Continuing Education: Is Bigger Better?
Architects worry that design takes a back seat when firms merge and expand.
Last year, Los Angeles-based AECOM merged with engineering giant URS and became a firm with $19 billion in revenues and 100,000 employees. Not only does it design and build projects in 150 countries, it can finance and operate them. Is the megafirm the future of architecture?
No, it turns out. While some prominent firms continue to grow rapidly by buying other firms (including IBI Group, Stantec, Perkins+Will, and HDR), the pace and scale of consolidations may be leveling off, though no one tracks the numbers.
Mergers are less common than acquisitions. Alexander Cooper, principal at New York firm Cooper Robertson, which has turned down such marriage proposals, sums up the difference: “If it's a merger, there's no money. If it's an acquisition, someone has money."
Mergers and acquisitions (M&As) are forcing a reconsideration of practice, however. Design can seem incidental to the management and delivery of a wide range of services that begin with brand-identity consulting and may extend into construction and facilities management. Large practices number in the thousands or tens of thousands of staff. “Small" might now be deemed fewer than 100. Problems with merging cultures, retaining valued staff, blurred identity, and loss of nimbleness have made firms wary of M&As.
Firms acquire other firms to add expertise and diversify project types, disciplines, and locations. Atlanta-based Lord Aeck Sargent (LAS) saw slow growth in the higher-education projects the office is best known for, so it acquired Brock Green Architects, which was experienced in private development. Those skills also have proved handy as more colleges and universities build using public-private partnerships. LAS enhanced its expertise in historic preservation with the acquisition of TWC Architects, based in Austin, Texas, and added a new discipline by acquiring an urban-design practice, Urban Collage. With six offices, the firm now employs 150. “We compete with a lot of different-sized firms, depending on the practice area," says president Joe Greco. “We can bring a depth of resources to historic preservation that small competitors can't match, and compete with the behemoth firms in science and technology."
“Many firms are acquiring to gain leadership," says James Cramer, chairman and founding principal of the Greenway Group, a consultant to architects. Says Phil Harrison, president of Perkins+Will, “In acquisitions, you get the relationships, the portfolio, the people."
Large firms tend to acquire in building types demanding deep and varied expertise, such as hospitals, labs, and infrastructure projects. And that expertise tends to drive global expansion, because it is in fast-developing countries where the new challenges and multi-billion-dollar projects are. (Of course, acquiring a firm in a desired location is often the fastest way to gain a beachhead.) Global cities present invigorating design challenges you don't find in America, says Peter Cavaluzzi, a principal who came to New York-based Perkins Eastman through its merger with Ehrenkrantz Eckstut & Kuhn (EEK). Joining the much-larger firm (now 900) allowed EEK to take its urban-design expertise deeper into building design and construction. “The fast-growing parts of the world are architecture's cutting edge," he says, “and you can't be an international player as a 10-person firm."
Big firms serve clients with high expectations for well-integrated services that can meet punishing schedules and demanding budgets. “They prefer a local presence,' says Stanis Smith, an executive vice president at Stantec, which is one reason the engineering/architecture firm has acquired 75 practices since 2000 and grown to 15,000 staff in 250 locations, many of them in small markets. He says the traditional team structure, with an architect herding a string of consultants, too often ends up as an awkward “marriage of convenience," in which communications are poor, as is the understanding of the locality or client culture.
Though growth through acquisitions seems to promise stability, profits, and challenging projects, the process of firm integration can be traumatic. Edinburgh-based RMJM, for instance, grew to 1,200 people with 14 offices worldwide, winning iconic projects like the Gazprom tower in St. Petersburg. It then sank under a mountain of debt when the crash came, owing as much as $36 million. RMJM survived, but one of its key acquisitions, Hillier Architecture of Princeton, New Jersey, closed, and RMJM shareholders lost millions.
Few collapses are so precipitous. Failure is more often measured by expectations that go unmet in the form of shrinking revenues, longtime clients who take work elsewhere, valued staff who depart, a muddled identity. And some practices are poor prospects for acquisition. “A lot of firms are looking to be bought because they haven't figured out a leadership- or ownership-succession strategy,' says Diane Hoskins, the co-CEO of Gensler. Founder Art Gensler set up an employee stock ownership plan (ESOP) to ease succession, she says.
Gensler has grown to 5,000 employees in 46 offices, with annual revenues of $1 billion, without acquiring. That's because, Hoskins says, “it's very challenging to merge companies and create a consistent culture." Cramer, who consults on M&As, adds, “acquisitions are too often looked at as a financial transaction rather than a strategic transformation." He thinks about half are shaky. “Too much time is spent on financial due diligence and too little on cultural due diligence." By this he means identifying compatibilities in capacity, expertise, and workplace culture. Merged practices “have to give people a reason to get up in the morning," says Richard Drake, a principal in Perkins Eastman's San Francisco office.
Truly understanding firm culture is difficult because key qualities cannot be measured objectively. “It is a bit of a crapshoot,' says Greco of LAS. “It's not an easy process to actively integrate two cultures and bring out everyone's viewpoints." Of its four acquisitions he regrets only one. “We were excited about the opportunity and didn't vet the personality and leadership of the smaller firm well enough."
Staff reviews on the jobs website Glassdoor often complain that “churn," “upheaval," and “layoffs' are common in rapidly acquiring firms as they winnow duplicative staff, replace existing talent with new, and try to merge cultures. As time goes on, some cite long workweeks without extra compensation and pressure to bill excessive hours to clients to shore up revenues.
Many smaller firms hear horror stories told by job applicants and acquired collaborators, which has made them wary of acquisitions. SOM has seen many of its valued consultants in lighting, landscape architecture, and cost-estimating in unhappy marriages to large firms. “People leave to form their own firms, and some lose the boutique identity that attracted us to them," says T. J. Gottesdiener, a managing partner in SOM's New York office.
The uncertainty undermines what for many are the selling points of working in a large firm: good pay and benefits, a good work-life balance, and a reliable supply of challenging, diverse projects. The commonly heard expression, “Three years and you're out," refers to unhappy leaders who choose to leave as soon as their contractual obligation to the acquiring firm expires. Says Cramer, “I would argue that, to continue to be competitive, you have to prove you can keep valued people at a mid- or senior level."
Though small firms long for the workload stability that large firms can achieve, the management of the multiplicity of talent spread globally can be extraordinarily difficult. A large firm can form a 100-person team of engineers and architects for an infra-structure project in Hong Kong, but day-to-day it finds it has too many mechanical engineers in Singapore and not enough in Chicago. It's why staff complain of frequent layoffs even as their firms appear to grow overall. “Scale itself is not a competitive advantage," says Cramer. “There needs to be a range of competencies. The firm must care about financial responsibility; it must be competitive, deliver the best design, and be a great place to work—a series of core values that are either aided or threatened by a given business combination."
There is a common understanding that the handful of very large, publicly traded firms must continually grow to please shareholders, which is achieved fast through acquisitions. “The financial interests of stakeholders are not wholly connected to the professional interests of architects," says Perkins Eastman's Cavaluzzi. “The firm wins large projects, which improves the stock price, but they do it by undercutting the competition, then abandoning the project because it can't make a profit. It's a gaming of the system so that a design practice can serve the master of being publicly held."
While architecture at the highest level is traditionally defined by experimentation and technical innovation, these values can be hard to maintain as firms grow. “Not to disparage any big firm, but the nimble, hypercreative culture we thrive in is hard to do in a big organization," says Dan Meis, who has formed sports-facility design groups within three large offices: NBBJ, Aedas LA, and Woods Bagot.
Big-city sports facilities would seem a good fit for big firms, but the perpetual buying and selling of sports specialists reflects a high-profile but mercurial market. Meis reluctantly walked away from the sports practice he had built within NBBJ when suddenly slack demand began costing the team its talent base. “That's when I realized the downside of a big firm. It's not easy to keep the monster fed with $500 million projects." After trying to rebuild his team at two other firms, he concluded he was better off leading his own New York-based sports-design boutique, Meis Architects, that would work with larger firms when needed.
The big firm can be seen as a robotic drone stamping out commodity buildings for faceless clients, but AEC giants are recognizing that design is a selling point. “The value of design is increasing in a very broad sense," says Perkins+Will's Harrison. SOM's Gottesdiener asks why the names of star architects come up so often. “Clients are seeing value," he says.
Keeping design front and center is a key reason that 1,000-person SOM, with 10 offices, half of them in Europe and Asia, does not desire to be significantly larger and doesn't acquire. Gottesdiener sees technology permitting smaller firms to do more. “Long term, larger firms are going to find themselves too bulky and unwieldy." Thanks to building-design technology, “our competition is now becoming firms smaller than we are."
The degree to which design gets subsumed at big firms assembled from many disciplinary parts touches on the much-debated question of architecture's relevancy. Architecture is supposed to solve functional problems, but also to contribute to culture and express it; it is supposed to create an inviting civic realm, even when itis assembled from individual private investments; and it should bring history alive, and enhance the environment. With many large firms led by nondesigners whose role is to create shareholder value, can big firms speak design's language and lead these conversations with giant and influential public and private clients? That will be the true test of M&As.
| To earn one AIA learning unit (LU) read the stories listed below and complete the test online. Upon passing the test, you will receive a certificate of completion, and your credit will be automatically reported to the AIA. Additional information regarding credit-reporting and continuingeducation requirements can be found online at continuingeducation.bnpmedia.com.
Architecture & Money: Practice