Negotiating an ‘undefined and uncontained’ crisis: Woods Bagot CEO Nik Karalis

As the economic impact of COVID-19 and the associated lockdowns continues to bite, the architecture industry is grappling with unprecedented challenges and an uncertain future.

Woods Bagot, an Australian-born global firm with 16 studios and 1,000 employees around the world, survived previous downturns such as the 2008 global financial crisis and recession in the 1990s, but, according to CEO Nik Karalis, this latest crisis is testing its business model in entirely new ways.

Here, Karalis speaks with ArchitectureAU editor Linda Cheng about the firm’s survival strategy, the importance of collaboration, and the role architecture can play in creating the post-pandemic future.

Linda Cheng: Lockdowns are in place in many cities where Woods Bagot has studios. How has this affected the practice’s global operations?

Nik Karalis: Global operation is a fascinating phenomenon. We consider ourselves one of a few organizations [in architecture] that are truly global in that we have 16 studios and people all over the world.

While we’ve had to remobilize our workforce in an extraordinarily short period of time, our communications in lockdown mode were as per normal because it’s how we communicate in multiple time zones anyway. There’s a certain irony in that our global studio – the fact that we are disaggregated, with no central command and control position – has enabled us to transition from a studio culture to a lockdown culture and use all our systems, processes and technologies. This is what we’ve been doing for the past six years.

In a certain ironic way, Woods Bagot is designed to deal with connecting everybody from afar. In this case it’s from their homes, but it’s no different having 16 houses versus 16 studios.

What we’re concerned with is safety, ongoing morale and the fortitude of people having to work remotely and not have the support of their colleagues around them. We are cognisant that the morale or the energy you get from a studio may dissipate over time.

We’re not worried about delivery. We’re not worried about inter-studio collaboration – we’re designed to do this. We’re even adapting now with new presentation methodologies with some of our clients. For example, in Saudi Arabia they’re asking us to present in a documentary style, so we invented a documentary style of presentation. We are resilient in that nature as a firm.

LC: Has this impacted the delivery of projects, particularly in relation to contracts?

NK: The issue around contracts is really complicated. We’ve noticed in the first two weeks of lockdown that the number of contracts put on hold, or that are likely to change their current work profile, amounted to about 20 percent, which is quite significant.

That’s one complexity of re-managing what was originally 100 percent of contracts to now 80 percent of contracts and what that means for resource management.

The other complication is the site works component of some of our contracts. We derive a lot of revenue from full-service opportunities. Going to site – and the protocols around that – has now become complicated.

The third complication is around deliverable and how we can demonstrate to our clients that we’ve met milestones and deliverables of their projects in a remote sense.

That’s the three aspects of the way that we have to manage contracts entirely differently: redeploying the workforce, negotiating more on-site issues and some of the payment terms. There is a bit of a work for us to do on reassessing the contracts to enable us to deliver on what’s in our scope.

LC: On site visits, in Australia, the federal government in Australia has defined construction as an essential activity and that has allowed it to continue during lockdown. But how are you finding that around the world? Are your architects still able to attend site visits?

NK: The question of what is essential and non-essential varies in different jurisdictions. In Australia, yes, construction is still considered essential. In the United States, it differs with some being considered essential. We’ve noticed that some construction firms that have shut down a number of their sites because of the intensity of COVID-19 over there.

Now, the first question we ask our staff is “Are you comfortable going to site?” We’ve got one major obligation which is to stay at home, protect ourselves and our families but on the other hand we’ve also got contracts requiring us to attend site visits in Australia, which feels like a bit of a contradiction.

So, what we’ve done is we’ve reached out to all of our main contractors and asked, “Can we negotiate a safe environment [for our staff], whether we can do defect inspections after hours, or digitally? Is there a protocol of the maximum number of people during a site inspection?” It’s a negotiated approach, which a lot of the mature contractors understand, because they also want to protect their workforce. We are negotiating – in a positive way – the terms for going to a site that we feel comfortable with as a business and that our staff feel comfortable with.

We will not force any of our staff to attend site visits, if they’re not comfortable going to a populated place, we will renegotiate the terms or ask someone else to take their place.

LC: In a service industry such as architecture, your outgoings are predominately wages and your incomings are predominately fees. With projects going on hold and the ability to procure new projects are decreasing, how are you managing the cashflow situation in order to safeguard as many jobs as possible?

NK: What we don’t want to do is panic and we don’t want to put fear into our decision-making process. Woods Bagot is a resilient firm, we derive incomes from a large, diverse pool of sectors and project typologies.

In the first instance, we try to redeploy staff across a diverse range of projects, which mitigates a central studio having to reduce its staff.

We’ve done cash modelling to about September. We are predicting that summer in the northern hemisphere is when we will need to preserve as much cash as we can to a minimum threshold so we can ensure continuity of payment.

We’ve got a number of other measures. We’ve stopped a number of non-essential investments, which is a problem for us because we are continually investing in ourselves, but we’re holding those investments for a period. We are withholding some future bonuses in terms of payments to our shareholders. We’ve made a minimal amount of redundancies and reductions in salary. There’s a cascading approach of how we manage and plan this over the next five months.

We’ve planned it in many scenarios: a 20 percent reduction in contracts, 30 percent, 40 percent and 50 percent, which is similar to what happened in 2008. We’ve carefully modelled what that all [these scenarios] mean for the survival of the business and then we will watch collections rigorously on a fortnightly and a monthly basis against our predictions and then adjust accordingly.

Ultimately, the important thing is preserving jobs so that we are able to re-scale up. That’s the prediction that we’re monitoring. How long is the dip? Where is the dip and how muted is the dip?

There’s no direct answer here, but we have an approach of modelling scenarios and watching the dips carefully, because they’ll be varied and they won’t be the same around the world. Australia might take a shorter period of time because it has put its controls in. Europe will take a hit. New York will take a very big hit and may take a bit longer, so we’re modelling each of those options and preserving cash to preserve as much payroll as we can, ready to re-scale. That’s our methodology.

LC: You’ve mentioned you had about 20 percent of projects go on hold globally. How much of that is in Australia or what proportion of your Australian projects are delayed or cancelled?

NK: In Australia it has been quite significant. I would say about half of that 20 percent is a consequence of the forecasted economic downturn in Australia. A lot of [the on-hold projects] are in Europe as well, that’s been hit very hard. North America currently is not too bad. In China, they’re coming out of lockdown and we’re winning some work so we’re improving there.

LC: What sectors are those projects in?

NK: Aviation is the one that has been hit the hardest of all of them, which is a significant portion of our work because we’re leading the infrastructure. We’ve got a lot of rail and aviation work. Aviation was the one that was stopped almost straight way. Education is another sector we’re worried about because of international students not travelling, so that has been hit as well. These are two of the main sectors that we saw a reduction in.

Housing was put on hold for a time just to understand what the new valuations of land mean but it’s not been quite as dramatic as education and aviation.

LC: Have you had to make any changes to employment arrangements for your staff? Be it standing down staff or reducing their hours, or reducing their salaries?

NK: We have made a reduction in the workforce, but a minimal reduction to ensure that we have right capacity for recovery. We had to make an adjustment, of approximately 10 percent, in the form of redundancies and furloughs.

The furlough initiative only applies to our Europe, North America and Middle studios, it does not apply to Australia and approximately 23 percent of furloughs applied to the entire redundancy group. Compared to the 20 percent reduction that we saw in our contracts, it was a minor adjustment.

The greater impact was a salary reduction and that means different things in different jurisdictions. There are legal nuances all over the world in terms of salary thresholds. We only reduced to a certain threshold or floor that we felt was compassionate.

The greater impact was a salary reduction and that means different things in different jurisdictions. There are legal nuances all over the world in terms of salary thresholds. We only reduced to a certain threshold or floor that we felt was compassionate. In Australia’s it’s clearly the award, we don’t want to go below the award. In others it’s a minimum pay amount. In the Middle East we have to maintain visa status so it gets quite complicated. We have to manage the nuances.

We employ 1,000 people around the world and if everybody took a small adjustment, we’re saving as many jobs as possible. Everybody is in it together. It builds trust and brings the employer and the employee closer. We’re all taking this. We’re trying to preserve as many of our colleagues’ jobs as we can so when the recover occurs we can re-scale up again.

Will it be three months? Four, five or six? We’ve got to model for each scenario so we’re not reacting, but rather, we’re testing and deploying. We had to make these adjustments to ensure that up until September or summer in the northern hemisphere, we are robust, resilient, and mature enough, ready to rescale up.

We put some people on a furlough scheme, which applies to our Europe, North America and Middle East studios. If we recover, like we’re doing in China and we can move work around the world and redeploy the people from an inter-studio point of view.

LC: Are you utilizing the Job Keeper subsidy in Australia?

NK: In Australia, as I understand it, you have to have a 30 percent reduction, and we don’t want to wish that on ourselves. We’re sitting at 20 percent so we don’t currently qualify.

LC: How much of the Australian workforce has been made redundant?

NK: The redundancies in Australia were 3 percent of our entire workforce.

LC: Woods Bagot is one of Australia’s oldest practices and you would have experienced a number of economic downturns. How does the current situation compare with previous downturns such as the 2008 global financial crisis and recession in the 1990s.

NK: Yes, we have survived both of those. The 2008 crisis was defined and contained. It happened quickly we knew what the impact would be and then it was over and then you’re straight into a recovery.

The 2008 crisis affected the northern hemisphere more, whereas Australia and China were not as affected, and we survived it.

When I say it was defined and contained, we knew what we were dealing with and we dealt with it quickly.

Here, it’s undefined and uncontained. We don’t know how deep, how long and where it might strike and whether there’s a double hit through countries coming out of lockdown and going back into it again.

You can’t manage your way around it, apart from scenario modelling. Whereas, the previous one was dramatic. And it was same in the 1990s in many ways.

This pandemic situation has elements of fear associated with it. It’s got an emotional, subconscious component, which is making people not think straight and they’re responding emotionally not sensibly. And it is uncontained. We can’t grapple with what it is. You can look at the prognosis and the analysis and try to understand how deep it is, how long it is, where and which sectors are affected, but it’s all emerging daily. You have to respond daily.

We all know we’re going to emerge differently so you can’t assume it has its end and then we’re going to be the same. We are predicting that life after, the emergence of Woods Bagot after, is going to be totally different.

There are going to be profound changes and luckily our sector leaders are beginning to explore what does that means? The contactless airport, instance. How do we design for that in the future and what’s the emergent business opportunity?

This kind of downturn is different to others where it was short, sharp, defined and recovered in normal instances. Nothing is normal here and when you recover, the rules will have changed. This is a double whammy. We are analyzing how the rules are going to change, how we will re-emerge and will our model, our global model, survive in a globalized crisis. Ironically, I think it’s going to work to our advantage.

LC: You’ve briefly talked about the opportunities after the crisis. Could elaborate on what happens when the pandemic is over and what are the opportunities for the practice on the other side of this and also, what are the opportunities for architecture as an industry?

NK: The opportunities for the practice is consolidating our foundation philosophy around people working collaboratively. It’s actually reinforcing our culture, which is multiple authorship, contributions through teams. It’s testing the ecosystem of the organization. This will test a lot of organizations. It is testing ours in terms of the resilience of the organization to deal with virtual working arrangements or a disaggregated workforce. But it’s advancing our cultural foundation to deal with these situations.

In terms of opportunities in the built environment, these will be enormous. We have climate change, millennials wanting a different social and ethical foundation, and now we have a pandemic. I kind of staple the three together and think, wow, there is something so profoundly different for the human species to handle. Airports will be different, our apartment buildings will be different, and we’re witnessing it at the moment. Childcare is going to be important. What happens to those people who do need to remain flexible in a working environment?

It’s going to change the typology of building and it’s going to change our response to how we deliver those new typologies. Obviously, contactless airports will be a really big one. Flexible, residential accommodation that allows people to work from home and live a more balanced life. Transport is going to be a big one around climate issues. We’ve noticed some change in the level of carbon emissions and that’s a good thing. We can actually demonstrate that we can tackle climate change.

I’d put all that under climate resilience. If organizations know that the shape of the built environment is going to change, then the shape of an architectural practice must change. It needs to be a combination of potentially smaller studios with flexible working from home, with less travel – only when it is critical.

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