What kind of firm you have probably depends on what comes naturally. Your capabilities, your interests, and your habits all together have a way of attracting certain kinds of work and certain ways of doing business. Chances are, whether you know it or not, you're already operating within one of the common business models for professional service firms.
So, if it’s already happening without you knowing, why should you care?
You should care because awareness of business models gives you the ability to be strategic about how your firm is structured. It’s similar to a design concept that gives shape to all decisions that follow. It can give you an understanding of how to match your staffing with the way you generate revenue in order to increase profitability. Understanding these business models underscores the ineffectiveness that can result from pursuing any job that comes along – often stalling a firm’s ability to gain traction in knowing what it’s doing and how it’s doing that.
To be successful, each business model has an ideal staffing configuration. Hence, the triangle image and the question: How wide is your staffing triangle?
Or to put it another way, what shape is the design concept for your firm?
BASIC BUSINESS MODELS
For professional service firms, there are three basic business models that are represented in Figure 1. To be clear, by business model, I mean an articulation of how you make your money. Are you dependent on high hourly rates and advanced expertise for which clients are willing to pay top dollar? Or are you working hard to be more efficient so you can make money while offering lower fees and quicker turnaround?
If your practice is like most design firms, you find yourself somewhere in between. Your core competency is based on your experience and your ability to solve complex problems. Making money is dependent on the skillful management of staff and clients. Any size firm can practice using any of these three models – you don’t have to be a big firm to be foster efficiency, experience, or expertise. Let’s examine each of these models individually.
Efficiency firms are focused on fast and less expensive project delivery. These firms often specialize in one project type or a narrow range of services and tend to serve clients that are looking for standard solutions and quick turnaround. For example, a small architectural firm that serves residential developers might operate effectively within the efficiency model. Large firms can operate in this model also if they specialize in the delivery of routine project types, such as big box stores. On jobs such as these, once standards and routine methods are in place, a firm can easily grow to accommodate an expanding market.
Because efficiency-based firms do projects with a significant amount of routine work, firm owners are able to hire less experienced people for production assistance. This helps to keep production costs down, while freeing the principals to acquire more work. Routine work may also lend itself to having a remote virtual workforce or to sub-contracting production work. With repeatable elements and standard processes, project delivery can be streamlined. Profitability is dependent on volume and productivity is relatively easy to obtain once systems are in place. Sustainable success in these firms requires continuous improvement of work processes and staying current with technology and trends.
When asked, most firm leaders will describe their firms as operating within the second business model and most are correct in their assessment. In contrast with efficiency firms that have deep experience but engage in routine projects, true experience firms are proficient at solving non-routine and complex design problems. While their experience may be in a certain project type, such as health care or museums, their core competency is the ability to successfully organize and deliver significant and complicated projects. Many successful experience firms find they are able to apply their accrued knowledge to a diversity of project types, a strategy that can help weather economic downturns in individual market sectors.
The basic management challenge for this type of firm is to match the project task to the pay-grade. Too much of a design fee is spent when the principals or project architects perform work that could be done by someone with a lower salary. For solo practitioners who have meaningful experience in complex projects, a first hire might be experienced support, rather than production help. An employee that can manage projects will free the firm owner to do more design work and nurture relationships that will lead to more opportunities.
Virtual collaboration with other firms as sub-consultants or joint venture partners is an excellent strategy for experience firms that want to grow and expand their project portfolio. Sustainability for experience firms is enhanced when they are adept at creating, acquiring, and managing knowledge from doing projects so it can be applied to future commissions.
Expertise firms have service offerings that rest upon deep knowledge and/or exceptional talent. These firms include those headed by “starchitects” with their unique style and abilities, or more commonly, by specialists in a narrow band of professional knowledge, such as acoustical design or passive house.
For firm owners who have deep knowledge and are thought leaders in their field, an expertise firm may allow a financially successful one-person firm to be established and sustained. When employees are involved, since most of the work is non-routine, few, if any, middle level and junior staff people are needed to complete the work. More commonly, expert practitioners will partner with other experts in related field to offer a broader range of services. Many also connect with academic institutions that allow expert practitioners the opportunity to teach and facilitate research activities that forward knowledge creation. One- or two-person firms can be very successful using this model since profitability depends on high hourly rates for services.
You now have an understanding of the 3 types of triangle-based business models common to design firms: Efficiency, experience, and expertise. For more information on this, look at the second part of this article. I cover how to recognize when these models become unbalanced and the consequences for your business, and you can figure out how wide your triangle is.
Rena M. Klein, FAIA, is also the author of The Architect's Guide to Small Firm Management (Wiley, 2010) and is principal of RM Klein Consulting.