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November 20, 2003

Architects play catch-up in the business world

  • Authors say old business model isn't working
  • By SUSAN L. HARRIS and KYLE V. DAVY
    Advanced Management Institute for Architecture and Engineering

    Harris
    Harris

    Davy
    Davy

    During the 1950s and 60s, design firms adopted the utilization rate business model. We believe this model no longer serves firms in today's economy, and that it actually pulls them into the downward spiral of commoditization.

    The situation can be changed by understanding several key ideas and adopting some innovative approaches to working with clients.

    We developed these conclusions during our two-year research project on “New Models of Practice for Design Firms” at the Advanced Management Institute for Architecture and Engineering in San Francisco.

    We've spent the past year collecting relevant case studies and designing practical in-firm applications, and are close to finishing our book on the subject. Summarized here are our nine key findings:

    1. Trapped in an antiquated business model.

    In the boom period following World War II, design firms operated in relative independence with standard agreements allowing for adequate fees. The economic shocks of the 1970s and 1980s forced firms to tweak this model with additional business practices, including marketing, strategic planning, financial and accounting systems.

    However, in the 1990s, the U.S. economy shifted radically from being capital-based to being knowledge-based. Project delivery methods changed, and design firms found themselves challenged by new competitors. Yet they stayed with the old, familiar business model — and began to fall out of step.

    2. Playing catch-up in the knowledge economy: becoming a living company.

    A living company is organized to optimize people and knowledge first and reward capital second, in a near reversal of the economic company's organization.

    “Profitability is a symptom of corporate health, not a predictor,” according to Arie De Geus, author of The Living Company, whose work is cited by us, along with that of James Collins and Jerry Porras in “Built to Last: Successful Habits of Visionary Companies.”

    Living companies are learning organizations, have a strong sense of identity, are tolerant and decentralized, with a diverse, entrepreneurial staff, and use conservative financing, minimizing their debt to provide flexibility.

    3. Creating value, not selling hours.

    We strongly believe that raising utilization eventually saps the strength of the firm. Why? Because in order to maximize utilization rates, firms must give up the very activities that make them healthy and innovative: creative and reflective time, research and development, learning, coaching and mentoring. The living company builds its survival and prosperity on those very things.

    4. Living systems, business ecosystems and value networks.

    De Geus writes that living companies connect outwardly with larger living systems (community, nation, society), and inwardly with smaller sub-units and individuals. Just as within a natural ecosystem, the health of the living company depends on the health of the larger living system, of organisms interacting with one another and their environment.

    Design firms contribute value to the business ecosystems that form around their clients; in turn these “value networks” describe the value created, assessed and exchanged within the living system. For example, Wal-Mart's value network emphasizes low cost and just-in-time merchandising, while Nordstrom's value system stresses individualized customer service and high-quality products.

    Value network models become successful when firms decide which ecosystem they will inhabit, who makes up those ecosystems, how value is assessed, and how the firm can contribute to the system's health and success.

    5. Collaboration, transformation and experience.

    Different types of work offer different opportunities for firms to engage in value creation. We often use the three types of work outlined by Ronald Heifetz (Leadership Without Easy Answers), to illustrate this point:

    • Type I Work addresses a known problem with a known solution and little participation by the client.

    • Type II Work addresses a known problem, the solution to which requires interaction with the client, and therefore leadership, facilitation and collaboration skills.

    • Type III Work can be called transformational. This work is highly complex: neither the problem nor the solution is yet understood. Clients need a trusted advisor, such as a design firm, to guide them through these new challenges that will require change and transformation as part of their solution.

    6. From one to many: A new ecology of design firms.

    The advent of the Internet spawned a boom in the invention of new business models, such as eBay's model for the garage sale, but design firms failed to embrace this move towards evolution and diversity.

    By largely sticking with a single business model, design firms looked more alike — and like a single commodity — to their clients. In nature, this lack of diversity is often the precursor of disaster — non-adaptable life forms often succumb to changes in the environment and the competition of more adaptable newcomers.

    New species of management consulting firms, design-build companies, and foreign competitors have already eroded the design firm's traditional role. Design firms must move quickly to increase their diversity from one another, and adapt to their clients' needs. An increased diversity of design firms can both survive and thrive in the new economy.

    7. The evolutionary role of technology.

    Six major trends triggered by the growth of technology, particularly instant worldwide communications and access to information, are transforming the world of design firms:

    • The economic shift from capital to knowledge that puts a greater value on human assets.

    • The shift from a local, geographically-bounded area of operations to the relative ease of operating globally.

    • The shift from having two options — a one-of-a-kind product or a mass-produced product — to the new option of mass customization, i.e. the ability to offer a great basic design and customize it for local conditions.

    • The shift toward ever-greater segmentation and specialization of design services, and the reactive shift towards re-integration.

    • The shift from a centralized, top-down management approach to a self-organizing, self-managing, collaborative approach.

    • The shift from providing products and services via a single organization to providing them via a network or alliance.

    8. Foundation for a new ecology of firms.

    Breaking out of the old economic model means moving away from selling hours. Design firms can choose which business models and pricing strategies to use — perhaps modeling themselves after their clients. Are they capital-intensive or knowledge-intensive? Local or global? Integrated or segmented? Do they provide one-of-a-kind products, mass production or mass customization? Do they provide services alone or through a network/alliance? Are they centrally organized, self-organizing or using collaborative methods?

    All of these strategies have different implications for design firm fee structures:

    • Through the perception of the value being supplied, or value pricing.

    • Through the perceived value of an ongoing collaborative relationship, or retainer pricing.

    • Through owning and operating projects — an investment-based approach to receiving fair return for value.

    9. Creating value by transforming design.

    One example of transforming design is Landmark Graphics, which went from being a computer software developer for three-dimensional models of subsurface geology to creating a “Decisionarium” where they assemble drilling/mining teams, providing them with highly accurate, 3-D digital models to test in lieu of the typical field visits to remote locations. This collaboration has vastly speeded up the lengthy decision-making process of the oil and gas industry.

    Design firms must similarly leverage the power of collaboration and the potential of new technological tools. They must look at how they fit into their client's business ecosystems and have a clear understanding of what value they create in those systems.


    Susan L. Harris, Ph.D., Senior Fellow, and Kyle V. Davy, AIA, Senior Fellow, are consultants on the leadership and development of individuals, firms and the A/E industry, with the Advanced Management Institute for Architecture and Engineering in San Francisco. Their book on New Models of Practice for Design Firms will be published in 2004.



     


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