The Death of the Architecture Firm
by Thom McKay
This is the first of a two-part exploration of how today’s architecture practices must transform to survive. Part Two focuses on issues related to people and culture.
Today’s architecture practices face existential change. Not only is the industry neck-deep in a massive consolidation, spurred largely by mergers and acquisitions,1 but all the traditional challenges continue to stack up against long-term survival—from the creeping commodification of design services to the onslaught of automation and the unending search for talent and quality clients. Throw in a low-level expectation of an economic recession in 2019, and the next few years are shaping up to be a perfect storm of adversity.
While many practices manage through these tempests—which seem to be happening more frequently and with greater intensity—a few fail to navigate the turbulence, sinking into the oblivion of insolvency.2 Some have even been swallowed whole by the lumbering behemoths of engineering conglomerates or global contractors, facing a range of new challenges to remain relevant in a brand-conscious, boutique-obsessed world.3 Is larger better? Is the traditional mid-sized practice slouching toward extinction?
Part of this shift may be the result of regular and predictable business cycles, especially in the United States, where the economy unfurls with the smooth consistency of a sine wave. Postwar America turned out what would become the country’s stable of large practices (SOM, HOK, RTKL, etc.), most of which survived more than a few recessions as well as the shifting tectonics of multiple generations and ownership transitions. For the last 75 years, business needed architecture and design, it would seem, so architects and designers became better at business. But is this the case today? Does that smooth sine wave still exist in a world of economic volatility, climate change and shifting demographics?
One clear consequence of the industry’s consolidation has been the rise of the mega-firm—a multi-disciplinary, diverse practice of 3,000+ professionals, a broad, global portfolio and a traditional leadership hierarchy. It is difficult to describe these companies in anything other than quantitative terms, and the various rankings in the industry trades are devoted to keeping score: revenue, headcount, square footage. These companies are large. They work all over the world. They specialize not in one or two typologies but in large, complex commissions that typically integrate multiple building types. Many also rely on acquisitive over organic growth.
But is this a positive, sustainable trajectory for the industry? Does it advance the practice of architecture in a way that benefits both the practice and the practitioner, or is it a more frictionless path to growth and shareholder enrichment? A convenient way to transition ownership?
These are pressing questions, and the answers are not clear just yet, but what does seem apparent is that a new type of structure needs to emerge—either because of the new demands of today’s business or because of the prevalence of consolidations—though it remains to be seen where these new models will come from. Ditto that on the leadership front. Where are the leaders of tomorrow, and what skills will they need to blaze a new trail for the industry? For existing firms or newly integrated practices, it will be much more difficult to have any significant transformation accompanied by a new business model. Thus, it may be much more likely that players and paradigms from outside the A/E/C industry will disrupt the status quo with new business models, new initiatives, and new ideas.
Transformation: Survival or Latest Trend?
Business schools and management circles are abuzz these days with earnest study of transformation and the absolute need to reshape conventional processes and operations. Every week brings new announcements about strategies to go digital or disruptive and capture the next wave of consumers. How much of this is likely and true and how much is B-School rhetoric is yet to be revealed, but there is little doubt that A/E firms are up against some hard choices.
First off, let’s define what we mean by transformation with respect to our industry. While breaking into a new market or acquiring a new service is always good business practice, it hardly sets a high bar or heralds a new era of disruption. Tomorrow’s practices will need to re-calibrate almost everything about themselves—from their fee structures to their team structures to their business processes—in order to compete against more agile providers. So, at least on this front, transformation seems a righteous tack.
In any business, there are three core aspects of transformation: financial, operational, and strategic. The financial element comprises the administrative infrastructure and metrics that a company values. The A/E world is largely a fee-for-service game, where clients pay for the hours a professional spends on a project, whether that be repetitive detail work or broadbrush, Big Idea concepting. Sure, there are some variations to this, but fee-for-service has been the status quo for decades and it seems unlikely to change anytime soon. And yet it must.
While most businesses approach financial transformation in quantitative terms—total shareholder results (TSR), EBITA, margin, or profitability—tomorrow’s practice must be prepared to consider or at least experiment with new models. While this may mean exploring atypical revenue streams (data, consultancy, allied value-added services), it more likely will involve the replacement of time-based compensation with outcome-based rewards.
Slow to be embraced by architects, results-based fee models are gaining traction in other professional services because they more closely align the consultant’s success to the client’s success (and thereby mitigate some risk for the client). These models also rely on tangible metrics (a reduction of operating costs, a boost in sales, etc.) and typically drive rewards on the back end (hit these targets and you get a performance bonus).
On the operational front, the simple aim is to remove waste and inefficiency from current processes or identify new, more efficient ones. Many practices will trumpet their adoption of technology (BIM, Virtual Reality, and Artificial Intelligence) as proof of their transformative chops, but this is little more than using new tools to solve old problems; there is nothing transformative about it. Scott D. Anthony, an author and consultant who specializes in business transformation, explains: “Sure, costs will be lower, customer satisfaction might go up, but the essence of the company isn’t changing in any material way. And, in a quickly changing world playing an old game better is simply insufficient.”4
Here, it would seem, size is the enemy. While we can debate what the future holds for the industry, it seems indisputable that agility—the ability to make strategic decisions quickly, mobilize effortlessly, and collaborate seamlessly—will be the hallmark. Those firms deploying cumbersome bureaucratic structures and matrixed gates of approvals will find themselves gradually left behind.
Which takes us to strategic change, by far the most significant … and the most difficult to plumb. For there to be lasting, tangible strategic transformation, the shift must be quantum, even alchemical in nature—from lead to gold. A car is a car until someone suggests that maybe it ought to fly, and then it becomes something altogether different. Of course, the inherent risk tends to be greater, as does the internal resistance, but “executed successfully, strategic transformation reinvigorates a company’s growth engine. Poor execution leads naysayers to pounce and complain that a company should have ‘stuck to its knitting.’”5
While all of this makes perfect sense, it neglects the two components that many architecture practices cherish most of all and typically consider among their core market differentiators— their people and their culture. How many of us have used the tired cliché that “people are our greatest asset” or tried to lure new talent because “our culture is collaborative and rich”?
Editor’s Note: In Part Two, we’ll take a closer look at how people and culture are inextricably linked, especially within a creative organization, and how this connection may be the path to tomorrow’s successful practice.
1 Morrissey Goodale reports that 2018 M&A activity among U.S. A/E/C companies is up 26% and 17% globally.
2 Swanke Hayden Connell Architects likely leads the pack but by no means stands alone.
3 Stantec and AECOM, perhaps the two most acquisitive organizations in the industry, have racked up more than 75 acquisitions since 2010, representing some $7B in capital investment between them.
4 “What Do You Really Mean by Business ‘Transformation’?” Scott D. Anthony, Harvard Business Review, February 29, 2016.
Thom McKay has more than three decades of experience in the A/E/C industry and served as the Director of Global Marketing and Communications at CallisonRTKL. He currently consults with architecture practices, developing strategies for growth and new markets.
This article is excerpted from the 1Q 2019 issue of DesignIntelligence Quarterly.