Firms of all sizes can position themselves to set the pace of change in a rapidly evolving industry
There is considerable optimism for growth by the majority of firm leaders. Most firms expect to grow in 2015. Some are feeling more confident because backlogs are strong and client communications are proving the relevance of today’s practices. In short, our 2015 panel says that clients are also more optimistic about the near-term future.
This underlying driver is strengthening the four elements of organizational DNA: Culture, Systems, Structure, and Staffing. Greenway Group tracks the metrics of progress within our Design + Enterprise Model: Marketing, Operations, Finance, and Professional Services. Taken together, key benchmarks are showing more health than last year with a corresponding vision for future performance. Net service revenues per full-time equivalent staff are now expected to top $178,000 for 2015, which represents the average projection by our panel. Some firms will outperform this.
The sum of our “looking ahead” research informs us that evolution is accelerating and that simultaneously we have the opportunity to create and sustain stronger design professions. The professions are adapting. The industry is evolving as well, and alert architects and engineers are not only keeping up with but are setting the pace of the phenomenon of change. This increasing success is being experienced by forms of all sizes, including the mid-sized firms. Laggards will be disintermediated. However, smart firms are adapting to change and are determined not to be left behind. There is an adrenaline rush as the design professions push forward.
Firm leaders report that they are now ready to re-define their professional practice metrics. These leaders know that they have an arsenal of competitive multipliers. These are enabled not only by technology but by better managed systems in firms. This zone is creating a neo-contextual sweet spot for tomorrow’s best practice.
For more than twenty years we have been tracking trends and logging data points in the design and construction sectors. During this time quite a large number of professional practices have changed significantly. They have changed their structure, brought on new practice leaders, created new governance models, changed marketing tactics, and reinvented the way they negotiate fees and deliver services.
There is a rolling forward of changes making new territory for best-of-class positioning in the marketplace. Through the keeping of metrics on success during times of change, we can show how and why the design professions are substantially different than they were just a few years ago. The first-generation iPad is now five years old. That big splash of a technology disruptor gave rise to hundreds of new tools, but also new attitudes about responsiveness, mobility, and action. The tablet initially dismissed as “extra device that’s not a full-fledged laptop” has evolved into a dynamic tool of engagement and constant learning. It has also inspired and empowered small- and medium-sized firms to achieve new levels of service, both inward- and outward-facing.
There is value in the study of success. We also study failure. In 1995 at the Salk Institute, Jonas Salk explained to the executive board of the Design Futures Council that while we learn from our own successes, we actually learn best from others’ failures. Developing a discipline of studying behaviors and patterns affecting our own and others’ successes and failures forestalls us from entering into resistive thinking styles (such as attitudinal denial) about the big changes that are underway.
Today the overall trends for growth in the design professions are positive. Still, we advocate that a constructive paranoia be exercised by firm leadership even when all positive signs are at a high point.
Success too can be the enemy of innovation. Engineers and architects can get so caught up in doing something a certain way that they become blinded by their own conventions. Professionals sometimes accept the status quo because it’s familiar and it works, so they stop thinking about making incremental improvements. When this happens, evolution of the practice slows and the competitive edge turns weaker. And as we have learned, these phenomena can happen in any economy. It’s the practice equivalent of entropy.
Growth is driven not just by the economy but by new value propositions supported by innovation in both product and process. New trends and shifts are feeding transformation in our AEC industry, and the pace of change is accelerating. Firms with strong design portfolios are leading the way to healthy growth. Firms of all types are growing. Here are a few examples:
In each of these firms, innovation (not the economy) is the driving reason for success. Greater value creation by professional service firms is taking them to new and strange realizations in 2015, paving the way for both excitement and a renewed passion. We live in eye opening times.
While the economy is on the uptick, it won’t help all firms. As economist Ted Levitt reminds us: “In truth, there is no such thing as a growth industry. There are only companies organized and operated to create and capitalize on growth opportunities. Industries that assume themselves to be riding some automatic growth escalator invariably descent into stagnation.” Therefore, while 92.2 percent of our expert panel is optimistic about the outlook for 2015, our interviews also revealed underpinning concerns including disruptive technologies and new delivery methods requiring larger scale and capital.
10 Transforming Trends
Below are ten of the trends that are now significantly impacting the future of the design professions:
1. Increasing Sophistication of Design and Management Technologies. Design by algorithm. Computers, computational power, and software have long been thought of as mathematical pursuits. No longer. In reality, the digital world is an extension of an architect’s human existence. New algorithms and processes will aid decision making and lead to the wisest and healthiest choices. It will both create and eliminate design jobs.
2. Design-build Models Accelerate to New Levels. It seems everyone from architect to contractor to owner is talking about streamlined delivery of projects. Design-build — contracting with a single entity to provide integrated design and construction services — continues to grow. This will encourage the traditionally factional and fractional design and construction industry to find new ways of collaborating. Essentially, design-build is a return to the traditional role of the master builder. Scale is important to this change because larger firms will often be needed to provide the services required.
3. Globalization is a Two-Way Street. International practice offers up significant projects and often non-commoditized fees. Architects and engineers like to travel and to serve. The top 30 U.S.-based firms are currently exporting $2.41 billion in professional services, with a significant increase in the rate of growth.
4. Complexity of Projects Requires an Enhanced Level of Collaboration. Projects will require new skills in collaboration and will force the hiring of non-designer experts who will be integrated solution providers changing the DNA of professional practices.
5. Expansion of Large Boutique Expert Practices. Large and boutique firms alike will become “change masters.” Under the leadership of visionary leaders and environmental scanning sciences, some A/E organizations will become sought after for trend analysis work which will impact urban design, planning, and climate change mitigation.
6. Talent Scarcity. As the baby boomer generation nears retirement age there are fewer younger staff qualified and ready to take the reins. Finding truly great talent is hard and getting harder all the time, which puts stress on traditional compensation patterns. Look for entry-level with a Bachelor’s $51,500 and Master’s at $60,000. And look for better profit sharing plans. Firms will ensure sustainable growth by placing a premium on retaining and recruiting the best talent.
7.New Differentiation Models. Every firm has a brand representative of the culmination of promises made — both implicit and explicit — about what the firm stands for, what it does, and how it delivers. Firms are finding new ways to differentiate themselves in both product and process.
8. Acceleration of Value Delivery. Fast firms are at an advantage. They will use gamification-based design in communicating design options to enhance faster client decisions.
9. Sustainability Agenda Places Architects and Engineers at Forefront. Sustainability is now in the wheelhouse of A/E practices. There are huge challenges to consider in areas of population explosion, food security, energy crises, socioeconomic instability, disease outbreaks, and strategies for housing and hope.
10. Increased M&A Activity Creates Rapid Evolution of Trusted Service Levels. Firms seek to gather top talent and new efficiencies on a larger scale. Large and A/E firms and construction firms have the financial resources to orchestrate business combinations. But cultural divide sinks some visions. Proceed with caution.
These are just ten of the dozens of trends and shifts being monitored by the Design Futures Council in our research labs in Georgia. We monitor the fast and the slow, the exciting and the mundane. But always, we keep an eye on the horizon for the new trends that will have the potential to disrupt or transform.
Aside from investigating the many technical, philosophical, and emotional questions relating to change in the future, we also like to take a deep dive into business management. A firm cannot be successful without being well managed, no matter how adept they may be with issues of change. Now, let’s take a look at the medium-sized professional practice and the threats that emerge with this scale of organization.
An Imaginary Trip to a Growing Mid-size Firm
Come along with me to a mid-size firm of 94 staff. What will we find? Does this firm excite its clients? Will we discover a firm with a clear vision of the future? How will the firm’s leaders describe their outlook? What will their confidence levels be? How enthusiastic will they be about the future? We’ve heard it said that the future is bleak for the mid-size firm. But we say, wait a minute, let’s take a closer look.
In the past, we’ve discussed that the generalist mid-size firm will be threatened by the phenomenon of change. Yes, but perhaps not any more so than other sizes of practice. Some of the most successful firms of the future will be the specialist mid-size organization. Why? They are not too big. And they are not too small. Many are cost- and process-efficient. Case studies by the Design Futures Council reveal that the mid-size firm will increasingly specialize and experience stable slow growth or better. Some will shrink of course. But overall, when we get asked about the future for mid-size firms we like to ask more questions. Smart questions about more than size. After studying hundreds of medium-size firms we see positive outcomes for the well-managed firm. In this case the firm size is 94. This firm struggles with their talent management and their ownership transitions. And yet, in truth most firms have similar challenges.
Now let’s look more closely at our imaginary firm. Their revenues are today just over $16,200,000. They are active in the following markets: hospitality, community colleges, commercial, and small-scale corporate. They have interior design (four staff), landscape architecture (two staff), and architecture professional services (79 technical staff) and they have eight support staff including accounting and marketing, and an illustrator/artist. They are located in the upper-mid-west. There are three owners, all male. One is 68, another 55, and another 42. The partner/owners get along quite well. The financial side of their agreement says that they transition the firm on a book value basis with payout over five years, which begins at age 65. Retiring partners can then work or not, and the current payment for services is just below $100 per hour. Fortunately, they have depth of talent in their ownership and a young female associate has shown interest in being a future owner. Following a tour and a review of their financial condition and HR statistics, here is our take on the experience and their outlook.
1. At first glance the firm’s demographics are problematic.
Out of balance. However, they have energetic leaders who are representative of their marketplace. They know they are ethnic- and gender-challenged. They need to write themselves a prescription and follow the plan. Within three years they can get the balance they seek.
2. They build strategic client relationships and systems.
The firm has strong relationships but these need to penetrate to next-generation levels internally and externally. They should be at a LEAP® strength of 88 or above. (LEAP measures fourteen categories of a firm’s culture. See www.greenway.us for further information.)
3. Technology innovation is advancing rapidly and leaving many firms behind, but not this organization.
They utilize the latest technology ranging from mobile devices to BIM. They have invested in training their staff. They have strong repute in all areas of technology and the partners of the firm keep up to date. Moreover, they have made a commitment to use the latest tools effectively, which will foster interesting dialogues that open the mind to the possibilities and potential for further innovation.
4. One of the partners is an enthusiastic cheerleader.
Others support the energy flow. Each in his own way is a champion of the firm’s unique talents. Here’s a secret: They coach and communicate internally and externally all that is special about their organization. They exhibit the best of their own unique charisma. One is the self-proclaimed “chief enthusiasm officer” advocating the firm’s many staff talents.
5. The staff is inspired by the firm’s vision.
This vision motivates the entire workforce and allows for a steady flow of positive adrenalin.
6. They have updated marketing materials.
They have good photography. Their website is current and compares favorably to their competitors’. They also have a game plan for external facing social media and communications. They refresh and invest every quarter. They are interactive with each of their four markets and they frequently extol their firm’s advantages and value propositions
7. What about profit?
This firm is getting the monetary return on investments they need to satisfy the owners. They have a staff savings plan that sets employees on a course for financial wealth building. Now that the economy has improved, they have raised the bottom line five points or more in 2015. Their profit target is 16 percent, pre-tax, pre-bonus incentives. They are paying a living wage and benefits to all on their workforce. The owners say, “What a privilege to have this responsibility.” They pay for performance. They understand that meritocracy cultures evolve faster than traditional HR evaluation system firms, and each year there is a merit evaluation system that provides reality feedback on professional performance.
8. Project management is a hallmark strength of this mid-size enterprise.
Discipline and new habits create new collaborative models. This firm knows that solid project management can take them to the top and also get the bottom line return that justifies the risks they take on a daily basis.
9. How about the intangibles of the leaders?
They talk of health in the workplace. Their message to staff: “Make this the healthiest year of your life.” Just three changes can do it: How they think, what they eat and how they stay fit. It is discussed and they implement an incentive for staying fit: three extra vacation days. A shower room has been installed in the firm and charts are kept of miles logged. A part of the firm plans on running a half marathon during spring break.
10. Finally, there are no signs of complacency or laziness.
This firm knows that tolerating such behavior can bring their mid-size firm down. They celebrate that they have the right team willing to work hard and collaborate.
As we say good-byes to this firm and their partners, they thank us for giving them an opportunity to focus on their firm. They say it helps them to achieve renewal and refreshment to stay in the game with new levels of curiosity about the future of professional practice. They wish to grow but not to the size of a super large firm. They will grow however, as it serves their clients better. They also intend to expand their reach and richness of learning networks. They are dedicated to keep growing their intellectual capital.
Moreover, they have adopted the recommendation of partners to take on about five hours of educational content for every one hour of entertainment content. One of the partners has involvement with a business school real estate development degree program where he shares information three times per year. The firm is far from perfect. But they are solid and they have confidence of their evolving value in the future.
Our viewpoint on the future is strategically optimistic. Why? Place the credit on the perspective of our members who share stories of what works and about new value propositions. The depth of firm benchmarks is without peer we are told. We have a commitment to better understand the history, the present, and to examine the records of professional practice to better understand value creation. Through our facilitation of the Design Futures Council think tanks, forums and summits, we seek to understand the potential of the processes, the performance, and the results of firms of all sizes. All benchmarks are going to change again in 2015. It will be different year, one replete with opportunities for architects and designers. We see plenty of signposts that should encourage and energize even the most cynical of skeptics.
Can the medium-size firm survive and thrive in the future? Can the large firm? Can the smallest firm? There is no compelling evidence to suggest otherwise.
James P. Cramer is the Founding Chairman and Principal of the Greenway Group. He is the co-founder of the Design Futures Council and past chief executive of The American Institute of Architects. He is co-author or author of three books on innovation in professional practice including How Firms Succeed, New Horizons for the Professional Services Firm.