Calculating the Value of Intangibles

Over the years, architects have had an uphill battle when attempting to explain the worth of their services and the value of investing in design. However, two recent trends are conspiring to make these challenges less daunting. First, a growing number of design advocates, such as former Winnipeg mayor Glen Murray and Carnegie Mellon University’s Richard Florida, speak convincingly about the negative economic fallout from uninspired design. Second, accountants now view intangibles as having much more significance than is typically reflected by a minor entry on the balance sheet. Designers can take advantage of this seismic shift toward valuing intangible assets if they understand how to reframe their conversations with clients.

Intuitively, we know that varying levels of design quality will add or subtract from a client’s bottom line. But the means of proving the magnitude of intangible value have been elusive. For instance, what’s the dollars-and-cents difference between a well-planned, inspiring space and a boring box? What’s the bottom-line impact of an architect who foresees opportunities and prevents problems? What’s it worth to clients when a designer helps them articulate their planning options and priorities?

Thankfully, in the world of finance, there’s growing awareness that decision-makers can’t afford to misjudge the value of intangible assets. Today’s rule of thumb is that 80 percent of the value of any enterprise is intangible. This means that the things you can count precisely–or numbers you can “prove”–add up to only 20 percent of what matters in our knowledge-based economy.

Professional accounting associations such as CMA and CGA caution their members against focusing too narrowly on tangible business assets. Their continuing education conferences are now aimed at finance executives who want to think “Beyond Bean Counting” because there’s growing awareness that healthy profits are the result of astutely managed soft (approximate) numbers. Conventional wisdom today says that “It’s better to be approximately right than precisely wrong.” There is no surer way to be precisely wrong than to dismiss intangibles.

Conversely, if soft numbers are ignored, they will eat away at the bottom line. For example, a recent Cornell University study concluded that employees who come to work when they are ill have difficulty concentrating and therefore work more slowly, which costs employers an average of US$255 a year each. “Difficulty concentrating” is a significant soft cost, typically overlooked, that is destined to become a hard cost.

Once a soft cost is placed in the spotlight, it can be minimized or maximized, rather than treated as zero. With the right approach, architects can credibly explain how:

Badly planned commercial space will cause a business to suffer or fail

Hostile environments will increase the stress borne by patients, shoppers or travellers

Workplace profitability will decrease when inadequate space prevents people from doing their best work

All too often, architects back away from cost/benefit discussions. However, in the client’s eyes, good management practice involves challenging every cost to determine if funds are being well-spent. Ultimately, we must ensure that our clients don’t make bad business decisions by neglecting design quality. Here are some techniques to help clients assess their real costs in connection with your services:

Express design benefits in business terms. Avoid the use of vague academic references, e.g., “the interplay between structural elements.” Instead, highlight strategic business outcomes, e.g., “in line with your aim to reduce staff turnover.” The cost of replacing staff ranges from 25 percent of annual wages for a support person to 150 percent of salary for senior managers. As is the case with all intangibles, it is difficult to prove a direct cause and effect relationship between working environment and employee retention.

Do back-of-envelope calculations. For example, the Canadian Green Buildings Council cites life-cycle cost figures from the U.S. Secretary of Defense that indicate “productivity gains of only 3.7% can pay for all facility costs over a 30 year period.” CGBC also highlights the fact that salaries of building occupants average five times the combined cost of rent and operational costs. Improvements to the built environment that impact job performance are thus seen as more significant than merely squeezing people into a smaller space. Clients can make better bottom-line decisions when the hidden costs of decreased productivity are factored into the equation.

Help clients identify their “Say-Do Gap.” Few clients set out to be hypocritical, that is, they don’t intend to contradict their people-centred mission statement or strategic plan. The designer’s job is to ask questions that expose gaps between the message conveyed by a facility and its stated goals. For example, “Does this dark, jumbled entrance say ‘patient focused care’?” There is a cost associated with sending confused messages to potential fundraising donors or others who look for a consistent image they can trust. The architect can lead clients to discuss what that cost might be.

Think in terms of “value proposition.” When it comes to establishing fees for design services, much research indicates that most clients look at value for dollar rather than lowest fee. Only when the choice between firms appears equal, or when firms offer a difference that clients don’t care about, does the selection typically come down to fee alone.

Therefore, architects will benefit by realizing that the profession has traditionally worked backward when setting fees. By relying on standard fee schedules, the cost of doing the project, or some internal formula for establishing a fee, all of these conventions are architect-cost focused rather than client-value analysis focused. Such approaches to fee-setting all but ensure that clients will perceive design and planning services as a commodity.

Now that architects are expanding their service offerings in response to the business needs of clients, it’s time to shake up old lockstep fee structures. Begin by figuring how much money you will save the client, or the value of insight into the project’s opportunities you are capable of provoking amongst all participants. What is this savings or insight worth to a particular client?

For example, architects have always functioned as construction investment advisors, whether or not they specifically identified with this role. Since architects make recommendations as to how the client should spend the allotted budget, they can frame their value proposition around making the best return on every dollar invested by the client.

Bottom line: There’s no doubt that calculating the cost of intangibles requires renewed discipline. Explaining the value of things you can’t count will always be a challenge. But thanks to changes in the world of management and finance, return on investment for design quality is no longer a foreign concept. And efforts to establish the intangible worth of planning and design services will have more impact than in the past.

Sharon VanderKaay, Associate AIA, is Director of Communications at Murphy Hilgers Architects Inc. in Toronto.