Creative disruption through technology, delivery, research, and M&A is shaking up the status quo … for the better.
When the temperature dips below 32 degrees, water becomes ice. In physics, the transformation from liquid to solid is known as a change of state. When external conditions change, even a little bit, the implications can be far-reaching. This same phenomenon is now occurring, at both large and small scale, in the A/E/C industry.
The distressed economy of the past few years has not been kind to design firms. Competition is up, fees are down, and profit margins are thin, resulting in significant downward pressure on both staffing and overhead. Estimates of overall job losses in the profession range from 30 percent to 40 percent. While conditions are beginning to improve somewhat, it’s become increasingly clear that the traditional model of professional practice is not in sync with the post-recession economy.
For far too long, the A/E/C industry has been trapped by conventional cost-based, risk-averse thinking that has consistently delivered sub-optimal results. According to studies by the Construction Managers Association of America and The Economist magazine, 30 percent of projects do not meet schedule and budget, and 37 percent of construction materials wind up as waste. That’s quite an indictment, especially considering that design and construction represents the biggest slice of gross domestic product after health care, at about $1 trillion per year.
By necessity, things are changing. The widespread acceptance of the sustainable design agenda (led by LEED ratings), productivity gains made possible by technology (most notably building information modeling), and promising new methods of contracting (such as integrated project delivery) are converging to drive fundamental improvements in how buildings are designed, documented, and delivered. This creative disruption is seismic in nature: It’s shaking the status quo from top to bottom and will inevitably lead to a new and better business model for the A/E/C industry.
Flipping the Paradigm
The traditional practice paradigm (selling time producing lines on paper) is essentially a cost-based model. In that world, issues of staff utilization, overhead, and timesheets drive firm management, and these are often in conflict with design values. There are elaborate systems for setting up job numbers, creating work plans, establishing QA/QC procedures, and overseeing billing and collections in an effort to run a tighter ship. Numbers are carefully tracked; spreadsheets abound. There’s plenty of data, but it mostly tells us, in exquisite detail, what we are doing wrong. There’s not much evidence that all of this management and monitoring is being used strategically to design better buildings or deliver them more efficiently, which is what clients really want.
It’s time for some new thinking. In a cost-based environment, low bidder wins; all other factors are secondary. But in a value-based business model, it’s the outcomes that matter. When the benefits produced outweigh the cost incurred, fees are no longer the primary differentiating factor. All too often, both architects and their clients fall into the trap of confusing cost with value because we lack a common language for expressing design value in business terms and business value in design terms.
Make no mistake: metrics matter. It’s one thing to say “That’s a cool looking building,” and quite another to say “That cool looking building has a much higher BOMA efficiency ratio, uses 20 percent less energy, and was delivered six months ahead of schedule, enabling the owner to accelerate revenue flow from the leases.”
Architects who can add meaningful design metrics to their bag of tricks will be seen very differently by the market because they will be talking a language that clients truly understand. They will be viewed as strategic thinkers, sought after as trusted advisors, and appreciated (and paid) as contributors to the bottom line. This means getting deep inside the heads of their clients, understanding what drives them and what keeps them awake at night. It means becoming fully conversant with their clients’ business metrics and using this knowledge to design better, more efficient, healthier, and less expensive buildings that cost less to maintain, and then delivering them sooner, on budget, and with little or no waste in materials. It’s a win/win for all concerned, but it does require a change of attitude and different ways of organizing the work.
Over the years, buildings have become increasingly complex. New materials, equipment, and systems have been invented. Codes and regulations are more stringent, calling for greatly enhanced building performance. Aided by computer technology, architects are experimenting with breathtaking new forms. As a result, it takes a legion of designers, technical staff, project managers, specialty consultants, contractors, subcontractors, and suppliers, not to mention owners, financiers, lawyers, and regulators to produce a project. Major firms now employ hundreds, sometimes thousands, of professionals and operate multi-office global organizations. The cost of technology and training to keep up with all this is steep, and as firms become larger, they inevitably need more sophisticated management and marketing to keep the ship afloat.
There are some interesting parallels to the health care industry, which has undergone huge advances in research, technology, delivery protocols, training, and risk management. As a result, the practice of medicine has been transformed, so much so that large organizations rather than individuals have become the primary decision-makers. Physicians — the actual providers of direct care — have ceded their leadership to government policy makers and insurance companies, who often determine which tests and procedures will be approved for a given diagnosis. Doctors have lost nearly all of their influence in determining how the overall health care system will be organized and operated, and while they are being marginalized, their compensation is dropping accordingly. Many are leaving the profession as a result. Could this same thing happen in the A/E/C industry?
As design goes global, there is a clear trend toward fewer, larger, multi-office firms. Perhaps aided by lower valuations due to the recession, the pace of mergers and acquisitions has recently picked up, with foreign organizations buying a big stake or outright control over major U.S. offices. Examples include RTKL, Burt Hill, Hillier, and Anshen & Allen. Domestic firms are also on the march, expanding their market penetration by buying other offices (Perkins + Will, Cannon Design, and NBBJ, to name a few). AECOM, the giant in the industry, has grown to some 45,000 staff, including both design (Ellerbe Beckett) and construction (Tishman). Progressive construction management firms such as Mortensen are pushing the technology envelope hard, and some such as Beck have a created a new practice model that truly integrates design and delivery within a single brand.
While all this is going on, newly minted design graduates are entering the market. Eager and educated in the ways of technology and faced with a dearth of opportunity in existing firms because of the recession, they are starting their own niche offices and getting good traction by offering highly creative design at modest cost, thus putting pressure on the larger firms to keep fees and overhead low in order to stay competitive.
This creative disruption in the teeth of a severe recession is necessary to establish a new platform on which the A/E/C industry can find its feet and move forward. The irony is that architects, who are so good at inflicting change on others, are woefully reluctant to embrace change in their own practices. There is plenty of opportunity, but true entrepreneurs are rare.
Success is Inevitable
But here’s the good news: Success is inevitable. There will always be architecture, just as there will always be health care. The questions are what we will call those who provide it and how they will be organized to deliver the goods. Despite (and because of) the recession, there is more potential than ever for a clever design firm to succeed; it’s just that we need to be facing the windshield rather than the rear-view mirror. The days of yore are not coming back.
What will this brave new world look like? Inspired by sustainable design, enabled by sophisticated technology, and energized by the potential of new delivery methods, the A/E/C industry is at the tipping point. Sustainability is already attracting substantial venture capital to fund technologies that will lead to new materials and systems, enhanced building performance, and reduced waste. Building information modeling and the many other software programs that link to it provide the means to smooth the curve from design to manufacturing to installation. As a result, we can expect much more offsite pre-fabrication (imagine a world without shop drawings). As for integrated project delivery, the single contract approach will, by definition, align the interests of the owner, designer, and constructor. No-sue clauses will make liability claims a thing of the past, freeing up teams to work together proactively rather than defensively. This will lower the cost of insurance and keep the lawyers at bay.
From all this, a new kind of design process will emerge. While there will always be a place for the talent-driven boutique practice, we can expect to see larger, more integrated design/delivery firms. This is not the same as design-build, with its inherent conflict between cost and quality. Instead, the design process will be based on value propositions pegged to business metrics and will rely on true cross-functional collaboration in which all the players have a stake in mutual success.
Teams are likely to be project-based rather than firm-based. The artificial division of the SD/DD/CD/CA phases will be replaced with a design/document/deliver mentality. Technology will enable much more sophisticated predictive modeling so that design options will be tested and optimized in advance for zoning, orientation, energy performance, acoustics and vibration, materials and systems selection, emissions, cost, and construction logistics, including waste management.
With teams linked by electronic means as well as co-location, the information in the BIM model will be much richer and easily retrievable. Early participation by key subcontractors and suppliers, working closely with designers and engineers, will make the handoffs from design to fabrication to installation much more efficient. In turn, bidding will be a thing of the past, replaced by a system of continuous cost review that will link the BIM model to the budget, tested and verified by current market data. Life cycle cost-benefit analysis will be factored in as well. There will be no need for value engineering after the fact.
The construction site will also see huge changes. The BIM model will be easily accessible to everyone by means of handheld devices and large-screen monitors, making paper-based plans and specs obsolete. Materials arriving on site (as well as recycled waste) can be tracked by bar code. Construction hardhats can be equipped with cell phone-like cameras so that problems can be reviewed and solved on the spot with live discussions, reducing the need for formal meetings. RFIs and change orders will be very rare indeed.
With a single contract approach, fees will be no longer be pegged to the cost of construction or hours spent but rather to the value produced. Financial incentives will be tied to the metrics that matter most to the owner. This could include higher BOMA ratings, lower energy cost, reduced facilities maintenance, and accelerated revenue flow from early completion, to name a few. Collaborative contracts will eliminate defensive design and CYA memos so the team can focus on the work at hand. The better a team works together, the more it will get paid because it is actually making money for the owner.
Note that all these process improvements are available to be used by any firm on any project, of any size, in any location. While big firms are equipped to provide a multitude of services in-house, nothing prevents smaller firms from forming their own professional networks of experts and using the same technology and protocols. In that regard, making architecture could become like making a movie (where the writer, director, cinematographer, and actors assemble for a specific production and then disband).
This new approach to design and construction raises some interesting issues. One frequently asked question is: Who owns the BIM model? The answer, of course, is that it’s the wrong question. The BIM model is merely a means to an end; it is not the product. It will have multiple authors and multiple users, and, as software continues to develop, it will eventually morph into the facilities maintenance plan for the finished building. A related question is : Who provides responsible control over the plans and specs? Despite the total team approach, approvals agencies will still look to a single party to sign and seal the documents for code compliance. Also, the legal profession and risk management industry need to catch up with this new way of doing business. New contract forms have been devised, and new kinds of insurance products are being invented, but it will take some time before they are accepted as industry standards.
However, these things are mere speed bumps. They can and will be resolved over time. For far too long, owners have been frustrated by a design and construction process that is unpredictable, inefficient, and wasteful. Architects consistently complain about low fees, and contractors suffer from poorly coordinated documents and the vagaries of bidding, which amounts to an educated guess about how much something will cost and how long it should take. We now have the tools, technology, and process innovation to change all that.
The recession has been tough on everyone, to be sure, but it has also taught a valuable lesson: More can (and should) be done with less. The impending change of state in the A/E/C industry is as inevitable as caterpillars turning into butterflies; we really have no choice. It’s just a matter of design.
Scott Simpson is a senior fellow of the Design Futures Council and a member of its executive board. He is a Richard Upjohn Fellow of the American Institute of Architects. With James P. Cramer, he co-authored the books How Firms Succeed and The Next Architect.