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    the future of profit per partner...

    Gregory Walker Oct 14 '12 6

     

    if you've lasted 4 or 5 years in this profession, you know that entry level wages for architects aren't the highest among the 'learned' professionals. constantly bemoaned, it's a murky subject, shrouded in a lot of secrecy, and fueled by fierce competition in the marketplace. it's the root of a lot of mistrust between firm owners/partners and their staff it's also the result, in part, of a shift in how professional staff are thought of: once we had 'the architect' and less skilled drafting labor. now... a lot of professional staff act as the drafting labor at many firms.

     

    generating answers isn't easy and today's post isn't going to attempt such an unified answer. instead, we're going to quickly highlight where a firm owner or partner may be coming from in this equation, by examining one of the more important factors motivating them. 

     

    a few weeks ago, the nytimes ran a great though largely unnoticed article in their legal blog which chronicles the woes of partners in law firms relative to billings and a statistic that measures "Profit per Partner" (or PPP). in short, PPP is the amount of profit each partner generates for a firm. it's a benchmark in their industry to help determine the best performing practices. 

     

    PPP, as the article notes, is important as well because for any services firm, the return on partner equity (yes, we all put something in at some point) is a really important consideration. firms, largely, aren't run just to become a jobs engine and profit center for everyone else (beyond the partners) in the equation. it's fundamentally an investment by the owners and should make a reasonable return to them for the time and liability involved. 

     

    for the last few years, as the recent aia firm survey indicates, profits have been falling for the profession as a whole. everyone has been hurt by this and most owners/partners in these firms have certainly taken their hits and lumps. accordingly, there's an even greater pressure, then, to find ways to help minimize the impacts of the downturn and to increase the profitability of firms.  (we'll tackle why this is so important another day. for now, think about it in these terms: a firm owner may certainly be in business for a lot of complex reasons besides raw earnings, but if you can't support yourself at a desired income level or you're not able to generate enough profit relative to what your other opportunities may be (as, say, an owner's rep at a university), it's something that's going to cause a re-evaluation of just why you're doing what you're doing at some point.)

     

    here's where the article focuses: what is the profession (law in this case, which is relevant since they large bill on per-project or hourly basis) doing to respond to a similar crises. personally, i found the following passage on possible avenues to increase revenue to be the most illuminating:

     

    "Michael H. Trotter, a partner at Taylor English Duma in Atlanta, says in his book “Declining Prospects” that there are only a few ways to increase profit per partner. One way is for firms to “charge their clients more for what they do”; another is for them to “do more work for their clients by working more hours or using more lawyers”; a third is to acquire more clients; and the last option is for firms to “reduce their overhead by paying less rent, restraining the compensation of their lawyer-employees and other personnel.”" (emphasis mine)

     

    'restrain' the compensation of everyone other than the partner. ouch if you're just a "lowly" project architect. 

     

    really, though, this isn't hard to figure out or understand. but it's running up against a 'contractor marketplace' that's going to make that type of constraint increasingly harder to keep (and yes, an oversupply of professional help right now will swing the needle the other way, but that will balance out at some point in the not so distant future). and there's really no mandate that you have to use the third option as a way of increasing the return on equity. you could always figure out how to charge more by figuring out how to create better value for better clients. but, it's an exceptionally easy option and one almost entirely within your own control.

     

    what i'd really like the aia to do is expand their annual salary surveys to do an in depth analysis across multiple firms, analyzing the data from each to help answer some of these issues and questions. how much are shareholders of different sized firms really seeing as the PPP? what are typical overhead ratios? and the thornier question: how are we really defining our 'value' to our clients? it's a worthy place to start...

     

     
    • 6 Comments

    • aphorismal
      Oct 15, 12 1:33 am

      I'd just like to say that I always enjoy reading your thoughtful analysis.  Keep up the great work!

      Gregory WalkerGregory Walker
      Oct 15, 12 11:05 am

      thanks - this subject deserves a lot more thought than i'm giving it here...

      dp10
      Oct 15, 12 2:27 pm

      Great series! The only way architecture can save itself as a profession is if we understand our role in the greater economic framework of the construction industry.

      And the keyword is indeed value. Considering the substantial complexity of construction (buildings really are in many ways prototypes), there clearly is a wide range of opportunities for our profession to add value to an architectural venture, including in the increased performance of buildings as well as the efficiency of the construction process.

      Sadly, the real estate market, to which we ultimately cater, is not structured in a way to appreciate the kind of performance-oriented value largely because it is instead streamlined for considerations of financial markets.

      sykesarch
      Oct 16, 12 9:25 am

      I am actually curious how the profits per partner dynamic shifts in the coming years due to two factors; 1) more architects are working at large firms and 2) more of these firms are being structured (or re-structured) as ESOP's (employee stock ownership plan).

      vado retro
      Nov 26, 12 5:04 pm

      . Stop me if you've heard this before. Along the lines of Architemps, has anyone bothered to start an agency that provides kick ass efficient and professional production services to design architects. For example, let's say I am a genius designer and can get work, but I don't want to employ people and pay benefits and insurance and pay for computers and lights and toilet paper. Is there a firm out there that can provide me the production services at a great price that will allow me to stay out of the trenches occupied by the doughboys of production drawing. That way I can do genius design, where Italian suits and drive big black german sedans and build my client base.

      boy in a well
      Nov 27, 12 12:46 am

      thats what the intern union will be for, if the kids can get it together without eating each other first.

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Central to the blog is a long running interest in how we construct practices that enable and promote the kind of work we are all most interested in. From how firms are run, structured, and constructed, the main focus will be on exploring, expanding and demystifying how firms operate. I’ll be interviewing different practices – from startups to nationally recognized firms, bringing to print at least one a month. Our focus will be connecting Archinect readers with the business of practice.

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