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1 June 2015 version 1

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5 Introduction Il Rapporto 2014 sull Imprenditoria del Progetto, quest anno doverosamente in inglese, aggiorna, partendo dalle classifiche delle prime società di ingegneria, architettura e committenza delegate il quadro dell offerta. Il made in Italy, finalmente lanciato dalle ristrettezze del mercato domestico, è più agguerrito che mai. Lo dimostrano non tanto i numeri, ancora risicati di un 2013 di transizione, quanto il motivato entusiasmo che ha connotato il workshop Imprenditoria del progetto: esperienze di internazionalizzazione a confronto svoltosi all Università di Bergamo lo scorso 2 ottobre. Si apre una nuova stagione di insediamenti stabili nei Paesi più promettenti e, in patria, di rafforzamenti imprenditoriali che passano più che da fusioni e acquisizioni, da nuove forme di integrazioni orizzontali per competenze e obiettivi. This 2014 Report on the Italian architecture and engineering industry traces the picture of a difficult domestic market which urges a new surge in internationalization. This approach which until a couple of years ago was simply important is now vital. In line with this scenario the Report besides presenting updated data on both demand and supply is apt, first, to provide the readers empirical evidences of the strategic importance that the design activity has for the economy as a whole and for the construction industry in particular. As engineering and architectural services occupy a position upstream of construction processes the dynamic of the demand for these services can be applied as a reliable indicator of the future trend of the demand for construction. The acknowledgement of the strategic role that design services hold calls for an integrated strategic program at the country and at the cross country level to encourage a fast recovery of the design industry and of all the other industries at the downstream of the supply chain. Second aim is to underline the importance that these services have for the competitiveness of industrialized countries. As engineering and architectural services are characterized by a high degree of knowledge intensity, by a strong connection with innovativeness and research, and by a link with other capital intensive and labor intensive industries, these services, different from others, are valuable as the possibility for imitative processes are more difficult and slower. To safeguard the competitiveness of the design industry is to a certain extent to safeguard the competitiveness of the industrial systems as manufacturing including construction is in most of the cases the material output of the immaterial application of knowledge in designing (in a way inventing) what does not yet exist. Besides emphasizing the importance of this industry, the focus is on the internationalization challenge and propose some managerial cues which we believe can help managers to address their strategies at the international level. We propose that focusing on the local-ness of the services provided and leveraging the intrinsic value of being Italian and of made in Italy can be an effective way to obviate the weak competitiveness of the national supply of design services and a viable and cost effective strategy to gain a better competitive positioning. The reflections we provide on this matter stem from several meetings and conferences with entrepreneurs, delegates of industrial and professional associations which are increasingly trying to fuel a socio-political debate to underline the importance of design to boost the Italian exports and competitiveness. Attached to the issue n. 45 of the weekly magazine Edilizia e Territorio this Report is edited by Aldo Norsa (professor at the University IUAV of Venice) and Giuseppe Pedeliento (post doctoral researcher at the University of Bergamo). Data regarding the macro economic scenario, and the public demand for design services are collected and elaborated by OPRI, the research center focused on professional service firms of the Entrepreneurial Laboratory (ELab) of the Department of Management, Economics and Quantitative Methods at the University of Bergamo. Data on the supply side (top entrepreneur s lists) based on 2013 balance sheets are collected and elaborated by the research firm Guamari, based in Milan. 5

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7 Figure 1 Geographical distribution of top 100 engineering firms (2013 revenues) Source: Elaborations of Guamari on companies balance sheets Figure 2 Geographical distribution of top 100 architecture firms (2013 revenues) Source: Elaborations of Guamari on companies balance sheets Figure 3 Geographical distribution of top 25 public procurement engineering firms (2013 revenues) Source: Elaborations of Guamari on companies balance sheets 7

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12 Chapter 1 THE GLOBAL SCENARIO: STATE OF THE ART AND PROSPECTIVE CHALLENGES Prima di esaminare domanda e offerta in Italia (sempre con lo sguardo rivolto all estero) lo scenario macroeconomico globale è d obbligo. Per una volta, in questo scorcio di 2014, non sembra penalizzare la Penisola, a fronte di problemi di competitività non meno gravi in Paesi europei già ritenuti virtuosi (nonché in Paesi di accelerata industrializzazione, oggi con il fiato corto). Se gli investimenti fissi lordi da quando è scoppiata la bolla finanziaria nel 2008 non riprendono quota il fatto stesso che l imprenditoria italiana del progetto abbia imparato in patria a convivere con la frugalità in tutte le sue manifestazioni, puntando su creatività e flessibilità, la rende più resiliente e propositiva all estero. 1. The Macroeconomic Outlook: a Focus on Gross Fixed Capital Investments The global financial and economic downturn at play since 2008, when the bankruptcy of the investment bank Lehman Brothers triggered the beginning of a financial crisis that rapidly affected the global market, had as a main outcome the collapse of gross fixed capital investment worldwide. Gross fixed capital investments (or fixed capital assets) consist of six broad asset types: dwellings, non-residential buildings and infrastructures, transport equipments, machineries and equipments and intangible assets. These assets are widely considered to be the most important indicators of national-regional longer-term economic growth and potential productivity, due to their great impact on welfare, product, and innovativeness. The global reach of the 2008 s crisis, besides drastically reducing financial investments in capital assets of countries belonging to the group of the world s most developed and industrialized, has also strongly bit many developing and underdeveloped countries that until 2008 attracted a great volume of investments and drove firms growth strategies. However, while the effects on fixed capital assets exploded in 2008, a more rapid recovery took place in the United States, although the European Union (EU) is still far from a solution. In the US the Federal Reserve (FED) massively intervened through the creation of specific programs to ease liquidity problems of national industries including also those that are tightly correlated with capital investments. In the EU instead the rigidity of the monetary policy and the restrictive parameters of the stability and growth pact for the member States are still in the way of a recovery. In the EU-28 from 2008 onwards statistical records document a strong reduction of fixed capital investments: six years after the beginning of the financial crisis and the subsequent economic recession, the gross investment levels in fixed capitals in the EU are about 15 per cent below their peak in The same applies also to the 18 countries forming the Euro area where the decrease of gross fixed capital investments in 2013 is of 15 per cent less if compared with its peak in 2008 (see figure 4). The amount of gross fixed capital investments in Europe are then benchmarked with those in the United States and Japan. As the figure 5 shows, the EU, the Euro area and Japan responded to the 2008 s turmoil by investing an increasingly smaller amount of financial resources while the U.S. followed an opposite path. 12

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14 Figure 4 Evolution of Gross Fixed Capital Investments in the EU-28 and in the Euro area ( ) Euro area (18 countries) EU (28 countries) Source Elaborations of OPRI on EUROSTAT data. Data are in current values Figure 5 A Cross-Country Comparison of Gross Fixed Capital Investments ( ) United States Euro area (18 countries) EU (28 countries) Japan Source Elaborations of OPRI on EUROSTAT data. Data are in current values The slump of fixed capital investments in the EU is severely hitting the less stable at least economically - member states, including Italy. In this country, gross fixed capital investments dropped by 4.4 per cent from 2012 to 2013 recording the lowest volume in a time series which begins in 2002 (see figure 6). The net loss from the 2007 s peak to 2013 is of 19.3 percentage points. More recent estimates foresight an additional 2.3 per cent decrease in 2014 and finally a slight upturn (0.8 per cent) in

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16 Figure 6 Evolution of Gross Fixed Capital Investments in Italy ( ) Source Elaborations of OPRI on EUROSTAT and ISTAT data (data are in current values) According to the last report released by the European Investment Bank (2013) on the state of the art of investment finance in Europe, the persisting downfall of gross fixed capital investments across the EU is due to the contemporary presence of the following factors which emerged after the 2008 s financial collapse: a. Large misallocations of investment across economic sectors; b. Uncertainty about the world economy; c. The excessive absorption of financial resources by banks; d. Financial constrains to small and medium enterprises (SMEs); e. Difficulties in financing infrastructure. This fifth factor needs an ad-hoc explanation. As the market for bonds for infrastructural projects has diminished, private long-term capitals are increasingly hard to find and strong fiscal consolidation is taking place in many countries, the aforementioned infrastructural needs cannot be satisfied. The shrinkage of gross fixed capital investments is a main concern for the European Central Bank. The incidence in the gross domestic product (GDP) which used to be about 20 per cent over the past 20 years, is now systematically below this threshold almost everywhere, with few exceptions (Austria, Bulgaria, Czech Republic, Romania, Latvia, Norway, ). In particular among fixed capital investments there is an aggregate of interest for this Report: construction, including infrastructures, private and public dwellings, industrial facilities, The Effects of the Global Crisis on Construction Investments Investments in construction are of particular importance especially in the developed and industrialized countries where they are generally higher than in other countries (where they are more frequently addressed toward productive assets). In the EU-28, in the time series investments in residential and non-residential construction accounted nearly 60 per cent of gross fixed investment (see figure 7), with the two sub-categories having approximately equal shares and with old member States investing more than newcomers. Thus, the difficulties in financing construction are perhaps the most critical cause of the fixed capital investments collapse. 16

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18 Figure 7 Average Share of Asset Types in Total Gross Fixed Capital Formation in the EU-28 ( ) 7% 34% 59% Construction Machineries and equipments Other assets Source: Elaborations of OPRI on EUROSTAT data N.B. Other assets include cultivated biological resources (0.3 per cent) and intangible assets (6.7 per cent) In the shorter time period and focusing just on the EU-28 and the Euro area, the evolution and composition of gross fixed capital investments is represented in figure 8 and 9. It shows that the 18 countries in the Euro area invest averagely more in dwellings and other buildings and structures, while invest less in transport equipments and machineries and equipments. As far as the overall construction investments are concerned their average incidence is of 58.1 percentage points between 2004 and 2014 for the EU-28 while is 58.2 per cent for the Euro area. The analysis of the dynamic of the other classes of fixed capital assets investments show that transport equipments, machineries and equipments and intangible assets are more volatile showing a greater variance of data distribution. Figure 8 Gross Fixed Capital Investments Formations by Asset Type ( ) in the EU-28 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% Construction EU (28 countries) Other Fixed Capital Assets EU (28 countries) 10,0% 0,0% Source: Elaborations of OPRI on EUROSTAT data. Data are expressed in percentage. 18

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20 Figure 9 Gross Fixed Capital Investments Formations by Asset Type ( ) in the Euro area 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% Construction Euro area (18 countries) Other Fixed Capital Assets Euro area (18 countries) 10,0% 0,0% Source: Elaborations of OPRI on EUROSTAT data. Data are expressed in percentage. n.b. Other fixed capital assets include: transport equipments, machineries and equipments and intangible fixed assets. Investments in construction instead include dwellings and other buildings and structures. As far as Italy is concerned, the formation of gross fixed capital investments is illustrated in table 1. In 2013 construction is the main aggregate with an incidence of 52.7 per cent followed by machines and equipments (32.2 per cent), transport equipments (9.1 per cent) and intangible assets (6 per cent). The dynamics of the gross fixed capital formation from 2009 to 2013 show that although construction is less volatile than machines and equipment (the average degrowth in the five years period has been 3.1 per cent of the former against 4.9 per cent of the latter) they diminish constantly Table 1 Gross Fixed Capital Formation in Italy ( ) Construction 161, , , , ,778 Machines and equipments 92, , ,506 92,074 86,807 Transport equipments 25,200 25,517 25,491 22,693 24,506 Intangible assets 16,167 16,322 16,235 16,063 16,105 TOTAL 294, , , , ,195 Source: Elaborations of OPRI on ISTAT data. Data are in current prices However, despite investments in construction are shrinking their incidence in the gross domestic product (which is dropping as well) continues to be significant. As figure 10 shows the ratio between investments in construction and GDP is averagely about 10 per cent. What worries is the constant decline of this ratio: from 2009 to 2013 the incidence of construction investments in the Italian GDP decreased by 1.5 per cent. 20

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22 Figure 10 The ratio between construction investments and GDP ( ) 10.6% 10.2% 9.9% 9.6% 9.1% Source: Elaborations of OPRI on ISTAT data. Data are in current prices. Besides their importance in economic terms in fact, investments in construction deserve a particular attention at least for the following reasons. First, because the construction industry is both capital and labor intensive. Construction (whatever they are, i.e. residential buildings, non residential facilities, transport infrastructures, energy plants, etc.), are hence a driving force for the existence and the development of many companies that in various ways and in different times of the construction life cycle take part in the production process (such as, just to cite some examples, concrete producers, steel manufacturers, original equipment manufacturers and assemblers, financial institutions, etc), as well as to sustain and to reduce the unemployment rate in the EU as this industry generates demand for skilled and semi-skilled labor force. Second, because the construction industry plays a key role in satisfying a wide range of physical, economic, and social needs and contributes significantly to the fulfillment of various major national goals. It is often argued that construction and infrastructures in particular is the backbone of national economies and the most important driver for development. As a matter of fact in today macroeconomic scenario, investments in infrastructures are frequently evoked by economists and experts alike, as the most effective leverage for the upturn of every economy. Architects and engineers occupy a position upstream of the building and construction process. Therefore, demand for their services is closely related to that of construction investments, which are in turn linked to the economic cycle. Demand for engineering and architectural services thus is a leading indicator that may be used to predict construction volumes in the medium-long term. In the next paragraph the economic and strategic importance of design firms and of the services they provide will be illustrated. 3. The Economic and Strategic Importance of Engineering and Architectural Services Design firms, i.e. firms delivering engineering and/or architectural services, are involved in all stages of a project: from preliminary phases, throughout the construction process, to procurement and delivery. Their services hence overlap substantially with those of other professionals involved in the completion of projects and are strongly integrated or inter-related with physical construction activities. Due to this specific nature, measurement of the economic importance of engineering and architectural output is not straightforward to the extent that, in official statistics, it is most often absorbed in the broader categories of services or construction. To quantify the economic importance of engineering and architectural services, 22

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24 a rule of thumb which is commonly accepted is to estimate their value at about 10 percent of the overall fixed capital investments. By applying this percentage the 2013 volume of design services acquired and sold in the EU-28 totalizes around 225 billion euros, 60 per cent of which are estimated to be directed toward construction (about 136 billion). If we apply the same reasoning to all countries and regions the value of the European market for engineering and architectural services world approximately be what is shown in figure 11. Figure 11 - Estimates of the European Potential Market for Design Services (2013) Euro area (18 countries) EU (28 countries) United Kingdom Sweden Spain Slovenia Slovakia Romania Portugal Poland Netherlands Malta Luxembourg Lithuania Latvia Italy Ireland Hungary Greece Germany France Finland Estonia Denmark Czech Republic Cyprus Croatia Bulgaria Belgium Austria n.c Source: Elaborations of OPRI on EUROSTAT data (The overall data are underestimated due to missing information for Ireland) Besides their importance in economic terms, design services are intangible, non perishable, inseparable from the service provider, unique, and co-produced with a great deal of customer involvement, characterized for their high degree of knowledge intensity and low degree of capital intensity. These services in fact, fall into the so called advanced tertiary category which includes all services characterized by a high degree of human capital intensity (it is estimated that approximately 80 per cent of the costs of design firms are composed of personnel overheads, as the majority are professionals), and for their strategic importance in leading the diffusion of innovation in other related and interrelated industries. 24

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26 Moreover, due to the intellectual nature of the services they provide and the knowledge intensity they bring to bear, design firms are strategic as the possibility for imitative processes are more difficult and slower. By considering the intangibility of these services their ease of transfer, and their high content of knowledge, they are often claimed to be an important driver of the internationalization of the entire construction supply chain. However, looking at the aforementioned ranking of ENR, this seems to be not necessarily applicable to Europe, where cross-border construction services appear as important as cross-border engineering and architectural services. To this matter however it is worth noting that although the percentage of turnover that design firms realize in non-domestic markets can be considered to a certain extent a measure of their entrepreneurial liveliness, and as the factual outcome of a strategy aimed also at diversifying the risks implied in the single country focus, this percentage when particularly high should not be interpreted as thoroughly positive. In fact, as design services are at the upstream of the construction supply chain and as construction investments and design services are the backbone of the economic welfare of a country an excess of international revenues should also be interpreted as the result of the lack of a domestic market. It is generally assumed that with the exception of the design services that are naturally directed in specific markets, such as the engineering of oil & gas and refinery facilities which are designed and built in the countries that produce such commodities the percentage of international turnover should be physiologically counterbalanced by a significant percentage of revenues earned in the domestic market. Summing up, if a rapid recovery of the construction industry is needed, an upturn of the design industry including providers of consulting services related to construction urges. In a world which is becoming increasingly competitive and open, in which product and process life cycle are becoming increasingly short and in which imitative processes of developing countries are speeded up, proper measures to favor design firms, their competitiveness and their innovativeness are the right policy to follow. 4. Market Challenges Coming to the Fore Despite as we argued - design firms can play a primer role in fostering the EU s economic recovery and, more in general, the rebound of developed/industrialized nations, market pressure affecting the global market for engineering and architectural services represent additional challenges that design firms are called to face and overcome to survive and grow in the long term. In today s European market scenario in which both public and private resources to finance residential and non-residential construction projects lack, and the few invested in construction projects are in no way sufficient to satisfy turnover targets of the national supply of engineering and architectural services, companies are obliged to turn to foreign markets to foster their growth and survival in the long run. As reported in the 2014 annual ranking of the Top 225 International Design Firms by ENR, the major part of European design firms regardless of their size - are scouting emerging markets in which great growth opportunities allow them to elude the poorness of their own national and regional market. As a result, the competition within the European market is dramatically intensified, with a myriad of players striving to acquire the few business opportunities available. The most promising European markets, such as Poland, Czech Republic and other Eastern European are growing less quickly than expected. Many small and medium sized European design firms are hence trying to access non-european markets that were previously mostly targeted by large firms by increasing the already fierce competition also in these markets. The results of this over competition are earnings, margins and profits on projects eroded almost everywhere. In addition, the improved economic condition of many developing and under developed countries has favored the emergence of local players, which contribute to overcrowd the market and to put even more pressure on prices. 26

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28 Chapter 2 DEMAND AND SUPPLY OF DESIGN SERVICES IN ITALY Un mercato come quello italiano che da almeno un decennio offre all offerta una palestra di esercizi di adattamento eppur, a tutt oggi, è popolato di società del progetto ancora vive e vegete, si presta alle riflessioni di cui abbonda questo capitolo. Contro intuitiva, alla fine di un lungo ciclo di gigantismo, come dimostrano le classifiche delle top international design firms di Enr, è la constatazione che la fornitura di servizi sofisticati, in una società sempre più terziarizzata, non è necessariamente da economie di scala. Ma piuttosto da economie di processo e di conoscenza che si possono conseguire, sempre che la governance sia lungimirante, anche e forse meglio con realtà autonome, creative, dislocate, sinergiche, specializzate, 1. Italian Design Firms: their Features and Their International Competitiveness The Italian productive system is traditionally characterized by small and medium sized enterprises playing a relevant role. In terms of number of small and medium enterprises (SME) in fact, Italy ranks first in Europe, with a number of SMEs which is almost the double of Germany (3.7 million against 2 millions). It is estimated that Italian SMEs account for about 99 per cent of the total number of national companies, employ about 80 percent of the overall workforce, and produce about 68 percent of the overall national value-added. Although in past decades, such a peculiarity represented a strong asset of the productive system resulting in a greater entrepreneurial dynamism, higher organizational flexibility, and greater space for creativity (the Schumachers motto small is beautiful 1 has been often evoked as a sort of competitive advantage), today it penalizes competitiveness in a world economy which is becoming globalized and where the most promising target markets account for the greatest part of the world s population (China and India at first). The structural characteristics of the Italian enterprises also extend to design firms which, to certain extents are characterized by even smaller organizational sizes. Being predominantly composed by professionals featuring a high degree of autonomy, and being naturally characterized by low capital intensity and by the prevalence of corporate governance entirely composed by professionals, design firms are a perfect archetype of the undersized Italian firms. In the list of the Top 225 International Design Firms ranked by Engineering News Record (ENR) only seven Italian companies are included. In 2013 the volume of international revenues earned by these companies totalizes million dollars, with a global market share of 0.8 per cent. The most important market is the Middle East (200.2 million), followed by Asia (120.6), Africa (92.3), Latin America and Caribbean (75.9), United States (51.5), Europe (48.4) and, finally, Canada (0.8 million) (see Figure 12). 1 Schumacher (1973) Small Is Beautiful: A Study of Economics As If People Mattered. Harper & Row Publishers: London, UK. 28

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30 Figure 12 Italian Top International Design Firms Presence Worldwide (2013) 8.7% 8.2% 0.1% Middle East 12.9% 33.9% Asia Africa Latin America and Caribbean 15.7% 20.5% United States Europe Canada Source Elaborations of OPRI on ENR Engineering News-Record - Top 225 International Design (2014) data In terms of sectors of activity petroleum is the most important (70.1 per cent) followed by transportation (19.9), general buildings (2.8), power (1.3), water supply (4.8) and sewage/solid waste (1.1 per cent) 2 (see figure 13). Figure 13 Italian Top International Design Firms by Sector of Activity (2013) 1.3% 4.8% 1.1% 2.8% 19.9% 70.1% Petroleum Transportation General building Energy Water supply Sewage/Solid waste Source Elaborations of OPRI on ENR Engineering News-Record - Top 225 International Design (2014) 2 Petroleum comprises refineries, petrochemical plants, offshore facilities, pipelines, etc. Transportation includes airports, bridges, roads, canals, locks, dredging, marine facilities, piers, railroads, tunnels, etc. General Building includes commercial buildings, offices, stores, educational facilities, government buildings, hospitals, medical facilities, hotels, apartments, housing, etc. Power comprises thermal and hydroelectric power plants, waste-to-energy plants, transmission lines, substations, cogeneration plants, etc. Water Supply includes dams, reservoirs, transmission pipelines, distribution mains, irrigation canals, desalination and potability treatment plants, pumping stations, etc. Sewage/Solid Waste includes sanitary and storm sewers, treatment plants, pumping plants, incinerators, industrial waste facilities, etc. 30

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32 Among the top 225 engineering firms besides those that are included the following should appear, if they had responded to the ENR s questionnaire: Tecnomare, D Appolonia, Agriconsulting, Enereco, Ets, Studio Galli Ingegneria, and Electroconsult. This would bring the Italian presence to a total export of 752,8 million dollars and a world market share of 1,1%. 2. The Italian Supply of Design Services: a Picture of an Extremely Fragmented Sector To understand the distinctive feature of the Italian supply of design services we draw upon the annual report published by CNI the National Council of Engineers - which every year disseminate the data concerning the number and value of contracts for design services awarded 3. One data in particular underline such uniqueness: in Italy according to the last census (2011) only 0.3% of firms providing engineering services have more than five employees. Thus, if the Italian industrial system is predominantly composed by SME s, the supply of engineering services is practically entirely composed by micro firms. According to OICE, the National Association of Engineering, Architectural and Technical-Economic Consultancy Firms, of the overall suppliers of design services currently crowding the market, 88.7 per cent are single independent professionals, 10.8 per cent are organizations composed by a number of employees between two and nine employees, 0.4 per cent have a staff composed by a number of professionals from 10 to 19. Organizations with a number of employees of 20 to 49 workers are 0.2 per cent. Large companies are numerically irrelevant. Firms of 50 to 249 employees are 0.07 per cent while those that can count on more than 250 workers are 0.01 per cent of the total (see figure 14). Moreover, of those organizations with a small number of workers, many organized as professional partnerships. Figure 14 The Italian Supply of Engineering Services by Firms Size 0.2% 0.4% 10.8% 0.07% 0.01% 88.7% Individual professionals 2-9 employees employees employees employees > 20 employees Source Elaborations of OPRI on OICE data. The greatest part of the Italian supply of design services is provided by single engineers or by non entrepreneurial firms, i.e. professional partnerships. Despite in the last decade several normative attempts have been issued to stimulate the creation of entrepreneurial firms in the provision of design services, this industry continues to be dominated by the prevalence of single professionals and professional partnerships. If we shift the focus merely on design firms, excluding hence both independent professionals and professional partnerships, the picture of the Italian engineering supply shows, however, that even in this segment organizational sizes are insufficient to cope with the challenges we previously briefly discussed. In 2013, the sum of the overall number of employees of all companies associated to OICE reached 10,754 units and 50 per cent of these are employed in engineering firms with less than 50 employees. It is worth noting that the sum of the total number of employees of all the firms associated to OICE which gathers 3 The analysis is done only for engineering services as aggregate data for architectural services are not available 32

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34 together almost the entire universe of Italian engineering firms, and excludes those that besides providing engineering services enlarge the range of their offering to construction and procurement is slightly higher than the number of employees of the French AKKA Technologies (10,645 employees) the tenth bigger European engineering firm in the 2012 rank published by STD - Svenska Teknik & Designforetagen the Swedish association of national engineering firms 4. And again, the 435 design firms affiliated to OICE generate a little over a billion in revenue altogether against 96 billion of the first 100 designed firms ranked by ENR and of 42 billion of the top 100 companies raked by STD. 3. The Italian Demand of Design Services and the Endless Battle of David against Goliath The Italian market has been historically affected and penalized (especially in comparison with other European and non-european contexts) by what we ironically here call the endless battle of David against Goliath. With this figure of speech we aim at making sense of the structure of a market in which a massive presence of small firms and independent professionals and professional partnerships (David), compete in the same competitive landscape with bigger firms (Goliath), including the Italian branches of huge multinational and transnational corporations. The main cause of this battle must be found in the excessive fragmentation of the demand and in the huge number of contracting authorities which are responsible for issuing and awarding public contracts of design services (but also of construction works and material procurement). To date there are more than 30,000 authorities, such as municipalities, regions, and other technical-administrative organizations which carry out contracting activities on behalf of the administration to which they refer. The recently issued spending review law have regulated this distortion and prescribed to drastically reduce the number of public procurement authorities. The excessive fragmentation of contracting authorities has undeniably contributed to fragment the supply as the local range of responsibility characterizing these authorities has favored the emergence of local-based organizations and have curbed their growth. If as many experts often write and say a strong supply needs a strong demand to exist and flourish, some of the reasons behind the small sizes of the Italian organizations have to be searched also in the structural features of the demand. In presence of an excessive number of contracting authorities, design firms find it impossible to properly segment the market and properly plan their commercial efforts; rather are naturally pushed to participate to as many bids as possible exasperating the competition. In addition to the fragmentation of contracting authorities there is another element that should be carefully evaluated and that support the idea that the Italian public demand for design services is a main cause of the scarce size of Italian design suppliers: the presence of technical staffs within public administrations deputed to the production and delivery of engineering and architectural services. In house design is still a practice (perhaps a malpractice) which is often conducted within many public administrations that besides creating distortion to the market, subtract important business shares to private players. In 2013, according to OICE, the value of design services produced in house by technical offices within the public administrations is about the same business volume accounted by the overall group of firms affiliated, i.e. c.a. one billion. If the unsatisfactory public demand can be considered the main driver of the small sizes of Italian design firms and of a market that is increasingly more poor of opportunities, the outcome are even worst. The main outcome is a fierce competition between small organizations and bigger companies which is partly responsible of downward price pressures on contracts awarded by public contracting authorities. Overall, in 2013 the price decrease of contracts for engineering services awarded by public authorities was of 34.5 per cent: less that the 37.7 per cent of 2012 and of the 41.3 per cent of 2011, but still too high (especially for larger firms which are characterized by a cost structure more rigid than that that afforded by single professionals or professional partnerships). The reduction of bidding prices in the three years was even higher than the price bidding reduction of contracts related to construction works (19.9 per cent in 2013, 21 and 22.7 per cent respectively in 2012 and in 2011). 4 The 2013 data have not been published (as of mid-october 2014). 34

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36 The significant price reduction on the basic tender price of design services is on one hand a symptom of a fierce competition between suppliers which are not comparable between them due to their structural differences in terms of cost structure. On the other is the main signal of a process of commoditization of the design phase that in the long run risks to affect the overall competitiveness of Italian designers. The data concerning the public contracts for engineering services awarded in 2013 confirms what previously stated. In the last year, according to the National Council of Engineers (CNI), of the overall number of public contracts for engineering services awarded, 34.7 per cent have been won by design firms (limited liabilities companies), 11.3 per cent by temporary mixed joint ventures composed by both firms and independent professionals and/or professional partnerships, and 0.5 per cent by consortiums. The remaining 53.5 per cent of the contracts instead have been assigned to independent professionals, professional partnerships or temporary ventures between them (see figure 15). Although professional partnerships and other non-entrepreneurial organizational forms have many advantages such as the substantial absence of financial capital invested, their great flexibility, and the high degree of independence it offers to the professional workforce their advantages are at the same time the main source of disadvantage to cope with and survive to the market we briefly previously framed. In the today market, design firms are required to operate on a global scale, to cope with demanding clients and with new forms of contracts - such as project financing and other types of public-private partnership, turn-key contracts, design and build agreements and other contractual forms which require the contractor to attain an obligation of results instead of an obligation of means which cannot be addressed neither by single professionals, nor by professional partnerships. If in terms of the number of contracts awarded independent professionals and professional partnerships have the lion s share, in value terms the group of engineering firms performs better (see figure 16). Figure 15 The Number of Contracts for Engineering Services Awarded by Public Contracting Authorities by Type of Supplier (2013) 11.3% 0.5% Engineering firms 34.7% 53.5% Independent professionals and professional partnerships Mixed temporary joint ventures Consortiums Source: Elaborations of OPRI on Infordat/CNI data. 36

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38 Figure 16 The Value of Contracts for Engineering Services Awarded by Public Contracting Authorities by Type of Supplier (2013) 0.1% 11.4% Engineering firms 11.4% 77.1% Independent professionals and professional partnerships Mixed temporary joint ventures Consortiums Source: Elaborations of OPRI on Infordat/CNI data. In 2013, 77.1 per cent of the overall value of contracts for engineering services issued by public contracting authorities have been awarded by engineering firms. Independent professionals and professional partnership won 11.4 per cent of the total amount of contracts (the same share of mixed temporary joint venture), while consortiums are irrelevant (0.1 per cent). Thus, while independent professionals and professional partnerships won the greatest part of contracts, engineering firms are awarded with those contracts characterized by a higher average price. In line with data provided by CNI the average price of contracts awarded to engineering firms is more than eight times the price of those awarded to independent engineers and professional partnerships (respectively 370,900 euro for the former, 40,800 euro for the latter) (see figure 17). Also other organizational forms, i.e. mixed ventures and consortium perform better in terms of average price confirming that Italian contracting authorities tend to consider bigger organizational forms as to be more trustworthy and reliable. Figure 17 The Average Value of Contracts for Engineering Services Awarded by Public Contracting Authorities by Type of Supplier (2013) 56, ,800 40, ,900 Source: Elaborations of OPRI on Infordat/CNI data. Data are in current value. 38

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40 However, despite the Italian market is still too fragmented we are currently at a turning point. On the demand side, the prescribed reduction of the number of contracting authorities imposed by the recently issued spending review which is still waiting for an implementing regulation is a right attempt to achieve also greater sizes of the existing supply of design services. In addition, the reduction of the number for contract dealing only with design without implying execution (reduced by 29.5 per cent from 2012 to 2013), which are basically the only contracts that allow independent professionals and professional partnerships to compete against more structured design firms, will lead in the middle and in the long run to a growth of the number of design firms and to the gradual diminishment of the number of independent professionals and of professional partnerships. Still on the demand side, another issue is favoring and will increasingly favor the consolidation of design suppliers toward greater organizational dimensions, that is the increased usage of turn-key contracts and other design and build agreements in which the counterpart of the design firm is the main contractor of the construction works, and not the contracting authority. As this kind of contracts are generally awarded to big construction companies, and as the bigger the company the greater its preference for a comparable counterpart to deal with, this shift will inevitably favor the selection of the organizations providing engineering services in the long run. On the supply side, signals of a possible armistice to the battle of David vs. Goliath are to be found in the increasing internationalization of design services. To properly cope with the challenge design firms need capital to invest, strategic marketing capabilities, organizational skills, and a managerial competence which goes beyond the technical capabilities held by professionals. All features that currently, do not match with the characteristics of independent professionals or of professional partnerships. 4. Managerial capabilities Being creative is not sufficient: in present times if David wants to beat Goliath he has to strengthen managerially. In particular, among the several capabilities of this kind design firms need to enhance, those rated to strategic planning are overriding. To penetrate and expand their presence in foreign markets they should be able to improve their abilities in perform a deep environmental scanning which is necessary to identify the opportunities and challenges facing them. The market knowledge acquired is of fundamental importance to properly address their actions and efforts, especially when they are set up to guarantee their presence in given countries in the long run. In many cases perhaps too many Italian design firms operate abroad in non-selected regions, i.e. not chosen on the basis of a rational strategic thinking. Thus, it seems that markets choose companies rather than the opposite. As a consequence, many firms invest in markets that despite being dynamic in the short run, are not equally dynamic in the middle or in the long run. When markets are properly chosen, entry strategies are clearly developed and pursued; and when these entry strategies are counterbalanced by a sub-set of strategies aimed at allowing firms to stay there for a long time, this can allow companies to nurture their growth and acquire a sufficient size to compete with foreign players. Strategy is hence needed to allow companies to bridge (at least partially) the gap. If strategies are clearly defined, set up and pursued, Italian design firms can increase their chances and differentiate from the other organizations which crowd the domestic market. Only strategy can solve the endless battle! 40

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42 Chapter 3 THE ITALIAN SUPPLY OF DESIGN SERVICES Il punto di forza di questo Rapporto, anno dopo anno, è la classifica, per fatturato 2013 (raffrontato al 2012) delle prime 25 società di committenza delegata, delle prime 100 società di ingegneria (e consulenza tecnico economica) e delle prime 100 società di architettura (e design). Completata dalle prime cinque società di validazione (di progetti) e di controllo tecnico-economico. Malgrado lo sforzo di sfondare all estero ancora nel 2013 la produzione delle prime 100 società di ingegneria diminuisce dl 4,7 per cento deprimendo sia la redditività operativa che complessiva e aumentando di poco l indebitamento. Meglio invece l esercizio delle prime 100 società di architettura anche se più radicate nel mercato domestico che accrescono del 3,5 per cento la produzione e esprimono un più 16,5 e un più 15,2 per cento rispettivamente per la redditività operativa e per gli utili netti. Al palo invece le società di committenza delegata che in alcuni casi compaiono con fatturati di liquidazione anziché di produzione evidenziando la loro natura transitoria specialmente quando nascono per obiettivi specifici e temporanei su iniziativa delle stazioni appaltanti pubbliche. 1. The Italian Champions Italy has a fragmented structure of services supply in engineering as well as architecture. But most of the firms have inherited one of the highest traditions both in engineering ingenuity and architectural creativeness. Therefore the picture should be decisively more qualitative than quantitative. This notwithstanding, the only objective way to present (especially to an international audience) the potential and the richness of what the Penisola can offer the world in terms of design (in its broader sense) the research firm Guamari prepares an exclusive list (based on official balance sheets) of the top 100 Italian engineering and top 100 architecture firms, plus a list of the top 25 procurement engineering firms. To complete the picture a smaller list (comprising five companies) encompasses the essential word of project validation. The Italian engineering tradition, originating two thousand years ago with the Romans (and expanding to the largest Empire in ancient times, second only to the Chinese), known for building the most extraordinary infrastructures, civil as well as military, continues through a number of very special engineering firms, planning, designing and delivering dams, roads, metros, railways, canals, tunnels all over the world. Not pursuing large contracts but rather carving for themselves specialized niches where their added value can best be appreciated. The Italian architecture tradition, at its height later in time, five hundred years ago, at the time of the Renaissance, has renovated itself in contact with industry and technology so that, today, Italy not only still nurtures some of the most famous architects worldwide but has given birth to a new generation of designers who contribute to change the human scene from the most simple object of use to the most complex environment. 2. Which Are the Names Keeping High the Italian Tradition As far as engineering is concerned, in order of 2013 turnover, the champions can be cited according to their field of specialization. Spea, Technital, Sina, Italconsult, Sineco, are the experts in roads: with a particular foreign expertise in the case of the second and the fourth, while the others are now prospecting foreign markets after having developed their activities on behalf of the two major Italian motorway networks. Proger, Tecnomare, Enereco, Ets - Engineering Technical Services, are the experts of engineering for oil and gas. Hydraulic engineering is developed by Sgi Studio Galli, Lotti, Elc -Electroconsult, D Appolonia, Hydrodata, Hydrostudio, Building and civil construction (from the point of view of design) is the specialty of Studio Altieri (namely hospitals), 3ti Progetti, Dba Group, Politecnica, Intertecno, Aic Progetti, Progin, Tekne, Environmental issues are dealt with by: Agriconsulting, Ambiente, Cooprogetti, Musinet, Montana, And, last but not least, tunneling (a specialty developed in a country where mountains accountfor one third of a very densely inhabited territory) is proposed by Geodata, Rocksoil, Metro Engineering, Tre Esse, Studio Geotecnico Italiana, 42

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45 As far as project management is concerned, a technique which the Italians are developing form the Angloamerican example, the expertise has gone a long way as proved by the record established by firms such as: F&M Ingegneria, Ingegneria Spm, Gpa Ingegneria, J&A Consultants, Hmr, As far as architecture (and design) is concerned, there are a number of firms which are famous in the world (archistars should they be called?): Renzo Piano, Massimiliano Fuksas, Antonio Citterio, Masimo Roj, Michele De Lucchi, Matteo Thun, Mario Cucinella, Dante Oscar Benini, Cino Zucchi, Carlo Ratti, Guido Canali, Paolo Desideri, And especially a number of designers (architects by training) who have become world famous (in certain cases in connection with the rise of the Italian fashion and luxury goods export): Roberto Baciocchi, Piero Lissoni, Massimo Iosa Ghini, Patricia Urquiola, Tiziano Vudafieri, Of peculiar interest, stemming from a time-honored Italian tradition, is the shift toward full-scale environmental design of time-honored car body design firms, especially the most famous three: Pininfarina Extra, Bertone, and, close to the top 100, Giugiaro Architettura. On another note, the Italian system is promoted in the world through a growing number of firms stemming from major public owners innovating procurement through internal advanced architectural and engineering services. This is the case of Italferr (group Fs) for high speed railway lines, Mm (for subway lines), Adr and Save (for airport engineering), Anas for sophisticated road design and construction, Thetis which is committed to exporting the know how accumulated in the conception and realization of Mose (the innovative system of offshore barriers meant to protect Venice, possibly the most coveted city in the world, from high tides, ). To complete the picture of the services provided in the field of building and construction in general the validation of projects is an important guarantee of professional performance: the major Italian firms, preparing to promote themselves in the world are: Italsocotec, Rina Check, Conteco, 3. Who is Who From an entrepreneurial point of view, and in line with the address list published at the end of this Report, the roster of the major architecture and engineering firms shows the following trends. While the architectural firms are all independent and in most cases stem from the personal offices of creative personalities: all of them still alive and active, brands reminiscent of present glories, the engineering firms, especially at the top, have a more industrial nature, whether part of larger diversified groups (mostly private) or independent but managerially run. The number of engineering firms similar to the architectural, thus stemming from professional entities, is smaller, of limited size and generally confined to building and construction, whether specializing in mep, or structural or environmental engineering or other. In order to reinforce their offer both architecture and engineering firms tend to establish consortia: among the former, Crescendo, including Degw, controlled by Lombardini 22, DeStudio, Studio Forward and Wip, Thp led by Pica Ciamarra Associati and extended to Gnosis Architettura, Interprogetti and others; FG Tecnopolo which proposes as its major firm Compagnia del Progetto; Ennesys, led by Proger with Manens-Tifs, Systematica, Via Ingegneria, Bms Progetti and others; Maestrale including four complementary firms, Ariatta, J&A, Redesco and Starching, In order to reach sizes more adapt to the world competitive environment a number of Italian engineering firms (architects and designers preferring to stick to their creative independence) are either relying on more powerful groups in which to find synergies or are practicing (or studying) forms of concentration which goes beyond the creation of consortia. Leaving aside the numerous subsidiaries of foreign groups, part of the first and second Italian leaders in motorways concessions are Spea (Atlantia/Autostrade per l Italia), Sina and Sineco (Gavio); Tecnomare is a subsidiary of group Eni; D Appolonia is affiliated with the biggest firm in naval certification Rina; while Italconsult has been recently acquired by Intesa San Paolo, one of the two major Italian banks, with, as industrial partner, Bevilacqua Engineering, synergies with the powerful cooperative movement (insurance, banking, retail, construction, ) are possible for firms such as Politecnica, Ambiente, Cooprogetti, Sts, Looking at the future, a few important developments can be foreseen among engineering firms in order to acquire bigger sizes: given the synergies between airports and motorways an incorporation by Spea of Adr Engineering (boosted by the impressive program of development of Rome-Fiumicino airport), the creation 45

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47 of a pole specialized in maritime works (but still diversified) promoted by the certification group Rina (recently diversified in a research centre, Csm) and including, besides D Appolonia, Thetis and Technital, with their strength stemming from having engineered Mose ; given the size acquired with a consistent policy of acquisitions (Idroesse, Girpa, ) 3Ti Progetti, which is also spanning architectural services through 3Ti Lab, is ready to acquire other ailing firms in order to become all the more multidisciplinary. Another potentially growing firm is Dba Group, thanks to the role played in its capital by Fondo Italiano d Investimento Sgr. Last but not least, out of the ten major subsidiaries of foreign groups Artelia Italia for the last three years has worked in the direction to create an hub for exports of Italian engineering in the Mediterranean area. 4. Numbers and Figures Wrapping up the four lists published in this report, the actors of the Italian professional offer in architecture and engineering add up to these numbers and figures, based on their 2013 balance sheets. The top 25 engineering procurement firms stemming from public entities add up a turnover of 2.6 billion euros (plus 9,7%) with a net benefit of 16,8 million (minus 64,8%). The top 100 engineering (and consulting) firms (mostly independent) add up a turnover of 1.4 billion euros (minus 5,5%) with a net benefit of 33 million (minus 62,5%). The top 100 architectural (and design) firms do better (although they are much smaller): they declare a total turnover close to 212 million (3,9% more than in 2012) with a net benefit of 7,5 million (minus 4,8%). Their better condition is also proved by the evidence that their financial net position is positive whereas the top engineering firms are loaded with an increasing debt (100 million). A last aspect, of a certain significance, is the distribution by Region of the Italian major firms. The weights being expressed in percentages of 2013 turnover. Lombardy, with its capital, Milan, hosts 31,6% of the engineering production and as much as 54,3% of the architectural and design output leading by far both the sectors; Lazio, region of the Italian capital Rome, occupies the second engineering position (with 18,9%) as in architecture (12,6%); Veneto, the industrious Region of Venice, is the third region in engineering (very close to Lazio with 18,2% but its architectural output represent just 2,7% (7 th ); The south of the country is represented by just Campania, the region around Naples, but with really poor percentages: it s 12 th in engineering with a 0,6% share and 8 th in architecture with 2,6% (see figures 18, 19, 20 and 21). Figure 18 Geographical distribution of the 225 (engineering, architecture and procurement) firms (2013 revenues) ABRUZZO 2,7% CAMPANIA 2,8% PIEMONTE 4,1% LIGURIA 1,9% VENETO 23,0% EMILIA MARCHE ROMAGNA 0,9% 1,6% UMBRIA TOSCANA 0,7% 1,4% TRENTI NO ALTO ADIGE 0,3% LAZIO 32,8% FRIULI VENEZIA GIULIA 0,2% LOMBARDIA 27,7% Source: Elaborations of Guamari on companies balance sheets 47

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49 Figure 19 Geographical distribution of top 100 engineering firms (2013 revenues) TOSCANA 2,1% MARCHE 1,9% EMILIA ROMAGNA 2,2% LIGURIA 4,2% ABRUZZO 7,2% PIEMONTE 10,0% UMBRIA 1,8% TRENTINO ALTO ADIGE 0,9% LOMBARDIA 31,6% CAMPANIA 0,6% FRIULI VENEZIA GIULIA 0,3% VENETO 18,2% LAZIO 18,9% Source: Elaborations of Guamari on companies balance sheets Figure 20 Geographical distribution of top 100 architecture firms (2013 revenues) EMILIA ROMAGNA 6,9% PIEMONTE 3,6% LIGURIA 6,2% VENETO 2,7% CAMPANIA 2,6% TOSCANA 11,1% LAZIO 12,6% LOMBARDIA 54,3% Source: Elaborations of Guamari on companies balance sheets Figure 21 Geographical distribution of top 25 public procurement engineering firms (2013 revenues) EMILIA ROMAGNA 0,7% CAMPANIA 4,2% PIEMONTE 0,4% MARCHE 0,2% LOMBARDIA 22,8% LAZIO 43,7% VENETO 28,0% Source: Elaborations of Guamari on companies balance sheets 49