In the current economic climate, many architect and engineering firms are eager to explore new business opportunities. Some expand their range of services and/or project types to existing clients. Others capitalize on their market reputation to add new clients in familiar settings. Still others look to expand into new territories both here and abroad. Of the three, geographic expansion carries the most risk.
Challenges in Geographic Expansion
Successful firms have deep local knowledge and connections. They know their local economy, business practices, politics, regulatory environment and competitors. They’re prominent members of the communities they serve. Once outside their territorial comfort zones, it’s a whole new ballgame.
When factored into the planning process, the technical aspects of the expansion can be addressed with relative ease. Local specialists can provide the requisite expertise to ensure that the firm’s designs, plans and specifications adhere to local building codes and ordinances. It’s the people side of the equation that can get messy.
Outside firms may not have the benefit of experience with local contracting agencies, developers or sub consultants. Nor would they necessarily have established processes to ensure a smooth working relationship with them and how to address issues as they arise. They also lack a shared history of mutually beneficial work that establishes trust or that motivates walking the extra mile when the situation demands it.
The firm’s internal resources may find themselves stretched thin to accommodate the expansion. Seasoned employees may be asked to take temporary assignments away from home to manage the local expansion while instituting the firm’s culture and business practices in the new environment. Remote employees may find themselves working extra hours to establish new business relationships and build the operating infrastructure to support the remote work teams.
If the planned expansion extends beyond the U.S. borders, all of the foregoing challenges become all the more acute. Navigating time zones, language barriers and currency exchange adds further risk.
And yet, where there’s a will and a clear profit potential, there’s a way.
Strategies to Mitigate Risk
Conduct Due Diligence
Take stock of all the factors that have influenced your success in familiar markets: economic and political trends, client behaviors and buying habits, competitive forces, workforce dynamics and the regulatory environment. If operating outside the U.S., consider regional stability as well as in-country rules regarding foreign investment, taxation, and restrictions or penalties associated with transferring profits to the U.S. Fill knowledge gaps with local experts. In other words, look before you leap!
Make Provisions for Staffing
Identify the people who will serve as the leadership team for the new business venture. If they will be expected to relocate temporarily or permanently, establish appropriate policies for compensation and expenses that can be leveraged in future engagements. Also consider how you’ll fill their current roles and responsibilities.
Know Your Cost Structure
Develop your loaded labor rates to ensure the new office overhead is properly covered, while providing for a reasonable amount for home office overhead allocation. Engage your procurement team to explore options for providing necessary materials and equipment. Warning: costs may differ widely by location! Discuss coverage and rates with insurance companies that operate in the target area. If operating outside the U.S., investigate currency conversion rates. Make sure your development team understands how these inputs affect the proposal process.
Consider Options for Market Entry
Look for ways to put your toe in the water and gain experience in the new territory before committing to a permanent presence. A business development team could spend time investigating the market and its potential before committing resources to enter it. A temporary assignment for seasoned employees could provide an income stream while building expertise in the local market. A joint venture with a reputable partner might make sense if you share a common framework with respect to workforce management, quality and risk.
Bring your current employees up to speed on your plans and the rationale behind your decisions. Be open to their feedback. It may save you time and money downstream! Let them know how the extra demands placed upon them contribute to a long-term vision in which they can reap their due measure of reward and job satisfaction.
Business expansion is the natural outgrowth of a successful firm, whether it includes adding new clients, expanding services to existing clients or entering new markets. With an appropriate amount of planning and discernment, it can elevate the firm’s market presence, reputation and financial strength to the benefit of its owners, employees, clients and communities it serves.
Meet the Author
Director, Architecture and Engineering Services
Diana Strassmaier, CPA, CCIFP®
Aldrich CPAs + Advisors LLP
Diana joined the firm in 2018 with almost two decades of experience serving members of various industries including construction, engineering and architecture, manufacturing and distribution, and government contracting. An expert on conducting overhead audits, Diana works closely with government contracting industry clients to offer clarity on how overhead rates work and help them maximize compensation.…
- Indirect cost rate (overhead) audits and consulting
- Financial audits, reviews and compilations
- Business and personal tax planning and preparation
- Certified QuickBooks ProAdvisor
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