By Steven J. Isaacs
There is a growing disparity of success among design firms. While some have attained new levels of revenue and profitability, others seem content just to “hang in there.” In this design market overview, we will examine the chain of trends that is holding back many firms, and explore how these trends continue to lead to slow recovery for architects and engineers
Conversations with clients and work with design firms across North America reveal several major trends that are merging into a chain of related effects. These trends appear to be driven by continued economic uncertainty. For example, a huge backlog of infrastructure work exists, from the smallest school district to the replacement of the Tappan Zee Bridge. Even with recent tax growth, states and municipal districts have not fully recovered from the great recession. Leadership from the federal government on economic issues is lacking, and Congress remains stubbornly gridlocked. Situations such as Detroit’s bankruptcy filing could lead to major disruptions of borrowing capacity by many other municipalities — a trend that could lead to even more disruption of capital project funding.
Arnold Mikon, president and CEO of Tower Pinkster Titus Associates Inc., an A/E firm based in Michigan, adds, “I don’t think the industry has been restored to the pre-recession levels, and that’s a trend that I spend much of my time thinking about on a broader basis.”
Project Funding Uncertainty
Many companies are stranded in a “wait-and-see” mode. These firms are reluctant to engage in capital spending, unable to obtain the money needed for projects, or are uncertain about whether the funds will be there to sustain projects through completion.
Affected clients are slow to start work, quick to delay work and seemingly unable to make decisions in the face of such questions as, “Where will the next stage of funding come from?” and “How will the project be able to move forward?” Many projects stall while waiting for clients to either make choices or find the funds to move forward.
This slow start-stop-delay-start again nature of today’s projects is deeply affecting many design firms’ operations. The great uncertainty about whether any given project will start, continue or reach completion has made backlog projections more of an art form. The insecurity about backlogs has fueled increased competition, with firms pursuing projects they would not normally consider in an effort to find viable work and build confidence in their backlogs. Unfortunately, many of those projects also stall, as the hunger for work drives some firms to continue dropping their prices, even at the risk of undercutting the firm’s ability to operate.
Arnold Mikon adds, “I feel good about our business prospects, but in terms of a specific backlog, it’s not as good as it has been historically. But we certainly see more opportunities these days compared to several years ago.”
With backlogs affected, determining upcoming staffing needs has become nearly impossible. As a result, there is a reluctance to hire people who may need to be laid off in only a few months time. In turn, this puts increased stress on long-term staff members from overwork and uncertainty about whether they will have the support they need to manage projects effectively. When a firm cannot offer consistent work flow, enterprising employees may strike out on their own, either as freelancers or to start their own firms.
Job seekers in the design professions have been hearing discouraging career messages for years. Online forums for young engineering and architecture graduates are filled with anxious discussions about the difficulty of finding positions. The ambitious and talented are seeking other fields where they can use their abilities — a trend that will help make the foretold shortage of engineers and architects a reality.
Chris Poland, chairman and CEO of Degenkolb Engineers, the nation’s oldest and largest earthquake engineering firm, explains, “The price pressure has really brought us to a new normal. The firms that know how to use technology and get by with fewer staff are extremely busy, though they remain slow to hire new staff. That said, after all the resizing our industry has gone through in recent years, most firms are busy at about 50% of their pre-recession size. However, many people have left the industry and may never return.”
Judy Nitsch, founding principal and chairman of the board at Nitsch Engineering, adds, “We have no problem finding entry-level people. The biggest challenge for us is finding people with five to 10 years of experience, since these are the people who have left the industry. That is probably our number one recruiting challenge.”
Clients Seek Ways to Deal with an Uncertain Environment
To mitigate the effects of economic uncertainty, clients are seeking alternative delivery and funding methods in the form of public private partnerships (P3s), IPD and similar systems. These methods are being adopted at varying rates around the country. Our data show public private partnerships, for example, are being used across the country with a somewhat higher level of activity along the East and West coasts and in the upper Midwest. While many of these projects involve transportation (where costs, such as tolls, are recoverable), others include schools, wastewater, courthouses and government buildings, and hospitals.
Pamela Anderson-Brulé, CEO of Anderson-Brulé Architects, based in San Jose, California, notes, “In California’s public sector, a broad-scale reordering and shifting is occurring on how things get done. As a result, state and local municipalities are now looking into alternative financing options, such as public private partnerships, or JPAs (where multiple cities or different agencies come together to deliver combined services), etc., to fund new projects. In fact, innovative cities across the country are starting to find ways to act more like private corporations, measuring accountability and marketing value as opposed to public entities of past generations. This will present huge opportunities for A/E firms in the near future that understand and can lead efforts in innovative service delivery and financing.”
The Changing Face of Clients
Changing delivery methods are also bringing a change in the face of clients. Historically, design firms worked directly with the owner. Under new delivery and financing methods, the client might be a group of players from a P3, developer/builder, operator, financier or financial holding company, to some other entity or combination of entities. Many firms may find that they no longer have as much, or any, direct contact with the owner, or that the owner may be a multi-headed conglomeration, with each “head” representing a unique set of interests that are not necessarily aligned with the others.
The Changing Face of the Design Business
Design firms that are experiencing a shift in their clientele will need to adjust. For example, marketing becomes more complex when you keep a larger group of stakeholders informed about the firm and engaged relationships will need superior interpersonal and negotiation skills, as well as the ability to draw out information that will help the firm more thoroughly understand its clients as well as its partners.
Glenn Bell, CEO at Simpson Gumpertz & Heger, a national engineering firm that designs, investigates and rehabilitates structures and building enclosures, notes, “Owners often are looking for the best of all worlds in terms of talent that is local to a project and to them, as well as very specific talent available anywhere else in the country or world. Today, we see hyper-competition driving creative teaming among design and engineering firms for the owners’ benefit. Much of the teaming is enhanced by technology, which allows for seamless project information sharing across different stakeholder groups.”
The Rise in At-Risk Work
Changes in clients and delivery methods are also driving an increase in at-risk work. “We’re experiencing an avalanche of work to do at-risk, more than ever before,” said the marketing director of an architecture firm in the Northwest region. “Designing upfront was normally only about 10% of our work; now it’s approaching 50%.” Few firms can handle such a large shift without making changes to their operations and searching for more efficient and effective practices. Donald E. Stone, Jr., CEO of Dewberry, which is based in Fairfax,Virginia, agrees, “On the A/E side, we’ve let too much of the market slip away, so we either need to be subservient to the General Contractors of the world, or take on a leadership position on design-build projects, which is a different risk posture than we’re used to. Moreover, we’re definitely seeing an increase in traditional A/E firms moving toward the E&C model. The traditional lines of A/E/Contractor are blurring, and company leaders will have to decide whether they are a victim of the market or whether they want to take control of the market.”
As firms find ways to deal with multi-headed clients and a shift in the relationship with those clients, industry consolidation may occur. The concept could be: If a multi-headed team is needed to deal with multi-headed clients, then maybe we’re better off if we band together into one organization. The strategic alliance of design firms may finally see its day arrive, although a different sort of legal entity may be needed to disperse risk across a larger group of players.
At the other end of the possibility spectrum, teams may take on characteristics more typical of a movie production, with many specialists coming together for one project and then dispersing afterwards - a scenario that would be a boon to small firms and specialized freelancers.
Predicting how to respond successfully to these conditions must be based on the needs of individual firms; there is no single answer for responding to economic uncertainty.
Progress Is Still Being Made
With all of these trends affecting many firms, we are still finding organizations that are creatively modifying the profession. The proliferation of high-performance building to new effective methods in delivering documentation, for example, is producing new leaders in the field.
If client attributes are changing, design firms need to alter how they deal with them. Firms must examine the trends described here and in other sources to evaluate how these impact the practice and markets. Only then can they make adjustments to strategy, operations, staffing and competencies to meet the new needs. Traditionally, a design project involved a high level of trust between the firm and the client. With more risk-taking and a different set of clients in the picture, firms may find themselves in the position where that level of trust is difficult to attain.
Strategic Response – Adapt and Evolve
The multiple trends we have identified — project funding, competition, finding and retaining staff, evolving delivery methods, industry consolidation — have merged somewhat and are being driven primarily by economic uncertainty. This has produced a push for alternative funding and delivery methods, created a change in clients and resulted in start-again, stop-again projects that cannot be scheduled effectively. The lack of a backlog leads to a reluctance to hire and drives people into other professions or freelancing.
Firms must adapt to the new client with new marketing tactics, adjusted strategies and operations, new or updated competencies and expanded client management methods. An alternative may be consolidation and alliances for dealing with multi-headed clients, higher risk and ever-increasing project complexity.
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