over the holidays, i've been catching up on a thick stack of publications that have lain dusty and dormant in my living room. in the din of the thanksgiving hangover, this particular article caught my attention:
yes, in some respects, it's yet another 'our profession is being disrupted beyond recognition', but what really jumped out was this recurring theme that i couldn't help but link back to the era of the big lizards: the meteor has fallen (more slowly, but as definitively) and trex and his friends (the dominant model of a 'professional' the past 80 years) don't really know how to react. they're getting their lunch eaten (literally) by these little things nipping around at their heels (those whippersnappers which just won't play inside the box).
in particular, i found the following passage illuminating for the traditional architectural model, especially with regards to fees:
"St. George says the most surprising aspect of JetBlue's agency search was how many firms still believed that the key to solving any business problem was the 30-second spot. But maybe he shouldn't have been surprised. Agencies still yearn for the fat 15% commissions they used to score off of a client's media spend, a spend ballooned mostly by television commercials. The industry isn't even close to adjusting to the truism that digital dimes don't replace analog dollars, the very problem that bedevils music labels, publishers, and television networks. Today, agencies really have no clue as to how they should get paid. "We still don't know how to monetize what we do," admits Peter McGuinness, CEO of Gotham, which, like Mullen, is owned by IPG. "We don't monetize ourselves properly, so we don't hit our margins."
In many ways, the end of the rich old model is the agencies' own fault. In the 1980s, agencies decided they could benefit from economies of scale, as well as manage client conflicts of interest, by merging. Not incidentally, this trend also gave the agency owners a way to cash out. The result was an industry centered on four major holding companies: WPP, Omnicom, IPG, and Publicis. But the move has backfired. "Agency leaders were making more money than the clients," says Martin, the industry consultant. "That's when the clients began to realize, 'Gosh, we must be paying them too much.' "
Clients forced the agencies into a service-fee model instead, which is far less lucrative. "It's like lawyers," explains BMO Capital's Salmon. "The fees are based on head count and time spent working." Grimaldi explains why this is so much tougher than the old model. "If a creative team now takes six people instead of two, just think about the burn rate of that room," he says. "Unfortunately, not everything generates as much money as it used to. There are only so many hours you can bill." Now those hours are getting squeezed from every direction. The clients employ procurement officers and cost consultants to negotiate down the fee on everybody in an agency. And given today's hypercompetition, agencies can sink up to $1 million and four months pitching for a new account they might never win. "When the smoke clears," says McGuinness, "we make no money."
Given this madness, the agencies still cling to those expensive TV buys. Bob Garfield, advertising-industry pundit and author of The Chaos Scenario, says, "Agencies have worked out very complex compensation formulas, which are nominally fee based, but if you track compensation against media spend, you will see that the lines are parallel." The less a client spends on media, Garfield continues, the less an agency makes. Some agencies are scrambling to address this by reinventing their compensation structures. "We are paying the price of belonging to an industry that does not know how to protect its own interests," wrote TBWA Worldwide chairman Jean Marie Dru in an Advertising Age manifesto entitled "Endless Pressure on Price Traps Agencies, Clients in Death Spiral." "We are our worst enemies."
Virtually every CEO in the business is now railing for one of two solutions to the problem of, well, not making enough money. First, they want to be financially rewarded for performance, and thanks to all those new data-analytics tools, for the first time ever, their effectiveness can be measured. Says IPG chairman Roth: "We should get higher [compensation] if it works and lower if it doesn't. That's how this industry can return to the profitability level." It's a nice thought, but those tools aren't infallible: While Wieden's innovative Web campaign for P&G's Old Spice garnered tons of publicity, Ad Age speculated that the boost in sales may well have been due to a coupon.
Then there's the industry's biggest fantasy about compensation. "We have to figure out how to get paid for the big idea, and what that idea is worth," says McGuiness. What's a big idea? Something as ubiquitous as MasterCard's "Priceless" campaign that arguably could transform a business. "This is a holdover from 20th-century marketing," says Brian Collins, a former Ogilvy exec who now runs an innovation consultancy. "People who think that way are supremely well equipped to work in a world that no longer exists." Plus, as Garfield points out, "in the whole history of mass advertising, the number of transformative ideas that have created wealth via advertising you can count on one set of fingers and toes." Garfield sees this big-idea payday as the last wish of an industry that's drowning. "In a world where media spend is in inexorable decline, and where advertising per se is an endangered species, [agencies] don't know where to turn," he says. "The realization of the nightmare is under way. And that nightmare is the utter collapse of the business model."
so, i believe we're on that cusp as well. too many firms relied, for way too long, on staying predictable and keeping one or two key accounts that repeat the same thing over and over.
what are the best new business models in the design world that you've seen? i'll start with shop - yes, predictable in some ways, but they've more fully (or openly if nothing else) integrated the means of production to align with theirs and their client's goals than most other firms that i've seen.
on the other end, a firm that's been offered up before (by me) is paratus - a project management company founded by architects whose sole focus is leading high profile cultural projects (think the kimball addition, foster's boston extension, lacma, etc.). lean, mean, highly specialized and capable of translating the nuance of design into the client's mission and pocketbook. from the outside, they seem like a new model.
I don't have any favorite new business models, but reading of the consolidation of the ad industry by way of mergers certainly reminded me of the current mergers and acquisitions craze in architecture. And in a similar way, a management is hoping to generate higher revenue through volume and efficiency.
Likewise the idea of billing based on "value" rather than hourly that is promoted by some management consultants is discredited in the article. On the other hand, if the architect becomes more directly part of the ownership team, does that compromise the ability to look out for "public good" that is supposedly the basis for our profession?
outed - you have started an interesting thread here and introduced some valuable ideas. However, I tend to believe that we need to be cautious about this idea that any one business model has any real relevance to multiple firms. Our profession has not fared well following the 'herd' and not doing enough thinking for our individual selves.
IMO, the relevant business model for a particular firm will be derived from a close and objective evaluation of the personalities, capabilities and interests of the person, or group of people, who own that firm. While there may be some commonalities among firms and lessons we can learn from other industries, there are no 'templates' for success. That's a trail we each must blaze for ourselves.
Good thread here, looking forward to the responses
I think quizz hit it on the head - there won't be one-size-fits-all solutions out there, but there will be more diversity of solutions (vs. the current all-firms-provide-the-same-services method).
There will be more specialization (as I've hoped for) but along with this more diverse business models (and more creative).
and i totally agree - nothing can (by definition) truly be all things to all people.
what interests me, though, is to see how the dominant model of our own profession is (largely) failing to adequately respond to the challenges it's increasingly facing (or has already faced). any pure, fee for service structure is going to be impacted by slowing demand in the broader market - easy enough. on top of that, sharply falling demand (according to econ 101) is going to put enough pressures on price to make them fall until an equilibrium is reached. this is fine and dandy for actual goods (be they ethereal) but it doesn't fully pan out for services, where the same effort may be required whether the price is a bit higher or a bit lower. (yeah, there's nuances but let's keep this somewhat simple). that artificial lowering of price isn't a result of increased efficiency (although firms may have to adapt their efficiency to keep up) - it's pure deflation. which will wipe out any gains of the past 10 years or so. link this to a % of construction cost model that was developed in the 1940's (and hasn't changed much since then), more complicated and sophisticated buildings, and we have a dead end coming up quickly.
overall, i'm surprised more owners don't see this and adjust accordingly. the easiest way, to me, would be to look at revenue streams and figure out how to diversify them (something we're actively in the middle of ourselves). one method would be to pick an area where long term growth looks better (say healthcare) and become a truly vertically integrated expert in it. yes, it'll take time, but it can be done in 5-10 years max. going vertical will allow some greater cushion if one area slows down, but it would (as someone i know is marketing their firm this way) also allow the team to travel almost anywhere in the world and offer the same high level of service.
we're going down the road of diversifying income into three areas - fee for service, royalty/recurring income (off of selling actual products), and investment/equity positions in some projects. the goal is to get them somewhat equal - roughly 40% fee, 40% royalty, 20% income from the equity stake. operationally, the firm would need to 'run' on no more than the 80% generated by the fee/royalty income. ideally, the operational costs will be covered by 40% fee/20% of royalty. the linchpin on this is to have the fee for service work be generating real income - you can't blow tons of potential revenue chasing work all the time (read, it depends on a few good clients with a lot of repeat work). since the royalty money will vary, it has to cover itself plus contribute to the work being done in exchange for an equity position. the goal, though, is to hopefully have it help cover some of the slack if the fee portion slips - either through shifting staff over to work on new products or to have it cover extra time for business development. the equity position work is pure gravy for the partners.
i can see very specialized design/build as a great alternative for certain niche markets, especially residential (of all forms). jonathan segal is of course one option, but so is krdb and a host of others. same with someone like front - do one thing hyper well and creatively (of course, i'd recommend they figure out how to monetize some of their solutions by working directly with a manufacturer on some new products based on their research so far).
Those seem like the logical progressions the industry needs to look at. The success driven model is a possible way to capture some of the profits of that the clients are taking, but it will also increase up front risk. How to mitigate that will be a tough undertaking, but not impossible.
KRDB and Segal are great examples of this and I know of a handful more local firms that are doing a combo of 'skin in the game' developments, design-build and regular arch services. Seems to be great a combo. The trick, of course, is learning enough of the development/financial side of things and having the equity to put in (unless it is just sweat equity).
The problem, of course, is that not many in the architecture world are well versed on the financial side of things, so jumping in without any knowledge could be painful.
On the other hand, being part of the development team can also create savings throughout the project.
I think your plan of diversification is something many people, in many professions, will need to evaluate and create a plan for.
Hopefully, this will all create opportunities for smaller firms to maneuver into markets early on.
What types of 'products' are you looking at selling? Have you started in this direction?
(what is Front's full name? I am getting a few in my search)
One of the fundamental problems with these kinds of analysis is primarily how tight-lipped the design community is overall.
The problem with creating and examining value is that value is tied to the design process itself. One can assume that a firm with bad books obviously makes bad designs.
William Rawn, SOK, HOK, Rafael Vinoy, Perkins + Will and Gwathmey are known to be the most profitable firms. Many of the big name firms don't even make the Top 100. SHoP and Robert Stern are in the 80s rank. Which should be pointed out is that SHoP is a design-build firm everyone fawns over and Robert Stern is king of the equity stake.
There's maybe 4 or 5 large architecture firms that are publicly traded. This basically means that unless you could sit down with each individual firm's leadership and accountant... there's not really a way to find out what business model any of them are using, how they are accounting income and expenses, how much money each firm actually makes or doesn't make and what the value of ownership actually is.
One point that should be made is that within the top 20 category, each firm is billing out close to $310,000-$400,000 per employee averaged overall.
Gensler is very proud of their $350,000 per employee figure (2,276 employees total). So, we know their gross revenue is $796,600,000. But that's a useless figure because we don't know how they got that, how many projects they completed in 2009-2010 or what their overhead is.
ug - total business model, no. the reality, though, is that, yes, there are many large (and profitable) firms. and you're dead right about the firms (i assume you pulled these numbers from the article architect ran late last year) that seem to be most profitable have very high per employee figures.
but, you can do some research and find out about different things they do. HOK, for example, has a product development studio, as does Gensler. the both market towards their core specialties. you can also look at both and see what types of services they market. we won't know how much (% wise) each one contributes, but you're right, there's only so much we can know.
what's easier to figure out is that the 10-30 person firms who are more generalist (ie, broadly drawn out expertise wise) are largely getting killed in this recession, especially if they didn't have a one toe in the government world. those firms, largely, are fee/service only. some do have some development equity (i know more of these than anything else), but some are branching into interior design and product design (again, more on the high end residential scale).
trace - here's front's website: http://www.frontinc.com we're selling furniture aimed specifically at the library and museum markets - things that need just a bit of rethinking to be better suited. software is still a bit tight lipped. but so far the reaction we've gotten from people inside the industry has been great. should be on the market in february.
I think there is massive opportunity to diversify business models and revenue streams for architects and designers.
I dont think that architects have even begun to scratch the surface of how to use the web and other media as opportunities to distribute architectural content.
I myself am developing such an enterprise, and I would be happy to discuss this offline via email.
totally agree. one other area i'd throw in that we're woefully oblivious to is the intellectual property (ip) implications in our work. one example, for us, is that we've converted a couple of houses we did for a developer into 'stock' plans and are now selling them through an upscale home plan site. these took about 8 hours to clean up, reformat, etc. but each one brings home more raw profit than we ever saw on the original project (not fee, but profit. if we sell 10 over their lifespan, we'll have made more than original design fee for all the homes we did in that complex). that's ip working for us. we're also patenting a clever storefront modification we developed for a project and working with a manufacturer to get it installed in their catalog as an option. we would get a royalty on each l.f. sold. again, is it much? probably not. certainly not enough to retire on, but it's something we've ALREADY DONE! if we didn't reach out, it would still be sitting there in our drawer, collecting dust. if it generates an extra 50k for us over it's lifetime, that's better than the alternative....
(just so i don't get the question as a follow up - yes, we contractually kept all the rights to the design and gave them a license to build them in that particular development. and, yes, we told them we were going to resell them. they're fine with it.)
dia - i think it's more developing something truly useful and meeting a need, vs. a want. targeting who to go to, etc. is easier than most people think...
I've heard of an interesting model, a guy I know who has been essentially trading a variety of design services for a stake in new startups and businesses...
Similar to the performance based fee idea, except I think in architecture, measuring dollar ROI, and accurately quantifying the performance of the design is a little more difficult than in say law, or even advertising...
Instead, the model here is to provide design services at a discounted rate, in exchange for a share of the business, and a small share in the profits... The kinds of businesses to invest in / design for are things like new cafes or restauarants, retail, etc. or even things like galleries, or like an apparel company or even a band or whatever else... You provide diverse services from architecture to interior design, brand development, graphic design, promotional materials, websites, furniture, etc. or whatever they need at a discounted rate, in exchange for a small piece of ownership...
There are at least a couple offices here in Seattle which have diversified to offer a variety of other services I think... A couple that come to mind:
Suyama Pederson Deguchi has a couple extra architecture ventures tied to their practice: 1. Suyama Space, art gallery; and 2. 3 x 10 a store basically for their designed furniture and other objects... http://www.suyamapetersondeguchi.com/industry/products01-04.asp
please correct me if i'm wrong.. but aren't the (so-called) consultants like front, basically the architect for a number of their projects?
for example, i saw in a recent lecture a proposal for some louis vuitton project in china, but one of the main reasons why they won the invited competition was because they had all the crucial and specific knowledge of glass manufacturing.
i can understand if they start working with a specific glass manufacturer as outed suggested (would be really exciting too see) but what makes their current situation a "new business model" ?
Yeah, I pointed out the design aspect of broadening the types of end products result a firm could produce in my portfolio trolling thread.
HOK's venutre is fairly new. I'm not so sure about Gensler. Though, to be honest... despite many of these firms diving into the quote-on-quote mass market, I'm not entirely sure how deep they would penetrate the market.
But there's quite a few example firms that do everything from product design to graphic design. While I do think this can help generate revenue, I'm not entirely sure how much revenue it actually generates. Though if one is getting into self-financing, ownership and equity schemes, design-build or development... having the largest revenue stream possible makes getting financing and credit much easier.
That being said... I'm going to assume that many of these side businesses basically break even and the primary reasoning behind their existence is for brand growth.
And name recognition these days is king. When I looked at that Architect magazine article, I didn't even know who most of those firms were. William Rawn is apparently only 40 or so people... so, I'm going to put them into the "medium-sized" firm category.
I think another thing is to define what sizes of firms we're dealing with. Compared to some of the big names who have literally thousands of employees, a 100 person firm doesn't really feel that big.
I think, though, medium-sized firms have a unique advantage to where things aren't as big yet to write off "the small things."
One possibility, that I've posited before, is for firms to get into property management and sales. It maybe only generate $30k-40k a month (which is nothing compared to SOM's or Gensler's billion dollar budgets)... but $40,000 is a lot of money to a firm of only 40 people.
Did you guys just inadvertently discover brandism? Because that's what the topic has evolved into. Lots of income opportunity if you are willing to design the fork, meatballs and the spaghetti factory. It really boils down to expanding the scope of your services and offering brand integration (for which you will have the proprietary code).
Back to the original article about Madison Street mad men: those guys' problems are more akin to those found in print media and music industry. Outdated business models that rely on content control. Architecture has its own share of problems, but advances in technology and digital reproduction isn't one of them.
Gensler actually puts out an annual report! While they don't release exact figures, they do give insight into their business model.
Their 2009 gross revenue was $697 million. Across the reported 2,276 employees, the figure is closer to $308k per employee in revenue. Divide by the fee multiplier, the supposed salary is closer to $87,000.
However, this is a company with 35 offices. I'm sure this presents a sizable chunk of overhead. Ignoring each individual office and using a generic figure of 175 square feet per employee, their office demands are roughly 398,000 square feet. At say $50 a square foot lease, the rough cost of their offices is ~$20,000,000 (2% of revenue, LOL).
However, a few salary surveys puts middle and high level employees around the $70k-100k mark and they seem to have very generous benefits.
mk2, re: front inc. they are basically a design build facbricator for building facades...
i think what makes them unique is the level of control they have and the level of close collaboration they have with the designers of the buildings... they seem to be ideas and concept people as well as the fabricator... they are not really just brought in to execute the design, but they are usually integral to the design team like mep consultants from early on... they drive the design and are involved much earlier in the process
but not sure if that qualifies as a new business model... are they consultants contracted by the architect, and then do they later have a separate contract with the GC to execute the fabrication? Not sure how that works... Also, are they paid on an hourly fee? Anybody worked with them / for them?
As some of the more 'mature' hands here at archinect may remember, back in the mid-80s Weld Coxe, his partners at The Coxe Group, and a guy at the Harvard Business School by the name of David Maistre published a book entitled 'Success Strategies for Design Professionals: Superpositions for Architecture and Engineering Firms'. While developed in a different era when the profession was dealing with significantly different conditions than we face today, there is an underlying logic to their "superpositioning" concept that does, I think, have a lot to contribute to this thread.
The book is long out of print. However, here are a couple of links that cover the basic concepts inherent in this very important work:
In my view, the most important aspect of their superpositioning model is the idea that design firms should respond to, and organize around, the particular characteristics of the specific 'niche' market(s) they intend to serve. And, the strategies made necessary by variations between 'niche' markets can differ quite significantly.
While the passage of nearly 26 years probably suggests a need to update some of the model's particulars, IMHO this lesson still has extraordinary validity today for those prepared to grapple with the discipline required.
this is a really fascinating discussion, thanks to everyone contributing, its enlightening... I'm particularly curious about potential clients reactions to these innovations.
I can imagine the inertia at the root of this problem is not only on the service side. How interested are potential clients in alternate business methods, particularly equity stake agreements? Along with that question, how much of this discussion regarding a change in our business model is predicated by a need to financially survive vs. clients demand?
Perhaps one thing that could be useful was some sort of open source BIM esque XBRL file standard for front of the office architectural business reporting? Wherein the deliverable would be a downloadable replicable business model.
Although given all the proprietary sorts of sensitive information involved might need to available only for example to AIA members?
I am not sure how receptive clients are to providing an equity stake in return for design services, but I would speculate that it depends on what the designer gas to offer, the stage of entrepreneurial development of the potential client, and how dependent the business is on the kind of design service provided... Branding services for some kind of retail would seem essential for example or graphic design services for some kinds of businesses... Or perhaps web development? Artistic visioning? Or interior design for a restaurant or cafe that would otherwise not have the startup capital to do some great design, but whose success is highly dependent on the space, and brand execution, that would be willing to bring on design talent as a vested interest with a long term relationship or ideas consultant to provide an enduring success for the venture? Seems like it would be a scenario where the business itself benefits from having the specialized design expertise of the designer/investor?
On a side note regarding Pb Elemental... How is their business run with regards to some of the developer town home projects that they have put out? I'm curious, not that familiar with it, but didn't they (pre economic collapse) have some kind of working relationship with a developer who sold their homes? It seems like they gave done some things, been able to develop a kind of Brand in their own design practice that has become tied to the consumer market in an unusual way for an architecture office... Within real estate sites, realtors sell "pb elemental homes" it seems, in a way that is a little different from simply houses designed by architects, where the architect is selling services directly to the home owner... Another example here in Seattle I can think of that sells this way is 1111 pike condominiums, which actually advertise as "Tom Kundig designed condo units"... Is this sort of a new development? Or is this something that has always been around in one form or another? Perhaps it just seems different because these units, while expensive, on the marketplace are simply not ridiculously expensive so as to be unreasonable or out of the realm
Of possibility except to super rich? But the kind of market brand recognition of Architects seems different...
the second one was infinitely more interesting but frustrating as well. it's about a startup which received series a funding (that's first round venture capital). the start up is interesting in that it aims to connect owners, builders, and available tax credits. frustrating because this is something that's been brought up before by users on this site - not only could/should an architect have been involved in creating this thing, architects should be a part of this process (and have been, seemingly cut out). the money's out there for good ideas.... http://techcrunch.com/2010/12/27/energysavvy-series-a-1-1/
Dec 28, 10 12:11 pm ·
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maybe it really is our business model...
over the holidays, i've been catching up on a thick stack of publications that have lain dusty and dormant in my living room. in the din of the thanksgiving hangover, this particular article caught my attention:
mayhem on madison ave
yes, in some respects, it's yet another 'our profession is being disrupted beyond recognition', but what really jumped out was this recurring theme that i couldn't help but link back to the era of the big lizards: the meteor has fallen (more slowly, but as definitively) and trex and his friends (the dominant model of a 'professional' the past 80 years) don't really know how to react. they're getting their lunch eaten (literally) by these little things nipping around at their heels (those whippersnappers which just won't play inside the box).
in particular, i found the following passage illuminating for the traditional architectural model, especially with regards to fees:
"St. George says the most surprising aspect of JetBlue's agency search was how many firms still believed that the key to solving any business problem was the 30-second spot. But maybe he shouldn't have been surprised. Agencies still yearn for the fat 15% commissions they used to score off of a client's media spend, a spend ballooned mostly by television commercials. The industry isn't even close to adjusting to the truism that digital dimes don't replace analog dollars, the very problem that bedevils music labels, publishers, and television networks. Today, agencies really have no clue as to how they should get paid. "We still don't know how to monetize what we do," admits Peter McGuinness, CEO of Gotham, which, like Mullen, is owned by IPG. "We don't monetize ourselves properly, so we don't hit our margins."
In many ways, the end of the rich old model is the agencies' own fault. In the 1980s, agencies decided they could benefit from economies of scale, as well as manage client conflicts of interest, by merging. Not incidentally, this trend also gave the agency owners a way to cash out. The result was an industry centered on four major holding companies: WPP, Omnicom, IPG, and Publicis. But the move has backfired. "Agency leaders were making more money than the clients," says Martin, the industry consultant. "That's when the clients began to realize, 'Gosh, we must be paying them too much.' "
Clients forced the agencies into a service-fee model instead, which is far less lucrative. "It's like lawyers," explains BMO Capital's Salmon. "The fees are based on head count and time spent working." Grimaldi explains why this is so much tougher than the old model. "If a creative team now takes six people instead of two, just think about the burn rate of that room," he says. "Unfortunately, not everything generates as much money as it used to. There are only so many hours you can bill." Now those hours are getting squeezed from every direction. The clients employ procurement officers and cost consultants to negotiate down the fee on everybody in an agency. And given today's hypercompetition, agencies can sink up to $1 million and four months pitching for a new account they might never win. "When the smoke clears," says McGuinness, "we make no money."
Given this madness, the agencies still cling to those expensive TV buys. Bob Garfield, advertising-industry pundit and author of The Chaos Scenario, says, "Agencies have worked out very complex compensation formulas, which are nominally fee based, but if you track compensation against media spend, you will see that the lines are parallel." The less a client spends on media, Garfield continues, the less an agency makes. Some agencies are scrambling to address this by reinventing their compensation structures. "We are paying the price of belonging to an industry that does not know how to protect its own interests," wrote TBWA Worldwide chairman Jean Marie Dru in an Advertising Age manifesto entitled "Endless Pressure on Price Traps Agencies, Clients in Death Spiral." "We are our worst enemies."
Virtually every CEO in the business is now railing for one of two solutions to the problem of, well, not making enough money. First, they want to be financially rewarded for performance, and thanks to all those new data-analytics tools, for the first time ever, their effectiveness can be measured. Says IPG chairman Roth: "We should get higher [compensation] if it works and lower if it doesn't. That's how this industry can return to the profitability level." It's a nice thought, but those tools aren't infallible: While Wieden's innovative Web campaign for P&G's Old Spice garnered tons of publicity, Ad Age speculated that the boost in sales may well have been due to a coupon.
Then there's the industry's biggest fantasy about compensation. "We have to figure out how to get paid for the big idea, and what that idea is worth," says McGuiness. What's a big idea? Something as ubiquitous as MasterCard's "Priceless" campaign that arguably could transform a business. "This is a holdover from 20th-century marketing," says Brian Collins, a former Ogilvy exec who now runs an innovation consultancy. "People who think that way are supremely well equipped to work in a world that no longer exists." Plus, as Garfield points out, "in the whole history of mass advertising, the number of transformative ideas that have created wealth via advertising you can count on one set of fingers and toes." Garfield sees this big-idea payday as the last wish of an industry that's drowning. "In a world where media spend is in inexorable decline, and where advertising per se is an endangered species, [agencies] don't know where to turn," he says. "The realization of the nightmare is under way. And that nightmare is the utter collapse of the business model."
so, i believe we're on that cusp as well. too many firms relied, for way too long, on staying predictable and keeping one or two key accounts that repeat the same thing over and over.
what are the best new business models in the design world that you've seen? i'll start with shop - yes, predictable in some ways, but they've more fully (or openly if nothing else) integrated the means of production to align with theirs and their client's goals than most other firms that i've seen.
on the other end, a firm that's been offered up before (by me) is paratus - a project management company founded by architects whose sole focus is leading high profile cultural projects (think the kimball addition, foster's boston extension, lacma, etc.). lean, mean, highly specialized and capable of translating the nuance of design into the client's mission and pocketbook. from the outside, they seem like a new model.
anyone else have their favorites?
I don't have any favorite new business models, but reading of the consolidation of the ad industry by way of mergers certainly reminded me of the current mergers and acquisitions craze in architecture. And in a similar way, a management is hoping to generate higher revenue through volume and efficiency.
Likewise the idea of billing based on "value" rather than hourly that is promoted by some management consultants is discredited in the article. On the other hand, if the architect becomes more directly part of the ownership team, does that compromise the ability to look out for "public good" that is supposedly the basis for our profession?
outed - you have started an interesting thread here and introduced some valuable ideas. However, I tend to believe that we need to be cautious about this idea that any one business model has any real relevance to multiple firms. Our profession has not fared well following the 'herd' and not doing enough thinking for our individual selves.
IMO, the relevant business model for a particular firm will be derived from a close and objective evaluation of the personalities, capabilities and interests of the person, or group of people, who own that firm. While there may be some commonalities among firms and lessons we can learn from other industries, there are no 'templates' for success. That's a trail we each must blaze for ourselves.
Good thread here, looking forward to the responses
I think quizz hit it on the head - there won't be one-size-fits-all solutions out there, but there will be more diversity of solutions (vs. the current all-firms-provide-the-same-services method).
There will be more specialization (as I've hoped for) but along with this more diverse business models (and more creative).
and i totally agree - nothing can (by definition) truly be all things to all people.
what interests me, though, is to see how the dominant model of our own profession is (largely) failing to adequately respond to the challenges it's increasingly facing (or has already faced). any pure, fee for service structure is going to be impacted by slowing demand in the broader market - easy enough. on top of that, sharply falling demand (according to econ 101) is going to put enough pressures on price to make them fall until an equilibrium is reached. this is fine and dandy for actual goods (be they ethereal) but it doesn't fully pan out for services, where the same effort may be required whether the price is a bit higher or a bit lower. (yeah, there's nuances but let's keep this somewhat simple). that artificial lowering of price isn't a result of increased efficiency (although firms may have to adapt their efficiency to keep up) - it's pure deflation. which will wipe out any gains of the past 10 years or so. link this to a % of construction cost model that was developed in the 1940's (and hasn't changed much since then), more complicated and sophisticated buildings, and we have a dead end coming up quickly.
overall, i'm surprised more owners don't see this and adjust accordingly. the easiest way, to me, would be to look at revenue streams and figure out how to diversify them (something we're actively in the middle of ourselves). one method would be to pick an area where long term growth looks better (say healthcare) and become a truly vertically integrated expert in it. yes, it'll take time, but it can be done in 5-10 years max. going vertical will allow some greater cushion if one area slows down, but it would (as someone i know is marketing their firm this way) also allow the team to travel almost anywhere in the world and offer the same high level of service.
we're going down the road of diversifying income into three areas - fee for service, royalty/recurring income (off of selling actual products), and investment/equity positions in some projects. the goal is to get them somewhat equal - roughly 40% fee, 40% royalty, 20% income from the equity stake. operationally, the firm would need to 'run' on no more than the 80% generated by the fee/royalty income. ideally, the operational costs will be covered by 40% fee/20% of royalty. the linchpin on this is to have the fee for service work be generating real income - you can't blow tons of potential revenue chasing work all the time (read, it depends on a few good clients with a lot of repeat work). since the royalty money will vary, it has to cover itself plus contribute to the work being done in exchange for an equity position. the goal, though, is to hopefully have it help cover some of the slack if the fee portion slips - either through shifting staff over to work on new products or to have it cover extra time for business development. the equity position work is pure gravy for the partners.
i can see very specialized design/build as a great alternative for certain niche markets, especially residential (of all forms). jonathan segal is of course one option, but so is krdb and a host of others. same with someone like front - do one thing hyper well and creatively (of course, i'd recommend they figure out how to monetize some of their solutions by working directly with a manufacturer on some new products based on their research so far).
just a few thoughts...
Those seem like the logical progressions the industry needs to look at. The success driven model is a possible way to capture some of the profits of that the clients are taking, but it will also increase up front risk. How to mitigate that will be a tough undertaking, but not impossible.
KRDB and Segal are great examples of this and I know of a handful more local firms that are doing a combo of 'skin in the game' developments, design-build and regular arch services. Seems to be great a combo. The trick, of course, is learning enough of the development/financial side of things and having the equity to put in (unless it is just sweat equity).
The problem, of course, is that not many in the architecture world are well versed on the financial side of things, so jumping in without any knowledge could be painful.
On the other hand, being part of the development team can also create savings throughout the project.
I think your plan of diversification is something many people, in many professions, will need to evaluate and create a plan for.
Hopefully, this will all create opportunities for smaller firms to maneuver into markets early on.
What types of 'products' are you looking at selling? Have you started in this direction?
(what is Front's full name? I am getting a few in my search)
One of the fundamental problems with these kinds of analysis is primarily how tight-lipped the design community is overall.
The problem with creating and examining value is that value is tied to the design process itself. One can assume that a firm with bad books obviously makes bad designs.
William Rawn, SOK, HOK, Rafael Vinoy, Perkins + Will and Gwathmey are known to be the most profitable firms. Many of the big name firms don't even make the Top 100. SHoP and Robert Stern are in the 80s rank. Which should be pointed out is that SHoP is a design-build firm everyone fawns over and Robert Stern is king of the equity stake.
There's maybe 4 or 5 large architecture firms that are publicly traded. This basically means that unless you could sit down with each individual firm's leadership and accountant... there's not really a way to find out what business model any of them are using, how they are accounting income and expenses, how much money each firm actually makes or doesn't make and what the value of ownership actually is.
One point that should be made is that within the top 20 category, each firm is billing out close to $310,000-$400,000 per employee averaged overall.
Gensler is very proud of their $350,000 per employee figure (2,276 employees total). So, we know their gross revenue is $796,600,000. But that's a useless figure because we don't know how they got that, how many projects they completed in 2009-2010 or what their overhead is.
ug - total business model, no. the reality, though, is that, yes, there are many large (and profitable) firms. and you're dead right about the firms (i assume you pulled these numbers from the article architect ran late last year) that seem to be most profitable have very high per employee figures.
but, you can do some research and find out about different things they do. HOK, for example, has a product development studio, as does Gensler. the both market towards their core specialties. you can also look at both and see what types of services they market. we won't know how much (% wise) each one contributes, but you're right, there's only so much we can know.
what's easier to figure out is that the 10-30 person firms who are more generalist (ie, broadly drawn out expertise wise) are largely getting killed in this recession, especially if they didn't have a one toe in the government world. those firms, largely, are fee/service only. some do have some development equity (i know more of these than anything else), but some are branching into interior design and product design (again, more on the high end residential scale).
trace - here's front's website: http://www.frontinc.com we're selling furniture aimed specifically at the library and museum markets - things that need just a bit of rethinking to be better suited. software is still a bit tight lipped. but so far the reaction we've gotten from people inside the industry has been great. should be on the market in february.
I think there is massive opportunity to diversify business models and revenue streams for architects and designers.
I dont think that architects have even begun to scratch the surface of how to use the web and other media as opportunities to distribute architectural content.
I myself am developing such an enterprise, and I would be happy to discuss this offline via email.
d
I prefer the Swedish Front ;)
dia - amen on the last post...
totally agree. one other area i'd throw in that we're woefully oblivious to is the intellectual property (ip) implications in our work. one example, for us, is that we've converted a couple of houses we did for a developer into 'stock' plans and are now selling them through an upscale home plan site. these took about 8 hours to clean up, reformat, etc. but each one brings home more raw profit than we ever saw on the original project (not fee, but profit. if we sell 10 over their lifespan, we'll have made more than original design fee for all the homes we did in that complex). that's ip working for us. we're also patenting a clever storefront modification we developed for a project and working with a manufacturer to get it installed in their catalog as an option. we would get a royalty on each l.f. sold. again, is it much? probably not. certainly not enough to retire on, but it's something we've ALREADY DONE! if we didn't reach out, it would still be sitting there in our drawer, collecting dust. if it generates an extra 50k for us over it's lifetime, that's better than the alternative....
(just so i don't get the question as a follow up - yes, we contractually kept all the rights to the design and gave them a license to build them in that particular development. and, yes, we told them we were going to resell them. they're fine with it.)
outed,
All good examples and exactly the kind of thing that can be taken advantage of - provided you [I] target, curate and market the right thing...
The IP thing is something that needs to be addressed, but I think I have the right approach there.
dia - i think it's more developing something truly useful and meeting a need, vs. a want. targeting who to go to, etc. is easier than most people think...
I agree totally,
Thats why I will be limiting what is marketed to very specific & narrow parameters.
I've heard of an interesting model, a guy I know who has been essentially trading a variety of design services for a stake in new startups and businesses...
Similar to the performance based fee idea, except I think in architecture, measuring dollar ROI, and accurately quantifying the performance of the design is a little more difficult than in say law, or even advertising...
Instead, the model here is to provide design services at a discounted rate, in exchange for a share of the business, and a small share in the profits... The kinds of businesses to invest in / design for are things like new cafes or restauarants, retail, etc. or even things like galleries, or like an apparel company or even a band or whatever else... You provide diverse services from architecture to interior design, brand development, graphic design, promotional materials, websites, furniture, etc. or whatever they need at a discounted rate, in exchange for a small piece of ownership...
There are at least a couple offices here in Seattle which have diversified to offer a variety of other services I think... A couple that come to mind:
Pb Elemental I believed is owner of this gourmet hot dog shop (which they designed) in Capitol Hill:
http://www.raenovate.com/2010/03/po-dog.html
Suyama Pederson Deguchi has a couple extra architecture ventures tied to their practice: 1. Suyama Space, art gallery; and 2. 3 x 10 a store basically for their designed furniture and other objects...
http://www.suyamapetersondeguchi.com/industry/products01-04.asp
clarification re: suyama
That is different, those are businesses that they opened as part of their practice I think, outside of architecture, not something they bought into...
please correct me if i'm wrong.. but aren't the (so-called) consultants like front, basically the architect for a number of their projects?
for example, i saw in a recent lecture a proposal for some louis vuitton project in china, but one of the main reasons why they won the invited competition was because they had all the crucial and specific knowledge of glass manufacturing.
i can understand if they start working with a specific glass manufacturer as outed suggested (would be really exciting too see) but what makes their current situation a "new business model" ?
@outed.
Yeah, I pointed out the design aspect of broadening the types of end products result a firm could produce in my portfolio trolling thread.
HOK's venutre is fairly new. I'm not so sure about Gensler. Though, to be honest... despite many of these firms diving into the quote-on-quote mass market, I'm not entirely sure how deep they would penetrate the market.
But there's quite a few example firms that do everything from product design to graphic design. While I do think this can help generate revenue, I'm not entirely sure how much revenue it actually generates. Though if one is getting into self-financing, ownership and equity schemes, design-build or development... having the largest revenue stream possible makes getting financing and credit much easier.
That being said... I'm going to assume that many of these side businesses basically break even and the primary reasoning behind their existence is for brand growth.
And name recognition these days is king. When I looked at that Architect magazine article, I didn't even know who most of those firms were. William Rawn is apparently only 40 or so people... so, I'm going to put them into the "medium-sized" firm category.
I think another thing is to define what sizes of firms we're dealing with. Compared to some of the big names who have literally thousands of employees, a 100 person firm doesn't really feel that big.
I think, though, medium-sized firms have a unique advantage to where things aren't as big yet to write off "the small things."
One possibility, that I've posited before, is for firms to get into property management and sales. It maybe only generate $30k-40k a month (which is nothing compared to SOM's or Gensler's billion dollar budgets)... but $40,000 is a lot of money to a firm of only 40 people.
Did you guys just inadvertently discover brandism? Because that's what the topic has evolved into. Lots of income opportunity if you are willing to design the fork, meatballs and the spaghetti factory. It really boils down to expanding the scope of your services and offering brand integration (for which you will have the proprietary code).
Back to the original article about Madison Street mad men: those guys' problems are more akin to those found in print media and music industry. Outdated business models that rely on content control. Architecture has its own share of problems, but advances in technology and digital reproduction isn't one of them.
The $350k was their reported figure.
Gensler actually puts out an annual report! While they don't release exact figures, they do give insight into their business model.
Their 2009 gross revenue was $697 million. Across the reported 2,276 employees, the figure is closer to $308k per employee in revenue. Divide by the fee multiplier, the supposed salary is closer to $87,000.
However, this is a company with 35 offices. I'm sure this presents a sizable chunk of overhead. Ignoring each individual office and using a generic figure of 175 square feet per employee, their office demands are roughly 398,000 square feet. At say $50 a square foot lease, the rough cost of their offices is ~$20,000,000 (2% of revenue, LOL).
However, a few salary surveys puts middle and high level employees around the $70k-100k mark and they seem to have very generous benefits.
mk2, re: front inc. they are basically a design build facbricator for building facades...
i think what makes them unique is the level of control they have and the level of close collaboration they have with the designers of the buildings... they seem to be ideas and concept people as well as the fabricator... they are not really just brought in to execute the design, but they are usually integral to the design team like mep consultants from early on... they drive the design and are involved much earlier in the process
but not sure if that qualifies as a new business model... are they consultants contracted by the architect, and then do they later have a separate contract with the GC to execute the fabrication? Not sure how that works... Also, are they paid on an hourly fee? Anybody worked with them / for them?
As some of the more 'mature' hands here at archinect may remember, back in the mid-80s Weld Coxe, his partners at The Coxe Group, and a guy at the Harvard Business School by the name of David Maistre published a book entitled 'Success Strategies for Design Professionals: Superpositions for Architecture and Engineering Firms'. While developed in a different era when the profession was dealing with significantly different conditions than we face today, there is an underlying logic to their "superpositioning" concept that does, I think, have a lot to contribute to this thread.
The book is long out of print. However, here are a couple of links that cover the basic concepts inherent in this very important work:
Charting Your Course (Coxe)
Charting Your Course (Maistre)
In my view, the most important aspect of their superpositioning model is the idea that design firms should respond to, and organize around, the particular characteristics of the specific 'niche' market(s) they intend to serve. And, the strategies made necessary by variations between 'niche' markets can differ quite significantly.
While the passage of nearly 26 years probably suggests a need to update some of the model's particulars, IMHO this lesson still has extraordinary validity today for those prepared to grapple with the discipline required.
this is a really fascinating discussion, thanks to everyone contributing, its enlightening... I'm particularly curious about potential clients reactions to these innovations.
I can imagine the inertia at the root of this problem is not only on the service side. How interested are potential clients in alternate business methods, particularly equity stake agreements? Along with that question, how much of this discussion regarding a change in our business model is predicated by a need to financially survive vs. clients demand?
Perhaps one thing that could be useful was some sort of open source BIM esque XBRL file standard for front of the office architectural business reporting? Wherein the deliverable would be a downloadable replicable business model.
Although given all the proprietary sorts of sensitive information involved might need to available only for example to AIA members?
"maybe it really is our business model... "
YA THINK?!
I am not sure how receptive clients are to providing an equity stake in return for design services, but I would speculate that it depends on what the designer gas to offer, the stage of entrepreneurial development of the potential client, and how dependent the business is on the kind of design service provided... Branding services for some kind of retail would seem essential for example or graphic design services for some kinds of businesses... Or perhaps web development? Artistic visioning? Or interior design for a restaurant or cafe that would otherwise not have the startup capital to do some great design, but whose success is highly dependent on the space, and brand execution, that would be willing to bring on design talent as a vested interest with a long term relationship or ideas consultant to provide an enduring success for the venture? Seems like it would be a scenario where the business itself benefits from having the specialized design expertise of the designer/investor?
Not sure...
On a side note regarding Pb Elemental... How is their business run with regards to some of the developer town home projects that they have put out? I'm curious, not that familiar with it, but didn't they (pre economic collapse) have some kind of working relationship with a developer who sold their homes? It seems like they gave done some things, been able to develop a kind of Brand in their own design practice that has become tied to the consumer market in an unusual way for an architecture office... Within real estate sites, realtors sell "pb elemental homes" it seems, in a way that is a little different from simply houses designed by architects, where the architect is selling services directly to the home owner... Another example here in Seattle I can think of that sells this way is 1111 pike condominiums, which actually advertise as "Tom Kundig designed condo units"... Is this sort of a new development? Or is this something that has always been around in one form or another? Perhaps it just seems different because these units, while expensive, on the marketplace are simply not ridiculously expensive so as to be unreasonable or out of the realm
Of possibility except to super rich? But the kind of market brand recognition of Architects seems different...
two recent articles made me want to dredge this thread back up: first is a new little piece on architectural record's site. not much in the way of specifics, but at least they're acknowledging the issue:
http://archrecord.construction.com/news/daily/archives/2010/12/101227recession_update.asp
the second one was infinitely more interesting but frustrating as well. it's about a startup which received series a funding (that's first round venture capital). the start up is interesting in that it aims to connect owners, builders, and available tax credits. frustrating because this is something that's been brought up before by users on this site - not only could/should an architect have been involved in creating this thing, architects should be a part of this process (and have been, seemingly cut out). the money's out there for good ideas....
http://techcrunch.com/2010/12/27/energysavvy-series-a-1-1/
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