27 Dec Unionization Isn’t All It Appears
Hugh Hochberg, December 27, 2021
The recent news that the employees of a firm whose work has been highly respected since the firm’s formation 25 years ago voted to unionize may appear to be an issue of employees versus management. A deeper dig indicates that there is more to the story. This article is not about that firm (SHoP), its leadership, management, or staff. It is an article about two separate factors that have contributed to widespread employee dissatisfaction in architecture firms: quality of leadership and architects’ willingness to undervalue their work by accepting embarrassingly low fees.
Start with the obvious: Employees in architecture firms, particularly in low- and mid-level positions, are underpaid relative to their education (and expense thereof) and the responsibilities they accept in their roles. Compensation has risen in recent years, including during the ongoing pandemic and fueled by increases in backlogs and firms competing for talent, with demand greater than supply. Simply economics tells us that increased demand elevates price, in this case, the price of talent.
Architects have demonstrated and amazing willingness to prove wrong the concept of supply and demand.
As will be noted below, when it comes to compensation from clients, architects have demonstrated an amazing willingness to prove wrong the concept of supply and demand. They do this by accepting low fees even as the demand for architecture services is increasing. As evidence, many firms note that their billing rates do not cover the cost of labor and overhead, plus a reasonable profit, particularly on fees for time-based contracts.
Further adding to employee dissatisfaction in architecture is that peer level talent in other fields is higher when education and experience are compared. Adding to the compensation concerns is the notion “we do this because we love it…irrespective of the uncompensated time we spend”.
The longstanding aspirational, and romantic notion that the practice of architecture draws on the love, passion, commitment, and talent of people aspiring to enter the profession doesn’t cut it anymore. In today’s world and today’s economy, a different reality prevails: You can’t afford to love if you can’t afford to live.
The underlying cause of dissatisfaction that encourages unionization clearly falls on the shoulders of the profession and those who lead or manage architecture firms. In July 1990, the United States Department of Justice (DOJ) filed a consent decree about price collusion to which the AIA agreed. The AIA at the time had about 54,000 members (which has grown to 95,000 today). All were bound to the decree with the result that since 1990 architects are more likely to strive for lower fees than their competitors. Apparently winning the project is more important than delivering it successfully for the client and for the firm. Firms that make a habit of taking work at marginal fees more frequently produce safe work that isn’t likely to reflect innovation and exploration. Analogically, a prospective buyer of a Chevy Tahoe SUV at $50,000 (which is a fine vehicle) is not likely to give serious consideration to a more innovative Bentley Bentayga SUV, priced upwards of $160,000.
For decades until 1990, architects had fee schedules that listed fees by project type, project size, project scope, and other factors. DOJ declared these fee schedules to be collusion in violation of the Sherman Act. That the AIA agreed so readily at the time was not in the best interest of the profession and now, thirty-one years later, the profession still suffers. (That said, however, fee schedules haven’t really gone away. As one example, look at the State of Michigan fee schedule published by the state government in 2003, thirteen years after the decree.) While there were and are numerous professions and business categories that DOJ could have attacked, it is likely that it saw architects as low hanging fruit that would succumb quickly to DOJ pressure. The outcome proved DOJ to have been correct.
Data shows profitability in architecture firms averaged single digits (with profitability for purposes here defined as profit before bonuses, retirement plan contributions, and taxes) until the late ‘70s, when concern for profitability that would allow discretionary investment in firms coincided with the increasing use of technological tools. Prior to that time, owners in many firms considered financially breaking even to be adequate.
When those same owners tried to sell their firms to employees to fund their retirement, they were rudely awakened when many ownership candidates resisted the price, and for good reason: If the current leaders weren’t able to make enough compensation to fund their retirement while they were leading their firms, their potential successors were smart enough not to be confident that that could elevate profitability high enough to fund their predecessors’ retirement, enjoy adequate compensate themselves, and fund their own retirement. This led to affordable pricing for internal transitions, with “affordability” dictated by purchase price being covered by buyers’ increase in compensation that would be adequate to fund the acquisition.
Add to the problem with funding of ownership transition was (and is) the need to have strong enough financial performance to invest in technology, training, and business development while also funding strong bonus programs and staff retirement plans. And therein is the financial heart of the unionization drive.
Better project planning, better overhead control, and stronger talent (that is more capable, better trained, and more enthusiastic about the work) contribute to success at multiple levels (design quality, technical quality, organization culture, and profitability). However, the easiest and most effective way to increase profitability is to increase fees relative to the effort expended.
Lowering fees as a general strategy is sheer lunacy, not only because of the loss the firm would incur, but also because the market remembers lower prices far better than it remembers higher prices.
It is oxymoronic that architects responsible for proposing and negotiating fees complain about clients’ pressure to lower fees, while at the same time readily agreeing to such fees. An unfortunately not-to-extreme example was four firms competing for a multifamily housing project a few years ago. All agreed that a reasonable fee would be approximately 6% of construction cost, yet the highest fee that any proposed was 4% and the firm that “won” – in reality, lost big time – proposed a fee of 2%. Lowering fees as a general strategy is sheer lunacy, not only because of the loss the firm would incur, but also because the market remembers lower prices far better than it remembers higher prices. Architects of such mentality have sealed their fate over and over, which brings us back to the lure of unionization.
Architects collude downward and are chagrined when they accept work at fees that they know won’t allow success on all measures, with the one most likely to suffer most being profitability. And it is the staff of those firms who bear the brunt of marginal profitability. If today’s owners want to avoid pressure toward unionization, they need to recognize the value of what they do and not accept fees from clients who don’t recognize that value.
Interestingly, contrary to the myth that a client needs to choose two of three – speed, quality, and price – are firms that provide all three. Much of the work of these firms is widely admired, and the firms often enjoy profitability that far exceeds industry norms, at times over 45%. This confirms that the myth is in fact a myth…and a self-fulfilling prophecy for firms that believe it.
Returning to the topic of “employees versus management”, I opine, based on empirical data, that the most successful firms (by multiple measures) are the ones that find how to have the least amount of management relative to the size and complexity of the firm. In this context, management and leadership are not the same. Management is getting the right people in the right place at the right time doing things in the right way with the right tools and systems. Leadership is defining vision and goals and enthusing people to go there.
It is a truism that good management complements good leadership, while excessive management covers leadership inadequacies. Hence, a firm with strong leadership needs less management. From a financial perspective, excessive management increases overhead expenses, so it is not surprising that firms that pride themselves on the strength of their management in response to inadequate leadership (although such firms are unlikely to recognize or admit the reality) achieve and maintain moderate but not outstanding profitability. And some of those same firms are breeding grounds for dissatisfaction that leads to unionization. There isn’t unionization precedent in architecture to know its effect on such things as collaboration, although we know that people collaborate better with people they know better and like better, and they collaborate less effectively with people with whom they have fundamental philosophical differences. It would be interesting to know how various categories of people voted – which of course we can’t know due, appropriately, to secret ballots – but it is reasonable to think that more entrepreneurial types and more creative types voted against.
Effective leadership engages with and supports people in the organization, strives to help people advance their careers, assure they have a healthy and not oppressive work environment, and refuses to accept clients who undervalue the firm’s work. Certainly, employee concerns warrant serious recognition in the unionization conversation, but without addressing the larger and rarely stated concerns about leadership and fees, the profession should expect more efforts to unionize. We have worked with firms to achieve these ends, and staff in these firms experience less discontent – because they have more opportunities and are fairly compensated for the value of their contribution – and are able to focus their efforts on advancing their careers, improving their firms, and elevating the quality of their projects.
© Hugh Hochberg, 2021
The Coxe Group Inc.