The design profession is constantly evolving and many firms are responding by adding innovative services to their scope and experimenting with alternate fee strategies commensurate with value delivered.
Responding to diverse client needs, designers are adding a broader range of differentiated services to existing design practices without totally reinventing their firms. In addition to basic services, such as drawings, specifications, and project administration, more firms are providing additional high value to clients through in-depth programming, including activity analysis, strategy services, financial/building modelling and diagnostics, productivity evaluations, sustainability expertise, brand development and integration, research, and more.
These services are not priced to compete in the “commoditized” market of space planning and CDs. Rather, these services generate solutions that enhance the quality of a client’s enterprise and well-being. As such, they deserve to be differentiated and priced in terms of the value and benefits they deliver.
But, what metrics define value in design?
A wide range of valuation metrics can be attributed to design that improves client enterprises. Benefits of good design include better communication; improved competitiveness; lower turnover; reduced absenteeism; improved image and brand awareness; higher sales; decreased risk; added customer satisfaction; enhanced operational effectiveness, learning, and productivity; improved health and well-being; and more effective performance on myriad scales.
Any one or a mix of these metrics may be important to a particular client. Some of these value metrics can be expressed in financial terms while others cannot. For example, the value of meeting the requirements of legislation and industry standards; improving community relations; securing intellectual property; and improving training, leadership succession and expertise all add value but are difficult to monetize. Notably, even Wall Street acknowledges the importance of non-financial value. An Ernst & Young investment study, among others, found that over one-third of the information used by institutional investors to make decisions about valuing a company’s stock is non-financial.
IDEAS ABOUT FEES
Metrics can be used as the basis for negotiating a value-based fee or other fee structures. Instead of defaulting to the familiarity of selling hours, forward-thinking firms are learning and using the language of value to distinguish innovative fee structures. The familiar hourly fee used by many firms often is based on staff experience and organizational hierarchy. The value a firm provides is equated with the number of hours clients are willing to buy. This is an economic business model developed more than 30 years ago and is more and more disconnected from the needs of today’s knowledge-based economy. At its core is the tenet: “Design is a time-based business and we sell hours.” The value proposition implied in this tenet can be summed up as “we will deliver professional services that are paid by the hour to provide solutions to a client’s design problems.” This model permeates the business of design and shapes the thinking and behavior of practitioners and managers. By contrast, innovative firms are using a value-based fee model to launch a project’s strategic developmental and consultative work as well as the familiar hourly fee model to bill for production-oriented work.
The reality is clients often expect more service for less money, and this pressures designers to reduce fees for increased scope. Viewed through another lens, clients may be averse to spending more simply because they don’t understand what they are really paying for. That’s why it’s so important to ask clients the question: “What are you trying to accomplish with this project and what is it worth to achieve your goal(s)?” The answer will lead to the defining conversation about the value the clieplaces on the solution and how the design firm can provide an engagement, including a fee structure, in terms the client can understand, using their own quantitative value metrics. What are the top priorities? Is it speed of project delivery? Is it leveraging investment in the design of the property to achieve a particular business result? Is it budget control, or a signature iconic design?
Helping clients to understand exactly what it will take to meet their valued goals will demystify the process. Designers can unpack fees on a phase-by-phase basis and define the tasks required to get results. In addition, putting parameters around the number of hours and options as well as the total length of the contract time the fees cover will offer clients a clear real-life picture of the scope of the project. At a minimum, designers should educate clients about their role in the decision-making process to link them directly to the cost and schedule.
The business and professional relationship with a client has to make sense for both sides, meaning that it has to deliver value to both. If value can’t be quantified to a client or if a service is not differentiated from what other firms offer, then, de facto, the commodity transaction focuses solely on cost. In other words, if the project need can be addressed by several firms, the job will go to the lowest-cost provider. To make work profitable in such circumstances, firms must concentrate on reducing their operation costs rather than negotiating higher fees, because value in this case lies in efficiency.
Such pricing arrangements are seldom profitable. What’s needed is a shift in thinking about fees. Newer pricing strategies generally move away from selling expertise by the hour and toward setting fees in relation to the benefit derived from the firm’s efforts. Firms are beginning to increase billing rates for higher-value services, establishing fixed fees or pricing structures comparable to consultants in those areas (e.g., strategic planning for facilities, real estate, infrastructure, process facilitation, etc.). Billing rates for strategic services can be up to 100 percent more than fees for basic design services.
A fixed fee can be structured and negotiated for entire projects or portions of the project. The key to a fixed-fee structure is defining meaningful benefits that will accrue to the client based on the firm’s expertise not on the basis of the tasks the firm will perform or the costs of tasks. For even the most traditional scope of services (e.g., design, drawings, project administration) a value-based pricing approach can be used. Value can be expressed in a variety of terms, including completing the project sooner, creating a space that has measurably lower operational costs and/or lower carbon footprint, and so on.
Another version of a value-based, innovative fee structure used by design firms and design/build contractors is the outcome-based fee. This fee approach applies a measure of performance risk to compensation. Examples of outcomes taken on by design firms include specific percentage increases in retail sales, improvements in office or housing leasing rates, or project completion within a specified time frame. With outcome-based fees, the opportunity for reward goes hand-in-hand with accountability. Notably, this method of billing is used by some commercial real estate project management firms with great success.
REFRAMING CLIENT RELATIONSHIPS AROUND VALUE
The relationship with clients will shift when design fee negotiations are reframed around the value delivered to a client’s enterprise and well-being. Pricing for design services can justly depart the commodity-like realm of per-square-foot cost and the basis of an hour’s worth of time.
In short, we must bring the same creative mindset to the operation of our firms and fee structures as we would to solve a design problem. The design firm that provides value-based service and innovative fee strategies demonstrates a differentiated vision and the ability to actively reframe its business and client relationships. Revenue is the lifeblood of design organizations, and fees deserve to be designed accordingly.
Lisa Henry, FASID, LEED AP, is a principal of the Greenway Group, which combines its industry knowledge and network with strategic business consulting to help design-based organizations thrive.