The last time we had a rapid downturn in the U.S. economy that truly crushed the profession of architecture was in the late 1980s. What if it were to happen again?
The pundits during the recession that began around 1989 blamed a 1981 tax law that encouraged real-estate investment for the sake of investment rather than to meet demand for space. Soon enough, speculative construction—primarily of office buildings—became one of those too-good-to-be-true deals, sort of like the dot.com IPOs of the 1990s or the home-flipping investments of this decade. Of course, it turned out that, yes, the deals were too good to be true. And, as you may recall, commercial construction came to a screeching halt. Firms laid off thousands of architects or went out of business altogether.
The joke at the time: “How do you call an architect in New York City? Holler, ‘Taxi!’” Except, it wasn’t funny.
As a result, urged on by its Practice Management Committee, the AIA national component launched a program, “Managing Rapid Change,” and enlisted the help of many, including current AIA Chief Economist Kermit Baker, to map a holding pattern for firms to follow until the market turned around. Assess your core talents, attack existing markets, get lean, and do it now, they said.
It was tough, but those times passed, thankfully. And the profession has enjoyed 15 or so pretty good years, despite the dot.com crash. (But that’s another story.) The upshot of prosperity, though, is that there are many firm principals in this country who have never experienced such an abrupt crash and likely wouldn’t react well if one occurred.
The dollar is weak, there are tens of billions of dollars in complex investments out there based on mortgages that are questionable at best, the stock markets are schizophrenic, and energy prices are on a skyrocket to the moon. Are we ready for what might come next? (And could even talking about how bad it might get become a self-fulfilling prophesy?)
What do you think?
Comments (1)
Change Management or change will manage you. Change is a constant in the universe, learn to live with it.
Architectural firms are vulnerable to market place conditions more than any other provider of professional services.
In general, Architectural Service Companies react to downturns in the construction market with staff reductions. There is a consistant failure in our profession to adequately take care of the staff while you are busy so that you can both survive when the bottom falls out of the marketplace for your services. For some reason it is perceived as bad business plan ahead to keep your staff, it is the rule of competition to never pay more than you have to pay for labor. Even though the inevitable market downturn will kill the golden goose.
This is an example of bad advice coming too late:
"As a result, urged on by its Practice Management Committee, the AIA national component launched a program, “Managing Rapid Change,” and enlisted the help of many, including current AIA Chief Economist Kermit Baker, to map a holding pattern for firms to follow until the market turned around. Assess your core talents, attack existing markets, get lean, and do it now, they said."
So based upon this wisdom in the past the ranks of architectural staff were professionally and financially crushed.
In Architectural firms the standing joke is; "Where sre all the 50 year old staff people?" Only it isn't so funny.
There is a better way. manage the company. You can do this if you know your nine numbers.
1. Know your profit numbers. Are you hitting your profit goals? Do you know what your profit target is or should be? Do you know how to determine your mark-up? The average pre-tax profit of architectural firms is simply not addequate given the economic cycles we experience.
2. Know your equity numbers. Equity or net worth is the actual value of your company, not including the intrinsic value. It is the sum of your total assets minus your liabilities. Do you know how to read a balance sheet or financial statement? This is the amount listed on the bottom line. The goal of your business is to grow this number! If the company does not grow in value, the company can not secure itself against economic downturns and budget shortfalls. The reason you can not do anything but lay off staff is you have insufficient equity. Invest in the companies future.
Rule number one for architectural firms is borrow money, set up lines of credit with your banker, when you are busy and do not need the money, so you will have money on tap when you do need it!
3. Know your overhead numbers. net profit starts with knowing how much your opperations cost and how much you need to earn and collect. At the beginning of every year calculate your overhead expenses, adequately anticipate spending and keep your company running and open. Define your net profit goal in the context of your projected overhead.
4. Know your sales numbers.
Most architects do not track their sales numbers or even have established targets. Most companies know they must have enough work to recover their overhead and generate a profit. You have to pay a certain amount forward to build the equity necessary to survive challenging economic changes.
By anticipating the downturn you know is coming and including a contingency in overhead for the economic downturns, architectural firms can determine how much work they need to perform at the mark-up & gross profit rate.
Economic downturns are a business cost that architectural firms can anticipate and must carry as a sunk cost of doing business. Architectural firms can define the total sales they need to be a survivor of anticipated economic downturn.
5. Know your job cost numbers. Eliminate surplus non value added work & compensate for deficiencies in opperations. Cost analysis arises from accurate capture of actual job cost. Do you have a cost accounting system? You have to know exact;ly how much it costs your company to produce the services you sell. Those numbers must anticipate and meet the cost of an economic downturn since we all know it is coming. The problem is most firms do not produce efficeiently enough to meet the profit goals or the overhead requirement of the company let alone the impact of the economic downturn.
6. Know your contract numbers. The top companies in the profession know their contract numbers. To manage your number you need to capture performance on each contract in a report every month. Manage your projects. I worked once for an employer who's principal would literally design away the budget and destroy the potential for a profit!
7. Know your receivables numbers. You can not make money unless you collect. If they can not pay ask them to sign a negotiable promissary note and sell it in the event of an economic downturn.
8. Know your liability numbers. Debt and liability must be tracked, charted and reported every month.
9. Know your cash numbers. Cash is the capacity to survive an economic downturn. Track your cash position every week. Chart the inflows and outflows of cash every month. Watch for trends that tap the availability of cash and compensate accordingly Cash is the life blood of the business.
Your profit is created by your staff. Doing great work does not really mean anything unless you make a profit and can keep the organization that is building the wealth. Great work is empowered by business management. Do not let your failure to manage be the final consequence of your effort and your employees hard work.
Posted by Terry L. Walker, AIA | November 16, 2007 7:31 PM
Posted on November 16, 2007 19:31