Many firms aspire to do international work. The projects tend to be large-scale, complex and high-profile, offering rich opportunities for innovative design. Such work can quickly help elevate a firm’s reputation, and it can also be lucrative, especially since most projects require only Schematic Design and Design Development (SD/DD) services, which are generally more profitable and less risky than Construction Documents and Construction Administration (CD/CA).
International work can be glamourous, helping to attract younger staff to the firm, and for those who enjoy travel, it can be enlightening and educational as well. For some major U.S.-based firms, international projects comprise a healthy percentage of their business. For example, according to recent research by DI Research*, projected 2018 revenues from non-domestic projects accounted for 17 percent of total revenue at Gensler, 21 percent at HOK, and 43 percent at SOM. Clearly, international work is an important aspect of the U.S.-based design business, and it is trending up each year.
Lots of firms would like to jump on this bandwagon, but there are reasons for caution. Over the past decade, as international work has expanded to unprecedented levels, there have been a number of important changes. First, and most obviously, the market has matured greatly. In decades past, leading U.S. firms were sought out for their unique expertise in highly technical and complex building types, such as healthcare facilities. They could offer specialized knowledge that was simply not yet available to local clients in developing countries.
For example, in the 1980s, Saudi Arabia constructed a number of sophisticated, western-style medical centers in such cities as Jeddah, Riyadh and Al Baha. Fees were generous and schedules were extremely tight, since during the oil boom, speed of delivery was more important than controlling cost. The government paid a premium not only for design and construction, but also for trained personnel to staff and run the facilities. Today, the medical infrastructure is largely established, and local firms have gained sufficient knowledge and experience to enable them to effectively partner with foreign firms or even provide the required full services themselves. This narrows the market for outsiders to some degree.
This same phenomenon is true for office buildings, hotels, airports and schools. In China, the state-sanctioned Design Institutes have become much more proficient and are now training world-class professionals who can do excellent work domestically without foreign assistance. Also, many young Chinese architects who trained in the U.S. have repatriated to start their own firms. Their language skills and knowledge of local culture give them a big leg up when competing with U.S. firms.
Bottom line: while the international marketplace is strong and growing, so is the competition. This reduces the need for international clients to seek U.S. expertise. Also, many of the larger firms have successfully established offices in foreign countries, effectively making them “local” in the mind of the marketplace. This lowers the cost of operations, since foreign labor is generally much cheaper than comparable U.S.-based labor. It also erases the difficulties of working across several time zones (not to mention greatly reducing travel time and overhead costs). The trend toward M&A (mergers & acquisitions) has resulted in the creation of larger, more extensive, and more effective multi-office networks which can leverage their knowledge, contacts, staffing and marketing expertise.
Another big, and equally obvious, change is geopolitical in nature. The Middle East and China in particular have seen the emergence of new leadership, a phenomenon which also holds in Turkey, India, South America and many African countries. These new leaders have set different agendas for their national building programs, and in some cases, prefer to use local rather than internationally-based professionals. China, for example, is making a huge investment in infrastructure (both domestically and in Africa), which requires a different skill set than design-driven architecture. Politics also introduces a level of uncertainty into the market, as centrally managed or autocratic governments may shift priorities or preferences on short notice.
Add to this the effect of the financial markets. Currency swings can be dramatic and sudden. For example, when the Brexit resolution was unexpectedly passed in the UK, the value of the British pound promptly fell from about $1.50 to $1.10 (a drop of 27 percent). It was a great time to buy London real estate with U.S. dollars, but not so great if you were a U.S.-based firm operating in the UK, as business promptly plummeted and many projects were delayed or cancelled outright, causing widespread layoffs. The Euro suffered a similar decline in value (mostly because of the uncertainty of the Greek credit crisis). It has recovered somewhat, but is still below pre-Brexit levels. Currency swings affect the ability of clients, both private and public, to undertake projects. Any firm with a serious interest in international work would do well to take these factors into account.
In the midst of all this change, some things have remained relatively constant. For example, different countries operate with different legal systems. In some, for all practical purposes, there is no legal recourse to effectively and fairly resolve disputes. In others (China is a good example), the law of contracts and the protection of proprietary information can be problematic. So being savvy about local laws and regulations remains at the top of the list for firms considering overseas work.
Ditto for the tax implications. It’s important to carefully study the prevailing tax laws in various jurisdictions and know how they are interpreted and applied (this can vary widely, even in the same country), as well as understand the regulations for repatriating any profits that might be generated (much more difficult in some countries than in others). U.S. tax law is also a major factor; it has undergone significant revision in the past few years. It may be great to do a big new project in an exotic location, but if your profit disappears due to unanticipated currency swings or taxes and cannot be easily transferred back to the U.S., then your efforts may be for naught.
Finally, with the advent of increasingly sophisticated design technology, plus the promise of additional productivity gains from such things as 3-D printers, drones, artificial intelligence and robotics on site, the nature of professional practice itself is changing quite fast. One impact of technology is to shrink or even eliminate the effect of distance. With proper coordination, work can be done collaboratively with multiple farflung partners across the globe with the push of a button. Indeed, a U.S.-based firm can actually produce a substantial amount of “international” work without ever leaving the home office.
With all this in mind, what’s a smart firm to do? Here are a few tips:
1. Hone your value proposition. Firms that want to work overseas must differentiate their services in a compelling way compared to potential competitors. What do you offer that others don’t or can’t?
2. Be able to explain your firm’s worth in locally relevant ways. Why drive across town for a gallon of milk if there’s a grocery store around the corner?
3. Cast a wide net. Actively seek partnerships and collaborations with other firms in other countries; this is the best way to leverage your expertise quickly and effectively.
4. Focus on U.S.-based clients which have foreign interests, then ride their coattails overseas.
5. Do your homework. Bone up on the relevant legal systems, contract laws, tax regulations, currency exchange rates and so forth. “Know before you go.”
6. Be prepared to invest. All startups are expensive, and this is particularly true when establishing foreign operations. Spend wisely, concentrating on the things that really matter. Be realistic about cost vs. value.
7. Consider working with foreign firms and/or clients who want to do business in the U.S. This is a kind of “international practice in reverse” and may well lead to additional opportunities overseas.
There’s no doubt that international practice can be exciting, invigorating and profitable, and it can also be a great way to grow your business. While there are potential pitfalls, those who are strategic and patient rather than impulsive and short-sighted will be successful. Remember to stay resilient and nimble. Things have changed a great deal in the past decade (just think back to 2008, when the big recession swept across the globe like a tsunami). If the past is the prologue, the pace of change will certainly accelerate going forward. Will you be ready?
*For more information about DI Research, go to: www.di.net/sponsored-research/
Scott Simpson is a senior fellow of the Design Futures Council.
This article is excerpted from the 4Q 2018 issue of DesignIntelligence Quarterly.