Back in the 1990s, then-Victorian Premier Jeff Kennett encouraged young people in that state to follow a dream of starting their own business.
In design, many have done that. Indeed, 2016 data from the ABS shows that there are around 10,800 businesses which operate in the architecture, engineering, planning or related consultant and design sector.
Nevertheless, many of these remain small. According to the data, approximately 60 per cent have fewer than five people, whilst 80 per cent have fewer than 10 people and 90 per cent have fewer than 20 people.
That, Management for Design (M4D) managing director Robert Peake said, is a problem. In a recent edition of his firm’s Business Journal, Peake wrote that the design sector in Australia has been slow to embrace a growing international trend toward mergers and acquisitions. In the past six years alone, that journal noted, around 600 architecture and engineering firms had merged in the US.
As a result, Peake wrote, the number of architects, engineers and designers in Australia “far exceeds the commercial demand for services” and there are “too many businesses competing for a diminishing service in an increasingly competitive marketplace.” The data, he noted, implies that there are just under 10,000 businesses which are largely reliant upon the principals to bring in clients, recruit and manage people, design and deliver projects and control finances. This, Peake wrote, leaves little capacity to build and grow the practice or to guide its evolution through broader trends which are impacting the profession.
All this is happening, he notes, as the profession is facing greater competition, with roles such as project management and construction management increasingly being performed by non-architects and design documentation in some cases being outsourced. As a result, he says, the role of the architect has been eroded and architects are now primarily seen as simply being design consultants.
Part of the problem, Peake says, is that many architects fail to set their practices up to be run like a long-run commercial enterprise.
“It’s very easy to open the door and set yourself up with a business. A lot of people primarily make those decisions on the back of ‘I have a project’ or ‘I have clients who I want to work for,’” Peake told Sourceable.
“They don’t do it on the back of ‘I want to establish a successful and sustainable business.’ That has nothing to do with why they are actually setting up a business. Unfortunately, that premise flows through for years.
“As a consequence, those businesses are set up with a heavy reliance on the principal and the directors to bring in the clients, manage the people, try and deliver the projects and control the finances. That doesn’t allow them a lot of capacity to build and grow the practice.”
According to Peake, an advantage with mergers and acquisitions is the ability to gain greater size and scale. Until practices reach a certain scale, he says, principals are forced to spend much of their time brining in clients, managing work, producing work, managing finances and managing people. Once the practice reaches a size of around 30 or 40, by contrast, they start to develop the people and resources around them who can handle a number of these things.
This frees principals up to spend more time developing and growing the practice. Such scale also helps practices to reduce risk by growing and diversifying their client base – potentially expanding into different sectors or geographic regions.
Greater scale can also deliver a more talented leadership pool upon which to draw and a more diverse base of skills. Larger scale operations also help to facilitate investment in emerging technology and innovations.
Although Australia is a less active market in the M&A space when it comes to design firms compared with other nations, some recent transactions have taken place. Early in December, for example, Brisbane based Mark Williams Architects announced it was joining with AEV Architects under a new company which is now known as Enborisoff Williams Architects. In July, Freemantle based Coda announced it had entered into a merger agreement with Cox Architecture. And in April, DWP Australia Pty Ltd Trading as DWP Suters (DWP Australia) merged with international design firm DWP. Prior to the merger, DWP Australia and DWP had been involved in an alliance together for around five years.
Leone Lorrimer was head of DWP Australia prior to its merger and is now chief executive officer of the combined group (called DWP), which has around 450 staff spread over twelve offices across eight countries.
Speaking about the merger and its benefits, Lorrimer said it is important to appreciate that clients are now international. Brookfield Multiplex, for example, is owned by the Canadian listed Brookfield Business Partners. Frasers Property Australia is a member of the Frasers Centrepoint Group which is majority owned three ways by a nominee company of the Development Bank of Singapore (30.25 per cent), a nominee company of Singapore’s United Overseas Bank (29.74 per cent) and the Hong Kong based InBev Investment Ltd (28.44 per cent). Many of the large hospitality groups are international. Lend Lease may an Australian company, but it has operations across the US, Europe and Asia as well as locally.
Many clients, Lorrimer says, want their design team to be able to combine the best of global expertise with excellent local delivery on the ground. Whilst this is challenging, she says this is what DWP in its case is seeking to deliver. In Vietnam, for example, the company is doing projects with luxury hospitality group Accor. Its local team is delivering the design and documentation on the ground in Vietnamese whilst its global hospitality team manages the relationship with Accor as a global operator.
Another advantage of operating on an international scale revolves around the development of an intricate understanding of important developments in various parts of the world. As well as clients being international, Lorrimer says knowledge is international and clients increasingly expect design teams to apply best practice not just nationally but around the world for the context of the project in question. In doing this, she says, there is little substitute for having people on the ground across a wide geography. This enables you to share projects, challenges and learnings and develop an understanding of why things are the way they are in different countries and markets.
It is also critical to understand and appreciate culture in different places. When Australian practices seek opportunities and projects across different locations, Lorrimer says it is imperative to appreciate the nuances and subtleties about doing business in different cultures. These include how to behave in client meetings, how much to push and how much to listen and challenge, and who needs to be in the room for the status and level of others in the room. Even the language you use, in some cases, will vary according to seniority of the person being addressed.
In terms of smaller practices, Lorrimer says many principals set up shop with a dream of being a designer but are forced to spend large amounts of time on issues other than design, such as finance and HR.
Furthermore, smaller practices with fewer resources have difficulty in keeping their practices evolving along with technology. In the case of DWP, Lorrimer says the firm has derived significant benefits by doing away with servers and moving their entire operation from a technology standpoint into the cloud. Merging, she says, provides an opportunity to have people within the organisation who are tasked to drive the practice forward.
Finally, a difficult phenomenon for many principals of smaller firms comes when they retire, having put decades of work into building and running their practice. When this happens, Lorrimer says, many firms find the sale value of their firm in the marketplace is limited as much of their practice’s value and goodwill is tied to themselves and their own relationships. This leaves many with a sobering prospect of simply turning out the lights after years of hard work.
For many approaching this phase, she says a better option might be to merge now.
Peake says there are several barriers to mergers within the design profession. With many architects being independently minded, they often do not want to lose control and wish to hold on to client relationships and design decisions. In addition, awareness within the sector about not only M&As but also business and practice management issues more broadly is lacking, he said.
Australia’s design sector has many small businesses.
To deliver on their potential, it appears that many might be better off joining forces.