All the Right Moves
Now into the third year of the current economic recession, the nation's top design firms have come to grips with the stagnant market.
While many firms were cushioned from the recession by work already in the pipeline when the downturn first hit, the flat market has finally started to cut into revenue.
Collectively, earnings for commercial, institutional, and industrial work reported by BD&C's Architects and A/Es giants were off 5.6% in 2002, dropping from $4.24 billion in 2001 to $4 billion last year. Moreover, approximately 20% of the top 100 firms expect earnings to drop in 2003.
Still, there are some bright spots. Eighteen of the top 100 companies grew more than 10%, and almost half made some kind of gain last year.
These firms are employing a variety of strategies to maintain revenue growth — whether it's chasing the hot markets, adjusting to meet the clients' changing needs, testing the international waters, starting a side business, or controlling costs.
Scrambling for work
The still-healthy institutional sector, especially healthcare and education, has been the savior for many firms. Nearly 70% of the companies that gained revenue in 2002 rely on institutional work for at least half of billings.
Understandably, many design firms have flocked to these still-thriving markets to make up for lost work in the commercial and industrial sectors. Institutional work accounted for 53% of billings in 2002 reported by the architect and A/E giants, compared to 46% in 2001.
In early 2002, Dallas-based HKS Inc. made a strategic move to enter the K-12 and higher education markets to make up for the flat commercial sector. The move paid off with several projects worth a combined $144 million in construction work under contract, says Ralph Hawkins, president and CEO.
"We sought out some of the best people in education and pursued the market aggressively," says Hawkins. That helped HKS reach record revenue in 2002 of $89.9 million in billings.
Atlanta-based Heery International credits much of its 27% growth in 2001 and further gains last year with a shift to more institutional work, especially government work. Such work accounted for more than half of billings the last two years.
Firms that have long relied on the institutional market for the majority of revenue have certainly felt a pinch from this increased competition.
"We'll show up for a pre-RFP meeting for a community college science center project and there's 400 architects there," says Roger Swanson, president of Anshen+Allen Architects, a San Francisco-based architect that focuses on healthcare and education work. "Everybody and their brother shows up. It's crazy."
Swanson says his firm has seen a dip in education work related to the increased competition, as well as less state funding and private donations.
Mining growth overseas
Expanding into selective international markets is a common strategy for growth. While many of the giants have already conquered foreign shores, mid-sized firms are testing foreign waters.
Without the deep pockets of the larger firms, smaller firms are taking cautious steps to gain foreign work.
One method is the strategic marketing alliance, says Robert W. Hoye, president and CEO of TRO/The Ritchie Organization, Newton, Mass. In June 2003, TRO allied with London-based Aukett to form Aukett +TRO Healthcare.
Hoye says TRO benefits from Aukett's local reputation and expertise, as well as its 15 offices across Europe, while Aukett benefits from TRO's healthcare expertise.
A strategic alliance with a well-established firm makes sense, because the learning curve associated with codes, regulatory approvals, and relationships with contractors and other providers is made easier, says Hoye. "And the cost is only a fraction of what a start-up or acquisition would be."
There's no legal tie between the firms until a commission is won. Then, a contract is formed under which Aukett assumes the lead role as architect of record and TRO shares the work.
TRO is one of several design firms to align with UK-based design firms to take advantage of the booming healthcare construction market in the United Kingdom. The influx of work stems from a 10-year plan by the National Health Service to construct about 100 new hospital facilities throughout Britain. Built through a private finance initiative — in which private consortiums design, build, and operate the facilities — the construction projects range from $20 million to $1.9 billion.
"They're huge deals, something like $25 billion each, of which the facility piece is just a fraction," says Swanson of Anshen+Allen. The firm was one of the first U.S.-based designers to get its foot in the door to the UK healthcare market when it joint ventured with Cheltenham, England-based Dyer Associates in the 1990. Last year, Anshen Dyer completed the first large-scale project under the initiative: the 1.2 million-sq.-ft. Norfolk/Norwich University Hospital, in Norwich.
Anshen+Allen made more than $8 million in revenue from international work in 2002, up from $1.7 million in 2001. International growth, the strong healthcare sector, and its acquisition of Seattle-based healthcare specialist Pacific Architects resulted in record 210% growth for the firm in 2002.
In April 2002, HKS formed a joint venture with London-based Ryder. Within the first six months of operation, RyderHKS landed two commissions. HKS also recently established an office in Mexico City. Work there includes offices, hotel/resorts, justice, multifamily, education, and sports, including several soccer stadiums. Hawkins expects foreign billings to represent 3% of revenue by 2004, up from less than 1% in 2002.
Hoye of TRO anticipates international work, which currently represents less than 5% of volume, to increase to 15-20% of volume by 2007.
More than a building designer
New services have also become a source of revenue for some firms. Gensler, for instance, has taken its design expertise to the product level, just as Michael Graves did for Target stores. Its brand strategy and design consulting division, called Studio 585, provides everything from product design to trade show booths to Web site design. Clients include carpet manufacturer Milliken, which collaborated with Studio 585 to create the Oxygen carpet line.
For Columbus, Ohio-based A/E WD Partners, selling its homemade online project management software has turned into a full-time business. Its expeSITE software is so popular among its retail and restaurant chain clients, like Wendy's and Home Depot, that the firm has formed a separate company, CJM Technologies, to sell it. CJM recently began marketing its in-house enterprise resource management system to other design firms.
"Sometimes I think we're a software company versus an A/E firm," says CEO Chris Doerschlag. "If you focus in on a specific niche like we do with retail chains, you can really start to develop specialties that set yourself further apart."
The firm has also expanded its service offering to include prototype design and food service operations engineering. These moves have helped revenue grow 48% in 2002, despite its 100% focus in the slumping commercial market.
Kansas City, Mo.-based A/E HNTB Corp. has been successful by adjusting to better meet its clients' changing needs, according to Terry Miller, president of HNTB's newly formed National Buildings Division.
"Their focus now is on preparing for new projects once the economy turns around," says Miller. "So we're doing more programming and planning work, helping our clients set the stage for when the market breaks."
In some cases, HNTB is helping clients come up with new funding strategies, especially for public work like university buildings, sports complexes, and convention centers. "It could be finding a hotel to accompany a convention center or locating a company willing to assist with some of the capital investment to be the long-term operator of the facility," says Miller. "Now that the bond market is not as convenient, private funds are coming into play with some of our public clients."
Controlling internal costs
At HKS, internal cost controls take in streamlining the invoicing process, balancing growth of staff with workload, and tracking designers' percentage of billable hours. "The target is 75-80% billable," says Hawkins. "If we see them dropping to 60% or so, we immediately ask them what's going on. It keeps people aware that we're watching to make sure that we're efficient."
But it's not all Big Brother at HKS. "We reward people for saving money," say Hawkins. "If people show us how they're saving money, we give them some of the savings."
While these strategic moves may represent just a fraction of overall work for the giants, they have proven to be able to get these firms over the hump until the economy recovers.
"The economic downturn has affected all of us in some way," says HNTB's Miller. "The key is adjusting to meet clients' priorities."
Big bulls in the bear market
|Anshen & Allen, San Francisco||+210%|
|Perkins & Will, Chicago||+72%|
|Moody Nolan, Columbus, Ohio||+51%|
|WD Partners, Columbus, Ohio||+48%|
|BBG/BBGM, New York||+45%|
|Watkins Hamilton Ross, Houston||+42%|
|Langdon Wilson, Los Angeles||+33%|
|Odell Associates Inc., Charlotte||+28%|