Two architects talk candidly about how they turned their business around even before the recession.
In 2007, Marvin Meltzer, AIA (far right), a partner in an extremely successful New York City multifamily housing practice, began going through the sort of business transition that no one should ever face. David Mandl, his business partner and principal of their firm, Meltzer/Mandl Architects, for over a decade, was diagnosed with terminal cancer. When an engineering firm interested in buying the business began going over the books, Meltzer and David Carpenter, AIA (near right), who had been helping to run the business in Mandl’s absence, learned that they knew much less about their firm’s finances than they thought. “They kept asking us for reports, such as what was the value of work in progress, and we didn’t have them,” says Meltzer.
The situation went from bad to worse when they attempted to get an extension on their firm’s credit line to get a temporary loan. They found out that many of the firm’s receivables were so many months past due that the bank considered them uncollectable, and therefore they could not be used for collateral. That severely limited the amount they could borrow. “We also didn’t know that once some receivables for a client get over 90 days old, the newer receivables from that client don’t count either,” says Carpenter, who is now vice president of the firm and a partner. “It was a shock.”
The situation as it existed at Meltzer/Mandl a few years ago isn’t all that unusual. When work is plentiful and firms expand to take advantage of it, it is easy for financial discipline to erode. Meltzer says, referring to his late partner, “David was a very good businessman. His idea was to expand the business, and I kind of left it up to him. We got up to 45 people, and I began to see the downside of it. I realized that I was getting out of touch with a lot of stuff that was going on. When the engineers started looking at our business, we began to realize that the way it was being run was unsustainable.”
A midcourse correction
Over the course of the next two years, Carpenter and Meltzer reexamined all of the firm’s major expenses — staffing, information technology (IT), benefits and insurance, the cost of legal and financial consultants, office space, and of course, how much the firm was owed by its various clients.
“We started by looking at our insurance and benefits,” says Carpenter. “As a small firm, we simply didn’t have enough people to get good health-insurance rates. We joined a professional employer organization (PEO) — in this case, a company called ADP Total Services. It takes care of payroll, benefits, and insurance.” One of the advantages for both the firm and employees (who are technically coemployed by the Meltzer/Mandl and ADP) is that they can receive health insurance at far less cost than they could as a small group. Costs for both the employees and the firm, which pays half of the employees’ health-insurance costs, have gone down by half. “Our employees are able to get much better insurance than we could offer them.” The PEO also carries the firm’s workers’ compensation insurance, which in the past had been a major expense.
“We also started taking a serious look at our staffing,” said Carpenter. “It was clear even before the slowdown that we were bloated. Some of our employees were only billing 50 or 60 percent of their time. We had a full-time renderer. Now we are getting renderings from China. We had a full-time person working with the city planning department. We had a full-time IT person. We are hiring consultants to do this work now, and getting better service,” says Meltzer. The firm does have some workers who are supplied by a temp agency. After paying the Internal Revenue Service a penalty, Carpenter is very strict about making sure that these workers comply with the IRS’s regulations about independent contractors.
The firm also decided to change its legal representation, after its lawyers failed to respond to a lawsuit, costing it a judgment. It also replaced its accountant. “We didn’t understand what we were paying for,” says Carpenter. “An architecture business just isn’t that complicated. The new one is getting half of what the old one was making.” In both cases, however, they had to phase out these services over time. “It was kind of tricky,” he continues. “You have to let them wrap up the work they’re in the middle of before you replace them.”
In both areas, the firm is getting the service they need at lower cost. The firm also subdivided its space and leases half of it to another company. Each company pays half the rent. They share some equipment and have a common reception area.
Money up front
Perhaps the most difficult and challenging change in the way the firm does business is in the way it deals with receivables. “At one point a few years ago, we were paying more than $100,000 per year servicing the debt on money we had to borrow because our clients weren’t paying us,” says Carpenter.
Part of the strategy involves more closely tracking late receivables and staying on the clients. But the firm also plays hardball now, not releasing drawings until the work is paid for. “We have said to clients, ‘We’re not your partners. If you want a loan, go to a bank,’ says Meltzer. “I told one guy, ‘You have owed us $400,000 for the past six months and we are not going to release the next phase of this project unless we are paid.’ And we were paid. We even have one client who was so bad we now make them pay us in advance. They do.” But, he cautions, “you have to be willing to lose clients, and we have lost some.”
Realigning business goals
The firm went from 45 to about 15 over the past few years. Many of these reductions came through attrition, he adds. “Some of our employees didn’t believe that the business would survive after David Mandl died, and they left. So, we haven’t had the layoffs,” Meltzer says, referring to the drastic downsizing other firms have experienced.
“If you don’t acknowledge that architecture is a cyclical business, you are bound to get hurt,” says Meltzer. “What I have come away with is that you have to determine what kind of business you want to have. I have always felt that a certain size company can better weather the storm. I was never that comfortable about being so big.” The principals also agree that they are lucky they became aware of the problems with the company’s finances and began strategizing ways that they could begin to cut costs before the recession began. “We are smaller and doing smaller projects,” Meltzer says, “but we are even more profitable now than we were then.”