Business of Architecture
The Virtues of Midsize
When it comes to managing firm growth, hugging the middle has its benefits, boom or bust.
In 2009, a traumatic year for U.S. architecture firms, with billings in free fall and extensive layoffs commonplace, New York–based Spector Group kept humming along quite nicely. Booked projects were under way at the SUNY College at Old Westbury and at an art-storage facility for Christie’s in Red Hook, Brooklyn, while a residence in the $10 million range was going ahead in Kings Point, Long Island. The steady flow of work suggested that this firm had largely avoided the downturn that was roiling the industry. “[Last year] was extra challenging for architecture in general, but we weathered the storm pretty well,” says Marc Spector, who runs the 68-person firm with his brother Scott.
If conventional wisdom is correct, this midsize firm is swimming against the tide. In tough economic times, it is thought, small and large firms fare best—the former because they are lean and mean and nimble, the latter because they have deep pockets and a roster of rich clients to tide them over. While none of these assumptions is written in stone, a look at a number of midsize firms like Spector around the country—with staff ranging from 20 to 99 people—indicates that hugging the middle does offer many benefits, whether in boom years or during a bust.
“People have been talking about the death of the midsize firm for many years, but many firms in this sweet spot are doing very well—or just plain well, relatively speaking,” says Ray Kogan, president of Arlington, Va.–based Kogan & Co., a management and strategic planning consultancy for the architecture and engineering industries.
To be sure, it isn’t all rosy for midsize firms. In fact, many have suffered extensive losses and layoffs as a result of the recession and are struggling to stay afloat. Even at the midsize firms that haven’t been hard-hit, architects say they are grappling with the challenges of new business development in a sour economy and the difficulty of maintaining staffing if projects do come along. Competition is fierce for few projects, and price-cutting is eating away at firms’ revenue. “This is much more dramatic than anything we saw in the ’90s real estate correction,” reckons Clark Manus, president-elect of the AIA and CEO of San Francisco–based Heller Manus Architects, a midsize firm where the number of projects in hand is off 50 percent.
Yet executives at these practices still firmly embrace the midsize model as one that best suits client needs and provides a sturdy operational and business foundation. They cite several reasons for their firms’ ability to survive a recession. These include relatively low operating expenses—compared with those for large, multioffice firms—and the flexibility to respond to changing markets. “We have the resilience and talent to be able to move quickly without a large overhead,” says Roger Heerema, CEO of Wright Heerema Architects, in Chicago. With a current staff of 25 and many corporate clients in the Chicago area, the firm registered a “significant decline” in billings but had only “a few” layoffs during the recession, Heerema says, because it managed to shift many existing clients from ground-up work to interiors.
One advantage of midsize firms over their smaller counterparts, these executives say, is being big enough to operate in a number of selective client markets while keeping expenses low, which has cushioned the blow during tough times. “Having a diversified portfolio means that when something goes into contraction, we are able to redeploy,” says Ed Jerdonek, CEO of Louisville, Ky.’s Luckett & Farley, an 88-person firm that works on correctional facilities, churches, higher-education buildings, automotive plants, government projects (at every level), and more. In other words, it’s easier for the firm to follow the money.
That diversity has also helped CR Architecture + Design, in Cincinnati, navigate several business shifts. After the 9/11 terrorist attacks, for example, the 52-person firm’s hospitality unit declined while its government group strengthened; in this recession, hospitality was down again, but publicly funded housing projects came back. The strategy was implemented at the firm more than a decade ago because “we knew there would always be ups and downs,” says CEO David Arends. CR did cut about 25 percent of its staff, but the firm is tracking “pretty close” to previous net revenue of around $9 million, Arends says.
Even midsize firms that focus on one particular sector, like the healthcare-focused Taylor, in Newport Beach, Calif., can cover a broad spectrum of projects. Randy Regier, president of Taylor, says the 58-person firm has always taken small and large jobs as part of its core business, from $5,000 maintenance remodels to $20 million hospital overhauls. “As the market shifted from large to small, gnarly remodel projects in the recession, we were well positioned,” he explains.
Kogan, the consultant, suggests that success in coping with a recession has less to do with practice size than with having strong management leadership and long-term strategies for managing finance and marketing—which all firms should have, irrespective of the economy. “Size itself is not the primary determining factor, and that bodes well for medium-size firms,” Kogan explains. “The myth that they face special challenges and won’t survive—that only small and megasized firms will survive—won’t come to pass.”