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What Really Drives A/E Performance – Culture or Governance?

Among the many complexities of running professional service firms, certain core foundations need to be in place to achieve operational and financial success. When we undertake engagements involving either measuring, enhancing or extracting firm value, we attempt to also look beyond the numbers to understand why an organization performs the way it does. And while the balance sheet and income statement are merely the “report cards” for keeping score, we critically assess both a firm’s daily norms and behaviors as well as recent strategic decisions that serve as indicators to influencing its objectives.

And while no two firms are the same, we’ve found the most important drivers of sustainable A/E performance are: 1) having a positive and productive culture, and 2) a leadership team that consistently makes sound decisions that lead to profitable outcomes. In other words, how a business is governed.

So what exactly is “culture” and “governance”? While both terms are tossed around frequently in understanding the context of A/E organizational and interpersonal dynamics, it may help to revisit both.

We admit that culture can be nebulous, fluid and also shaped by many factors – a firm’s size, ownership, client base, disciplines, and founder’s persona. Many A/E leaders and employees will often describe their culture to us. We hear adjectives that run the gamut from “collegial,” “family,” “controlling,” “independent,” “collaborative” to “work hard, play hard.” All are helpful to appreciate patterns, traditions and policies at a macro-level, but understanding what comprises culture requires something much more elemental.

For help, I turned to our friend Chris McGoff, founder of the strategic and management consulting firm The Clearing in Washington, D.C. Over the course of his career, Chris has worked with countless organizations, including a large number of A/E and professional service firms.

From his upcoming book, Match in the Root Cellar, Chris offers that every firm culture is real, and it’s tangible. It’s a part of the human experience, and there will always be culture around us, in every form. Cultures can be generated that inhibit performance, and cultures can be generated that propel people to perform at their absolute peak.

Chris says that those that live in this kind of culture, a Peak Performance Culture, just “click.” Everything they do, they do as one, seamlessly, so that things go fast, but they go smoothly. Big, complex architecture or engineering projects suddenly seem easy because an entire culture is geared toward the same goal, the same cause, following the same processes, and relying on each other because they know that every other person on their team has the same goal, the same thought and the same mind. That is culture. It is the best kind of culture, and it is the simplest thing in the world to define.

However, his key takeaway is culture is the line that separates the behaviors you will tolerate from those you won’t. Every time you’re with a group of colleagues, this line exists. It’s invisible, but it’s real, and if you step across it, you know it immediately. His chart below captures that essence perfectly.

(c) 2013 The Primes, Inc. All Rights Reserved.

(c) 2013 The Primes, Inc. All Rights Reserved.

And what do we mean by governance? Quite simply, it’s how leaders run the business. CEOs, presidents, principals, boards and other key individuals enact broad policies and specific decisions that they believe will best serve the interests of the firm, their employees and clients. In most cases, these are choices that leaders feel will put their company’s resources to their best use and allocation, maximize profits, minimize risks, while also adhering to specific morals, values and the mission of the organization overall.

Examples of this are: Who makes principal this year? Should we acquire other firms? How do we allocate bonuses in a down year? Is it worth cold starting an office in Florida? Could we raise our billing rates? Should we refresh our website and corporate logo? Is it better to extend our lease or look for new office space? Which clients and projects need more of our attention? Is an ESOP the best option for us?

Now, of course, every organization would love to have the best of both worlds – a strong and cohesive leadership team and a Peak Performance Culture. Unfortunately, in our experience, that dynamic can be somewhat elusive. Let me illustrate with two scenarios:

Excelsior Architects has what many feel is an enviable culture. The 180-person firm recently celebrated 75 years in business and proudly maintains a list of cutting-edge and award-winning projects across a variety of market sectors. Best practices of technical innovation, design acumen, and cultivating younger architects are traced to its origins. There is an unspoken “Excelsior Way” to business development, project delivery and ownership transition, which has led to many satisfied and repeat clients. Excelsior is highly respected by its competitors.

Recently, however, the staff feels that leadership has veered off track. Never fully recovering from the recession, there are whispers the firm’s best days are behind them. Seeking new avenues, the principals made two small acquisitions in the last seven years, neither one of which integrated well, leading to “us vs. them” turf battles. Staff openly feels management has kept on several prominent, yet unproductive principals who barely carry their billing and client weight. Excelsior’s key K-12 market experienced a downturn which caught the leadership team by surprise and led to blaming and further inaction. Two rising stars passed over for promotion left to start a competing interiors firm and management failed to appreciate the impacts on three key clients. Most of the principals are over 55 and aren’t responsive to new tactics for marketing, social media and interacting with a fresh staff of status-hungry millennials.

Or how about the opposite case? Paramount Consulting Engineers is a first generation, 65-person civil engineering firm. The founder and CEO is a charismatic individual who has assembled a hard-working and accountable management team that directly oversees its various offices and divisions. The Paramount leaders promise to “walk the talk” and openly communicate the company values of “Service, Communication, Passion, Courage and Pride.” The firm has increasingly taken market share in its core land development sector and makes strong profit margins year in and year out. Two new branch offices have been successfully started within the last 5 years.

Yet, for all its good fortune something never connects culturally. Paramount has a reputation as a “sweat shop” and turnover rates are abnormally high. Emphasis on profit and office silos has led to an attitude of sharp elbows and lack of trust in sharing resources and opportunities. Staff openly gossip while others make ego-centric promises or detrimental threats in a “sink or swim” environment. Paramount seems to be successful in spite of itself.

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The ramifications of understanding culture vs. governance as distinct performance drivers are evident in many situations. With regards to succession planning and ownership transition, should the priority of new leaders and owners be as change agents or stewards of the current culture? With M&A transactions, finding compatible cultures that align is key, but equally important are the seller’s leaders who must work and remain with the combined entity. How does an A/E firm that markets itself with recognizable thought leaders and design personalities help find meaning and purpose for others to achieve self-satisfaction?

Thoughts? Opinions? What are your culture and governance like? Are both driving your firm to sustained and peak performance?

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