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Becoming a World Class Design Firm

Where are we today?

Where are we going?

How are we going to get there?

By John B. Pruitt, CPA

Engineering and architectural firms must be smart, nimble and focused to compete in today’s world economy. This will become even more so in the next millennium. Owners and managers of A/E firms are facing decisions that can make or break their firm on an all too frequent basis. The year 1996 was, for many firms, “a good year.” A typical comment from principals of A/E firms was, “In 1996 there was more money available in the public sector and this should filter down to the private sector markets in 1997.” The prevailing thought was that the year 1998 would be a “cool-down year.”

Most owners and managers felt whipsawed: They now had the fruits from a good year so they can better plan for the future, but they didn’t have the time. They were too busy with client matters. Comments such as: “When we need to plan we are too busy, and when we have time to plan we need to get busy and market.” Who said that it was easy running a design firm?

Why are there always a few firms that defy the norms and have an excellent year when the rest are having a so-so year? Is it more luck than good planning and practice management? Not in most cases!

We will examine some of the elements that are common in those firms that typically have a good year in spite of the economy. Also, we will look ahead at what is likely to happen in the A/E industry during the next five to ten years.

 

In A Nutshell … FOCUS

FOCUS is the one word that best explains their success. This is true in any year but is especially true during tough years. The profit differential between well-managed and poorly managed companies will be more conspicuous in mediocre or poor business environments. Volume tends to cloak unresolved management issues.

From a distance, the management of these successful A/E firms is viewed as either very aggressive, lucky, or even downright smart. The key financial ratios for these firms, such as multipliers and utilization rates, will be above industry averages. However, to get to the causes of their success, we must look beyond historical numbers. Typically, the successful firms had already established sound strategic plans and practice management procedures that provided the framework for their present success.

The challenge for management is knowing how to achieve the desired results. It is relatively simple to know where you want your A/E firm to be. Knowing how to formulate this picture of a dynamic and resourceful firm, first in management’s “mind’s eye” and then to lead the firm with this vision is today’s most valuable contribution by management.

Let’s look at some of the components that successful firms tend to have. They are as follows:

  • Management is well focused on their core activities.
  • Management is looking more than one year ahead.
  • Management feels they have an excellent cadre of key employees.
  • The firm markets itself well.
  • Project Managers effectively manage their projects.
  • Employees believe that they have a personal vested interest in the success of their company.
  • They tend to be “niche” firms with larger firms favoring a “studio” organization setup for niche specialization.
  • The firms have some geographic diversity.

The information gathering process used to make the above observations consisted of interviewing the leaders of over two dozen A/E firms across the nation. The interview process was designed to produce a free-flow response from the participants. Staff size in the sampling ranged from 20 to over 1,000. The geographic dispersion was virtually from California to Maine. There was no attempt to establish confidence levels or other statistical analysis to quantify the interview results.

 

Focus on Core Activities

The core activities for an A/E firm, or any business enterprise, are the functions that are left when all ancillary activities are stripped away. Those functions that are left form the basis or core of the firm. The ancillary or support activities are certainly not ignored. Rather they are designed and evaluated on the basis of how they support the core functions of the business. The emphasis is to streamline and eliminate any non-value-added work.

The core functions for the successful firms always seem to consist of five interrelated activities. They are:

  1. Acquiring interesting and potentially profitable projects.
  2. Providing professional services that meet or exceed clients’ expectations.
  3. Managing projects so that above average profits are generated.
  4. Retaining good clients.
  5. Investing wisely in employees and other company resources.

When you consider the above activities, the idea of focusing on core functions is a “no brainer.” It just makes sense! A Mission Statement typically is a declaration of the primary core activity for a company. Once this focus is established, there are fewer questions about how priorities will be set. Any function that strays from the core activities or the direct support to achieve the core activities must be challenged. “Is it worth doing?” must be frequently asked when dealing with non-core activities.

An example of a more concrete function contributing to core activities is the reporting function of an accounting department. The emphasis should be on providing the information that is needed to effectively manage client projects, rather than a detailed review of every expense report. The audit function should not be ignored, however, it must be used in a cost effective and wise manner. The prime directorate for ancillary activities is to support the core activities for the firm in the least complicated but functional manner.

Often meetings are a source of unfocused activities. Do the meetings at your firm have spark, structure and focus? One A/E firm that was interviewed has a standing rule that no meeting will last for more than 1 ½ hours (client and shareholder meetings excepted). Their reasoning is that the essential issues of any problem that justifies group involvement can be identified and remedied within the framework of an hour plus meeting.

The remarkable feature of core competencies is that they tend to evolve. Honda started in the motorcycle business, however, it did not tie its future to that particular business. They saw their core competency as a world leader in engines and powertrains. Honda leveraged that competence into cars, lawn mowers, garden tractors, marine engines and generators.

Is it a reach to compare Honda with a design firm? Not at all! The design and technical abilities inherent in an engineering or architectural firm make them ideally suited to be the designers of the future.

Management Is Looking Ahead

Seeing the future may be more about having a wide-angle lens than a crystal ball. The managers of design firms that are truly looking ahead can articulate the five or six fundamental industry trends that will affect the company. Questions that are discussed and at least tentatively answered at management meetings include:

  • What are the forces already at work in the design industry that have the potential to profoundly transform our industry structure?
  • Which clients will we be serving in the future?
  • Who will be our competitors in the future?
  • What skills or capabilities will make our company unique in the future?
  • In what future end product markets will we participate?
  • What end result do we want to attain? Can we work backwards to figure out how to get there?

Often management meetings for design firms concentrate on multipliers, utilization and overhead rates, setting sales goals, and dissecting the historical financial performance. The emphasis for the more successful firms is to not ignore the past, but to use it as a planning tool for success in the future. The successful firms for the new millenium will be asking “Why?” regarding the traditional means of doing business.

Excellent Cadre of Key Employees

All of the managing principals of the firms interviewed that had an exceptional year said that their company has an excellent cadre of key employees. One principal further stated that the only assets that meant anything were the firm’s employees. It seemed to fit: Excellent employees–Excellent company.

The amount of pressure to meet deadlines and budgets seemed to be as intense and likely more intense with successful firms as with any other A/E firm. However, the pressure seemed to be a positive influence. Everyone seems to be held more accountable for their own performance. Another comment from a principal was that, “Our employees know that deadlines are pretty much non-negotiable once they are set, so we seem to always meet our deadlines.”

If we can draw an overall conclusion of the employee mentality of these successful firms, it seemed to be–work hard, work smart and don’t quit.

Marketing Know How…

Almost all principals of A/E firms believe that, as a whole, their firms market their services “above the average.” A more critical review of marketing efforts would perhaps provide a firm with improved insight on how to better target their marketing activities. The firms interviewed that had the greatest success during 1996 have some common characteristics in their marketing efforts. They are:

  • The managing principal is closely involved in the overall marketing strategy and effort.
  • The firms seem to have better than average strategic alliances with other successful A/E firms.
  • They all have a full time, non-technical person (meaning they are not architects or engineers) who helps direct their marketing effort.
  • Most of them use desktop publishing software to develop relevant information specifically designed for the desired customer/client.

The physical changes in promotional materials in the A/E industry during the past three years have been very pronounced. From proposals to brochures, the use of color and graphics has reached proportions ranging from subtle and exquisite to eye-popping “grabbers.” Perhaps the more dynamic part of the marketing effort is how some of the successful firms entered the international marketplace.

Many of the successful entrées into the international marketplace have been the result of following a client. A common scenario is a client going into the international marketplace and needing assistance from a trusted “ally.” Strategic alliances with clients will become more and more commonplace. A/E firms have “shirttailed” various types of clients into international markets, including other A/E firms, private sector and public sector customers.

Those firms that tried joint venturing with the “locals” in foreign countries reported more horror stories than successes. Mexico and Eastern European countries seemed to have more difficult markets to penetrate. There are currently several A/E firms embroiled in legal actions with their foreign promoters in those geographic areas. The Far East, notably Japan, Korea, Singapore and Taiwan tended to be areas in which the firms interviewed had greater success.

Projects Were Managed Effectively…

The successful firms seem to support their project managers with positive and proactive attention. Top management is involved at least monthly, if not weekly, in reviewing the progress and the planning aspects for specific projects. There seems to be a firm-wide expectation of bringing in projects at or below budget. As a result, there are very few project overruns.

The quality and the timeliness of project management reports from the accounting department are important. However, the perception is that the historical viewpoint provided by the reports is a tool for client communications, staff scheduling and planning and not an end in itself. The focus centers on the commitment to and involvement in meeting clients’ needs within the project scopes. All of the firms interviewed that had a good year in 1996 stated that their job cost reporting system is adequate or better.

Employees’ Success Is Linked to the Firm’s Success

The successful firms tend to have employees that feel that if the firm does well, then they will also do well, both financially and with their professional development. Discussing compensation plans with managing principals generated no clear consensus of what types of plans work best. All firms responded that they pay performance bonuses when there are sufficient company profits.

Bonus plans seem to have a variety of operating philosophies and functions. Many bonus plans are part of the funding mechanism for new shareholders to purchase company stock. Most firms pay out bonuses by first determining the amount of the bonus pool and then divvying up the pool on a somewhat arbitrary basis. However, most owners agree that a more effective bonus plan would be achieved if employees knew and understood what “sought out behavior” was going to be rewarded.

An interesting approach to determining bonus criteria for the upcoming year was described by one principal of a successful A/E firm. He explained that when the company’s budget development process is completed for the year, the principals of the firm study the job functions for the various employee classifications. They determine what functions they want to encourage and assign a percentage weighting on that basis. This is then presented and negotiated with the respective employee.

With mutually agreed upon employee specific goals, the desired functions and behavior will be known and encouraged. No matter what the vehicle is for establishing compensation or bonus payments, it is bound to be controversial.

“Niche” or “Studio” Firms

Niche firms tended to be more profitable than “do-everything-for-everybody” firms. However, there were exceptions. There were two firms in the survey that were “full service” A/E firms that had excellent bottom line results. However, the niche firms tended as a whole to enjoy larger profit margins.

Most niche firms that were interviewed have between 10 and 40 employees. They consist of specialists in safety engineering, detention facilities, embassy design, light rail, specialized landscape design, airport instrumentation design and remediation services. There are many other niche specialties.

One large architectural firm was able to exploit niche markets by breaking itself into self-managed, 25 to 30 person “studios.” Each of their studios operates independently and focuses on specific design market niches. This helps them to focus more on their clients and less on the bureaucratic requirements that often develop in larger A/E firms. The firm has achieved a competitive advantage: They have the resources characteristic of larger firms but also the flexibility and dynamism of a smaller enterprise.

Geographic Diversity

All of the firms that had excellent profits for 1996 had some geographic diversity. The reason stated most often for the geographic diversity is that: When the economy in one geographic area is poor, it is likely that it will be cushioned by a better economy at another location. Some niche firms are able to have a one-office organization and yet have a national and even an international presence.

 

The Future of the Industry – Where Are We Going?

There are two somewhat opposing ideas about the future direction of the A/E industry. One is to get big and offer more and more services. At the other end of the spectrum will be the “virtual” firm. These two extremes will probably end up being very complementary to each other. There will probably be excellent opportunities for well run A/E firms that are not at either end of these polarities.

Let’s first consider the big, multi-billion dollar firms of the future. We can have a preview of these firms by looking at several of today’s largest A/E firms. These firms are already Architectural/Engineering/Development/Construction/Op-erations enterprises. They are billion dollar infrastructure developers, complete with a “bank” or financing arm.

Increasingly, larger A/E firms will approach major design or infrastructure projects with a “totality” concept. They see opportunities in developing and maintaining infrastructures for entire countries such as Poland, Equador, or even China and Russia. Presently, larger firms are offering service functions such as financing, privatization of government services, building and operating cogeneration facilities, construction & turnkey operations and even property management services. The service capability of these firms will increase dramatically in the next ten years.

Consolidation of larger firms into even larger firms will continue to accelerate. This will happen mostly through mergers. The larger CPA firms went through, and perhaps are continuing to go through, a similar consolidation process. However, the difference between the CPA firm consolidation and the A/E consolidation will be that A/E firms will have the opportunity to carve out more client services. They will be able to offer new services better than existing providers. How many multi-billion dollar firms will there be in ten years? Less than ten—probably less than five.

A/E firms will look attractive to outside investors. There will also be continued pressure for larger firms to either merge or go public to fund the retirement of major shareholders. The long-term effect of having the ownership of professional service companies held by private investors will be interesting to observe. Will the pressure for short-term profits affect the viability of a long-term strategy? Not if the firm wants to survive!

The format of the successful medium-large sized A/E firms (from 120 to 500 employees) will probably be some type of a highbred of the “studio” concept. Self-managed “enterprise zones” that are focused on a market niche that can be fast acting and client responsive will do well. The managers of the medium-large companies who can build their firm’s infrastructure to consolidate resources, and at the same time encourage innovative specialized work groups will have a competitive advantage.

Now the “virtual” firms—this will be a most interesting business entity. The virtual firm will be comprised of mostly smaller firms (1 to 10 staff members) that have formed a series of loose associations to help market themselves. Smaller firms will quickly unite with other smaller firms around the world for specific projects. The resulting confederations will form within hours and will dissolve just as quickly. There are already virtual firms on the World Wide Web (Web) that link multiple A/E firms scattered throughout the world.

The “virtual” type firms will be some of the providers of support functions, such as accounting and even some of the marketing functions, that will probably be fractured-off from the smaller to medium sized A/E firms. Rather than being a “death durge” for the controller, the outsourcing trend of the future will provide more opportunities for competent accountants. There will be more opportunities in the A/E industry for CFO’s and controllers to either become a more integral part of the management team, or become owner/operators of virtual service bureaus for processing A/E information.

The amount of change that the A/E industry will experience in the next 10 years will be more than our industry has experienced in the past 20 years. The amount of information that will be available to anyone with a computer and a modem is presently astounding. The future availability of information is probably beyond our present comprehension. We are seeing the tip of the iceberg when we access the Web. “Home pages” and e-mail addresses will become as common as listings in phone directories. The firms who are more adept at managing and using this information will be the firms with the most opportunities.

For all firms, strategic alliances with other A/E firms, new product development along with savvy marketing practices will be important keys to their future successes. Smaller firms will rely more on creative niche development strategies. Resourceful and creative firms will continue to do well.

John Pruitt is President of A/E Consulting Services, Inc., a management consulting firm to the design industry. He has assisted many A/E firms in establishing viable strategic and ownership transition plans. Seminars on how to plan for the 21st Century will be present by John this Spring in Orlando and San Francisco. Mr. Pruitt may be contacted at A/E Consulting Services, Inc., 1623 Second Street, Kirkland, WA 98033, or call 425/827-2995.

 

One response to “Becoming a World Class Design Firm”

  1. This was a great article John. Would love to hear more

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