Weighing the risks and rewards of expanding into new markets
Too often, design firms jump into opening a new office without fully understanding what it takes to make them into a sustainable office with ongoing, repeatable business. Sometimes investing the same vast quantities of time, energy and money in a new office close by, or in an existing office, will offer a better return on investment than opening an office in a city abroad.
Opening a new office is often driven by the need to expand the business into new markets, or in a response to weak markets at home. A new office can also provide exciting career opportunities to retain and attract the best talent. Moreover, the competitive nature of the design business has almost compelled some firms to enter new markets to remain competitive, or at least to appear as such.
Leveraging an existing project or client relationship is the most typical way of seeding a new office. Information about the local market is more accessible and mustering partners is easier in part because so many other firms, large and small, have already paved the way. Distance seems less of an issue because of telecommunications technology, colleagues speak multiple languages, and many have probably worked abroad before. It’s an enticing prospect to have an office closer to overseas clients, who themselves are tired of paying reimbursable expenses or having to wait twelve hours to speak with their design consultant. Having a new platform that will make things easier on the staff at home is also very compelling.
Despite these benefits, achieving the objective of building a sustainable practice is a long, arduous journey that takes commitment and resolve from the entire firm. And while it is no doubt exciting to open a new office in a dynamic global city like Shanghai or Mumbai, is it actually worth it?
Ironically, most U.S. firms would never seriously think of taking on the fierce competition in New York City or the political machine in Chicago, but it’s now common to see them in places like Shanghai and Mumbai. Last year there were over 30 U.S. design firms operating in Shanghai alone. It’s a wonder given the unfathomable amounts of money, energy and patience it takes to open and maintain an office in, say, Mumbai, why more firms haven’t focused their energies closer to home in places like New York or Chicago.
Thinking Fast and Slow author Daniel Kahneman says that we make sense of the world around us based on “… our almost unlimited ability to ignore our ignorance.” Are we ignoring our ignorance by opening up a new office in a country where we aren’t knowledgeable about the competition, rules of practice, or speak the language? Perhaps that would explain why we commit vast sums (relatively blindly) halfway around the world instead of directing the same funds toward a city closer to home. While the overall market may be bigger abroad, there are also far more unknowns and unforeseen risks.
Opening an overseas office not only has practical considerations, it also has deep and sometimes unforeseen ramifications on a company’s business and culture. There has never been an easier time to open a design office, yet opening an office abroad is still fraught with peril. Of course, unknown issues that rise up seemingly out of nowhere will test a firm’s resolve, as there is a lack of precedents and circumstances may not follow the logic we are used to. Clients with nefarious business relationships, insatiable demands of permitting officials, changes in tax law and even coup d’etats complicate even the most well thought out and well funded ventures overseas. So why do it?
Counterintuitive as it may seem, the alternative to expanding your practice is to invest all those resources (literally) in the office you already own by “opening” an office-within-an-office that focuses on a new building type or market. Sure, it’s not as sexy, but the leadership is already there and there’s no need for translators, international tax consultants, local design institutes, and midnight conference calls.
However, assuming you have done your homework, evaluated (and dismissed) opportunities closer to home, and have not “ignored your ignorance,” these three things are critical when debating the opening of a new office, regardless of where it will be:
Leadership in management and design is key to the success of a new office. The size of the market for design services can be enormous, but that should not be the sole determining factor or justification for expansion. Rather, the number and location of offices should be based on the number of leaders you have (or can acquire), not on the size of the market. Leadership for the new venture should be equal to the best you have. Finding qualified leadership is harder than it sounds because a new office requires a unique, entrepreneurial, jack-of-all-trades-master-of-none leader, a type that is few in number, even at home.
Tolerance for uncertainty
A new office puts pressure on company finances, pushes design teams, and strains relationships between partners — mainly as a result of the unknowns and unpredictable nature of starting up a new office. In Europe and North America for example, the rules of practice and law are well defined and enforceable. However in Asia and South America, it’s not so simple. Contracts, for example, which are so painstakingly translated, negotiated and celebrated when signed, are constantly reinterpreted or ignored altogether by clients and thus become the cause of much stress between partners separated by time and distance. The resulting distraction from your current business is easily and frequently underestimated.
Cost of Close
It’s ironic to be thinking about the cost of closing an office when the main concern of a start-up office is having enough fee to keep it open. The cost of opening a new office has come down dramatically recently, making it more feasible for small practices especially. But the cost to close an office should not be taken lightly and should figure in your decision making. The cost to let people go, wind down leases, pay severance, notify clients, and dispose of assets can easily run many times the cost it took to open and maintain the office.
Regardless of what you decide, opening a new office can unite an organization with a common purpose, provide opportunities for the staff and, if done properly, grow your business and your brand. That is, if you don’t ignore your ignorance.
Riccardo Mascia, AIA is Managing Director for HOK Asia Pacific.