Overview: This term Yale is offering a graduate seminar entitled “Exploring New Value in Design Practice.” I’m guiding this experimental research course with my Harvard colleague Brian Kenet (who teaches professional practice at GSD). Brian is a management consultant to architects and engineers but not an architect. That makes us an unlikely but possibly potent pair to explore the central question of the course: why isn’t the practice of architecture properly valued, economically or otherwise? And if you accept that premise then what options are available to change our value proposition as architects? Here’s the abstract from our syllabus:
How do we make design a more profitable practice? Design practice has traditionally positioned building as a commodity in the delivery supply chain, valued by clients like other products and services purchased at lowest first cost. Intense market competition, sole focus on differentiation by design quality, and lack of innovation in project delivery models and and business models, has resulted in a profession that is grossly underpaid and marginally profitable, despite the fact the building sector in its entirety operates in large capital pools where significant value is created. The profession must explore new techniques for correlating the real value of an architect's services to clients and thereby break the downward pressure on design compensation. This seminar will re-imagine and re-design the value proposition of architecture practice, explore strategies used by better compensated adjacent professions and markets, and investigate methods by which architects can deliver--and be paid for-- the value they bring to the building industry.
We are going to look at the business models of practice and construction, and the construction industry supply chain, for clues and opportunities, talk to experts in adjacent professions like law and medicine, and investigate other design disciplines like product design, fashion and film-making. Through the semester we hope to establish a series of hypothesis and vectors for further investigation and research.
Brian, our students and I thought this this blog might be a good place to document some of our discussions, early conclusions and general thoughts, so I will be attempting to do so weekly. Those of you who know me as a teacher know that I try to be compulsively planful and prepared, and this seminar—because it explores a largely unexplored topic—is neither. So I hope readers will tolerate the messiness that is an early draft of what we hope will be provocative ideas forthcoming. And with that, some notes on our first couple of sessions:
Session 1/Problem definition: “Why don’t architects get paid for value?” We started our first class of the term asking “what is the issue here? Is there actually a problem?” Brian set out the four components, as he sees them, of practice: Art, craft, service (as a regulated profession) and business enterprise. The value “machine” is somehow comprised of these parts. Since there has been no systematic study of this question, there’s no real understanding of the “sweet spot” between the competing demands of each. (That lack of study is mostly a function of the tertiary position that practice has in most U.S. architecture schools, combined with the Justice Department’s consent agreement with AIA that they be not at all involved in any discussion of architect’s compensation, lest it be considered anti-competitive.)
We examined a possible “boats and ocean” analogy where architectural practices are small boats floating in the larger “ocean” of the industry, along with the adjacent vessels of our engineering collaborators, the building industry, and finally society at large. Each of these participants have their own definition of “value.”
After a brief discussion of the seemingly “winner take all” culture of star architects receiving the lion’s share of significant commissions, leaving the balance of practice to compete on a fee basis for the remaining work, we turned to the question of why value per se is an issue. It was suggested that architects may not be interested in the question (until they see their first paycheck); firms struggle to differentiate from each other making value only a function of lowest fees; a lack of general understanding and appreciation of “what architects do for a living;” and the inherent tension of the provision of professional services versus creation of physical products (like drawings or buildings).
We then looked at a first working list of the possible “value outcomes” of practice, with an eye toward revisiting and refining these ideas during the course of the term. The list included: happiness, profit, asset performance, public satisfaction, public affection (where’s the “American Idol” of architecture?), brand, and civic pride. An incomplete, but interesting, list to big a larger discussion.
Session 2/Defining Value Propositions in the context of industry economics: This class started our series of brief kick-off presentations by the students about background topics that build understanding of industry issues. A very provocative summary of “what is a value proposition?” included the following definition from Wikipedia:
A value proposition is a promise of value to be delivered and a belief from the customer that value will be experienced. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services. Creating a value proposition is a part of business strategy. Kaplan and Norton say “Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.”Developing a value proposition is based on a review and analysis of the benefits, costs and value that an organization can deliver to its customers, prospective customers, and other constituent groups within and outside the organization. It is also a positioning of value, where Value = Benefits - Cost (cost includes risk)
The students (Yas-Teg) then suggested a derivation of Maslow’s hierarch that could define different kinds of value in architecture:
The “architectural hierarchy” was then interrogated to ask if Brand/Design are somehow the key values delivered by architects, and efficiency/cost+schedule could be delivered by others. The idea suggested that somehow “design” was separate from these other issues, but we’ll explore that question later. In the meantime, the hierarch did raise another even more provocative, if not unexpected set of questions about whether the essential, ineffable quality of good architect should be “valued” in any way other than simply appreciated, and whether that “outcome” should be correlated to the core value proposition of practice. It is certainly strongly implied in how we train architects; why doesn’t it manifest more clearly? And since it was suggested that “critical architecture” actually alienates the public, is value found elsewhere?
We concluded by looking at the economic models of building in the United States, where in 2011 (according to AIA statistics) architects generated approximately $21B in fees in support of the design of $320B in buildings and generated approximately $2B in profit from those fees. If profit is an indication from a market of value, then that $2B is about 1/2 of 1% of the overall cost of the total $341B spent on buildings.
Session 2/Practice Business Models: This session was focused on understanding the underlying mechanics of an architectural practice, including the business and financial model. The backgrounder team presented a concise analysis of business models, defining them as follows:
A business model is a framework or strategy consisting of four elements that help a company define, create and deliver value:
1. Customer value proposition: how does the business help a customer get a job done?
2. Profit formula: how does it create value for company and customer?
3. Key resources: what people, equipment, technology, brand are required?
4. Key processes: what training, development, planning, sales?
After an exploration of pricing (or how a business “keeps” some of the value it creates as profit) the team explained the basics of the architectural business model:
1. Customer value proposition: deliver high quality projects on time and within budget
2. Profit formula: charge percentage of customer budget (cost-based pricing!) resulting in fragmentation of the suppliers (unable to share resources, drive down price)
3. Key resources: talent, brand, client relationships
4. Key processes: design process, marketing development
Brian then explained the dynamics of financial performance of a practice, which really can only adjust three variables to increase its value as defined in these terms (in other words, the gross profit it generates): (1) increase the customer value proposition and thereby bring in higher fees; (2) increase the utilization of people working in the firm, creating work faster or staying more consistently billable on projects, and (3) get clients to pay bills faster so you don’t have to borrow money to cover payroll. Of course there are lots of other subtleties—like fee mixture, capitalization, principal payments, bonuses—but the model itself is surprisingly simple to understand and run.
Inasmuch as the term is not focused on polishing the simple business model, we turned to thinking about how one might increase inputs to the model (higher fees) and other efficiencies. A first list included:
1 - Getting paid more for the same amount of work provided by correlating it to some other value than lowest price
2 - Reduce the number of providers in the marketplace, creating scarcity and price rises
3 - Connect compensation to measurable outcomes (the lower regions of Yas-Teg) rather than fixed bids.
4 - Capture the value of capital as it passes through the supply chain, like a financial services company sets up deals
5 - Find new ways to capitalize practice and operate from a stronger financial platform. The inherent instability of services businesses make them lousy capital investments—how many publicly-held design firms are out there?
6 - Radically improve collections to get money in the door faster
7 - Radically improve utilization to make work much more efficient.
Brian concluded with the following suggestion: can we find “novel activities, linked in novel ways, including new participants, that can generate new kinds of value?” As we explore other models and professions we will return to this theme.
We sent the students off for studio travel week, taking a weeks’ break before Session 3.