April 29, 2010

1. Shaping the Future of Architecture in Minnesota April 29, 2010

2. Carlson Consulting Enterprise Team • Aravind Gottemukkula, Team Lead • 2nd year MBA, emphasis in strategy and operations. • Aravind has seven years of experience in engineering consulting. He is interested in working in management consulting focusing on strategy and operations. • Doug Everling, Team Member • 2nd year MBA, emphasis in general management. • Doug has seven years of experience in financial services and founded a light manufacturing and distribution company dealing with sustainable home products. He also served as president of the Carlson MBA Association during the last year. Doug is looking forward to a career in business development or management consulting. • Matthew Nelson, Team Member • 2nd year MBA/JD, emphasis in finance • Prior to coming to the University of Minnesota, Matthew served in the military and worked as a software engineer.  Matthew is looking forward to a career in management consulting. • Mitch Krautkramer, Team Member • Junior, emphasis in strategy and operations • Mitch currently serves as the President of the Entrepreneurship Club.  He is interested in pursuing a career in consulting or accounting. • Darick Leach, Team Member • Junior, emphasis in finance and management information systems. • Darick was a business owner for four years before enlisting and serving seven years in the U.S. Marine Corps. Almost all of his work experience is in some form of project management. After graduation Darick desires to pursue a career in management consulting.

3. Agenda 5) What can AIA-MN do to foster the recovery of the architectural services industry in MN? 2) How has the landscape of the architectural services industry changed? 3) How have the players in the value chain changed and how has this affected architects? 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? 1) What is the current state of the architectural services industry in MN?

4. Executive Summary • 5) What can AIA-MN • do to foster the recovery of the • architectural services industry in MN? • Redefine the services that architects currently offer. • Identify opportunities for additional service offerings. • Provide training and certification when appropriate. • 2) How has the landscape of the architectural services industry changed? • Architects used to control most aspects of the building process and therefore captured more of the overall value being created. • Several trends have combined to pressure and reduce the role of the architect. • 3) How have the players in the value chain changed and how has this affected architects? • Niche players now specialize in specific tasks within the building construction process, which were controlled by architects, for example: • Program Manager • Code Consultant • 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? • Other industries (print media, accounting, human resources) have dealt with issues similar to those facing architecture. • Functional Specialization • Technology • Reduced perception of value • 1) What is the current state of the architectural services industry in MN? • Architectural services industry growth is heavily dependent on general economic activity and the availability of capital, both of which were negatively affected by the recent recession. • Recovery within the architectural services industry will coincide with general economic recovery, and is anticipated to begin in 2011. However, opportunities remain to expand the value provided by architects.

5. Project Approach Extensive research was conducted, including expert interviews, primary quantitative research, and industry analysis. The team identified issues and developed preliminary ideas for recovery strategies. Jan 29 (Kick-off Meeting) Mar 8 (Mid-point Presentation) Apr 29 (Final Presentation) Fall 2010 (AIA-MN Recovery Plan) AIA-MN Follow-Through Carlson Project Review macroeconomic trends Interview industry experts across value chain Synthesize findings Survey architects, contractors, and owners Seek feedback from AIA-MN members Review of similar, but unrelated industries Evaluate preliminary ideas and develop additional ideas Develop preliminary ideas for recovery strategies Estimate the impact of strategic alternatives Identify next steps for AIA-MN Develop and distribute a recovery plan for AIA-MN

6. Expert Interviews To develop our understanding of the building construction process, we interviewed a broad range of owners/developers, architects, and contractors.

7. Surveys for Architects, Contractors, and Owners To quantify key elements that affected the building construction process, we initiated surveys of architects, contractors, and owners/developers.

8. Agenda 5) What can AIA-MN do to foster the recovery of the architectural services industry in MN? 2) How has the landscape of the architectural services industry changed? 3) How have the players in the value chain changed and how has this affected architects? 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? 1) What is the current state of the architectural services industry in MN?

9. General Economic Trends Architectural services industry growth is heavily dependent on general economic activity and the availability of capital. GDP and Real Estate Loans Change in GDP and Real Estate Loans 4.85% 5.84% • In 2009, GDP growth was negative for the first time in over 70 years • Interest rates are at 30 year lows • Both GDP and real estate loans outstanding have deteriorated over the past several years • U.S. banks posted sharpest decline in lending since 1942 Source: US Census, The Wall Street Journal

10. Industry Segments Architectural services industry revenue is primarily composed of three sectors: Institutional, Commercial/Industrial, and Residential. • Commercial/Industrial • Office buildings (12.5% of overall revenue) • Retail stores (6.5% of overall revenue) • Renovations and expansions of all the above • Residential • Single-family housing (12.5% of overall revenue) • Multi-family housing • Renovations and expansions of all the above • Institutional • Education (20% of overall revenue) • Health Care (10% of overall revenue) • Cultural • Recreational • Transportation • Other • Historic restoration projects • Expert witness services • Interior design • Urban planning services • Construction and project management services Total Revenue $42.25 billion Source: IBIS

11. Construction Trends Residential and Commercial/Industrial construction is expected to return to normal growth, with Institutional showing slight increases. Construction Revenue by Sector Percentage of Construction Revenue by Sector • Commercial/Industrial has maintained its relative percentage of the overall construction market • Institutional has grown its relative percentage of the overall construction market • Residential has seen significant shifts in its percentage of the overall construction market Source: IBIS, Minnesota Department of Employment and Economic Development, AIA MN Recovery Task Force

12. Construction Outlook The construction industry will experience slight growth in 2010 and continue to grow slowly in the following years. ↓ 8% ↑ 1% ↑ 4% ↓ 9% ↑ 9% ↑ 4% ↓ 6% US GDP 4.9 % MN GDP 4.4 % • Office and health care construction grew 15% and 8.5% respectively per year from 2005-2007 • Construction industry is expected to have cyclical growth matching US GDP • Average growth in value of total construction through 2014 is projected to increase 4.1% annually • Non-residential building construction is projected to grow at 0.7% per year until 2014 Source: IBIS, Minnesota Department of Employment and Economic Development

13. Architectural Services Outlook The architectural services industry is expected to begin recovery in 2011. ↑ 2% 0% ↓ 4% ↓ 2% ↑ 1% ↑ 2% ↑ 4% ↓ 2% ↓ 1% ↑ 4% MN GDP 4.4 % US GDP 4.2 % • Revenue climbed by 6.9% in 2005, 5.7% in 2006, and 11.2% in 2007 to reach a total of $44.7 billion • Demand for services projected to gradually strengthen as cyclical growth begins in downstream markets • The architecture industry is expected to grow 2.4% per year until 2014, matching the US GDP • 25% of Minnesota architects think adding value and lowering fees will allow them to remain competitive over the next three years Source: IBIS, Minnesota Department of Employment and Economic Development, AIA MN Recovery Task Force

14. Agenda 5) What can AIA-MN do to foster the recovery of the architectural services industry in MN? 2) How has the landscape of the architectural services industry changed? 3) How have the players in the value chain changed and how has this affected architects? 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? 1) What is the current state of the architectural services industry in MN?

15. Value Chain, Roles, and Responsibilities: Once Upon a Time… Architects used to control most aspects of the build process including serving as owner’s representative, key decision maker for all downstream changes, and overseer of construction. *Consultants include engineers for mechanical, electrical, plumbing, structural, and civil. Source: Interviews with real estate developers, architects, and contractors; Carlson Consulting Enterprise

16. What Has Changed? Several issues have combined to pressure the role of the architect. These are reducing the influence of the architect in the overall construction process. Five Major Issues

17. Value Chain, Roles, and Responsibilities: Program Managers Architects currently control fewer aspects of the build process, many of which are now owned by Program Managers. As a result, architects are capturing less potential revenue from the process. *Consultants include engineers for mechanical, electrical, plumbing, structural, and civil. Source: Interviews with real estate developers, architects, and contractors; Carlson Consulting Enterprise

18. Value Chain, Roles, and Responsibilities: Design-Build Firms Design-Build Firms are playing a more prominent role, which has deemphasized the architect’s role and distanced the architect from the centralized decision makers. Design-Build Firm *Consultants include engineers for mechanical, electrical, plumbing, structural, and civil. Source: Interviews with real estate developers, architects, and contractors; Carlson Consulting Enterprise

19. Survey Design Overview Surveys for architects, contractors, and owners/developers focused on understanding architects’ services and how they are perceived by other players. Fairness of fees received by architects Value Value provided by each participant in the building construction process Education received in each of the key service areas provided Preparedness Qualification of architects to provide each service Gaps in education/qualifications and services provided and those perceived as important in the future Services Provided Frequency with which each service is provided Services provided and those perceived as important in the future

20. Respondent Demographics - Architect Survey respondents represent employers of all sizes and architects working in all major segments. • Number of people working at respondent’s current employer • Percentage of work done in each segment Total responses: 357 Total responses: 369 Note: 20% is a strong response rate Source: Survey for AIA Members, Carlson Consulting Enterprise

21. Architects’ Fees and Value Provided By Each Player Most architects believe they add the most value in the building process, and that their fees are unfair. Do you believe the fees you are receiving are fair? (fair here means appropriate for the value that architects add to the building construction process) How much value does each participant in the building construction process add to the overall end product? Very Fair Neutral Not Fair At All Total responses: 480 Total Responses: 474 Source: Survey for AIA Members, Carlson Consulting Enterprise

22. Gap Between Fees and Value Added Architects believe they add high value to the construction process but think they are receiving disproportionately low fees. Fairness of Fees Value Added Average 2.42 Average 4.88 1 2 3 4 5 Neutral Some value Very fair High value Not fair at all No value Potential reasons for gap • Architects believe they add more value than reality • Other players do not fully realize the importance of an architect • Other players may be trying to squeeze lower fees out of the architect • Architects may be trying to be paid higher for the value they add to the project Source: Survey for AIA Members, Carlson Consulting Enterprise

23. Contractors and Owners Initial survey results and interviews of owners and contractors reveals architects are adding value to the project and are charging fair fees. How do these different perspectives affect working relationships and the quality of the end product? Based on limited data: *Complete survey results needed for further analysis*

24. Comparing Supply and Demand For Services We asked architects to assess their preparedness and the demand for a range of architectural services. Very Optimal Optimal Frequently Are architects prepared to meet the demands of the clients? Are architects prepared to meet the demands of the future? Future Importance Service Provided Not At All Not At All Qualified Not Prepared Education Not At All Very Prepared Very Source: Survey for AIA Members, Carlson Consulting Enterprise

25. Gap Between Services and Education Architects feel underprepared to provide many of the services that are currently demanded by their clients. Frequently Building Codes Frequently Optimal Construction Admin. Program Mgmt. Planning/Zoning Approval Interior Design Service Provided Service Provided Green/LEED Lighting Optimal Cost Estimating Feasibility Studies Furniture, Fixtures, & Equipment Energy Analysis Not At All Strategic Planning Acoustics Not At All Signage Standards Not Prepared Education Prepared Urban Design Post Occupancy Evaluation Financial Analysis Education Not Prepared Prepared Total responses: 370 Source: Survey for AIA Members, Carlson Consulting Enterprise

26. Gap Between Services and Education Significant gaps exist between provided services and education in certain financial, management, and technical service areas. • Building Codes is the most common technical service offered, and just over 50% of respondents said their education didn’t somewhat prepare them for this service • Cost Estimating is the most common financial service offered, but almost 80% of respondents said their education didn’t somewhat prepare them for this service (but most feel qualified for the future) • Construction Administration is the most common management service offered, but almost 70% of respondents said their education didn’t somewhat prepare them for this service Select Services’ Level of Preparedness Due to Education (Technical, Financial, and Management services) Percentage of Responses Total responses: 370 Services selected are the two from each category with the largest gap between education score and level of service provided Source: Survey for AIA Members, Carlson Consulting Enterprise

27. Gap Between Qualifications and Future Architects generally feel prepared for the challenges of the future, but there are some opportunities for additional training. Very Very Energy Analysis Optimal Strategic Planning Cost Estimating Financial Analysis Future Importance Future Importance Post-Occupancy Evaluation Lighting Urban Design Acoustics FFE Optimal Landscape Architecture Not At All Not At All Asset/Facilities Management Signage Standards Not At All Qualified Very Qualified Not At All Very Total responses for future services: 351 Total responses for qualification questions: 363 Source: Survey for AIA Members, Carlson Consulting Enterprise

28. Gap Between Qualifications and Future Architects generally feel prepared for the challenges of the future, but there are some opportunities for additional training. Qualification to Provide Select Services (Technical, Financial, and Management services) • Most architects feel qualified to perform program/project management, with almost 50% stating that they are very qualified • Financial Analysis showed the biggest disparity between future importance and qualifications-almost 60% don’t feel even somewhat qualified in this service • Both Energy Analysis and Green/LEED showed large disparities between the importance to the future and present qualifications, even though a majority of respondents thought they were qualified in this service Percentage of Responses Total responses for future services: 351 Total responses for qualification questions: 363 Services selected are the two from each category with the largest gap between qualified v. future importance scores Source: Survey for AIA Members, Carlson Consulting Enterprise

29. Further Analysis With Contractors and Owners Completing the contractor and owner surveys will help answer whether architects are meeting the needs of key partners and customers. • Key Questions: • What services do contractors believe architects provide effectively, and how does this compare with what architects think? • What attributes do contractors believe architects provide effectively, and how does this compare with what is important to contractors? Contractor Survey 440 recipients, 11 responses • Key Questions: • What attributes do owners believe architects provide effectively, and how does this compare with what architects think? • What services do owners look for architects to provide, and how does this compare to what architects think is important? • What attributes do owners believe architects are effective at, and how does this compare with what is important to owners? Owner Survey Not sent as of this time

30. Agenda 5) What can AIA-MN do to foster the recovery of the architectural services industry in MN? 2) How has the landscape of the architectural services industry changed? 3) How have the players in the value chain changed and how has this affected architects? 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? 1) What is the current state of the architectural services industry in MN?

31. Research of Other Industries Print media, human resources, and accounting are industries that have been affected by similar changes as architecture and offer valuable lessons learned. Rationale for Selection Chosen Industry • Technology caused shift in the way services are delivered • Core services being co-opted by increased competition Print Media • Increased efficiency due to technological advances • Importance of licensing/regulatory certification Accounting • Trend towards functional specialization • Commoditization of lesser value added activities • Outsourcing Human Resources

32. Lessons Learned From Print Media Companies that viewed the internet as a growth opportunity and transformed their business models survived, while companies that viewed the internet as a competitor suffered. • The internet boom of the late 1990’s has opened up a new and easily accessible channel for delivering news, creating these two issues for traditional newspaper companies: • New online competitors (e.g. yahoo news, monster.com for job classifieds) • Reduced fees as advertisers and readers migrated online New business model used the internet as a way to deliver news faster, and advertise more effectively and efficiently. Prior to Response Outcome News delivered through print and online version of the print. Online advertising was essentially a copy of print advertising. Surviving companies found growth by utilizing a new business model that delivered up to the minute news on demand with targeted advertising to consumers. Source: Harvard Business Review’s “Reading Disruption’s Fine Print,” Clark Gilbert and John Ure, 2005.

33. Lessons Learned From Accounting Accountants have remained relevant because they exploited opportunities for expansion of services and have created meaningful certifications. • Evolving business and regulatory environment has forced accountants to look beyond providing traditional accounting services: • Technology squeezed basic accounting work • Businesses needed better ways to manage financial information Accountants took initiative to expand role of accounting and made certifications more accessible while maintaining standards. Prior to Response Outcome Basic accounting services were not providing the level of service required by customers and did not differentiate the accountant from a bookkeeper. Certified accountants became increasingly important to the business environment and have become a necessity for all public companies. Source: Terry Tranter, King, Thomas A, More Than a Numbers Game: A Brief History of Accounting, Hoboken, NJ: John Wiley & Sons, Inc., 2006

34. Lessons Learned From Human Resources Human Resources has evolved as an industry into functional specialties that are easily outsourced to specialty consultants. • As companies look for ways to reduce costs, HR activities that add less value became commoditized as specialty firms could provide services more cost effectively: • Emergence of payroll processing and executive recruitment firms • HR was forced to define and communicate its core value HR workers migrated to specialty firms (payroll processing, executive recruitment, etc…). Prior to Response Outcome HR specialties within a company that add less value are outsourced. Strategic elements (organizational design, etc…) are retained. HR workers moved to specialty firms that fulfill client needs within a given niche more cost effectively than the company could achieve on its own. Source: IBIS World, interview with Robert Vellella, Carlson School of Management.

35. Lessons Learned From Other Industries The strategies with the best outcomes integrated the ability to adapt while reinforcing the core value each industry provides. Primary Strategies Outcome Catalyst • Core activities remain that provide the most value • Activities that add less value become commoditized and are eventually outsourced Functional Specialization • Develop new business model • Reinforce the value of licensure and professional judgment • Industry becomes more efficient and productive Technology • Develop integrated marketing communications to reinforce the value being provided • Owners will have a better understanding of the value of an architect Reduced Perception of Value

36. Architects’ Core Competence: Two Sources of Value Other industries retain the sources of value that are most difficult to imitate. For architects, this value is provided through the form and function of a building. High Complexity Example: Landmarks Highly Specialized Aesthetically Focused Less Cost Sensitive Example: Museums Highly Specialized Less Cost Sensitive High Visibility Form • Example: Strip Malls, Multi-Unit Housing Standardized • Highly Cost Sensitive • Low Visibility Example: Hospital, Specialized Factory Functionally Focused Highly Specialized Moderate Visibility Function

37. Agenda 5) What can AIA-MN do to foster the recovery of the architectural services industry in MN? 2) How has the landscape of the architectural services industry changed? 3) How have the players in the value chain changed and how has this affected architects? 4) What can we learn from the way other industries have responded to discontinuities that have reshaped their landscapes? 1) What is the current state of the architectural services industry in MN?

38. Where Do AIA-MN Firms Go From Here? Architects will have to employ several strategies to recover from the recent recession. • Redefine services offered • and/or grow industry • Recapture roles • Enter new markets • Exploit new trends • Govt. lobbying Ensure adequate labor capacity to meet demand as economy rebounds • Permanently lost • Find new industries • Leverage skill sets Jobs that will be recovered within architectural services industry Jobs recovered in other industries Recovery Strategies Architects in Minnesota Currently employed Laid off, unemployed, or underemployed Expected cyclical recovery Employment Gap

39. Business Expansion Opportunities exist for architects to redefine the services they are currently offering their customers. Opportunities to target new services and customers should be pursued once core operations are optimized. Prioritization • Strengthen the Core: Effectively communicate the value of current services to current customers • Expand Service Offerings: Develop and test new service offerings with current customer group • Pursue New Customers: Market current services to new potential customers • Market new proven service offerings to new customers New Customers New Customers New Services Core Services Current Current New Service Offerings

40. Defining the Core Opportunities to enhance core service offerings have the highest probability of success. As distance from the core increases, likelihood of success decreases. Core Framework Level Definition • Core Services: Services that architects are currently providing • Level 1: Services that architects may have done in the past or that architects are qualified and expected to provide Core Services 1 2 3 • Level 2: Services that architects have never previously offered or are less qualified to provide • Level 3: Services that are non-adjacent or non-existent in the current value chain

41. Preliminary Ideas – Strengthen the Core Strengthening the core services offered by architects is critical before expanding beyond the core. Improve customer orientation Improve relationships with collaborators Reduce gap between academy and practice

42. Preliminary Ideas – Beyond the Core Opportunities exist to offer services to new customers and to identify new service offerings that can be integrated into architects’ practices. Expand markets and improve public perception of architects Identify additional service offerings

43. Next Steps for AIA AIA will utilize preliminary ideas to formulate specific recovery strategies and communicate them to the AIA membership. • Seek feedback on issues identified and preliminary ideas from AIA-MN members • Task Force meeting on May 10 • Town hall meeting on May 17 • Evaluate preliminary ideas – types of questions to address in this process: • Do architects want to be program managers? • Could architects capture additional value by reclaiming program management or would it mean working more for the same fee? • What are the potential barriers to implementation for the various strategies? • Develop and distribute to members a strategic plan for recovery for the Architectural services industry in Minnesota • Repeat surveys every year to understand trends and to modify strategic plan to account for changes in the industry. • Include “Net Promoter Score” in future surveys to gauge customer satisfaction Source: Reicheld, Frederick F. “The One Number You Need To Grow”, Harvard Business Review.

44. Appendix: Sector Revenue Institutional Revenue (billions) Single-family Revenue (billions) Industrial Revenue (billions) Multi-family Revenue (billions) Commercial Revenue (billions) Source: IBIS.

45. Appendix: Task Definitions • Creative direction – dreaming/visioning a project and conveying the vision to the players in the building construction process. • Financial responsibility – responsibility of paying all players within the construction process and covering all material costs. • Owner’s agent – on owner’s behalf, “policing” the various players, making key decisions during the process, and authorization of bills for payment. • Schematic design – conceptual design that becomes the basis for the design team to complete detailed design • Detailed design – drawings completed by design team • Cost estimation – estimating construction costs based on detailed design and/or construction/bid documents. • Construction/bid documents – documents detailed enough for contractors to use in construction and are typically part of a bid packet. • Construction oversight – oversight to ensure that construction is completed per the design. • Construction– the actual, physical process of constructing the structure.

46. Appendix: Gap Between Services and Education • Not Prepared-Provide Service-11/23 • Cost Estimating (1.81, 3.36), FFE-Furniture, Fixtures, Equipment (1.96, 3.13), Construction Administration (2.13, 4.25), Green/LEED (2.24, 3.53), Planning/Zoning Approvals (2.23, 4.03), Energy Analysis (2.32, 3.03),Building Codes (2.44, 4.59), Feasibility Studies (2.60, 3.48), Program/Project Management (2.53, 4.11), Lighting (2.69, 3.49), Interior Design (2.82, 3.80) • Not Prepared-Don’t Provide Service-8/23 • Lease Administration (1.27, 1.45), Asset/Facility Management (1.34, 1.77), Financial Analysis (1.56, 2.54), Signage Standards (1.56, 2.71), Post-occupancy Evaluation (1.78, 2.58), Landscape Architecture (2.41, 2.40), Acoustics (2.50, 2.96), Strategic Planning (2.63, 2.95) • Prepared-Don’t Provide Service-1/23 • Urban Design (3.31, 2.56) • Prepared-Provide Service-3/23 • Site Selection (3.52, 3.32), Master Planning (3.61, 3.64), • Space Programming (3.83, 4.20) • Note: the first value is the average score for education, the second • is for frequency for which the service is provided

47. Appendix: Gap Between Qualifications and Future • Qualified-Not Important to the Future-1/23 • Signage Standards (3.03, 2.64) • Qualified-Important to the Future-16/23 • Cost Estimating (3.06, 4.24), Urban Design (3.07, 3.65), Lighting (3.18, 3.71), FFE-Furniture, Fixtures, Equipment (3.22, 3.46), Post-occupancy Evaluation (3.28, 3.64), Strategic Planning (3.29, 4.34), Green/LEED (3.62, 4.53), Interior Design (3.73, 3.99), Feasibility Studies (3.76, 4.57), Planning/Zoning Approvals (4.11, 4.37), Master Planning (4.13, 4.55), Site Selection 4.13, 4.26), Program/Project Management (4.21, 4.53), Construction Administration (4.26, 4.44), Building Codes (4.31, 4.60), Space Programming (4.51, 4.60) • Not Qualified-Important to the Future-4/23 • Financial Analysis (2.34, 4.12), Landscape Architecture (2.43, 3.15), • Acoustics (2.72, 3.50), Energy Analysis (2.83, 4.50) • Not Qualified-Not Important to the Future-2/23 • Lease Administration (1.65, 2.31), Asset/Facility Mgmt. (2.02, 2.79) • Note: the first value is the average score for level of qualification, the second is for the importance to the future

48. Appendix: Gap Between Importance and Effectiveness Very Very Survey In Progress Contractors Believe Effective Contractors Believe Effective Not At All Not At All Not Effective Architects Believe Effective Very Architects Believe Effective Not Effective Very

49. Appendix: Contractor Perception of Architect Effectiveness Very Very Survey In Progress Importance to Contractor Importance to Contractors Not At All Not At All Not Effective Effectiveness of Architects Very Effectiveness of Architects Not Effective Very

50. Appendix: Gap Between Importance and Effectiveness Very Very Owners Believe Effective Survey In Progress Owners Believe Effective Not At All Not At All Not Effective Architects Believe Effective Very Architects Believe Effective Not Effective Very