We can map our own destiny through strategic planning.
After I finished my Chinese food, the waiter brought a fortune cookie to me. It simply read, “Good luck is due to good planning.” We are in historical times with this current economy, and indeed, that phrase applies. We will not survive as a profession if we just wait for good luck or until the economy turns our way. We must plan our destiny. If not, other people and organizations will plan it for us.
This is the story of how we explored our destiny at HKS Inc. as a global architectural practice. We all face challenges, but we can turn these challenges into opportunities for our industry.
As you would expect, the economy is a popular topic in the real estate development, design, and construction industries. All organizations have been affected. Simply put, projects emerge from funding opportunities, and if those funding opportunities do not exist, then the projects do not move forward. We first experienced the pull-back of commercial lending, and now, after stimulus funds have been committed, we expect dramatic cutbacks in the federal government sector. Even states and municipalities are decreasing capital expenditures due to budget shortfalls. This results in a reduction of funding for public and private projects in the near future.
Although 2011 was a relatively good year, questions arise in the design industry about the first two quarters of 2012 and beyond. With 2012 an election year and because of the nation’s negative sentiment toward the ever-increasing national debt, many people do not expect Congress to pass additional federal funding for projects. In addition, commercial real estate lending from banks is very low for new construction compared to overall real estate lending. Most lending is associated with repositioning and acquisition of existing buildings. New construction is not competitive with work on existing buildings except when there is a desire for higher accountability for green design, smart technologies, and prime locations. Repositioning and upgrade of existing buildings appears to be a larger market for architects to assist our clients.
Alternative funding does exist, but it is the exception. Recently, Texas passed Public Private Partnership (P3) legislation, through the Texas Facilities Commission, for vertical development. This alternative funding has traditionally been used for infrastructure, highways, and bridges. Now there are opportunities for education, aviation, and health care projects to receive these alternative funding mechanisms.
Much like the P3 in Canada and the Private Financing Initiative projects in the United Kingdom, this funding in Texas may include financing, design, construction, or operations. Although the formal committee assigned to the legislation has not yet met, one hopes the current guidelines will be fully vetted. The big question here is, How is the funding put together? Regardless, there are some evolving opportunities.
Firms that want to stay busy with a healthy backlog will have to explore all opportunities of funding for their projects to bridge 2012. We are all hopeful that after the elections, our country will be back on its way to recovery.
The design and construction industry continues to face extraordinary challenges. At the annual HKS principals retreat in 2009, we focused on where our profession was headed, not in the short-term but in the long-term. Our retreat was focused on 2020 and where not only our profession was headed but specifically where we wanted to be as a firm.
In 2010, we conducted a strategic planning meeting to map our journey to 2020. The plan was divided into sequential three-year windows but was focused more long-term on the 10-year plan. Personally, I am not a big fan of complicated, laborious plans; I typically like to see a short, maybe even one-page, plan, as former General Electric CEO Jack Welch has suggested. However, in this longer view, we did drill down to the key components of our practice. Our discussions and deliberations were recorded, to be reviewed each year of our journey. We also created a shortened action plan for gauging our progress.
Our plan was to involve a number of consultants to give us their perspective on the direction of the profession, including Jim Cramer from Greenway Group. His insight and counsel influenced our evolving our strategic plan.
We revisited our purpose: Why do we come to work every day and do what we do? What drives us as architects? What is the promise that we make to our clients as a firm? From this discussion, we derived our purpose as “Enhancing the human experience where we work, live, play, and heal.” This is simple but meaningful. In a time when the state of the economy has all but decimated financial reward, we must remember why we became architects. Our professions are not all about money but, rather, accomplishments. Rhetorically, though, people do need financial sustenance, and that cannot be forgotten. (This animation inspired from a Daniel Pink presentation about his book Drive substantiates that need: http://www.youtube.com/watch?v=u6XAPnuFjJc.)
The subsequent work sessions and discussions focused on not only where we want our firm to go but where we want to be when we get there. It was exciting, it was bonding, and it was heartfelt. Out of the discussion emerged four main topics — identity, markets, delivery, and corporate structure — some of which surprised us but were absolutely relevant to our projected journey.
HKS is a 73-year-old firm. Our identity has not been consistent. Our founder initially built homes and small commercial projects during the Depression. Over time, HKS became a Dallas regional firm, growing almost exclusively in commercial markets. As principals came and went, we began to develop the reputation for designing speculative office buildings that were easily leased and technically proficient. Our design was hit-and-miss in the 1970s, and we worked with many other design firms as the architect of record, again because of our technical and production effectiveness for well-designed buildings.
During the 1970s, our founder reached out to recruit a renowned designer, Jack Yardley. Yardley had been widely respected at CRS but had since joined a local Dallas firm. That was the true beginning of our design department. Yardley began to build a more design-oriented practice. Over the years it has been a slow but deliberate process, with Dan Noble now leading our design effort. We have tremendous success in being recognized by AIA awards and, in fact, garnered 12 AIA design awards in 2010 at the local, state, and national levels. In 2011, we received more than six AIA awards, a reduction most probably due to some degree to our declining work load. Regardless, it was the most awards we had won in any 18-month period in the history of our firm.
We wanted to celebrate and continue to be a technical firm but continue our architect-of-record practice at about the 15 percent level and raise our design capabilities for the other 85 percent of our practice. The identity and image of our firm are very connected to this history. As any architect can tell you, you are only as good as any building that people see every day.
In our discussions during our planning meetings, we wanted to continue to be a more well-rounded firm in our global practice. Our vision emerged from these discussions. We want to be in charge of our destiny, not have it dictated to us by our competition. This vision moved us toward being perceived as a tier-one firm as opposed to just performing as a tier-one firm.
Marketing efforts were evaluated by sectors as well as geographic areas. Both sectors and geographies have a tendency to be silos, which we wanted to change; therefore, much of our effort went toward creating our manifesto of being one firm. We wanted to bring the best practices of our firm across both geographies and market sectors to serve our clients to the best of our ability.
A big part of our effort included evaluating criteria of each regional office and market sector. Honestly evaluating market sectors’ strengths and weaknesses closely coincided with their actual performance. Also, each of our offices was assessed on similar criteria to identify what made certain offices succeed more than others. Economic health of a community played a strong role in this evaluation, but it allowed us to fine-tune our services to the markets.
At first, discussion on this topic was retrospective of how we practiced in 2006. Then we realized that we now live in a very different world of fees and client expectations. This led us to look at where delivery of our services could adapt and change over time.
We are beginning to realize the importance of lean practices in our services and how they are integral parts of integrated project delivery (IPD). This next step to a collaborative approach has become a proven method to encourage better project coordination and add value to our clients’ services but can be a significant cultural change for many who are coming from the conventional practice. This is one of many developing approaches to improve our practice and move it forward to better and more appropriate designs.
Each of us recognizes that most computers are effective for about three years and then become obsolete because of the increasing memory demands of technology. Likewise, our processes that are linked to computers have to be evaluated. New programs that can assist us in improving our practice are demanding more of the hardware. Our awareness of that fact led us to looking at custom building our computers versus purchasing off-the-shelf hardware. We already see a significant gain in our utilization and performance as a result.
Our delivery methods plan started with objectives and then was segmented into specific tasks to accomplish how we want to practice.
Over the many years that I have been at HKS, we have been a Subchapter S corporation. It is, simply, very similar to an incorporated partnership. The tax liability or credits are passed through to the shareholders. (A side note: Most law firms are Subchapter S corporations, and most politicians are attorneys, so it seems that most laws favor this type of corporation.) All that said, there are issues of retaining capital in the company, and although it raises the value of the stock, the shareholder may pay income taxes on non-realized revenue. This can cause a prickly situation in a down year, when bonuses may not be plentiful to absorb the tax liabilities. Dividends can be distributed to assist in payment of the taxes, but that is not always ideal, either. This begins to tie bonuses to stock ownership, we tie bonuses only to performance.
Another issue with a Subchapter S corporation is it will not allow any foreign ownership. As a result, if we chose to purchase a company abroad, we could not stock swap in our purchase.
We continue to evaluate the corporate structure, but thus far our accountant’s direction is to remain as we are. If we changed in the future, it most likely would be to an LLC structure.
As a firm that grew out of Dallas, most of our senior management — specifically, the board of directors — resides in Dallas.
As a result of the plan, I have found it much easier to make decisions about the course of our firm. My fellow principals are supportive of the direction, and it requires far less communication spelling out reasons for the decisions our leaders are making. Overall, this effort was well worth the hours spent developing the plan. In addition, our subsequent three-year plans already are formatted and simply need to be tweaked to align with the overall 10-year plan.
This exercise allowed us to be much more nimble in implementing the plan. In the past two years, we were able to expand into the science and technology market sectors, including laboratory planning, and bring on a market sector thought-leader for federal work, health care interiors, and federal military health care. We expanded geographically into Denver, Chicago, Indianapolis, and San Diego. This is in addition to growing our international presence in India by opening a branch in New Delhi and continuing to build our China office in Shanghai.
We created a manifesto for HKS that has resonated with our practice: one firm. We bring the full knowledge and experience of our firm to every client. We do not have office cost centers but, rather, project accounting. Many firms advertise that they have a one-firm philosophy, but we take it to the next level. This works well with our insatiable desire to serve our clients. We do not see competition among our offices because of this philosophy. We focus on which team is best for each client. Our regional offices do not compete; they provide geographic access to all of our professionals.
We now have clear domestic and international strategies in our architectural practice. We have recently seen a positive impact to our bottom line since the beginning of the recession in the fall of 2008. Net revenues have increased substantially and will allow us to continue to invest and grow our firm to serve clients around the world. Most important, we can serve our clients more effectively and responsively.
HKS has not been idle but, in fact, has been active and nimble. I am pleased to see that since the 2008 crash our efforts have followed much of our strategic plan.
Our Asia strategy included both expanding into China and expanding our existing practice in India. We have actively pursued the China market with the opening of our Shanghai office. We have 30 projects active in the country, including health care and hospitality. We also expanded our India practice from Chennai to New Delhi including health care, sports, and hospitality.
We recruited a science and technology thought leader in Washington, D.C., and added Earl Walls Associates to assist with the lab planning services of our San Diego office.
Geographically, we wanted a greater presence in the Midwest, so we expanded from our Detroit base into Chicago with a commercial thought leader to add to our health care practice. This was accomplished by purchasing Maregatti Interiors, which had offices in both Indianapolis and Chicago. Maregatti Interiors will provide health care interior design services nationally and internationally.
Our sports group diversified into HKS World Events by providing a nationally renowned planner of sporting events to assist in the design and to bring event planning to our sports and entertainment venues.
As the economy sputtered, we identified urban design as a service that many of our clients needed. We chose to merge with an existing practice in New York City to provide our urban design and planning services. We have already served projects in the United States, Panama, and China.
With steady work in Denver and the mountain region, we decided to open a permanent office in Denver. Our health care and educational leaders are pursuing a number of projects in the region while already providing a robust health care practice.
Both our commercial and health care governmental practices were augmented with new leaders. Our intent is to identify opportunities in this area, realizing that the many governments are attempting to be smarter with the expenditure for facilities. Many alternative opportunities to finance these projects appear to be developing.
Our hospitality practice has been growing both geographically and in market share around the world. Although we work with many talented interior design firms that specialize in hospitality, we have chosen to start a small hospitality interiors practice to seamlessly serve our clients when requested.
Our design talent is now balanced with our technical capabilities. We still desire to do architect-of-record work with our fellow colleagues, but we have also diligently built a more design-oriented culture. As discussed earlier, we have won a significant number of AIA design awards over the past several years and are now recognized for our designs for many building types.
In closing, since the fall of our industry in 2008, we have focused on nimbleness and taking advantage of markets that were active nationally and internationally. Our strategic plan became a roadmap and a great way to make decisions as we moved patiently into new geographic areas and market sectors. This journey was taken without borrowing money and, in fact, came out of cash flow. The results have produced excellent and exciting projects while providing a profit that we all were proud of in this time of economic turmoil. Most important, we provided great opportunities to employ many architects who otherwise might have been unemployed. We added approximately 120 jobs in our industry due to the strategy we developed. As we distributed bonus checks at the end of 2011, we had a great, positive response from staff. Our clients receive tremendous services, and we produced exciting architecture.
I wish I could say our profession’s obstacles are gone, but in an election year and with the federal deficit reaching $15 trillion, our challenges are mounting. We all need to be focused on how we can improve our profession’s standing in the community, look for alternative financing for our buildings, and improve our value to clients. There is pressure to lower fees, but we must always sell the value proposition to our clients. As architects, we provide a service to our community and world that makes a significant impact — and we should be paid fairly.
We are not perfect; no one is. I find that most architects perform at almost 98 percent perfection on a greenfield project. That is astounding considering that we are building a one-off product on an exterior site. Even product manufacturers build prototypes and beta test them prior to final production, and still they have recalls. The design and construction teams do an amazing job.
I challenge all of you to continue to improve the recognition of design services. It makes our world an exciting place to be. I am still excited by architecture after almost 39 years of practice. We will get through these tough times, but it is important to move our firms and our professions forward strategically.
H. Ralph Hawkins is the chairman and chief executive officer of HKS Inc., one of the top five architectural and engineering firms in the United States. He is a senior fellow in the Design Future Council, a fellow in the American Institute of Architecture, and a member of the Council of Fellows in the American College of Healthcare Architects.