AD&V London Business School Case Study

Tere Bruno

John Mullins

LBS Ref: CS-19-10

Date: June, 2019

Ricardo Álvarez-Díaz and Cristina Villalón (A)

Abstract

It was September 17th, 2008. After having spent the previous eight years building a thriving architectural practice in San Juan, Puerto Rico, Ricardo Álvarez-Díaz was worried. Two days earlier, the venerable investment bank Lehman Brothers, the fourth largest in the USA, had filed for bankruptcy protection. This morning, his two largest and most important clients had called (within one hour of one another!), cancelling projects that were already well underway. Newspaper headlines everywhere were screaming disaster. The global financial markets were in turmoil.

Álvarez-Díaz had just checked his accounts receivable and had learned that his firm was owed some $2.1 million by these and his other clients. A significant portion of that sum was, in turn, owed to the various professional service firms that worked on his projects. “I don’t want to be an architect anymore,” he said to himself. “I’m responsible for all these people. This profession does not afford me the financial freedom I crave.”

Tere Bruno is a Research Associate and John Mullins is Associate Professor of Management Practice at London Business School. London Business School cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some names and places and all financial data have been disguised.

© 2019 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written permission of London Business School.

Ricardo Álvarez-Díaz: Shaped by his heritage

Ricardo Álvarez-Díaz’s path into starting and building an architecture firm had been shaped by his Cuban-Dominican heritage and upbringing. Ricardo’s father, Ricky, came from a family of educators, writers and doctors and had been studying engineering in Massachusetts at the time Fidel Castro gained power in Cuba in 1959. Ricky’s family then owned property, land, several businesses, and had gathered enough wealth to last for generations. However, the family’s plans were interrupted by Castro’s revolution and, like many Cubans, their lives soon changed abruptly. After Cuba’s new government took all the family’s assets and the family were threatened for opposing Castro’s regime, the young Ricky joined his father in Mexico, Miami, and then Puerto Rico, to which the family had fled. They never were to see Cuba again. For months, they lived behind a hardware store where Ricky’s father Ricardo Sr. had found a job.

Ricky soon found a job driving a cement truck. One day he gave a friend a lift to an interview with an American department store chain that would soon be opening its first store in Puerto Rico. While he was waiting for his friend, he, too, was asked to interview. After months of working as a truck driver and having shared with his father unbearable accommodations, Sears, at the time one of the USA’s largest and most successful department store chains, hired him into an entry-level position. Ten years later, through his hard work, and despite little further education, he was appointed one of the vice-presidents of the company, the highest position available for locals in Sears Puerto Rico. In his new Puerto Rico homeland, the Cuban immigrant had come a long way.

In different circumstances but with similar results, Ricardo’s mother, Helen, had also left her country, the Dominican Republic. Helen was also from a wealthy and hardworking family. Nevertheless, her father, fearing that the Rafael Trujillo government would take over his company, and being the entrepreneur he was, decided to sell the business to an American group in 1961, investing the considerable proceeds in businesses and real estate in Puerto Rico and the USA. In 1965, during the Dominican Civil War, he decided to permanently move his family to San Juan, Puerto Rico where he could provide a better and more stable future.

Helen was a smart and adventurous girl from a family of entrepreneurs. Being a Dominican in a new island, however, she never felt she belonged. When she graduated from high school in the Dominican Republic, she went to Newport, Rhode Island to study for her undergraduate degree in home economics. Being unconventional, she decided to do what girls from society did not do, first, find a job and second, find a job normally suited for a man – she got a job as a race-car driver. She loved the speed, the liberty, the control. The independence and assertiveness she embraced as a driver contrasted with the restraints she felt from her traditional Latin culture. Though Helen was ahead of her time, her spirited ways quickly came to an end. As soon as her father found out about her job, she had to abandon her world of freedom for a life where men dominate, and women follow. Shortly thereafter, back in San Juan, Helen met Ricky and soon married She became a housewife and never held another job, but always kept her entrepreneurial spirit. Soon, she gave birth to their son, the architectto-be Ricardo Álvarez-Díaz.

Immigrant entrepreneurs

Shortly after Ricardo’s birth, Ricky, having come from a successful Cuban business family, resigned from Sears to start a new business with Sr. López, one of his suppliers. Helen did not like the idea. “Something is not right about Sr. López,” she said to her husband. “I don’t think you should go into business with him.” But Ricky disagreed with her, saying, “Helen, what do you know about business? Leave this stuff to me.” Within one year, Sr. López had stolen the money Ricky had invested and the business failed. With financial backing from Helen’s father, and with many helpful ideas from his entrepreneurial wife Helen, Ricky spent the rest of his career successfully serving as the sole proprietor of a manufacturer’s representative business in Puerto Rico for international construction material companies.

Ricardo Álvarez-Díaz, of course, grew up the product of his parents’ origins. Both families had left their own countries; both had either nearly – or actually – lost and regained some degree of wealth. He inherited his strong work ethic from his father and entrepreneurial spirit from his mother. He experienced how his father never wanted to spend money and how his mother viewed money differently. “Money is a vehicle for freedom,” she had once said to her thenyoung son. “Money gives you choices.”

Growing up, Álvarez-Díaz always felt he had to prove himself to others to be accepted. He felt he didn’t belong, not even in his own island. He was a Puerto Rican, albeit the son of a Cuban father and a Dominican mother. He felt different, out of place. Sometimes he just wanted to disappear

An aspiring architect

Álvarez-Díaz had wanted to become an architect since he was 5 years old, when he came across an architectural model of his godfather’s newly designed home in Ponce, Puerto Rico. He loved to draw, and told his godfather, “I want to be an architect someday.”

Growing up, he encountered challenges that dissuaded his passion. He attended an all-boys Catholic school where sensitivity and love for the arts were not encouraged. Álvarez-Díaz learned early on that his appreciation for beauty and balance was only going to make him a target for the trashcan at the cafeteria. Therefore, to be accepted, he tried proving himself to others and did what was expected of him, including playing football But he didn’t forget his dream.

While in high school, at a career day, he met a prominent architect from Puerto Rico. After a very short conversation, the architect told him some harsh words he wasn’t expecting to hear. “You are not fit to be an architect. You need to be ambitious and you don’t have what it takes.”

Álvarez-Díaz, questioned how this man could know this from a 2-minute conversation. For the first time in his life, he questioned whether he should study architecture. His parents, knowing quite well how strong his dream of becoming an architect was, did not allow this person to discourage their son. They took him to meet some other architects who were much more encouraging.

When he graduated from high school, his parents encouraged him to pursue the path he had aspired to since he was a little boy, assuring him he had their full support. He chose to study architecture at the University of Notre Dame in South Bend, Indiana At Notre Dame, ÁlvarezDíaz excelled in his studies and felt free. He felt he didn’t have to please anyone or pretend he liked things he did not. He did not have to hide behind a façade anymore. Most importantly, no one cared where his parents were from. In Puerto Rico, he felt like a foreigner. At Notre Dame, he felt accepted. He slowly learned to start leaving behind that persona that chose to do things because they were expected of him.

Álvarez-Díaz graduated from Notre Dame in May 1996 with a concentration in philosophy (from which he learned that “I can make my own choices.”) and a professional degree in architecture. Along the way, as part of his architecture training, he spent a year studying in Italy, where he came to appreciate the classical beauty and majesty of the European architectural tradition. “I knew I wanted to work for a top firm and do great design,” he recalled, “and I was dead-set against the typical sprawling American suburbia, full of dreadful shopping centres and lookalike, copy-cat houses.”

He then moved to New York City to work for a famous architect by the name of Robert A.M. Stern. He joined Robert A.M. Stern Architects (RAMSA), along with his friend from college, Johnny Cruz. It was a different time back then, so neither of them had a fixed place to work at the office; they had to wait for people to leave to use their computers.

Both worked side by side, day and night for monthly take-home pay of $1,800, half of which went straight to rent. The duo would stay at work until 10 pm every night, in order to qualify for a free dinner and a free ride home. Álvarez-Díaz would eat half of his meal for dinner and save the other half for lunch the next day. “We were barely making ends meet in pricey New York City,” he recalled Yet despite the low wages and long hours, Álvarez-Díaz was very disciplined and was able to save $7,000 during his time in NYC.

One day, Álvarez-Díaz and Cruz received a complaint from the human resources department. It seemed other employees disliked having to listen to them speak Spanish all the time. They found this complaint odd since, although Johnny’s last name was Cruz, he didn’t speak a word of Spanish. As an apology for the misunderstanding, the firm’s management offered to get them whatever they needed. Cruz didn’t ask for anything, but Álvarez-Díaz saw it as an opportunity and asked for a computer and a personal working space, plus a company-paid course in AutoCAD, a computer-aided design system that was threatening to replace the architects’ traditional drafting pencils, drafting tables, and voluminous rolls of paper drawings His requests were immediately approved. He learned an important lesson. “In life you never get what you deserve, you get what you ask for and negotiate.”

Learning how architecture worked

Soon, Álvarez-Díaz’s standing in the firm rose. Not only did he have his own workspace, but he began giving internal tutorials on the new software tools. His new status also gave him access to staffers in more senior roles where business decisions were being discussed. These conversations helped him identify and understand what the business model for an architectural

firm was based on: perception and relationships. He was stunned. “If you become famous, you get work! But this flies in the face of what we learned in school about what it takes to be a good architect: to listen well and put yourself in the shoes of your client or user. Good design was a solution to a problem, and design should serve the user. Do good work and you’ll get more of it. Or so we were taught.”

Álvarez-Díaz vented with Cruz, “School only taught us design, nothing about how to run an architecture business. How can we help get work if we can’t promote ourselves? We don’t know anyone in New York. How are they going to know we exist?” Cruz replied, “This profession is viewed as a vocation, not a business. If you are perceived as good, people will come to you.”

One evening while Álvarez-Díaz and Cruz were working late, the RAMSA telephone rang. The receptionist had gone home, so Álvarez-Díaz’s supervisor, an architect with 15 years’ experience at the firm, picked up the call. The call turned out to be from a prestigious film studio in California, which was embarking on a very ambitious project. Was RAMSA interested? “I recall that my boss kept deflecting the conversation to design issues, with which he felt comfortable, and away from the more commercial questions the caller was apparently posing,” recalled Álvarez-Díaz. “He seemed unaware of the potential long-term and prestigious business relationship that was at hand. That very night, I realized that, despite the many hours I was spending at the firm, my questions about the business side of architecture were not being answered. Perhaps I needed to work for a smaller firm in a smaller market.”

New directions

Álvarez-Díaz left RAMSA with the understanding that, “Clients come based on your relationships, and relationships are built upon whom you know.” Socializing was not something that came naturally to Álvarez-Díaz, however. In fact, he struggled with it. He would rather be working, sketching or watching documentaries alone, than out mingling with socialites. He would never be able to create meaningful relationships in stuffy NYC. But back home, he felt, in a more relaxed Latin and warm culture, he had a better chance of reaching the right circles.

Álvarez-Díaz moved back to Puerto Rico and started working in a local five-person architectural firm, hoping to gain more understanding of the business side of architecture. He soon made himself invaluable to the small firm. He was not only a skilled designer, he was fast! He had a sixth sense for efficiency and an innate business savvy. He was very hands on and soon noticed that the architects in the firm could not sharefiles. He connected all the computers and created an internal server. He did not take himself too seriously either, so his personality and quick-witted jokes quickly won over the partners and clients at the firm. He was also happier being home and closer to family.

Álvarez-Díaz soon learned, however, that the ways of doing business in Puerto Rico and New York were the same. It was about who you knew. Clients couldn’t know if you were a good designer or not. They knew if you were responsive. There was enough work to go around, however, so there was really no need to hustle. One project led to the next and he continued trying to work as hard as possible and learn as much as possible along the way.

Cristina Villalón

Cristina Villalón’s father Manuel had also been born in Cuba and her mother in the Dominican Republic. Manuel left Cuba in November 1960 after Castro took control. He was sent to Miami, Florida, on his own, with his 8-year-old sister, Ana, the first in their family to leave. His brother and sister, twins, were sent just two weeks later. His mother, however, was not able to leave for the US until March, four months later, and his father not until August 1961.

Manuel had left with nothing except a small suitcase, the clothes on his back, and a few Cuban cigars to sell. He was sixteen at the time. Once they reached Miami, his little sister stayed with some family friends while her parents waited to get out of Cuba Manuel flew to Philadelphia where an uncle was able to use some connections to get him accepted at a local prep school at a fraction of the normal cost because Manuel was top of his class in Cuba. With sheer will and determination, Manuel was able to pay and work his way through school, managing to get accepted at top universities stateside: The University of Pennsylvania Wharton School of Business and subsequently, Harvard Law School. There, he met his future wife, Tina, Cristina Villalón’s mother, who was attending a secretarial school in Massachusetts. They married in June 1969. After moving a couple of times, first to North Carolina, then to Madrid, the couple decided to move to Puerto Rico, where Cristina was born soon after.

Cristina Villalón grew up with a first-hand view of the importance of education. Her father was a workaholic, a corporate tax lawyer, a CPA and a professor at a local university. He worked long hours, never getting home before 10 or 11 pm at night. He was an insatiable reader and learner and put great emphasis on the importance of education and working hard with integrity and passion. Traveling was common even when cash was short. It was a way to learn about the world. At home, her mother never worked outside of the home, but was always there to support Villalón in all her involvements. She encouraged her daughter to be independent and to never take no for an answer.

Villalón grew up playing sports frequently and competitively. In high school, she was involved in a variety of activities. She was the captain of the basketball team, president of her class, and involved in the recycling club and the school yearbook. Thereafter, following a semester at the overwhelming and huge Boston University (“It was too cold, and there were too many people I knew!) a cousin in California convinced her to move west. Pitzer College, a small, progressive liberal arts school, “Was the perfect place for me,” she exclaimed. There, she learned, and became even more passionate about environmental issues.

After graduating with a degree in Art History, Villalón moved back to Puerto Rico, where she took a job working at a local designer jewellery store. She had re-met Álvarez-Díaz at a Christmas party at his parent’s house shortly after his return to Puerto Rico. At the party, they had just clicked, discovering they had the same love of Rome and their favourite book, The Fountainhead Their mothers had known each other since their high school days in the Dominican Republic. Growing up, Álvarez-Díaz and Villalón had always known who the other one was, but they had never connected socially. Álvarez-Díaz was Villalón’s older brother Manuel’s age and a friend of his. Villalón was Manuel’s pesty little sister. Since the party, however, they had stayed in touch and become fast friends.

Coincidentally, while Álvarez-Díaz was working at the local architecture firm in San Juan, Villalón’s uncle needed an architect to deal with changes in, and sign off the plans for each of the homes in a massive residential community he was developing Álvarez-Díaz announced this prospective new client to his employer. His employer, however, saw it as uninteresting work, and suggested that he do the work in the evenings and on weekends. Never one to shy away from work or pass up an entrepreneurial opportunity, Álvarez-Díaz jumped at the chance. “That got him out of having to give me a raise!” he recalled “And it solved a problem for Cristina’s uncle, by giving him an inexpensive solution that could turn around projects fast.”

Álvarez-Díaz Group is born

Álvarez-Díaz started moonlighting and making cookie cutter designs, using essentially the same designs for numerous clients he sometimes didn’t even have to meet. “I work very fast, so I was able to give Cristina’s uncle a good value and give his clients good designs, though they were all pretty much the same. I was not yet licensed to practice independently in Puerto Rico, so I hired an engineer to stamp the drawings. This man was my guardian angel. And he taught me a lot about permitting. Without him, I wouldn’t have been able to go on my own,” Álvarez-Díaz recalled. At $2,500 per house, and with over 30 houses that first year, he was off and running. “But it was the same story all over again: I got the work because of relationships, not because anyone recognized the quality or innovativeness of my work. I was merely a machine.”

In early 2000, Villalón’s uncle asked Álvarez-Díaz to design the clubhouse for his new development project, for a fee of $30,000, a fee greater than the annual salary he was earning at the small architectural firm. With his engineer and friend as a mentor and willing to stamp all his drawings, Álvarez-Díaz was able to quit the local firm and go on his own. Soon, as word got around that he was responsive and delivered quickly and affordably, more business came to him, though his biggest client remained Villalón’s uncle. Other developers, too, were riding Puerto Rico’s housing wave; some hired him, and, thanks to his highly efficient way of working, profits soon materialised

Coming together

Up to this point, Villalón’s and Álvarez-Díaz’s friendship had grown but neither of them had identified their feelings for each other. They talked a lot and shared thoughts and ideas, which were not always aligned. “Why do you keep taking all these projects you don’t even care about, Ricardo? It’s mass production design. Is it just for the money?” As he had heard many times when he was growing up, he replied, “Cristina, what do you know about business? Leave this stuff to me.”

Seeing her interest in architectural plans but her reluctance to study architecture, Álvarez-Díaz encouraged Villalón to take a local course in interior design. She loved it and decided to enrol at Pratt Institute, a leading design school in New York.

By 2004, Villalón and Álvarez-Díaz, having seen one another when she would return to San Juan during breaks from school, started dating, but they kept their budding romance secret from their families to avoid any pressure. While Villalón was in New York, they spoke on the phone often. Álvarez-Díaz even tried to get her an internship at his former office with Robert A.M. Stern. “Just let me know and I can get you the job.” She replied, dismissively, “No thanks.”

“What? Do you understand what a distinguished firm that is? Do you know how much you’ll learn just by being there? It’s a great opportunity.” “Yes, I do, but I just don’t want to work in that type of environment.” Villalón had heard first-hand from Álvarez-Díaz what the firm was like and she wanted a different type of experience.

To their mothers’ great joy, Villalón and Álvarez-Díaz married in November 2004, soon after she graduated from Pratt. Returning to San Juan, she began working for a local designer who specialized in high-end residential design. “The job’s not done until the last toss pillow is in place, the project has been photographed, and hopefully published,” she learned. “That’s how you get more work,” she thought.

Parallel yet different paths

By late 2005, Villalón had passed her exam and earned her interior design license She began working on her own and Villalón Interiors Inc. was born. She worked hard, non-stop, always paying attention to every detail, even after the couple’s first baby girl arrived. She was confident that her work ethic, excellent service and unique designs would help her be successful. However, she and her husband had different views about the best way to run a business and constantly butted heads about it.

Álvarez-Díaz: “Cristina, you’re spending too much time on that design. When are you going to finish that project?”

Villalón: “When I finish it. I’m working as fast and as hard as I can. It’s not my fault the client doesn’t make quick decisions.”

Álvarez-Díaz: “That’s your problem. You have to be more forceful with your clients. They get one option, not three. When you find something that works, keep specifying that.”

Villalón: “Rick, it’s not that simple. This is their home, not mine. I can’t impose myself. Each person is different. I don’t believe in mass production design. What’s the point in making every project the same?”

Álvarez-Díaz: “Well, you’re putting the clients’ needs before ours. I can’t keep subsidizing your business. I don’t have the luxury of letting projects go on forever. I have people to support.”

Nearly three years after having married, in late 2007, Puerto Rico’s housing market was still booming, and both businesses were growing rapidly. Additional developers were giving Álvarez-Díaz projects, and Villalón’s publications and word of mouth endorsements had landed her one client after another. They now had one daughter, with another on the way. They owned a three-storey house, a second beach home in Puerto Rico, and had purchased two flats in Miami. Life was very good.

Álvarez-Díaz came home one night after a cocktail party and told his wife, “You won’t believe what happened tonight ”

Villalón: “What happened?”

Álvarez-Díaz: “Sr. Saldaña introduced me to Sra. Gomez and told her I was an architect. She leaned over and told me she knew of this young talented architect whom she wanted me to meet. He had studied abroad in France and was designing the houses in all these popular new developments.”

Villalón: “No way! She was talking about you!”

Álvarez-Díaz: “Yeah, I think so. I was in shock but, of course, I played along. I asked her if this guy was a friend of hers and she said yes. And, before she turned around to talk to the next person, she said, ‘You should definitely meet him, I know you’ll like him.’ She clicked her champagne glass with my glass of water and the piece of lemon hanging on the rim of the glass fell on my shoe.”

Villalón: “People are truly full of it.”

He nodded in agreement but was thinking, “I guess that’s how it works, people begin to recognize you and talk about your work and you get business.”

In late 2007, Álvarez-Díaz was asked whether his firm could design a new Asian restaurant in a tourist-oriented part of downtown San Juan, including the interior “Indeed, we can!” was his reply, though the firm had never done a restaurant before and had never done interior design. Villalón agreed to do the interior work and they completed the job. It was their first job together and they were both nervous. Of course, they had worked closely together as parents, but this was different, this was business.

The restaurant was a smashing success. Villalón paid attention to every detail, scouting Buddhas at all the low price department stores in the island and coming in under budget. She took perfect pictures and they were able to publish the project in a leading interior design magazine. It was their first job as a team and, and even though their chemistry had not been perfect, they had made it work. For the first time, Álvarez-Díaz understood how much he respected his wife’s work and he began learning to express his appreciation and his admiration for her. She was thorough, patient, and passionate about every detail. He was fast, efficient, and brilliant.

Everything was going very well for both businesses. Villalón Interiors Inc. looked like a winner. Álvarez-Díaz Group continued to grow and was now seven persons strong, with steadily growing revenue and profits (see Exhibit 1: Álvarez-Díaz Group Revenue and Profit, Inception through 2007) Six developers were now clients, each seemingly thriving with new multi-unit projects on the boards. In addition to this revenue, Álvarez-Díaz was flipping houses, making easy money and buying real estate on his own, as mortgage financing was easy to get. Property values continued rising with no signs of stopping.

The crash

Neither of them saw it coming. The couple had taken every spare cent and invested in properties. They never thought of preparing for a change in circumstances. Not once did they think about investing in marketing for the business or a rainy-day business fund.

Early morning on September 15th, 2008, Álvarez-Díaz awakened expecting a normal, ordinary day. He turned on the television to listen to the news while he took a shower. It was his everyday routine: wait for the water to warm up, jump in the shower and listen to the news on TV before the day started. “The Dow is expected to open down 300 points this morning,” the newscaster intoned. “Everyone thought the good times would never end.”

Álvarez-Díaz tried to open his eyes and the shampoo that was dripping from his head burned them. “What the hell are they talking about? Four hundred Lehman Brothers employees coming out of this majestic building with their boxes, paintings and umbrellas?”

The words majestic and building lingered in Álvarez-Díaz’s head. He turned off the shower and listened. “They got caught up in the housing bubble, but the bubble ended. Because the housing market deteriorated, people started to default on their mortgages and made the assets Lehman Brothers held plummet in value. “Well, there you have if folks”, the newscaster said, “For those of you who have been sleeping, wake up; Lehman Brothers has filed for bankruptcy.”

Two days later, with the global financial markets in turmoil and fear running rampant, two of Álvarez-Díaz’s developers cancelled their projects. They, together with his other clients, owed his company $2.1 million for work already completed and invoiced, but not yet paid for. In turn, he owed various consultants and other suppliers nearly $600,000, alongside bank credit lines of another $177,000 (See Exhibit 1, Income Statement and Balance Sheet First Half 2008). “Surely, they will pay what they owe us,” he said to himself, a bit nervously. “But if they don’t, and my customers default, how will I pay my consultants and my people?”

Álvarez-Díaz’s father had taught him the value of hard work. His mother had taught him to think and act entrepreneurially. Clearly his last eight years had been an unqualified success. Or had they? If the world was falling apart, would it all turn to dust, just as his paternal grandfather had experienced in Cuba so many years ago? “What do all those lessons and these changes mean for me and my company?” he wondered. It was far from clear what he should do next.

3,500,000.00

3,000,000.00

2,500,000.00

2,000,000.00

1,500,000.00

1,000,000.00

500,000.00

0.00

Revenues & Net Income (loss)

2001 through 2007

All figures have been disguised

Exhibit 1: Álvarez-Díaz Group Revenue and Profit, Inception through 2007

All figures have been disguised

Exhibit 2: Álvarez-Díaz Group Income Statement and Balance Sheet, First Half 2008

All

Tere Bruno

John Mullins

LBS Ref: CS-19-11

Date: June, 2019

Ricardo Álvarez-Díaz and Cristina Villalón (B)

Abstract

“I don’t want to be an architect anymore,” Ricardo Álvarez-Díaz told his wife Cristina Villalón the afternoon of September 17th 2008, two days after the Lehman Brothers crash. “Eight years and I have nothing to show for it. I need to do something different.”

“No”, Villalón quickly answered, as if she had been waiting for this moment for a long time. “You do not need to do something different. What you need to do is do things differently.”

Tere Bruno is a Research Associate and John Mullins is Associate Professor of Management Practice at London Business School. London Business School cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some names, places, and all financial data have been disguised © 2019 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written permission of London Business School.

Resolving the crisis

After getting some advice from his wife, Ricardo Álvarez-Díaz contacted a local banker and inquired off-the-record about the financial strength of his key customers. What he learned was sobering. “I don’t expect any of them to be solvent six months from now,” said the banker. “Maybe you should try to get what you can from them now, while they can pay you at least something.”

Álvarez-Díaz did not hesitate to follow the advice. He quickly met with each of his clients to negotiate deals, offering to cancel the projects for those who had not already cancelled When all was said and done, he agreed to a reduction of a whopping 70 percent of what was owed in exchange for immediate payment of the remaining 30 percent. With the fees he collected, about $650,000, he paid his consultants and key suppliers much of what he owed them (less a ‘haircut”), with $300,000 to spare. Six months later, most of his developer clients had shut down all their projects

Meanwhile, his next question was how to deal with his employees. After consulting with them, he decided to dissolve his company’s 401k retirement plan and distribute its cash to the employees. He then committed to keeping them on staff, determined to find continuing work for them, one way or another.

Cristina Villalón: A difficult project

In early 2008, while still pregnant with their second child, Cristina Villalón had begun work on a high-end residential design project for a jet-setting couple who seemed to have money to burn. By early 2009, the project was nowhere near finished, and the clients were complaining about the nearly six-figure sum they’d already spent on her fees. Naively, she agreed to cap her remaining fees Exasperated, Villalón exclaimed to Álvarez-Díaz, “They want ten alternatives for every lamp and light fixture, and then they want ten more! Plus, they also want me to negotiate the price with every supplier! And everything has to be unique – nothing that’s been seen elsewhere This is impossible! I just need to finish it.”

Álvarez-Díaz saw things differently. “You’ve got to cut your losses and move on.” Villalón replied, “But if I don’t finish it, then I can’t photograph it, and then I can’t publish it. It will be an entire year’s work in vain!”

A week after capping her fees, the project started having serious problems. The contractor ended up quitting and Villalón ended up working without charging additional fees for two more years, finally finishing the job in 2011 – and getting it published, as well. “It nearly cost me my marriage, and my business, but I got it done. That project was my PHD in what NOT to do.”

Second time around

For Álvarez-Díaz, the road ahead looked dark without any hints of brightness. He estimated his remaining funds would be enough to keep the lights on for two years, thanks in part to the extremely low rent he had negotiated for office space in a bank building in downtown San Juan. Meanwhile, with his wife’s encouragement, in early 2009, he decided to return to the University

of Notre Dame, his alma mater. But this time he returned to join an executive programme targeted at CEO’s, to finally learn about business.

At Notre Dame, in the presence of other CEOs, he immediately felt a sense of belonging. He learned that no matter the scale of the company, the problems were all the same. He came to understand the importance of planning and preparing for the inevitable ups and downs of the market. He recognized how scared he was to fail the people that worked for him; he worried about them, especially about Villalón and their two girls. And most importantly, he realized he needed to come up with a new business model for his firm. But, to do that, he had to do some research and soul searching.

Business model

At Notre Dame, Álvarez-Díaz realized his architectural firm was, in reality, a service provider, like many other such businesses. He interviewed other service providers, to understand how they did business. He learned several things:

 Service businesses generally charged by the hour, not as a percent of the project, as architects had historically done.

 Your office space represents the image you want to portray as a firm. Having a receptionist, a waiting area and offering coffee while your clients wait for you sends a message that you have experience and your business is real.

 Time spent and money spent do not necessarily translate into a better product.

 Time must be measured and charged for. “If I am efficient, I can charge fewer hours.”

 He could no longer wait for clients to come to him.

Álvarez-Díaz decided that running an architecture business with a studio mentality did not suit him. He was running a business, and things would have to change At Villalón’s urging, there would have to be a balance between money and purpose. One or the other would not suffice. Before, out of fear, he had agreed to do any project that came through the door, regardless if it aligned or not with the firm’s strategy. He would be more selective which, in turn, would create a perception of exclusivity amongst his clients. And there was more:

 Hourly fees would be raised from $85 to $300. The right clients would be willing to pay because they felt they belonged to an exclusive club.

 Push the client to avoid change orders. Client indecision translated into a waste of time and money. Clients’ expectations needed to be clear.

 Charge for up-front research. “If I do the project, 50% of the research fee will be credited.”

 Meet only in our office where we control the terms, space and perception.

Álvarez-Díaz was satisfied with the new business model. He felt more organized and clearer and decided to keep the firm going. However, he knew the plan would not work with the amount

of work he was producing. The firm had slipped into loss-making territory, and he knew his savings would not last for much longer.

Retail design: an opportunity?

Meanwhile, Villalón’s work was winning accolades and her designs were being featured in important industry publications. Sometimes she was able to use Álvarez-Díaz’s employees on her projects. And sometimes she would work on his projects.

A client of hers, who owned 83 shoe stores all over the island of Puerto Rico, operating under several well-known international brands, needed an Interior Designer for the stores. After first hiring her to do the interior design of his flat, and loving the result, he then offered her the stores. According to the leases under which they operated; each store’s interior was required to be completely updated every five to seven years “I did my thesis in retail design as a student at Pratt,” Villalón replied. “I can do this, but I’ll need an architect! Luckily, I’m married to one!”

Villalón could hardly wait to tell her husband the news of what had been offered. “My client loves his apartment, and has now offered me the design of the stores. But there will be electrical and lighting changes, for sure, and spaces to be reorganised, too, which means changing the HVAC systems as well. This work will require an architect. We can take on this work together.”

“Let’s do it. We need work.” Álvarez-Díaz replied. It was mid-2010, and the Puerto Rican economy was still in the doldrums. She knew they needed the client. Retail work turned out to have its own set of challenges, though. The work was fun but required a lot of time. The first concept of a store would always lose money. But the repetitions were money makers.

Was retail design the way forward?

As the third anniversary of the global financial crisis approached, the Álvarez-Díaz Group was doing better, but not as well as Álvarez-Díaz had planned. He had a new business model, but little work was forthcoming, other than the retail work.

The husband-wife team had decided that Álvarez-Díaz Group would deliver and bill the shoe store work, as it was the more substantial of their two firms. The shoe stores were keeping his team busy, but he knew he needed to be more proactive. Villalón had her residential clients but was focusing on the stores and had left some of her other business behind. In addition, even though they had been collaborating and excelling in their projects, they continued to clash professionally.

It did not take long before Villalón realised there was a fundamental problem with the shoe store work. “This is mass production design. Fast, mass design is the opposite to detail. What are we doing, Ricardo?” she would often ask. “Trust me, Cristina. We’ve used this material before. It worked. Let’s use it again.” “No. Design is all about uniqueness,” she would reply. “Quality can’t be sacrificed. The details are not the details, they make the design,” she’d say, quoting the famous American designer Charles Eames.

Sometimes, Álvarez-Díaz would get exasperated and say, “You are taking too much time. We have to finish ”

An opportunity arises

In 2012, a new law, Law 20, was passed in Puerto Rico that would allow service providers to work in Puerto Rico, export their services to clients abroad, and pay 4 percent income tax on services instead of the customary 30 percent Álvarez-Díaz Group was the first architecture firm in Puerto Rico to register under the law.

Álvarez-Díaz saw the new law as an opportunity to leverage the work they were doing for their retail shoe client, and seek retail design work for other overseas retailers. “We could offer clients a discounted price for our work by sharing the savings from the tax break,” he said to his wife over dinner one evening “But we’ll need to speak and work with one voice.

“By working together and holistically, both the architecture and interior design, we would do the work much more efficiently and end up with a better product,” Álvarez-Díaz said convincingly. “No firm in Puerto Rico does both, and nearly all the interior designers are sole practitioners working from their kitchen tables. It would be better for the client than hiring two different teams. I think we should merge our firms.”

Villalón looked at him and said nothing.

Tere Bruno John Mullins

LBS Ref: CS-19-12

Date: June 2019

Ricardo Álvarez-Díaz and Cristina Villalón (C)

Abstract

Assuming the Puerto Rican economy would soon emerge from its slump and having decided that working together in a holistic manner would enhance their opportunity to win new clients, Ricardo Álvarez-Díaz and Cristina Villalón merged their firms. Soon, additional projects to design retail store interiors came their way and became the firm’s saviour.

But retail design had its shortcomings, and in early 2016, their firm won a multi-year contract for the design of three major affordable housing projects that would enable them to “Get out of retail,” as Villalón put it. But Álvarez-Díaz wasn’t so sure that was the right thing to do.

Tere Bruno is a Research Associate and John Mullins is Associate Professor of Management Practice at London Business School. London Business School cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some names, places, and all financial data have been disguised (where applicable)

© 2019 London Business School. All rights reserved. No part of this case study may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written permission of London Business School.

New beginnings

Ricardo Álvarez-Díaz and Cristina Villalón decided to set their professional differences aside and merged their firms in 2012, creating Álvarez-Díaz & Villalón (AD&V) Villalón, now the mother of three young children, had been hesitant about joining forces, but her husband had convinced her, and she decided to give it a try. “We have to move into new office space and create a presence that speaks to the quality of the work we do,” they both agreed “The small space we leased during the downturn has got to go.”

“We’ll have a glass conference room right in the heart of the office where everyone can see who we are and how transparent we are,” Álvarez-Díaz added. Villalón chimed in. “This will be the space where we’ll build communities and have an impact on the environment We’ll also use it to showcase what we do. And, most importantly, it will be environmentally conscious, so we can walk the talk.” She knew once her husband was convinced about something, he became unstoppable. She only had to convince him. And she did.

Both were optimistic about their new endeavour and recognized the added value of working together. Despite her husband’s pleading, “That is too expensive!!” they built a beautiful and environmentally conscious office in Santurce, an historical and up-and-coming area of San Juan that had long been neglected. They installed solar light tubes, efficient air conditioning, and other ecologically friendly materials. They won LEED Platinum certification for their office and became the first architecture and design office to do so in Latin America.

As they pondered what their new firm should stand for, they hired a consultant and wrote down the set of values they wanted to live by. (See Exhibit 1: AD&V Values) They felt they were headed in the right direction.

Cristina Villalón’s awakening

Frustrated with how hard she worked while not earning much profit, Villalón decided to read and learn more about interior design as a business. She soon realized that she and her husband needed to communicate more synergy. “We need to view and portray ourselves as a holistic team that does interiors and architecture.”

In 2013, Villalón attended a lecture on the business of design at an industry conference in North Carolina. “I went in one person and came out another ” The speaker had made every mistake in the book and told her audience about all of them – hilariously! It was extremely validating and made her realize the issues she was having were because she was not treating her business as a business. She learned the following:

1. Everything you do for a client is business: “Any time you take someone’s hard earned money, you are no longer a “creative business”, you are a business.”

2. Charge per hour for your time and charge every single hour.

3. Double your rates! Charge twice as much as you are now charging per hour ($125 to $250).

4. Always buy wholesale.

5. Split your discount with your clients. Now you are both on the same side.

6. Log religiously: Document everything so if you must explain your work and time spent, you have it easily available. This builds trust.

7. If prospective projects are not likely to be cost effective, politely say ‘No’ Villalón resolved never to do business the same way again.

Retail design takes off

AD&V started getting accolades for their work in and outside Puerto Rico, thanks to the good work they were doing and Villalon’s prowess at getting their work published. They had found a niche in retail design and had few competitors in Puerto Rico. They made the decision to concentrate on retail and continue developing the business.

By the end of 2013, AD&V was an international firm with clients in Panama, Venezuela, Abu Dhabi, and Dubai, and was named among the Top 40 retail design firms in the US. (See Exhibit 2: Top 40 Award) They were charging $300 per hour in hopes of getting closer to making real profit.

By the end of 2015, AD&V had designed 87 retail projects. But not everything was perfect. One of their largest clients, a franchisee of several well-known international retail brands across shopping malls in the Middle East, was troublesome to work with. “Emails from female members of our firm were not readily answered. This became a dilemma since our project manager was a woman,” recalled Villalón She realised that the project had been a problem from the beginning. All their meetings were through Skype, there was difficulty understanding each other, and expectations were unrealistic. The client had never designed or operated a department store, so they were unclear about what they wanted “We were working day and night trying to get this done and our team was burning out.”

One day in early 2016, Villalón decided she had had enough of this game playing “We need to analyse our business and stay true to our values,” said Villalón. “Is this what we want to do? There’s no sustainability in retail. In five to seven years, everything gets thrown away into a landfill and we start all over. We’ve designed our offices to showcase what we believe in, but our work does not align with our values! We need to help the world too ”

“I don’t necessarily disagree with this, but what kind of projects do you want?” asked Álvarez-Díaz “I want sustainable cradle-to-cradle life cycle projects, done by energy-conservative methods, with non-volatile paint and recyclable materials,” she replied, earnestly. “What happened to our plan of impacting our environment? What are we doing with these guys? They don’t share our values, nor our purpose.”

That night, Álvarez-Díaz studied the company’s numbers for 2015 and confirmed that the fees from retail design were growing rapidly but profit was not. (See Exhibit 3: AD&V Revenue and Profit 2008 – 2015) Exporting of retail design work was not really happening to the degree he had hoped. Retail design was a very difficult place to make money, he concluded. “We would need another forty to forty-five more stores to make real money ”

A new direction?

In early 2016, MBS, the second largest affordable housing developer in the US, needed a firm in Puerto Rico to design three upcoming projects near San Juan. Visiting the AD&V office, the prospective client immediately grasped what AD&V stood for and could bring to the projects. The other firms they visited were all very small firms working out of their principals’ homes.The contrast was clear.

“These projects are just what we’ve been waiting for,” said Álvarez-Díaz with excitement. “And our experience with multi-family projects before the crash means we’ll have the expertise we need ”

“This is enough work to keep our team fully occupied for three years.

“Now we can get away from retail,” Villalón replied equally enthusiastically “But how do we drop all these clients? Plus we’ve spent years building up our reputation in retail. Are we just going to throw all that away?” Álvarez-Díaz countered, “Maybe we can keep retail work, but only in the US and Latin America ”

“I’m torn, Ricardo. I understand we spent all this energy and time, but we also need sustainable projects that feed our soul and add value to our community. Retail is the opposite. Retail does not seem to align with our values,” she argued.

“Again, I don’t disagree Cristina, I’m also torn. But we have to make money, and leveraging our relationships in the retail industry can help us better identify new clients ” They stared at one another. “Ricardo, who is the right client for AD&V – the retail or housing clients? He pondered and answered, “Both, the ones with whom we can solve problems, work as true partners, and build long term relationships.”

“That is MBS,” said Villalón Álvarez-Díaz replied, “Yes, but, it could also be a chosen group of great retail clients as well.”

A few weeks later, they had won the work for MBS. Still, they wondered, what should they now do about retail, their bread and butter for the last four years?

Exhibit 1: AD&V Purpose, Vision and Values

Our Purpose

To create aesthetically pleasing, environmentally responsible, functional buildings and other spaces that enhance the quality of life of the people who live and work in them.

Ultimately, we want to create positive experiences and change the world for the better.

Vision

To positively transform people’s lives by designing Places of Purpose.

Values

1. We are Architects and Interior Designers. Each approaches design with a different perspective. Our designs are executed HOLISTICALLY to reach informed, well thoughtout, cohesive, and seamless solutions.

2. We are contextual designers. We consider our project surroundings. Our designs always have a SENSE OF PLACE.

3. Our designs are USER-CENTRIC. We pay attention to the customer experience.

4. All people should enjoy design regardless of age, size, ability, or disability. That is why we employ UNIVERSAL DESIGN

5. The best designs are designed for people and consider HUMAN SCALE and PROPORTIONS.

6. Great designs have a sense of HIERARCHY and a superior SPACE PLAN.

7. As designers, we are trained to be SOLUTION PROVIDERS.

8. Our designs are FUNCTIONAL and AESTHETICALLY PLEASING.

9. We have a responsibility to our planet and we take it seriously. Our design choices are always SUSTAINABLE.

We are STORYTELLERS. Our designs have a story behind them.

Exhibit 2: Top 40 Award, 2013

7,000,000.00

6,000,000.00

5,000,000.00

4,000,000.00

3,000,000.00

2,000,000.00

1,000,000.00

0.00

-1,000,000.00

Revenues & Net Income (Loss) 2008 through 2015

All figures have been disguised

Exhibit 3: AD&V Revenue and Profit, 2008 through 2015