We Need To Talk About MONEY: 10 profit drivers of small architectural practice.

I can already see the disgust in the faces of those of you who have just read the title of this blog. This is supposed to be a kind of architecture blog and not a money blog. The P for Profit word, and of course, the D for Drivers word. Some of you will also be thinking we never talked much about money at architecture school. So why should we talk about it now?

The AIA in America (not the other Australian one with the similar acronym) 2016 Firm Survey reports that in American firms in 2015 9.7% of firms were not profitable.  21.5% were very profitable with profits above 20% of revenue. 27.6% had profits of between 10 and 20%. But, for 41.2% of everyone else, they only had profits of less than 10% of revenue.

AIA_research

In Sydney the other week, I mentioned this to another MBA graduate who was managing a large firm. It was the usual Architects with MBAs conversation, bemoaning the financial knowledge of architects. This person suggested that there would only be a “few firms” in Sydney that were making a profit of more than 10% or even 5%. If that’s all you are doing then you might be better off putting your money in the bank or buying some shares that will give you a 5 or 6% dividend.

The following is for you: 0 to 10 percent architects, for the architects, wanting to get out of the doldrums of low margin profits. There is no one silver bullet for making your small practice, or even large practice, more profitable. Unfortunately, managing a practice is about getting whole range of little things correct to make it profitable.

1. Don’t guess or make up your charge out rates.

Don’t guess it or make it up. I am thinking maybe there are still people who actually don’t bother to work out charge out rates. Your charge out rate has to cover your own salaries, superannuation and all overheads. The Australian ACA has a great tool that can be found here.

2. Charge for everything (and I mean everything).

Don’t give anything away for free. Not your Intellectual Property, not your time and not anything else. Think like a lawyer and charge your clients for copying, printing, travel and especially your EXTRA time. Charge for EXTRA time expended on a project as a result of client backtracking, indecision, planning or other stuff ups outside your control.

3. Fix (or actually have) your office systems

Ever get the feeling you are spending your life trying to find bits of information no matter in what format or where they are stored. The essential bit is being able to find information quickly and efficiently.  Having in place databases, filing structures and systems that makes workflows quicker is important given that your time is the biggest cost in a practice.

4. Negotiating: Say no and be willing to walk away

Don’t take on a job at a low price because you need the work. What’s the point of doing a job at such a low fee that you are either making a loss or you cannot pay your staff to do it. That’s like you are actually paying the clients to let you do the job.

5. Cash Flow

Sadly, this can be almost full-time job and requires constant vigilance. Get a bookkeeper. Cash flow is volatile. If you think architectural practice is about a steady stream of cash or revenues coming in you are very wrong. You need to manage the volatility of erratic and chaotic cash flows. Use the dreaded Excel sheet.

Figure out when your bills or expenses are coming in and when you will get paid. Try and understand the concepts of Free Cash Flow and Economic Value Added. Managing your cash flow means you will not crash and burn and always be lurching from crisis to crisis because you have no money for stuff. There is great advice and techniques here about Cash Flow management for small practices at Panfilo.

6. Looking after the talent

Don’t underpay your staff. That can be illegal. Don’t discriminate. Don’t treat your staff like shit. You will reap what you sow. It takes a lot of time and money to employ new staff. Don’t yell at them, don’t give them conflicting messages or information. Manage staff in a timely manner. Recognise if you are employing less experienced people who are cheaper to hire, then please help them to be more experienced.

This is a huge subject, and it goes without saying the better you can mentor, manage, and treat your staff the more profitable you will be. Take the time to be with them and provide them with everything they need to get things done for you. Managing and empowering your staff so they can do the boring stuff means more time for you to design.

7. Managing your portfolio of projects

Don’t try and design everything. Spend design time on the projects that matter to you. Decide which projects are trash-for-cash. Don’t waste your time on these get them done. For every five projects in an office one will be great, one will be a nightmare and 3 will bring in the dollars.

8. Competitive strategy

Having a strategy means you know what you are doing and what it is you will design. Don’t waste time designing things that don’t matter.

Every small practice, in my country does housing of some sort. Every architect says they are into sustainability. How are you going to market yourself so that you are seen to be different?  How is your practice going to deliver its services to clients in a way that makes them want to come back one day in the future?

9. Research

Do some research or design research (maybe the odd competition or speculative project) that will build design knowledge in your firm. Work on it when the drudgery of everything else gets to you. Build expertise in something you are passionate about and this will help you differentiate yourself and win work.

10. Operating priorities to build capability 

One thing at a time. Do you have an operational plan? A plan that helps you to prioritize the next three to six months? Do you have projects in the office that will make you more productive? Projects that build capability. Like sorting out the material samples, reviewing the marketing stuff, getting some new software?

Finally: Andy and Philip

For those of us who drank the Architecture Kool-Aid when we were young architecture students the future seemed rosy. Imbued with the Kool-Aid toxin I was convinced that I could make a go of it. I would live the jet-setting architecture lifestyle and hang out in the art galleries in NYC with the New York 5, Nico, Andy W, Lou and the Velvets, and go to a loft dinner with Fischerspooner and Laurie Anderson. We were spoon fed this stuff and these days the star-architect’s dream now seems embodied in Bjarke, Rem and Schoomie.

The more efficient and profitable your firm is the more time you will have for design. In a strange way design is actually all about the money. I am definitely sure Andy Warhol (and this most subversive of architects) would agree with this proposition as well.



Categories: architects and money, architectural practice, business strategy

Tags: , ,

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