In my first blog in this two-part series, I talked about the way architects’ schooling fails to train us in running businesses and prejudices us against profit-making. Here, I try to work out how true this is and the extent of its impact. What does the evidence tell us?
Even for died-in-the-wool entrepreneurs, starting and managing an architectural practice is tough. It demands many new skills and areas of knowledge, especially if you employ people: leadership, commercial strategy, business planning, financial management, entrepreneurship, negotiation, human resources management, people management, marketing, promotion, networking and sales.
On top of a demanding professional workload, this extra burden can take you by surprise and run you ragged. The dangers are long hours and weekend working, unhappy employees, cashflow crises, inefficiencies, legal claims and unsatisfied clients, with all the knock-on consequences for home life and personal happiness.
And with the challenges facing architectural practice from disruptive tech these days, agile, savvy entrepreneurship is critical. Are we up to the job?
The profession’s perception of its own business competence
The evidence of a business skills gap has been acknowledged anecdotally for many years. For example, in 2011, the RIBA’s Future for Architects report found that clients thought that ‘architects are so preoccupied with their vocation that they do not consider that practice is a business.’ Valuable, usually pre-project, skills go unpaid, something the practices who contributed to the report readily agreed ‘would never happen in any other profession.’
Clients’ perception of the profession’s business competence
The 2014 Farrell Review of the profession concluded, ‘Business and finance should be taught as standard within architecture schools.’ Not only will this equip students in the business of architecture, it said, but ‘would help counter the perceptions within the construction industry that architects lack commercial awareness and an understanding of their clients’ business-driven needs.’ In response, the profession’s review of architectural education, currently stalled, proposes to add business skills to the curriculum.
More recently still, the RIBA Client Liaison Group held many sector-specific roundtable meetings with client representatives. Among many useful findings, it showed that clients look at how architects conduct their own businesses for evidence of how far they can be trusted to look after the clients’ interests.
The harsh realities
The most recent devastating recession left a trail of insolvencies in its wake. It doled out brutal lessons, exposing the extent to which the profession had been lulled into commercial complacency. Eggs in too few geographical or sector baskets left many up the proverbial creek without a paddle. Architects swiftly swelled the ranks of the unemployed by over 2000 in August 2009.
Have the lessons been learnt?
The picture is improving, but not quickly. Numbers out of work have returned to ‘normal’ low levels. Back in 2013, Caroline Cole of Colander reported that 60% of practices did not have a business plan, and of those that did, only 15% planned beyond one year. 40% did not have an annual budget, and 20% of practices with under five employees did not even monitor cash flow.
The latest evidence
Last year’s RIBA Business Benchmarking Report (2015), a compulsory survey of RIBA chartered practices, shows some improvement, not least because to be a chartered practice you must have a business plan. Now the vast majority plan ahead a year or more. However, a significant minority – 20% – of small chartered practices (i.e. fewer than five staff) and just under 6% of larger ones (i.e. with five or more staff) plan ahead for less than 12 months. Extraordinarily, 2% of practices with 50 or more staff plan no more than 6 months ahead.
Most also have cashflow forecasts up to a year ahead, although the smaller the practice, the less likely this is. The prevalence of formal job descriptions though does not follow this pattern, and overall the numbers that bother with job descriptions is comparatively low.
Marketing budgets, regarded as a critical ingredient of any business growth or, indeed, survival strategy, are apparently falling prey to ‘short-term acute pressure to reduce overheads’. The general benchmark spend as a proportion of revenue for professional services companies is between 5 and 8%, rising to about 15% if they are aiming for growth. However, regardless of size, RIBA chartered practices spent on average slightly less than 1% on marketing in 2015. Reducing overheads in this way could be a shortcut to going bust.
Are we profitable?
Taken as a whole, chartered practices made profits of 18% of revenue. This appears healthy, but the detail reveals an uneven picture. The mean revenue per practice of just over £1m in 2015 was skewed overwhelmingly in favour of the minority of larger and London-based practices. Although some micro-practices made impressively high-sounding profits of 50% of revenue, mean average profits for practices with fewer than five staff translated into just over £37,000, tricky for directors paid entirely in dividends. Contrast this with profits of practices with over 50 staff, who averaged just over £1,450,000 – albeit only 12% of revenue.
Comparison with other professional services
Compare the business performance of architects to the legal profession. Clearly, the legal and architectural services markets are not directly comparable. However, the differences in financial performance are striking.
Chartered practices made on average £56,000 in revenue per fee-earner (including partners, directors and sole principals) in 2015. In comparison, fees per fee-earner (including partners) in law firms averaged £127,000 in the regions. In the City, it was £261,000.
Average profit per partner, director or sole principal of chartered practices was £61,000, ranging from just £21,500 for sole practitioners to £158,000 in 50+ practices. Compare that to profit in legal firms in the same year. Every equity partner brought in profit of £221,000 in the regions and £480,000 in the City.
Some truth in the rumours
Reports of architects’ lack of business acumen are exaggerated. Nonetheless, where there’s smoke there’s fire, and there’s enough smoke here to warrant concern.
This year, the RIBA ran a survey investigating what clients think of architects. It is to be published on 9 November, pretty much at the same time as the next RIBA Business Benchmarking Survey results. Both should make fascinating reading.
An overt business focus should never be an afterthought. It is the foundation of every good architectural service. Sound business practices and appropriate financial governance not only allow you to concentrate on architecting, it inspires confidence in the client body that you know what you are doing.
So come on: let’s get to grips with the business of architecture and realize our worth.
At the end of 2015 I was appointed RIBA Ambassador for Business Skills.
By setting out the arguments, supplying the evidence and starting the conversation, I want to win hearts and minds over to better business practice.
I intend to speak at events, run a social media campaign, enable collaborations and unify existing RIBA resources, building a movement to switch on the profession’s business-savvy gene.
But I can’t do it alone. I need your help. I want to hear your stories, your insights, and your tips.
Let’s realize our worth together. Please get in touch now.
Visit http://architectskills.com/ or sign up for updates to find out more.
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