MANAGEMENT FOR DESIGN
BUSINESS CONDITIONS SURVEY RESULTS DECEMBER 2019
Contents
3
Summary
5
Current Business Conditions
7
Key Issues Facing Businesses in 2020
9
Results & Findings
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Summary What’s happened to confidence in the economy and business performance compared to the same time 12 months ago? According to our recent Business Conditions Survey, there is an increased level of uncertainty amongst the leaders of architecture, engineering and design businesses compared with 12 months ago. And there is a noticeable reduction in confidence levels as our respondents are faced with uncertain economic and industry conditions. Our survey indicates that there is a level of uncertainty (and pessimism?) that we have not seen over the past 10 years of conducting the survey. As a pointer, only 10% of our respondents are very optimistic about their business performance over the next 12 months (compared with 33% this time last year) We asked over 700 business leaders, directors, and executives from the architecture, engineering, consulting, and design industries. All were senior executives, with 40% being business owners. The Business Conditions Survey aims to accurately assess the prevailing economic and business climate and to drive thinking and decision making to assist businesses to work through the current circumstances and deliver sustainable growth.
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Key points from our recent business conditions survey are: •
After years of continuous increasing revenues, there is a noticeable tapering in growth expectations for businesses in our industry
•
Only 15 % of respondents expect improved economic conditions over the next 12 months
•
ver two-thirds of our respondents expect their profit margin to stay the same or O decrease (25% expect their profit margin to decrease!)
•
70% of respondents don’t expect to have a skills shortage moving forward – significantly changed from past years
•
nly 5% of our respondents expect to significantly increase their revenues over the next 3 O years
•
L eading indicators including forward revenue projections point to softening in the year ahead
So, certainly not optimism! Not surprisingly one-third of our respondents don’t expect to increase their fees (compared to 10% last year) and salary levels will only increase moderately (if at all).
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Current Business Conditions Australia has experienced over 25 years of economic growth! This is the second-longest continuous period of continuous growth of any advanced economy in the world. This is happening whilst we are experiencing a slowdown in China, international trade “tensions”, uncertain geopolitical conditions, and Brexit uncertainty in the United Kingdom. China’s GDP grew at an annualised 6.2 per cent in the June quarter—its weakest result in three decades. The US, however, is powering along as are some of our faster-growing Asian trading partners. Putting all this together, the outlook for the world economy, including Australia’s, is looking more pessimistic than any time over the past 5-10 years. According to the ratings agency Fitch “The outlook for the global economy has deteriorated significantly due to the escalation in the US-China trade war,” the agency wrote in its recent Global Economic Outlook. World GDP growth is expected to be 2.6 per cent this year—which is a significant drop from last year’s 3.2 per cent. Here in Australia, the economy has slowed to its slowest pace in a decade as GDP growth is running at a pedestrian pace of 1.4% (a decade low)—this is significantly below Reserve Bank (RBA) forecasts. As a consequence, the RBA has cut Australia’s official cash rate to a record low of 0.75%. The economy is weakening! And any number with a 2 in front of it will be seen as a positive outcome. At least the Federal Budget is in surplus!?
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According to the recent RBA statement. “The economy was benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector. However, “further rate cuts have not been ruled out”. This dip in economic growth means we’re seeing an increase in unemployment, a decrease in the availability of full-time roles, and stagnating participation rates across most sectors. Economic and employment market uncertainty has made companies cautious of hiring or increasing labour costs like salaries. The unemployment rate has crept up over 5.5% and wage growth is not rising! After 5 years of stagnating incomes, Australians are still experiencing record low or near-record low wage growth. This is all somewhat different to the business conditions 12 months ago, where we noted NAB’s index of business conditions (Oct 2018) suggested conditions were “well-above the long-run average and consistent with solid activity. Business conditions remain well above average and this reflected a healthy business sector alongside the strength in economic growth through to 2019” The good news is that we are in the midst of what could be considered an “infrastructure boom”. There is increasing and significant investment in road, rail, water, ports, airports, and telecommunications. And there is increasing demand for infrastructure professionals. Growth in non-residential sectors such as education, health, and aged care is being sustained by “contentious” population growth and our ageing demographic. In a warning shot to confidence though, our survey results suggest that conditions have turned for the worse.
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Key Issues Facing Businesses in 2020 1. ECONOMIC, SOCIAL POLICY UNCERTAINTY AND TRUST The lack of effective and consistent leadership in the federal government and increasing uncertainty around big issues like energy, climate policy and tax have been a handbrake on business activity for too long. These major policy endeavours also suffer from a lack of bipartisanship. We chose a government based not on what they offered, but on what was on offer as an alternative. We are experiencing what some have called the “powerlessness of power”. The ability of our political leaders to present complex policy ideas in the public domain has been limited and often the attempt will be conveyed as a weakness. The Australian political environment currently is, quite frankly, a “dead weight” on economic activity.
2. DIGITAL DISRUPTION TO TRANSFORM WORK This will continue to be a major influence on the success of businesses and those with the capacity and thirst for innovation will reap the rewards of effectively utilising advanced technologies to streamline business and build client engagement. How do they do this?—by combining multiple emerging technologies to gather data, automate processes, and build structures with more precision, accuracy, and speed. These technologies also enable investors to see value from their large investments much sooner than in the past. Are you replacing your people with technology?
3. INFRASTRUCTURE KEEPING UP Australia continues to remain at a crossroad regarding the infrastructure requirements for our growing economy—with enormous demand across the nation to improve the connectivity of people, places, and freight to stimulate growth and job creation. The quality of Australia’s infrastructure is a key indicator of the country’s economic, social, and environmental health. Our ability (or lack thereof) to fund and rapidly deliver major infrastructure and transport projects is critical to sustaining and building on all that we value. We’re making inroads but there is so much more needed to be done!
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4. BOOSTING PRODUCTIVITY Through good or tough times, the equation that defines business success for professional service businesses remains the same: optimising people, skills, and capacity = increased profitability. While the math may be simple, of course, the realization of this potential can be a lot more challenging. Whilst we have sustained economic growth for over 25 years, Australia’s per capita GDP continues to fall with terms of trade. Without a lift in productivity to counteract the fall in the terms of trade, slower per capita GDP growth is likely to prevail. We need to increase our investment in education innovation, business systems and leading ICT infrastructure.
5. GENDER IMBALANCE AND INEQUITY Across both architecture and engineering, we are still confronted with significant genderbased wage discrepancy. Our industry, in particular, still reports one of the largest wage gaps across all industries and this sees women earn approximately 85% of the comparable male wage on average. In 2019, women account for only 1 in 8 of those in engineering jobs in Australia and we are not making enough progress. Boys are three and a half times more likely to take up the subject in secondary education and are five times more likely to study engineering at university.
6. COMPLIANCE AND REGULATION This is a dead weight on the economy and business performance and it’s not getting any easier. It may seem that 2019 is a record peak for regulation—but in actuality, we haven’t even begun to answer the truly huge new regulatory question of our time: how to deal with new technology?—especially in the fields of cybersecurity, big data, machine learning, and AI. Regulation is nowhere near coming close to keeping pace.
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Confidence & Economic Outlook There is a change in the levels of optimism about the economy and business conditions moving forward compared to 12 months ago. Only 15% of our respondents expect the economy to be growing over the next 12 months. The remaining respondents— slowing, declining or stagnant! Unlike previous years, only a very small proportion of respondents are very optimistic that their business will significantly improve and grow. (5% this year compared to over 30% last year and the previous years) And ominously, 10% of respondents believe that their businesses will experience difficult business conditions. This compares with the previous year where only a nominal proportion of businesses expected difficult conditions. Adding to this downturn in confidence levels, a high proportion (25%) of respondents expect their profit margin to decrease! This compares with 14% in 2018 and 7% in 2017.
On a more positive note, 35% of our respondents expect to increase their profit margin, although this is lower than the previous year (45% in 2018). Looking out 3 years, one-third of our respondents expect the economy to be growing and two-thirds (65%) expect the economy to be slowing, stagnant or declining. Not confident!
Unlike previous years only a very small proportion of respondents are very optimistic that their business will significantly improve and grow
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HOW CONFIDENT ARE YOU ABOUT THE GROWTH PROSPECTS OF YOUR COMPANY IN THE NEXT 12 MONTHS?
10% Very Optimistic That Business Will Significantly Improve and Grow Cautiously Optimistic That Business Will Significantly Improve and Grow The Business Will Face Difficult Conditions
90%
WHAT DO YOU EXPECT TO HAPPEN TO YOUR PROFIT MARGIN OVER THE NEXT 12 MONTHS?
35%
40%
Increase Decrease Stay the Same
25%
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HOW DO YOU PERCEIVE THE ECONOMY IN THE NEXT 12 MONTHS?
15%
25%
Growing Slowing Stagnant
40%
20%
Declining
LOOKING AHEAD FOR THE NEXT 3 YEARS, HOW DO YOU PERCEIVE THE ECONOMY?
5% 25%
35%
Growing Slowing Stagnant Declining
35%
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Growth After years of expecting increased revenues, we are seeing a correction in the growth expectations for businesses. 60% of our respondents expect less than 5% growth in revenue over the next 12 months. 30% of respondent expect no growth at all. And 5% expect to go backwards! 12 months ago, only a small percentage of businesses were anticipating their revenue to stagnate. Growth projections have been downgraded. Alongside the outlook for the global and Australian economy, confidence levels have weakened amongst our business leaders. In previous years there has always been a proportion of our respondents that have expected revenues to increase between 20 – 40% in the coming year. This year no businesses are expecting this level of growth over the next 12 months.
75% of our respondents expect revenue growth of between 5-20% over the next 3 years. And 1 in 5 businesses expect less than 5% growth! Increased market share is still expected to be the main factor driving growth over the coming 12 months, with approximately 50% considering this to be the number one source of growth. There has been little change in the proportion of businesses that expect growth from new disciplines or diversification. Management for Design clients have experienced an average growth in revenue and profit of 15–20% but expectations for the year ahead are more subdued.
HOW MUCH DO YOU EXPECT REVENUE TO GROW / REDUCE BY IN THE NEXT 12 MONTHS?
5% More than 40% Between 20-40%
30%
40%
Between 5-20% Less than 5% We Don’t Expect Growth Reduce Between 0-5%
25%
Reduce Between 5-20%
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HOW MUCH DO YOU EXPECT REVENUE TO GROW BY OVER THE NEXT 3 YEARS?
20%
5% More than 40% Between 20-40% Between 5-20% Less than 5% We Don’t Expect Growth
75%
WHERE WILL YOUR GROWTH COME FROM?
31%
32% Increased Market Share
18%
19%
New Markets/New Locations New Disciplines Price Increases
(WEIGHTED AVERAGE)
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Business Priorities & Issues Developing new markets and locations is a high priority for our respondents. And increasing productivity continues to increase as a key priority, as businesses look to maximise performance in an increasingly uncertain environment.
Innovation and research and development continues to be a high priority but it is interesting to note the increasing emphasis on leadership development in this years’ results. Over 80% of businesses consider this issue to be in the top 3 business priorities into the future.
Alongside this, there has been a significant decrease in recruitment, retention, and outsourcing as a business priority from 12 months ago. A very small proportion of businesses (less than 5%) rated this in their top 3 priorities compared to over a third in previous years.
WHAT ARE THE MAIN BUSINESS PRIORITIES FOR THE NEXT 12 MONTHS?
22%
21% 17%
17%
9% 1%
6%
7%
(WEIGHTED AVERAGE)
Controlling / Reducing costs
Outsourcing
Innovation and R&D
Recruitment and retention
Increasing productivity
Technology
New markets / locations
Leadership development
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Business Performance Consistent with other responses and indicators of confidence in the economy, there is less confidence in improving business performance over the next 3 years—although 80% of respondents are cautiously optimistic. Few (5%) are very optimistic. This compares with over 20% of businesses that were very optimistic in 2018.
Few are very optimistic. This compares with over 20% of businesses that were very optimistic in 2018
And the number of businesses that expect to be in a holding pattern is similar to last year.
HOW OPTIMISTIC ARE YOU ABOUT YOUR BUSINESS PERFORMANCE IMPROVING OVER THE NEXT 3 YEARS?
5% 5% Very Optimistic Cautiously Optimistic We Will Be in a Holding Pattern The Business Will Go Through a Challenging Time
90%
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Business Improvement Developing and retaining people is no longer considered the number one factor in improving business performance. The most critical factors now are leadership development, improving operations, and business development.
Developing and retaining people was the number one priority for more than 40% of our respondents in previous years. This year – only 10% of business leaders consider this issue to be the main priority. The emphasis on strong and effective leadership continues to increase as does technology and business development capabilities. They will be key drivers for the year going forward.
This is consistent with a downturn in business confidence. Let’s develop our leaders, improve productivity and improve our business development capabilities. No surprises that wages are not anticipated to increase significantly.
WHAT DO YOU NEED TO WORK ON TO IMPROVE YOUR BUSINESS PERFORMANCE?
19%
20% 17%
15%
13% 8%
7%
(WEIGHTED AVERAGE)
Leadership
People development and retention
Operations and delivery
Business development
Quality of work/services
Technology
Controlling/reducing costs
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Investment and Technology Increased business-to-client connectivity is now expected in the industry. Our respondents understand that investment in people, technology, marketing and infrastructure has a positive effect on business performance, as well as on client relationships. Having said that, there is a reduction in the proportion of respondents that are expecting to increase their investment in these areas. 55% of respondents expect to increase their level of investment compared with 80% 12 months ago. However, investment in technology has increased year on year and the next 12 months will be no different, with over 50% of our respondents expect to increase their
investment. The impact of technology on business performance is increasing, with more and more businesses identifying the connection and applying sophisticated technological solutions. The role of technology as a collaboration tool, much more than the ability to stay connected 24/7, was also identified by our respondents.
55% of respondents expect to increase their level of investment
WHAT DO YOU EXPECT TO HAPPEN WITH YOUR INVESTMENT IN PEOPLE, TECHNOLOGY, MARKETING AND INFRASTRUCTURE OVER THE NEXT 2 YEARS?
35%
Increase
55%
Decrease Same
10%
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People 45% of our respondents do not expect to increase their employee numbers, with 15% expecting to reduce their numbers. The remaining businesses expect to increase employee numbers moderately. No businesses expected employee numbers to be significantly up—a combination of business conditions, improved productivity, and the impact of technology! Salary levels are expected to be moderately up (70% of our respondents). Although, no respondents expected salary levels to be significantly up (compared with 10% last year). Hours worked per week is expected to largely stay the same, or only moderately increase. No businesses expected average hours worked to significantly increase.
So, in summary—not great for those expecting salary increases. Moderate wage increases, if any, and similar hours to be worked by people are expected. Onward and upward? Our respondents aren’t sure, although they are increasingly concerned with their leadership capability and capacity.
70% of businesses do not expect to have a skills shortage. This is the complete opposite of 12 months ago
WHAT DO YOU EXPECT TO HAPPEN WITH THE NUMBER OF YOUR EMPLOYEES?
15% Significantly Up Moderately Up
30%
55%
Same Moderately Down
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DO YOU EXPECT TO HAVE A SKILLS SHORTAGE OVER THE NEXT 12 MONTHS?
30% Yes No
70%
WHAT DO YOU EXPECT TO HAPPEN TO SALARY LEVELS OVER THE NEXT 12 MONTHS?
30%
Significantly Up Moderately Up Same
70%
Moderately Down
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WHAT DO YOU EXPECT TO HAPPEN WITH THE AVERAGE NUMBER OF HOURS WORKED PER WEEK?
10%
15% Significantly Up Moderately Up Same Moderately Down
75%
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Pricing A significant change from 12 months ago. Two-thirds of our respondents do not expect to increase the price of their services in the coming 12 months. This is the opposite to 12 months ago when two-thirds expected to increase the price of their services. Our prediction, that price increases would be difficult in an increasingly competitive market, was correct. We still haven’t really seen price increases, unless the business has a unique and compelling value proposition!
A weak economy and business conditions have placed increasing emphasis on maximising leadership contribution, efficiency, technology and business development. Repeating historically strong profit levels will prove difficult in an increasingly competitive environment.
Two-thirds of our respondents do not expect to increase the price of their services in the coming 12 months
WHAT DO YOU EXPECT TO HAPPEN TO THE PRICE OF YOUR SERVICES OVER THE NEXT 12 MONTHS?
5%
30%
Significantly Up Moderately Up Same
70%
Moderately Down
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About Management For Design Our team can take care of your everyday business management functions; from financial control and accounting to business management, technology, business systems, communications, and leadership. Our most important contribution can be assisting you with strategic business planning and change management. Refocusing your way of working means you’ll spend less time micromanaging, but the key decision-making will always remain firmly in your hands. We understand all the fundamentals that need to be in place to run an efficient and highly productive design practice. Our systems provide the critical business information you need to make informed decisions to enhance performance, improve operations and generate more business. For managing work, we have proven processes to deliver effective project management, resource planning and project costing. We are firmly positioned around where business is heading—information anywhere/anytime, business intelligence and out-sourcing/partnering to enable your business to focus on your area of expertise.
MANAGEMENT FOR DESIGN
Management for Design provides integrated business systems and services to the design industry, across Strategy, Finance, Technology, Communications, Business Systems, and Leadership. By working with Management for Design our clients are enabled to focus on what they are great at and to control and build their businesses. For more information visit www.m4d.com.au or phone 03 9645 8834.
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