of course, in architecture and design the competitive pressures are stressful at most times; no matter if the future markets look to be strong or weak.
Leaders of professional practices recognize that there are always changes and threats looming large over an AEC industry that some say is both slow to anticipate and slow to change. However, the counterpoints can be understood after visiting a variety of firms. Case studies provide evidence that our AEC industry seems poised to respond, innovate, and navigate current changes and threats. While some firms are feeling behind the curve, others are setting the pace of what will be a new profession — a new industry.
Why Opportunity is Knocking
At our workshops, forums and summits we put an emphasis on the principles of strategic foresight. Firms that accept the discipline to engage in strategic foresight can not only avoid predictable hazards, but also position themselves to take full advantage of emerging, yet sometimes paradoxical opportunities. This is important because our industry is not only experiencing linear innovation — that which you might plan for in the traditional sense — but also non-linear with unexpected changes. We have found that disruptive forces can be anticipated and planned for through scenario and strategic foresight, not to mention intuition.
Professional Practices are Recruiting High Energy and Youthful Talent
This issue of DesignIntelligence focuses once again on talent and compensation, bonus, and equity benchmarks. You have no doubt heard cyberpunk author William Gibson’s expression, “the future has arrived, but it’s just not evenly distributed.” This is true in our profession today. We see that some firms are energized and experiencing great satisfaction during this time of upheaval while in others the leadership edge has gone somewhat stale. Some professionals have consciously or unconsciously chosen to take a path of indifference which over time often results in irrelevance.
In some organizations there appears to be more inertia than evolution. If this cultural characteristic dominates it can be difficult to put in place a sense of renewal. Some in our industry are either dead or dying. This can happen to any firm regardless of organization size. Radical change and professional mutation is unfolding in ways that are hard to keep up with. Few firms believe that they are ahead of the curve. But keeping up is to be admired. Our surveys show a variety of firms, both traditional and non-traditional, who are seeking and finding good fortune now. And there is more ahead. This is more than a self-fulfilling prophesy, it is professional readiness. A mindset to win more, lose less, and achieve professional satisfaction.
Design organizations, and by this we are talking about not just the professions but schools where design thinking is taught as well as manufacturers and suppliers who embrace cultures of design excellence, are all playing increasing roles that intercept the future — and make that future a better one.
It’s a Time to Reconceive Core Strategies Dealing with Younger Generations of Talent
Some of the changes being faced by the design professions today will change the professions for the better. This good news means that a variety of shifts will complement the visions and values of evolving organizations. The culture of creative organizations and professional practices is increasingly being influenced by the new Generation Y professionals (millennials). The millennial generation is now a factor in the setting of the cultural thermostat in our professional practices. These young professionals (millennials are approximately age 20 to 35) are for the most part well educated and watchful. They will challenge conventions but usually with a soft voice. They will quietly change their place of employment rather than challenge status quo aggressively. They desire to be in firms and with other professionals whom they believe in. Take a sample firm today and find out what the average age is. As an example, if the average age is 32 and the firm has visionary leadership, that firm is likely poised to be strong, energetic, and with a genuine work ethic. Moreover, client organizations in public and private sectors are hiring Generation Y professionals too. Thus, new zones of rapport and respect can be formed where marketplace decisions will be made in the future.
Modest Economic Growth will not Slow the Power of Design
We expect only modest economic growth in the next three years. The U.S. GDP is projected to be right around 1.9 percent. Why? China’s slowdown will be one factor. But so will the slowdown in capital investment by private clients in the United States due to high tax structures that dampen the will for entrepreneurship. Could we be entering a new recessionary time? We think it wise to prepare for the worst. Contingency plans should be a part of every strategic business plan in prepared organizations. Of course, firms can grow when markets don’t. In the downturn scenario, global capital will seek out safe harbor investments. Real Estate in the United States and Canada are attractive options today for foreign investors. What’s at the basis of this? Relatively stable real estate valuations and the rule of law.
Today, organizational strategies should include both strong offense and defense. In other words, to identify areas that improve competitive advantages and other areas where firms can overcome competitive disadvantages. It’s always good to identify disadvantages and work to rectify them. These opposites will go hand in hand under the stewardship of leaders with courage. We do not see economic stagflation anytime soon but we do see storm cloud on the horizon. Look for profits during the downturn to stay at double digit percentages so long as the value propositions are compelling and top talent is deployed, showing advantages that have clarity.
Globalization has New Paradoxes
The top thirty firms exporting design services outside the United States invoiced $2.7 billion USD. We see some erosion to this in 2016 due not only to softening global trade but also due to the strong valuation of the U.S. dollar which can make it harder to export competitively. The world’s best talent, it can be argued, is found in U.S. based multinational firms. Therefore, watch for more contracts being negotiated in both U.S. and foreign currencies; with the work done where there is strong talent; and watch for a flattening or single digit drop in U.S. design export growth. There is not only pent up demand but an ongoing hunger to improve the quality of life around the world. U.S. firms are positioned well in this marketplace and have the content and talent to deliver solutions. A diversification strategy that includes global targets is not going to disappear even though global growth in architectural services will flatten or dip somewhat.
Medium Sized Firms Grow and Evolve
There is a misunderstanding that the medium-size firms are at a competitive disadvantage in today’s marketplace. A primary reason cited is that these firms are slower to evolve and that their talent is less accomplished and aging. Our research does not support this. We encourage readers to compare the reach and richness of the top 1,000 firms in the 16th Edition of the DesignIntelligence Almanac of Architecture & Design. Take a look at this year’s edition which was mailed to Design Futures Council members last month and compare the metrics with the Almanac of three years or five years ago or ten years ago. Focus for a while on just the medium size firms. Look at the dates of when they were founded. Take the list and skip the top 100 for a moment and just focus on the next 300. You will see that for the most part, medium size firms are healthy and growing. They also have strong brands in their regions. Many of them are marketing more aggressively to build market share; they are diversifying their offerings, they are recruiting top talent from both smaller and larger firms, they are expanding their geographies, and they are changing industry norms through the use of technology. Medium size professional practices have a future so long as they don’t over harvest from their balance sheet and of course, they must keep reinvesting and diversifying into new businesses as the economic marketplaces shift. Many are doing this quite well, but greedy firms will tend to devolve.
Firm leaders can prepare for the unexpected and they can be prepared for the changes ahead, both known and unknown. Resilience cannot be achieved without foresight. Look around for warning signs such as unresponsive leadership that is in denial or is lacking vision for the future. The complexity of modern technology will be a challenge for many firms but the new tools play into the strengths of the disciplined architect. Some professionals will experience psychological threats that can be due to a media hype. Leaders should choose their media consumption wisely. One real threat is internal to organizations. Watch out for leadership that fatigues, does not renew, has lost the energetic bounce required of today’s leaders. Leaders in each generation need to challenge complacency wherever they find it. Be watchful. Some threats to growth are self-inflicted, not just from outside pressures.
There has Never Been a Better Time to be in the AEC Industry
There are a massive new opportunities in today’s marketplace. Furthermore, there are architect entrepreneurs who are identifying market opportunities and creating relationships of service beyond traditional practice. Firms are creating new partnerships, joint ventures and alliances. New advantages.
Today’s youthful architects have a vision too. Generational shifts are good for the design professions. As we travel we hear some say that millennials seek unreasonable entitlements. Things like rapid promotions, constant positive coaching with trophies, better work-life balance, and a sense of purpose beyond profit. But we see much more to this. Consider when millennials were born. They entered the labor force in the aftermath of the Great Recession. And while there is full employment today of architects and designers many of these youthful professionals are still feeling behind the curve in terms of making a living wage. Their compensation and levels of responsibility in some firms are sub-par compared with peers they are replacing.
Youthful professionals are looking to get a foothold and to catch up professionally. Many of these young professionals have large debt, are fearful of another economic downturn, and are subsequently risk averse. They need a leadership boost. Firms who coach and encourage the thousands of talented Y talents will be rewarded. As this generation enters their prime in the marketplace they will be the decision makers and leaders of a bold new profession. They will find the pathways to success. They will find that opportunity is knocking.
James P. Cramer is the chairman and co-founder of the Design Futures Council. He is chairman of the Greenway Group and author of three books on professional practice leadership.