Unlocking the hidden value of design services - Part 1

This might be shocking to hear but I believe the recession has been good to the design industry.

Don't take me wrong, I know from the inside how much design firms have suffered during the last few years. Many businesses have folded under the weight of overhead costs they could not eliminate or the debt they could not repay. For others, the lack of profitability seems to have permanently discouraged partners from investing in their firms and it has led many practicing designers to lose faith in the profession they have worked so hard to belong to.

When I started this blog over a year ago, I set out to explore how sanity in the design profession required such a fine balance between leveraging the magical experience of creating something new while remembering that what we create must have value to others. Understanding the post-recession re-tooling of creative professions was my goal and it all started with my first post “What’s in the toolbox?”

So why do I say that the recession has been good to design businesses?

Because now that designers are finally seeing an increasing number of interesting RFPs flowing-in as well as a steady rise in billings, the holders of equity in firms are realizing the full potential of their newly-acquired “recession-survival” skills: they have learned to appreciate the value of the information contained in financial statements, they have developed selling skills they never thought they had, and they are reaping the benefits of a focused strategic thinking.

The professional landscape has changed and designers are now guided by a new map.

I am surprised by how frequently these days designers mention their attendance to real estate and investment conferences, their active presence in social media platforms, their new-found curiosity for Gen Y'ers and Millennials, their interest in deploying financial resources in technology and their deeper understanding of metrics that help them run better performing businesses.

All these interests bring improvements to the economics of the design services industry, but I have also noticed that what I consider to be the best measure of success is often absent from the conversation, crowded out by all these new and exciting activities. I am talking about that one element that has been the foundation of so many designers’ careers: a satisfied client.

I think there is a real risk that the search for operational efficiency might become the Holy Grail of designers focused on surviving the next economic dip. If firms make the keystone of their mission to become well-oiled and lean machines, they might just crowd-out the Client. While I insist that the recession has made many design practices better managed businesses, designers should not forget that the success of their services results from contributing positively to the goals of their clients.

So what do we get from satisfied clients that return with more work?

• They increase the profitability of the business by reducing the cost of sales

• They become an active part of the firm's marketing strategy – providing referrals and tilting the needle of trust in the right direction for other potential clients

• They increase the intrinsic value of the business by solidifying the client portfolio and helping raise the backlog baseline

• And last but not least – they provide the most significant and elusive reward a designer can get: a compliment for a project well delivered.

Here's the challenge: design firms need to be professionally managed to succeed but if they seek efficiency solely by approaching design as a goal in itself, they will only survive until the paradigm is disrupted again. But the firms that approach design services as a dynamic and evolving process by which they leverage their client’s ability to succeed, those are the ones that will perpetuate the business.

As designers seek to define their value proposition in the current economic environment, they must strike the right balance between the cost of the resources they apply to each endeavor and the opportunity cost of those resources. It is only by striking the right balance that we can maximize the productivity of each creative professional in the organization and unlock the hidden value of our services.

Design professionals are particularly vulnerable to over-servicing and under-valuing their involvement in projects, and that risk increases exponentially when clients do not provide the adequate level of project management. By delivering effectively on the services that clients have bought we can achieve a baseline profitability, but by actively expanding the scope of work and up-selling services that are perceived as adding value to the project, then firms can truly leverage their resources to maximize the performance.

In my next post, I will explore examples of actions that leverage this new management approach and unlock the value of design services.

What's in the toolbox?

There is a lot of soul-searching going on inside design firms these days in face of one of the greater challenges the design industry has ever experienced.

Design businesses have seen hard times before, and past industry cycles have generally triggered incremental improvements to management, but this tidal wave that combines an economic recession with deep changes in the paradigm of real estate development has proved to be a much more disruptive experience and one that requires a different set of tools to retain competitiveness.

Designers are facing an economic downturn, the pressure of fast-pace technological innovation, new project management methodologies, evolving construction practices, and most of all a new owner's dilemma. This time around, design firms will not find a growth model just by making managerial changes: the paradigm has shifted, and organizational changes will have to closely monitor the evolving economics of real estate asset management.

Design activities have at its core a search for new archetypes, and more than ever before new archetypes are also needed in the organization of design. Taking a cue from the movie The Matrix, I think it is time we choose the red pill ...

The business model for architectural firms, interior design firms and associated disciplines is one that has evolved mostly from the inside out - in its essence, the designer’s value proposition is to add value to the built environment and to those seeking to profit from it. But business strategies have been hit by a high level of market volatility coupled with a significantly reduced availability of capital for new construction and property renovations. So instead of billing a premium to sell talent and expertise, design firm Principals find themselves spending a higher portion of billable time performing marketing and business development, and the rest of the time they often feel  they are merely ensuring that the harsh reality of uncertainty does not contaminate the very essence of the creative process in the midst of their teams.

Revenues are down, but so is morale - and without a jolt of transformational initiative, no amount of continued strategic business review can seem to revive the business.

Management level discussions focus around how to survive the current period and how much profitability can be sacrificed to retain existing teams, but it is a fallacy to plan for a future where design services will be provided in the same way they were before 2007. Some firms have been evolving through more or less successful combinations of organizational changes and technology investments. Such examples include progress towards building information modeling and integrated project delivery processes, which the larger portion of firms does not have yet the scale to embark on. But the challenge I hear the most these days is the difficulty to adapt project cost structures to highly competitive fee levels, ensuring quality in the creative product, in the documentation process and in construction administration services.

Basically, where can designers cut costs without abdicating entirely of the premium that derives from talent and experience, and without increasing risk levels in the project delivery?

To succeed, designers will need to interpret at a faster pace the signals of change in the industry, and they will have to make hard decisions about how to evolve their organizations in order to stay competitive. The assessment of the paradigm shift and how it affects each firm must be performed in a well-planned but flexible format, and in a disciplined and frequent way. The challenges that design business managers face today are essentially a difficulty in benchmarking their operating margins, in forecasting revenue given the volatility of the overall market, in defining target market share and in catching up with firms that have a scale advantage.

I have found a good amount of inspiration in the ways to achieve a dynamic and adaptive organization in a very competitive and evolving marketplace in two recently published books:

• One is the narration of the notable turnaround of Ford Motor Co. (Alan Mulally and the Fight to save Ford Motor Company). What Alan Mulally did at Ford sets an example for all businesses and provides a very inspirational guide to point a company in the right direction. As I distilled it, leaders need to assess the context, understand the risks, outline the goals, define a path to achieve them and then, they need to focus their efforts in removing all the barriers that prevent their teams from performing at the highest level towards those goals.

• Another source is a publication by The Boston Consulting Group: “Adaptive Advantage -Winning Strategies for Uncertain Times”, which expresses thoughts on competitive advantage in the following way: “Sustainable competitive advantage no longer arises exclusively from position, scale, and first-order capabilities in producing or delivering an offering. All those are essentially static. So where does it come from? Increasingly, leaders are finding that it stems from the “second-order” organizational capabilities that foster rapid adaptation. Instead of being really good at doing some particular thing, companies must be really good at learning how to do new things.” More than just incrementally improving the project delivery model, better performance will come from the speed at which design firms can adapt to the shifting business paradigm. So the million-dollar question for design firm leaders is: what are the factors that influence this shift and what capabilities must we deploy to build a sustainable competitive advantage in the design services industry?

Stated in a simpler form: what is in the designer's toolbox to develop winning strategies, achieve growth and profitability in this uncertain market?

                                                                              Richard Stine - The World of Richard Stine

Each designer and each firm has its own toolbox, based on its history, culture, size and management style. And many tools can be used to achieve a winning strategy. From my successful experience running an international design firm during the recession, I believe that there are 5 key aspects that must be addressed:

Discover new ways to unlock value in design services.
This means understanding that there is a need at all levels of the organization to perform “deeper” services:

• Don’t just sell design, sell value.
• Don’t just sell ideas, sell solutions.
• Don’t just sell services, become a partner to your client.

Advance and diversify capabilities.

Specialization often means that premium value can be extracted from expertise and strong relationship with clients, but we must keep in mind that clients talk to us about today’s solutions while they are looking into the future at upcoming problems they want to solve. Designers must anticipate how they will solve those problems. It is about understanding what the market will want, but also how we can deliver those solutions effectively, efficiently and economically. The discussion about what capabilities are needed to succeed tomorrow and what resources will be necessary to obtain them is critical. It must happen with a sense of urgency, but in a disciplined and measurable way, one that will seek a high return on investment for the firm. More complex systems and processes are expensive to implement and service diversification brings often difficult authority delegation and requires the addition of talent, but if they result in a sustained pricing premium then it is an investment worth considering.

Leverage business intelligence to increase performance.

Today information exists everywhere and at all levels of the firm, but few designers work tirelessly to preserve and extract all the value they can from the knowledge that is created every day. Every idea that is tried leads us closer to success in this project, but it will also help us fail better next time. Every working hour leaves behind a wake of value that must be harnessed and made available to the organization. Leaders must find ways to connect the dots and establish systems where performance can be assessed through the prism of the existing information and knowledge.

Align the artistic vision behind solid business goals without limiting the creative process.

Design firms are businesses and there is no safer path to success than a solid, inclusive, realistic business plan supported by robust and disciplined financial management. However, this is just the baseline than ensures we provide the basic creative service value. The premium value we all aspire  to deliver comes from intangible factors that design leaders must impart to their organizations to achieve successful growth:

• Inspire the team to define a vision beyond the client’s horizon
• Engage seniors to better understand market needs to ensure the success of our client’s endeavors
• Use the modern marketing toolset to increase the ability of the firm to influence 
• Educate all designers to communicate the intangible value that resides in the emotional component of design: if all designers speak a language of value, then the premium will be easier to deliver.

Define a Vision and turn it into a Culture

Successful leaders don’t just plan and execute alone or in committees: they engage the seniors, they include the juniors, they mentor by default, they encourage training and education. Vision in a black box is no more than a short-term plan, but Vision in a transparent box can become a Culture, and when a positive Culture pervades an organization, then growth and performance become the natural mode of work: the firm will retain talent, it creates opportunities for careers and it increases the value of the business.

So these are my building blocks for the new normal. Now, it's time to get to work ...