An article in this week’s Economist about Italian business clusters—that is, where businesses in the same industry form geographic clusters—offered some interesting observations. First, that traditional business models cannot survive global competition. A strategy to deal with global competition includes innovation and building brands. In short, diversification.
This led to a question: how does one approach diversifying architecture firms so that they, too, will be more able to weather economic vicissitudes? For that, let’s turn to Paul Nakazawa. Of course, there is the more “traditional” model of diversification: “many architects have several different kinds of SEPARATE businesses, which serves to diversify dependency on one source of revenue. The time-honored diversification scheme is teaching and practice — we all know lots of people who do that gig.”
More after the break.
And we certainly do. Of course, with such an approach, people often run the risk of, well, being stretched too thin. Because in addition to teaching and giving students proper instruction (that is, concerted attention), there are the different aspects to running an architecture business, which not only includes working on current projects, but generating new ones. That can pose serious time conflicts, as many an architecture student has observed.
Then there are the Design/Build firm models, which involve similar time and expertise issues. That is, while a principal might be eminently qualified to lead the design aspect of the firm, the same is often not true for leading the “Build” aspect. And again, there is that pesky issue of time.
So how about a completely different business model, such as acquisitions? In other words, would it work to acquire a “build” company in order to complement and bolster an architecture firm? Again, this is what Mr. Nakazawa says, “Larger A/E and A/E/C firms do consolidate many different kinds of practices and business segments under one umbrella, but they employ specific legal techniques to partition business and professional risks/liabilities. Also, when they go from being privately to publicly owned, the ultimate financial risk is shifted from professionals owning their own firm to the holders of a company’s shares and debt…one of the motivations for mergers and acquisitions is directly about the issue of increasing revenue in a way that also reduces risk and volatility.”
However, he cautions, there are legal concerns: “There are a number of reasons why it is not smart to mix businesses within the structure of a professional services corporation. Many states require firms practicing architecture to do so under specific forms of legal organization. It does not really make much sense from a business perspective to mix different risk classes within a professional services company. For instance, if you mix design and build within the same firm, in some states you may be increasing the liability of the architects — we would be going from providing services to providing a product (and therefore subject to product liability law). If you mix design with real estate in the same firm, a failure in the real estate market (as we are experiencing now) could bankrupt the firm and take down the architectural practice with it. I actually had a case where a client was taken out by running its real estate holdings in the same company as the design practice. The design practice was fine, but the company defaulted on real estate loans and this took down everyone.”
So here is the question: what kind of business models have you used to weather the rapidly changing economy? What has worked and what hasn’t?