Avoid the Dot-Com Disaster: Manage Risk Properly

Much has been written about the demise of the "new economy" and the return to the old. The fact is that while the new economy—exemplified by the dot-com bubble of the '90s—enjoyed the spotlight for a few years, the old economy never really died. It was only pushed to the footlights, while business pundits and young executives exercised new options for operating their businesses.

By Donald L'Abbate, Senior Partner, L'Abbate, Balkan, Colavita & Contini, L.L.P., Garden City, N.Y. May 1, 2003

Much has been written about the demise of the “new economy” and the return to the old. The fact is that while the new economy—exemplified by the dot-com bubble of the ’90s—enjoyed the spotlight for a few years, the old economy never really died. It was only pushed to the footlights, while business pundits and young executives exercised new options for operating their businesses.

Design firms, too, were often lured into new economy practices: focusing on the number of clients instead of the economics or profit picture behind the contract; or believing that “fast” equals sound operations. Regarding this latter point, technology became king. In some cases, designers believed the use of electronic processes could replace old-fashioned relationship-building.

Those firms are probably not around today. In fact, design firms that too quickly embraced the new models over sound old-economy practices probably can be found alongside their misguided counterparts in the dot-com arena—part of neither an old nor a new economy.

The lesson is that there are no shortcuts to success, especially in professions such as architecture and engineering, which rely on the intellectual input of principals. Computer-aided design programs do not replace the creativity, knowledge and experience of a good designer.

Furthermore, design professionals and engineers need to employ common sense with respect to all aspects of their practices, and the adoption of new practices must be backed up by effective risk-management strategies. Identifying the risks and developing risk-mitigation policies and procedures is the first critical step.

Positive remnants, new risks

One can criticize new economy practices but must acknowledge that it did produce some good concepts—when properly executed—such as:

  • Outside-the-box thinking and challenges to old ways.

  • Greater collaboration.

  • Applied technology to support and enhance client service.

However, these beneficial concepts come with risks. Innovation can jeopardize consistency and reliability; collaboration often requires more due diligence and better communications; and technology introduces new and different exposures.

Employing new design concepts, materials and applications can result in expediency and economy, but it removes the comfort of experience and the reliability of tried-and-true methods. Venturing into new territory can place a designer out on the proverbial limb. If the new idea doesn’t work, he or she may have to pay the cost of its failure.

By using well-accepted design concepts and materials, designers can feel secure that, in the eyes of the law, their choices are reasonable. Simply stated, they are the standard of practice.

Conversely, when a designer chooses to be innovative, experience is no longer a shield. For example, problems with the application of a new material could give rise to questions: Why did you use that material? Did you carefully assess how it would perform in this type of application?

If a proven material fails, the designer can always argue that in years of prior similar use, it never failed before, thereby providing a strong defense to a negligence claim.

In order to reduce potential risks associated with innovative materials or techniques, it is incumbent upon the designer to perform an extensive evaluation to identify potential problems, and more importantly, to develop strategies to mitigate possible exposures. The importance of this cannot be overstated. Going forward, with each successful use of a new material, the due diligence can be reduced.

Likewise, collaboration with others can often produce excellent outcomes. However, there are aspects of collaboration that pose certain threats to architects and engineers. Many of them stem from issues of responsibility, all of which should be dealt with in a legal document.

In addition, there are regulations that limit with whom—and to what extent—the design professional can collaborate. For instance, joint ventures create particularly significant legal implications and liability issues for design professionals, such as splitting the proceeds and defining responsibility for taxes, employee issues and regulatory compliance. Any situation of this kind calls for a clear understanding—in writing with review by an attorney—to delineate the various rights and obligations of the parties involved. Even in less formal collaborations, professional restraint and common sense must be employed in dealing with the various circumstances that may arise.

Finally, new technologies are threatening engineers with whole new possibilities for risk exposure.

Technology-related exposures

One area of potential risk with which design professionals have become increasingly familiar is computer-aided design. For example, there are CAD glitches associated with incompatible programs, inadvertent changes to a document, loss of data, reuse of someone else’s design without consent and unintentional changes to a CAD file.

Many engineers now recognize the need to take certain precautions relating to both CAD programs and the electronic documents they generate. Basically, a sound CAD risk-management strategy should reflect the following:

  • Select the appropriate program—one that best suits the types of projects for which it will be applied. Check with other engineers who have used the program.

  • Test the program by using it on completed designs and compare results.

  • Be sure that it is the latest release of the program, that it uses up-to-date code and that the vendor apprises users of any new updates.

  • Train personnel thoroughly using a standardized training program.

  • Establish, in a formal agreement, policies and procedures covering the transmission of CAD-generated documents by and between multiple parties, whether electronically or through magnetic documentation.

  • Comply with the American Institute of Architects “Standard Form of Agreement between Owner and Architect,” which governs the format and use of instruments of service in electronic form.

  • Remember, at all times, that when it comes to professionals, speed is not always the most desirable attribute.

Just as CAD poses certain risks for engineers, so does electronic mail. E-mail is an informal means of communication, but it is being used widely for formal communication. However, unlike a traditional letter, e-mail is often sent without careful thought, review and editing. Design professionals should establish e-mail communication policies that promote thoughtful, carefully worded documents. Chief among these guidelines should be the use of drafts, which can be reviewed prior to sending, and the saving of all incoming and outgoing e-mails. Firm personnel should be trained to understand that every e-mail they send becomes a permanent part of the project file and should be treated accordingly.

Keep in mind that while it speeds the intervals between processes, e-mail does not speed the design process itself. Allow a sufficient period of time to complete projects, and don’t be lulled into the false sense of security that the immediacy of e-mail creates.

Another technology-related area of concern, where extra caution is needed, is with shared files. Electronic files that will be shared among professionals must be established in a secure area of the system, not where they are accessible to outside parties and subject to errant change, viruses or theft.

Additionally, to avoid potential problems, insist that all parties sharing the files use a common program, have fingerprints in place to track and record who is making what changes to a file, and have a website traffic program in place to monitor who is visiting the site.

Old economy, sound economics

A key difference between the old and new economies is how business success is measured. The new economy fostered the idea that a business’ viability can be judged by an increase in customers, sales and website traffic. The idea of checking out a prospective client and dealing only with reputable parties was pushed aside in the chase for bigger numbers. Money flowed fast, and no one seemed to recognize who the clients were and their ability to pay. In the booming ’90s, it was easy for design professionals to fall prey to this way of thinking.

Perhaps the best thing to come out of the new economy is the challenge to old ways. It is always good business to step back and consider what you are doing and how you are doing it.

Firm principals should look at how their firms are functioning on a day-to-day basis in an ever-changing economic world. They must consider all aspects of operations, from employee relations to accounts payable/receivable practices and project management. Challenge how managers and supervisors are communicating with staff. Do they meet the standards of the profession? Are they operating in full compliance with workplace legislation and professional standards? Is project management at the level of performance and risk management that it needs to be to protect the firm and its profitability?

These are all simple questions, but each is filled with land mines of potential risk and liability. Assessing how you do business and measuring its ongoing viability and profitability is a fundamental principle of the old economy and is key to effective risk management.

New Federal Form Could Catch Firms Off Guard

The federal government will likely require a new Standard Form 330—required on all federal project proposals—by the end of this year.

“Some A/E firms, particularly those that have already centralized their project management databases, will be able to make the transition to SF 330 fairly smoothly,” says Peter Fabris with Natick, Mass.-based ZweigWhite. “Many others will find the new form causes headaches, until they develop the tools and processes to track and provide the new information required of them more efficiently.”

The initial draft, released in October 2001, provides a good understanding of what to expect on the final version, which is expected to be released in May. SF330 will replace SF254 and SF255, the forms currently required of A/E firms seeking professional service contracts with federal agencies.

The most difficult task for firms will be to improve how they collect and record project data required in new federal RFPs. Software companies serving the A/E industry are preparing products for the changeover but cannot complete their work until the final form is released. Software vendors say they will be able to revise their products before the government begins mandating the use of SF 330 but admit that the deadline could be tight.