Whether prompted by the need to expand or contract the size of the partnership in response to firm growth or reduction, or by a change in direction of the practice such as entering a new market, or the desire to hold on to key senior staff, leadership transition is inevitable and healthy for architectural firms wishing to last beyond their founding partners. No firm is identical, and each transition is unique and needs to be treated as such. But there are two common themes to successful leadership transitions: preparation and communication.
Preparation for major transitions, which are critical to the lifeblood of a firm, is ideally initiated years in advance of the change. A well-managed firm will have a strategic plan that outlines the firm’s mission, vision and goals, as well as a succession plan that frames the rate of change among owners. Often a firm develops written criteria defining the requirements to achieve leadership as well as ownership positions within the firm. Criteria may include professionalism, values and ethics; attitude toward risk; ability to attract and retain clients; strategic thinking; project management skills; and design ability. These attributes will reflect both the current reality of the firm as well as the long-term goals and allow new leadership candidates to be evaluated thoroughly and fairly. This process requires consensus within the partnership, a vital component to preparations for leadership change.
When a potential candidate is identified internally and early, a firm can take a structured approach to providing the mentoring and professional development the individual often needs and surely deserves. This cultivation will allow the prospect to eventually be considered for partnership. Searching externally for an appropriate fit and interested candidate takes time, and also benefits from the guidance of a strategic plan and partnership criteria.
Whether the leadership transition involves promotions, new hires or even mergers and acquisitions, to be successful, it must be well conceived and well communicated. Bringing up new leaders—or importing them from outside the firm—can affect a firm in myriad ways, from the functioning of the partnership group to the chemistry in the studio. With the understanding that change is inevitable and can be healthy, and with the appropriate preparations, the change can have a dynamic effect on the practice, staff morale, the quality of the work and the reputation of the firm.
To maximize the benefits of the change, the same thoughtful approach should apply to communicating the transition. Just as the principals should begin mentoring and selecting their successors years before they will become partners, the preparations for the transition should begin in marketing well before the announcement of new partners. Positioning the candidates identified for promotion as experts within their field takes time. They need to develop their market or define their expertise, identify their client base and establish their own profiles within the firm and the industry. Often the “senior partners” need to share some of the limelight to allow the next generation to be recognized. Orchestrating this outreach effort during the years preceding the big moment lays the groundwork for the announcement of the promotion. Done well, it helps staff and the broader community to understand why an individual was selected for a new leadership position, the value this person brings to the firm and his or her accomplishments. The announcement of the promotion should build on this, articulating how the promotion fits within the vision of the firm and clarifying the benefits the individual’s new role will bring to the practice and its clients.
The internal communications plan deserves as much attention as its external counterpart. Formal announcements of the change to consultants, clients, and the press are essential, but a great deal of a firm’s reputation is gained through more casual connections with those within the firm. If a client asks the project manager or if a consultant calls and asks the receptionist about the recent change, and that person cannot communicate it clearly, that would carry more weight than the well-crafted website announcement. To ensure that the message is conveyed consistently, appropriately and sufficiently by everyone at the firm, the message needs to be shared with the staff in a variety of formats; depending on the size and culture of the firm, this can be done through an office meeting, an all-staff email, or the firm’s intranet, or all three. Communication to the staff can be completed within the weeks leading up to the formal announcement, so that any questions can be answered and any concerns vetted before the news goes public. The media releases and announcements to clients can be shared with the staff as well, as they are distributed externally. This allows the staff to help carry the message for the firm.
Oh, and, as soon as you think you are done with the transition, it will be time to start on the next round.
Kirsten A. Sibilia Assoc. AIA, LEED AP has spent 15 years helping architectural firms with marketing, public relations, communications and strategic planning. She is Dattner Architects’ chief marketing officer and previously was marketing principal at FXFOWLE Architects and chief marketing officer at JCJ Architecture. Kirsten serves as the director of publications for the AIA New York chapter and wrote the “Public Relations” chapter for The Architect’s Handbook of Professional Practice for AIA National. She coauthored an SMPS National white paper, Fast Forward: Marketing Through Leadership Change.
Overall revenue levels are flat, billing rates are down and the utilization rate for architecture and engineering (A&E) firms is just 61.5%—yet the industry is beginning to show signs of recovery from the biggest downturn in recent history.
During the 2011 A&E Summit sponsored by DiCicco, Gulman & Company (DGC), we revealed industry trends for an industry that continues to struggle.
It is clear that not every firm will conclude that “flat is the new growth,” as co-presenter Ian Rusk ASA, of Rusk O’Brien Gido + Partners, put it. Some firms will find ways to grow despite current conditions.
One reason for optimism is that the direct labor billing multiple for 2010 was 3.23. Historically, a multiple of 3.0 or higher has been large enough to produce a reasonable rate of return. However, the 2010 multiple was slightly lower than the 2009 multiple of 3.28, and in both cases the multiple was artificially inflated by salary reductions.
Overall, as Rusk reported, revenue for the top 500 firms nationwide was flat in 2011, totaling just less than $80 billion. Although more than 100,000 firms are in the A&E sector, the top 500 represent about 80% of revenue. Overall, revenue from U.S. work declined, but many firms made up for the deficit by seeking more work abroad.
However, backlog levels are increasing for many firms, and billings and inquiries are rising.
Although a DGC survey of 34 client firms found that the utilization rate is just 61.5%, that’s still a slight improvement from the 2009 rate of 58.9%. To improve profitability, firms must boost the utilization rate significantly, especially for firm principals, who had a rate of just 42% in 2010.
The average billing rate for firms is flat at $108 an hour and is expected to stay around that level through 2011, while net-fee income per full-time employee is up modestly from $137,000 to $139,700. However, net-fee income per employee varies widely from one firm to another, with an overall range of $110,000 to $192,000.
Although income has increased slightly, costs have decreased slightly. Overhead per direct hour dropped from $73.11 to $66.64, and each employee’s average hourly cost rate was $36.28, down slightly from $36.94. The drop reflects the improvement in the utilization rate. The overhead rate of 2.02—down from 2.14—is still not good, but it is well below the break-even rate of 3.02. A rate of 1.75 to 1.85 would be a sign that the industry is returning to a healthy level.
The DGC survey found that firms are operating at a profit of about 7.5% of their net fees, compared with a profit averaging just 0.4% last year. That comes out to a profit of $8.15 per direct labor hour, which is low, but up significantly from $1 an hour in 2009.
To survive and grow, firms must focus more on working capital (receivables + cash – short-term debt), which should be approximately 20% to 25% of net fees; otherwise, they’ll end up relying too heavily on bank financing.
Although current staffing is in line with industry backlogs, it is likely to take four more years before the industry fully recovers, according to co-presenter George Christodoulo, Esq., of Lawson & Weitzen.
Christodoulo noted that as of March 2011, construction nationwide stood at a seasonally adjusted annual rate of $768.9 billion, which is just half of the $1.5 trillion pace that economists consider to be healthy.
The industry is struggling with too much debt, high accounts receivable, bad real estate and poor morale. It is also hindered by project cancellations, unavailability of financing, high unemployment, poor cash flow and heavy competition for few projects. These factors, along with a significant number of firm principals nearing retirement age, will result in increasing consolidation.
“In a slow-growth economy, many realize that growth comes from taking market share away from penetrating new markets and adding new clients,” Christodoulo said. “Acquisitions are a faster way to achieve growth.”
For acquisitions to take place, though, sellers need to set realistic valuations that are well below 2007 valuation levels.
With many architectural and engineering (A&E) firms downsizing or even closing, it may not seem like a good time to think about growth.
However, some will see opportunity in the current economic climate. If the prevailing mood among A&E firms is to ride out the current climate, those that concentrate on growth may be able to succeed if they plan carefully. It may, for example, be a good time to consider acquiring other firms or merging.
The keys to growing successfully include:
• Extensive planning
• Having the right people in the right positions
• The ability to make decisions quickly and move forward as an organization
• The ability to execute as a group
Execution is key. If a firm can’t execute a strategic plan as a group, meeting the other criteria for growth won’t matter.
David M. Sullivan CPA is a partner in the A&E group at DCG in Woburn, a CPA and business consulting firm specializing in the A&E industry. He can be reached at firstname.lastname@example.org.