Since the stock market’s all-time high in October 2007, Wall Street has seen $8.4 trillion of equity evaporate. Credit markets are in disarray. Individual retirement accounts and institutional endowments have taken a beating. It’s only a matter of time until this financial tsunami ripples through the design and construction industry.
Since the stock market’s all-time high in October 2007, Wall Street has seen $8.4 trillion of equity evaporate, the biggest drop in value since the Great Depression. Credit markets are in disarray, with both borrowers and lenders equally suspect. Individual retirement accounts and institutional endowments have taken a huge beating. Governments have found it necessary to step in and shore up private enterprise in unprecedented ways, including direct investment in private banks to keep them afloat. We are seeing whole countries (Iceland, for example) go bankrupt over a weekend. It’s only a matter of time until this financial tsunami ripples through the design and construction industry.
While nobody can predict the future with certainty, we can expect to see many projects either delayed or cancelled outright. Those that do proceed will certainly undergo close financial scrutiny — every penny will be counted. Access to capital is tight and getting tighter, and it’s nearly impossible to finance a speculative project such as an office building or hotel. What’s a design firm to do?
These new financial conditions will affect everyone — clients, architects, engineers, and contractors alike. The good news is that design is an inherently value-added enterprise. Creative professionals know how to save their clients money both by reducing capital cost and through increased operational efficiencies, especially in energy consumption.
Remember that in tough times, a penny saved is a penny earned. Here are some specific things that design firm leaders can do to navigate the current stormy waters and position their firms for enhanced success down the road:
See things through your client’s eyes. With so much uncertainty in the marketplace, every client will be under some degree of stress. This is a good time to sit down with clients to understand what kind of pressures they are under and how you can help alleviate them. For example, if cash flow is an issue, be proactive in devising a payment plan that everyone can live with. Look for ways to lower their energy and maintenance costs or ways to redesign ongoing projects to tighten up on capital budgets. Accelerating schedules can help, too, especially when the cost of general conditions is factored in. Communicate up front; don’t wait until later to find out if projects are likely to be delayed or cancelled. Let your clients know that you are an ally and an advocate for their success.
Protect ongoing client relationships. In tough times, it’s critical to maintain ongoing client relationships. Have a candid chat with your clients — find out what you’re doing well and what can be improved, and then take specific steps to show them that you are listening. Find out what’s in the client’s pipeline. Even if prospective new work is medium or long term, start now to position your firm for the new business. Let your clients know that you share their pain and that you’re in it for the long haul.
Fire risky clients. Some clients are naturally litigious, may delay payment, or may cancel projects altogether. Some might even threaten professional liability suits as a way of avoiding paying what’s owed. This is a good time to make a candid, objective assessment of which clients you wish to live with for the long term. Regardless of the cause, troubled relationships benefit neither side. If it’s time to bail out, then bail. It may be tough to walk away from current work, but in the long run you’ll be glad you did.
Cash flow, cash flow, cash flow. Make sure that your invoicing is accurate, consistent with the provisions of the contract, and timely. Call clients to verify they received the invoices. Inquire (politely!) about when you can expect payment. If the check does not arrive, follow up. Be professional at all times, but be consistent in pursuing every dollar owed. In a tight credit market, cash is king. Keep as much of it as you can on hand.
Talk to your bank now. Even firms that have traditionally avoided taking on debt may find themselves in need of a temporary cash infusion. If clients don’t pay, you still have to make payroll. The best time to arrange to borrow money is when you don’t need it, so negotiate a line of credit now even if you have no immediate plans to use it. (You might consider arranging for a home equity line of credit for the same reason.) For those firms that are already cash-strapped and likely to need more, get to the bank and put your cards on the table. Find out what your real borrowing capacity is (You don’t want to be surprised later!) and plan accordingly. That said, avoid taking on excess debt if at all possible, as it basically acts as a heavy tax on your future earnings.
Scrutinize your staffing. This may be the hardest decision of all. When work gets low and utilization drops, it’s in the best interest of your firm to trim staff. Rather than think of this as eliminating jobs, try to think of it as preserving the jobs that are left. After all, if the firm cannot continue to run profitably, all the jobs will be in jeopardy, including yours. When scrutinizing staffing, think strategically. Who will really be valuable for the long haul? Who can help bring work in, design it well, produce the documentation, and make sure that jobs are well managed? Remember to look at the overall blend of staff, and resist the temptation to play favorites based on personalities. Whether you realize it or not, everyone knows who the productive people are, and those are the ones you want to keep.
Reposition rather than downsize. Now may be the time for the firm to downsize. If so, proceed strategically. Stay with your strengths — solid, long-term clients. Resist getting into new markets that require heavy investment. Think twice — no, three times — before entering any design competitions.
Cut costs now. Question everything. Every dollar you spend must count. Cut back on travel, fancy hotel rooms and meals, office lunches, perks such as company cars or club memberships, etc. Send only one person to a conference, not several, and make sure that they report back when they return. Make frugality a point of pride. This tells your staff that resources are precious (including them). One thing not to cut back is investing in client relations. Every lunch or dinner you can have with a client is money well spent.
Create new value propositions. Don’t just talk about cutting back on capital costs, enhancing energy efficiencies, or accelerating schedules — show your clients how you will accomplish these things for them. Be specific both in terms of cost and outcome, and provide the metrics to back it up. Because design is inherently a value-added proposition, there are many ways to do this, so tailor your approach to each individual client. Ideally, you’ll be able to show them how you can save money that exceeds the cost of your fees, a sure way to get hired.
Stay calm. Stay strategic. This is not the time to panic. Big change is in the air, and change always brings opportunity. Continue to re-engineer your firm by embracing building information modeling, integrated project delivery, and sustainable design. Forge new relationships with consultants, contractors, and approvals agencies. Look for new ideas that will benefit your clients. Be optimistic and stay enthusiastic. Remember that neither the good times nor the bad times last forever, and that this, too, shall pass. And remind your clients that the really smart owners know that the best time to build is when labor is plentiful and prices are down. This could be the best time ever to re-design the design process.
Scott Simpson is managing director of KlingStubbins in Cambridge, Mass. He is a Richard Upjohn Fellow of the AIA, a Senior Fellow of the Design Futures Council, and a founding board member of the Rice Building Institute. He has been a visiting design critic at Harvard and Yale, from which he holds degrees. Simpson is the co-author of How Firms Succeed and The Next Architect.