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2012 A/E M&A Outlook – Is the Glass Half-Full or Half-Empty?

“Never make predictions, especially about the future.” – Casey Stengel

As we settle into 2012, there are many reasons to be upbeat about the prospects for A/E and environmental consulting firms. First and foremost, many presidents and principals we talk to across various geographies and capabilities just sound more optimistic and confident, which in many cases is more than half the battle. After “hunkering down” and slashing costs for most of the last three years, many firms are soundly growing again, profits are up, and morale has improved. Backlogs are firmer, utilization rates have improved, and while many organizations continue to do “more with less,” incremental hiring is starting to take root. The private sector, slumped at the wheel since 2008, is reviving from its slumber and the early embers of sensible construction lending activity appear to be picking up.

For the half-full crowd, there are many A/E firms of all shapes and sizes that continue to stand out. These organizations have clearly benefitted from core market capabilities in thriving sectors, skillful penetration of new markets, stronger business development initiatives, and/or seasoned management teams who knew how to steer the ship when the storm clouds emerged. And while many of these firms are well-positioned in “hot” sectors like energy and power infrastructure, industrial and manufacturing, mining/extraction, and water, there are just as many firms in general architecture and renovation, transportation, environmental science and compliance, and (gasp!) land development who can also tout their improved performance and outlook.

However, we’ve all been around the block long enough to know that it’s way too early for the end zone dance. The recovery (are we allowed to say that word now?) has come in frustrating fits and starts and many A/E firms that have grown are simply bouncing back from huge drops in historical performance. A good number of firms are, in fact, still struggling along. Leaders that predict sunnier days ahead are also quick to acknowledge a laundry list of factors that could spoil the party, from yet another economic recession, Congress (everyone’s favorite piñata), looming election uncertainties, potentially higher taxes, and dramatically slower government spending. Add to that hand-wringing over internal leadership and ownership succession issues, elevated fee and billing pressures, and rising costs for healthcare and other benefits, and the half-empty crowd starts to roar. And don’t forget that no sustained economic recovery has ever occurred without major contributions from housing. Hey, no one said this would be easy!

These divergences have played their way out in the A/E M&A market, typically a barometer of overall industry confidence, capital allocation, and risk-tolerance. By our figures, after an impressive 2011 performance, M&A activity is down roughly 30% to start the year and is mirroring a general slump in global M&A across all industries. Today’s A/E and environmental deals that are getting done are increasingly dedicated to international combinations or targets in well-fortified niches. And yes, while we certainly feel strongly regarding the long-term rationale that M&A activity will ramp up (i.e., – it’s a consolidating industry, aging demographics amid glum internal transition prospects, firms should evaluate M&A to accelerate growth in a 2% GDP world, etc.), the short-term headwinds still have to be considered (i.e., – many serial A/E buyers remain gun shy about jumping back in, potential sellers are holding off to showcase better future financial results, etc.).

Buyers – Beggars Can Be Choosers
A/E leaders and M&A development teams continue to express heightened interest in speaking with firms that match their well-defined target criteria, and we here at ROG + Partners remain quite busy with numerous buyside engagements. Many of the factors that we outlined in last year’s M&A outlook remain in force, including publicly traded and large privately-held A/E firms seeking international franchises in emerging economies or access to natural resource development, while international players continue to shop for platform companies here in the U.S.

However, in this stop and start economic environment, buyers of all shapes and sizes are also becoming a bit more “patient” and “picky” about the targets they are evaluating and the time and energy they are putting forth. Not acquiring simply for acquiring’s sake, they are thus seeking targets that will either enhance their market/service presence or allow them to penetrate into new markets or geographies. They are not spinning their wheels with targets with unrealistic valuations and demands or dire turnaround situations. However, buyers will negotiate on terms and show more structure flexibility and overall willingness for those firms that readily add synergistic and strategic value and fit their “square peg in the square hole” needs.

Another interesting development from our viewpoint is the growing number of leaders who share that they would be readily open to a “game changing” deal for their organization. By this metaphor they mean potentially acquiring a firm much larger than their preferred comfort zone, or even an outright merger of equals and talents, if it helped diversify the organization geographically and added complementary clients and services, while creating long-term shareholder value. As we lamented recently regarding the plight of many mid-size A/E firms, these organizations are most ripe for this type of transformational combination.

Sellers – Timing is Everything
There have been a number of sizable, well known U.S. firms that have sold in the last year. Two firms in particular, MACTEC (sold to U.K.-based AMEC) and ATC Associates (sold to Australian-based Cardno) were motivated, in part, due to private equity-related sponsors wishing to finally part with their portfolio companies. Both international buyers were motivated by further expansion of their environmental engineering and consulting capabilities in the U.S. Right place at the right time!

Ultimately, timing plays a huge role for sellers. Many owners who are considering selling realize that their last 3-4 years of financial performance isn’t exactly inspiring and are rightly worried about valuation expectations and selling on the “down slope.” Some may just hold out for a few more years or attempt to convince buyers of the (real or imaginary) “hockey stick” performance just ready to emerge in 2012 and beyond. But sitting on the sidelines doesn’t change the fact that these ownership teams aren’t getting any younger, and don’t have feasible internal transition plans in place. Add to the mix that tax rates will be a huge wild card coming out of the election this year (alas, 2010 all over again), with the possibility of capital gains and qualified dividend rates either remaining at existing levels or perhaps rising dramatically.

Unfortunately, complacency sets in and owners can become paralyzed to simply do nothing at all, exacerbating an untenable position and putting the organization’s overall future and sustainability at risk. Given that ownership stakes in A/E firms likely constitute a sizable portion of future retirement assets, we encourage many owners to start planning for a coordinated internal or external planning process sooner rather than later!

At ROG+ Partners, we possess strong relationships and years of experience navigating A/E and environmental buyers and sellers through the M&A process and towards winning combinations. Whether you are seeking to grow through acquisitions or by evaluating your firm’s strategic and ownership alternatives, please contact us as to how we can help your organization.

Millennials… Please Don’t Fail To Launch.

The perception by older generations of company owners is that members of Generation Y (aka “millennials”) are inert bodies when it comes to rising to the challenge of ownership. Maybe they were coddled too much by their baby boomer parents. Or perhaps the millennials as a generation are a result of a modern culture where no competition has a loser and everyone gets a medal for just showing up.

Whatever the case, because the reality of this might not be too divergent from the perception, here is the corollary: getting ownership into the hands of younger employees is paramount to ensuring the longevity of your firm!

Most owners are gradually coming to grips with the fact that millennials are the next generation, but I suspect that the greater issue at hand is that many millennials have yet to realize that the future is theirs for the taking. All too often preoccupied with promotions, raises, and more personal time, younger employees may not realize that the greatest measure of one’s worth to a firm is measured in ownership. So, for those who may be ready and willing to accept the beckoning of ownership, where to start?

Getting Going

Here are a few basic questions that millennials should be asking A/E firm owners to assist them on the path to ownership:

What is the ownership picture here, and what role can I play in it?
Chances are you won’t waste your time broaching this subject if you’re not serious about it, which is a good thing for both you and your company. Merely showing an interest in ownership might be the biggest catalyst in your becoming an owner, because frankly, management doesn’t always have the best read on what its employees want. This question also serves as an excellent prompt to getting a clearer understanding of what your employer’s short- and long-term goals are for you.

Some firms have a formal process in which ownership is tied to a certain title, meaning that there are generally very measurable goals set for each preceding position, while others will treat the issue of ownership on more of an ad hoc basis. Either way, and considering everything in between, the only way to proactively learn about ownership possibilities is to show interest.

What does ownership mean in my firm?
As broad a question as this may seem initially, it is actually easily reduced to a very specific concept – does ownership simply represent an additional financial benefit to an employee (with any and all corresponding responsibilities, of course), a symbol of gratitude (sometimes referred to as “sweat equity”), or is there also an inherent component of leadership with each share or unit owned?

Over the past winter holiday, I spoke with friends who, like me, are considered the earliest of the Generation Yers. While many work for firms where a meaningful ownership stake isn’t quite in the cards (i.e., publicly traded companies), a few are in positions not dissimilar to mine, and as to be expected, had varying descriptions of what ownership meant on a personal level. For one who works at a consultancy, it was a combination of the aforementioned financial benefit and leadership angle – for another who joined a budding Web 2.0 startup (yes, tech startups are back!), it was just the ability to have a voice as a firm leader… In any case, understanding the culture of ownership in one’s firm is a great place to start learning more about the opportunity.

How will I pay for ownership?
If you’re already at the stage of being considered in the next round of ownership offering, this is likely one of your primary concerns. The actual dollar cost of any investment is always part of the consideration put into estimating the true value of the investment, and although investments in privately-held firms often provide far greater returns than can be found in the external market, the additional risk assumed by such a purchase does not mean that the investment should be had for zero or next-to-nothing!

Not to fret, however, because rarely do sellers require significant outlays of cash or other forms of non-company financing, and many are actually willing to work through financing issues with buyers, generally through notes payable to the company or to the seller; such debt can often then be serviced by profit distributions. Although some buyers would prefer to have guaranteed bonuses or other forms of compensation to help cover the entirety of their loan payments, both parties should strive to strike a balance between the needs and desires of the sellers and the abilities of the buyers in regard to purchasing the shares.

The Future is Now?

Whether you’re a member of Generation X, Y, or even Z, now is the time to take a good look at your future, from both professional and financial perspectives. The opportunities for ownership are greater today than they ever have been before, but I can’t think of a truly good reason to put this kind of planning on the back burner. As for baby boomers or anyone else who’s got succession planning on the mind, find a way to engage the next generation of leaders in your firm, and avoid a “failed end.” Taking the appropriate steps to do so will, at the very least, help you avoid the unsettling position of not having much in the way of transition alternatives.

“We Need to Talk”: A Primer on Kick-Starting Ownership Transition Efforts

In the middle of a recent ownership and leadership planning engagement, I received a call from one of the two shareholders describing that the other owner suddenly developed a health issue and, as a result, they now need to explore new options. I had known both owners for years and they always had reasons for delaying a transition discussion, from general anxiety to “it’s not the right time.” Now, they are finally taking action in which the choices are much more limited because they ran out of time and viable structure options. In fact, within the last three months, I have had three clients that had unforeseen issues arise and they were forced to watch good employees leave because of uncertainty surrounding ownership and leadership discussions, because they dread the frankness of “The Talk.”

What goes through your mind when you hear, “We need to talk?” We all dread “The Talk,” and immediately go on the defensive. Why? It makes us uncomfortable. Now, after years of kicking the can down the road, we are seeing more A/E firms opening up discussions regarding ownership transition, and oftentimes (as illustrated above) because of forces beyond their control. As an average 10,000 people a day or nearly 80 million Americans through 2030 reach the retirement age of 65, many closely held companies are being forced to critically assess how they transition ownership and leadership.

I have been working as an advisor for more than 20 years and have seen my fair share of companies ranging from very poor management and operations to outstanding. But sadly a lack of ownership and leadership planning is common for firms of all shapes, sizes, and backgrounds. Failure to plan for ownership and succession planning will more than likely lead to a failed end. So why do firms do this, especially successful and well run organizations? Some of the most common themes I have come across include the following:

  1. The anxiety of both the unknown and the thought of giving up control simply prevents many otherwise intelligent and hard-working owners from taking action;
  2. The next generation of employees – Gen X or Millennials – are perceived as not wanting to work hard for ownership possibilities, or simply don’t want the risks and responsibilities that come with becoming an owner in an A/E firm; and
  3. It is simply not a good time to transition because financial performance is down.

Today, it’s been my experience many A/E and environmental consulting firms of all shapes and sizes select the last category.

Anxiety Attack
Giving up control creates anxiety for owners because ultimately they don’t want others directing or influencing the company and they don’t want to feel less valued by their employees and clients. If control is important to an owner or group of owners, then that company is not creating an environment for developing leaders. Leadership is a cultivated skill that gets created in an environment where the leaders themselves become replaceable.

Too often though, owners equate giving up responsibility to giving up control. Allowing for some decentralization of the decision making process, such as identifying people to hire, managing the project resource allocations, accounts receivable collection meetings, and the like, only encourages younger employees to feel that they can add value. Control lies in the power to shape the direction of the decisions that your managers make. It may seem counterintuitive, but the less you make your firm rely on you for business development and operational and financial management, the more value you create for your company. Giving up responsibility does not equate to giving up leadership.

Generational Differences
Many firms are delaying their planning because of real or perceived generational differences. As one of my clients said to me a couple years ago, “I blame myself for this situation because we protected our younger generations too much from ‘bad experiences’ in life, thus creating an environment of entitlement.” With the lackluster economy, this sentiment about the next generation is changing.

Recently, I was working with a client who needed to redeem a large shareholder and sell shares to select employees– and I recommended that they offer ownership to some younger employees. My client did not think that this was possible because the younger employees might not possess the financial know-how to take full advantage of such an offer, nor did they think it would be fair to other, more experienced employees. Much to their surprise, the experienced employees were receptive to the idea of the younger ones having a meaningful stake in the company. Working with both the employees and the owners, we were able to better open the lines of communication – and allow for the sharing of ideas and concerns of all parties.

Weak Financial Performance
Owners nearing retirement want to obtain the highest price for their interest in the company. So why should owners sell their shares when the value is low? However, waiting for the market to return is risky, and selling shares does not mean sell ALL of your shares. It is common practice for owners nearing retirement to sell a portion of their interest over time to take advantage of the future value increases and reduce the risk against future decreases in value.

When large shareholders sell some of their shares in a valuation that is perceived low, they are sending a message to those key employees that the company is committed to them by sharing a greater upside potential than downside risk. The selling shareholder is also reducing his future redemption risk because he has a smaller stake going forward. Even if his reduction in percentage in ownership is marginal, any reduction is an improvement in managing the company’s future redemption risk.

Rusk O’Brien Gido + Partners have facilitated discussions between internal buyers and sellers of A/E and environmental consulting firms and are experienced at addressing valuation, management roles and responsibilities, ownership structures, and leadership development. The first step in having “The Talk” is often the most difficult, but you don’t have to do it alone. We can help you get started.

Bonuses or Shareholder Distribution — Which Should Take Priority?

Occupy Wall Street protesters rejoice! The New York Times reported this weekend that 2011’s bonuses for the top investment banks are likely to be down 15-30%. But before you shed a tear for those downtrodden bankers, reflect on the fact that the average total compensation per employee of Wall Street banks such as Goldman Sachs and JP Morgan Chase will still be on the order of $300,000, with bonuses for managing directors typically measured in seven figures.

Unfortunately, even in their best years the typical A/E firm couldn’t even dream of having such a level of discretionary profit to throw around. Median profit margins in this industry (before taxes and discretionary bonuses) tend to range between 8% and 12% of net service revenue. With a relatively modest profit pool to work with, management is often faced with a difficult decision at year end—how to divide up the pool between bonuses and shareholder distributions in a way that keeps everyone happy.

There are two primary questions here:

  1. Should priority be given to incentive bonuses or to shareholder return on investment?
  2. What sort of return on investment should an owner in an A/E firm expect?

Where should the priority be?
I’ve heard many managers, consultants and advisors suggest that incentive bonuses always be given priority over shareholder distributions. The frequent refrain goes something like, “You’ve got to reward your top performers with sufficient bonuses to continue to motivate and retain them.” There are a number of problems with this philosophy. To begin with, your top performers—the people that create real value in your organization, should be the owners. If you have good alignment between the ownership of your company and the people that create value for the company, then the question of how to prioritize profit distribution is moot. If this is NOT the case in your firm, aligning ownership with the top talent and leadership should be your first task.

Secondly, there is the matter of ownership transition planning. A frequent challenge for A/E firms is how to encourage investment by prospective owners, or further investment by younger existing owners. In order for retiring owners to be able sell their shares, the younger generation must have a healthy appetite for the company’s stock. The best stimulant for this sort of appetite is a strong return on investment. However, if profits are directed first to incentive bonuses, with whatever’s left over (if anything) going to the shareholders, you’ll never be able to provide a sufficient return on investment.

I’d also offer this observation. In companies I’ve worked for and in many client firms, I’ve seen highly valued employees resign days after receiving hefty incentive bonuses. So be careful not to assign too much value to such bonuses as a key employee retention tool.

What sort of return should an owner expect?
If we can agree that priority should be given to shareholder return on investment, then the next question becomes what that return should be. Return on investment is defined as the total amount that an investment appreciates over a period of time (e.g., a year) plus any distribution paid to the shareholders over that time, divided by the value of the investment at the start of the period. Take the example of a firm with a stock value of $10 million at year-end 2010. If the firm’s value at year-end 2011 increases to $11 million, and over the year it pays distributions to its shareholders totaling $800,000, then the shareholders return on investment would equal 18%.

Stock Appreciation: $11,000,000 – $10,000,000 = $1,000,000
Shareholder Distribution: $800,000
Total Return: $1,800,000 / $10,000,000 = 18%

The first element of the return on investment, the stock price appreciation, will be determined based on the method you use to value your stock and the firm’s performance over the year. It’s the second element, shareholder distribution, which falls to the discretion of management.

I would argue that there should be a minimum targeted return on investment, but not necessarily a ceiling. The firm’s owners have invested real money; they risk the potential loss of their capital, and sometimes they even guarantee the firm’s debt. With the potential downside risks that the owners are subject to, they deserve to enjoy the upside when the firm does well.

Various models exist for estimating required rates of return for equity investors. These include the capital asset pricing model (CAPM), Ibbotson build-up method, and other models that look to public market pricing of stocks relative to the current interest rate environment. These models typically point to a required rate of return in the 17% to 25% range. Adjusting for the lack of marketability of privately held stock (because the above models are based on data from publicly traded firms) this range increases to 22% to 32%.

For that reason we advise clients that their target return on investment should be somewhere around 30%. You may not achieve this target every year, but you might also exceed it some years. In the example above, the firm’s distribution would need to be $2 million rather than $800,000 in order to provide a 30% return to its shareholders.

Sharing the wealth
Of course management will always need to exercise a healthy degree of discretion when it comes to profit distribution, and the thinner the profit pool, the tougher the decisions will be. Profit sharing and incentive bonuses still have their place, and owners should be willing to share the wealth. Just remember that the long-term viability of your firm requires having good people that are truly vested in its success. These are (or should be) your owners and providing them with a strong return on investment is priority number one.

The Vanishing Mid-Sized A/E Firm

“We’re too big to be little, and we’re too little to be big.” – Burt Hill’s CEO Pete Moriarty on his board’s decision to sell to Stantec in 2010

Being stuck in the middle can be hard. In my mind, no one personified that dilemma better than Jan Brady, the perpetually awkward and insecure middle child on the classic TV series The Brady Bunch. On one hand, Jan was always jealous of her pretty and popular older sister Marcia, leading to unfair comparisons and inferiority complexes. And on the other, the family seemed to shower more affection on little Cindy, the sweet and talented youngest daughter, complete with her pigtails and cute lisp. If Jan wasn’t battling freckles, she was nervous about wearing glasses. As best as she tried to make a name for herself or form her own identity, Jan struggled to fit in.

You could draw similar comparisons to many mid-sized A/E and environmental consulting firms in this climate. From our vantage point, more of these “in-between” firms are struggling to fit in (and survive!) as well, leading to increasing numbers selling to larger national and international players (see table). While many leaders have sensed and observed this trend over the years, the underlying factors driving this phenomenon are unlikely to subside anytime soon.

The Middle Class
The initial question is just what exactly constitutes a “mid-sized” A/E firm, and in talking to industry leaders and experts you’ll find no shortage of opinions. Given the fragmented nature of an industry with thousands of niche practices, some define firms as “mid-sized” if they have 25 to 50 employees, particularly those that are single-discipline or dominate a particular city or region. Other companies, such as Halcrow (6,000 staff) and PBS&J (3,900), lamented their underwhelming size as motivation in selling out to industry titans CH2M HILL and Atkins, respectively. That’s a big range!

For simplicity’s sake, we’re going to define mid-sized firms as those with staff sizes between 150 and 1,500 employees. This would cover those organizations that comprise the ENR 500 up to approximately number 50. At a minimum, these firms have the following general characteristics:

  • Multi-disciplined service offerings, typically including some combination of engineering, architecture, planning and/or environmental consulting
  • Mix of public and private sector clients
  • Anywhere from 5 to 50+ office locations, with activities often dominated in one state or several regional footprints
  • Privately held, with ownership profiles ranging from sole owner to 100% ESOP
  • Formal management structures, governance policies, and IT/financial reporting systems

A/E firms above 1,500 employees tend to get exponentially larger, are often publicly owned, focus on the largest building or infrastructure projects, and have national and international franchises. Those below 150 typically tend to focus on several cities/counties in a particular geography, have higher client concentrations, fewer owners, and simpler organizational matrices.

Checking Out?
So why sell? In discussions with dozens of leaders of mid-sized organizations who sold over the last few years, the reasons they offered were the following:

  • Higher valuation – it’s common to see mid-sized A/E firms sell stock internally at book value or other deeply discounted levels as a means of affordability and simplicity. Cash-rich publicly-traded buyers have the resources to offer much higher valuations, in many cases from 5 to 8 times operating earnings and 2 to 4 times book value. For baby boomer principals whose ownership stake is often the largest asset in their retirement portfolio, better to cash out sooner rather than later. Another factor for owners – future tax rates will be going in one direction – up!
  • Ownership transition failure – the reality today is a large percentage of mid-size A/E firms have ownership profiles that defy logic. Many are “top heavy” with principals in their 50s and 60s who own a large majority of the stock. There simply aren’t enough 30 and 40 year-olds ready, willing, and able to buy these senior owners out in a coordinated process that won’t result in a decade (or more) long sell down. With profitability levels down, using the firm as a conduit to fund buyouts via cash bonuses for equity or other transfer mechanisms is increasingly difficult. More ominously, in a low growth environment, cash used to pay down redemption liabilities means less available for firm reinvestment, incentive compensation, and growth capital.
  • Leadership succession failure – hand-in-hand with ownership transition challenges are leadership succession ones. Aging A/E leaders haven’t done nearly enough to prepare and groom their next generation. Many presidents and principals look around and readily admit they don’t have faith that the next tier of managers has the capacity and acumen to guide them into the 21st century.
  • Increasing client demands – the trend in A/E client delivery models has been towards more “one stop shopping” and offering end-to-end solutions from multi-discipline planning and design through construction and monitoring. Larger firms often have the geographic coverage, broader service offerings, and business development resources that many mid-sized firms lack.
  • Diminishing marginal returns – mid-sized firm leaders voiced their frustration with the steady creeping of corporate overhead, bureaucracy, fixed costs, branch offices, governance policies, and slower decision making, all of which served to produce lower shareholder returns! In contrast, small, niche firms had lower cost structures, were more operationally nimble, and can often focus on one discipline, market segment, or geographic area more effectively.

Fighting the Tide
Fortunately, many firms aren’t quite ready to accept the inevitability of their predicament and simply get swept away with the winds of change. There are hundreds of resilient mid-sized firms who have survived through booms and busts, leadership changes, new competitors, and management fads. Recessions have a powerful way of honing the senses, and today more than ever, savvy leadership teams are challenging the conventional wisdom of business as usual as well as shaking up their firm cultures. Some of the bolder initiatives they are undertaking include:

  • Regional combinations – mid-sized firms experiencing similar growth or ownership challenges are coming together to create larger regional engineering or architecture organizations for sustainability and growth. Good examples are H.W. Lochner and Bucher, Willis & Ratliff joining forces in the Midwest, and Pennoni linking with Patton Harris Rust in the Mid-Atlantic. Architecture firm “merger of equals” are developing around common urban centers as well.
  • New ownership models – faced with sizable redemption liabilities, some organizations with conventional owner/partner models are considering new avenues, including implementing Employee Stock Ownership Plans (ESOPs) or Employee Stock Purchase Plans (ESPPs). Studies have shown that broad-based employee ownership, combined with open book management and other participative measures, can be a strong impetus to growth and profitability. Private equity is another model, where growth-oriented financial investors can help with a partial exit strategy for owners while injecting capital and business expertise to accelerate growth.
  • Intentional shrinking – most A/E firms are smaller than they were five years ago, and many significantly so. Lower project volumes have led to a combination of layoffs, office closings, divestitures, and a strategic culling of clients. As a result, many leaders offer that they are “leaner and meaner” than they have been in years and are more focused at a reduced size.
  • Get growing – for all the hand wringing and tales of woe in the A/E industry, trust us that there are a number of great growth stories taking place every day. Mid-sized firms that are “bucking the trend” are doing it through taking a critical evaluation of their business development and marketing practices, aggressively pursuing new markets and client verticals, acquiring niche firms themselves, bringing in outside talent at all levels, and taking market share away in a lower growth environment. It’s refreshing to see!

Endgame
The A/E industry is going through some remarkable structural changes. The big keep getting bigger. Either displaced or just fed up, sole practitioners are putting out their own shingles in larger numbers. Design and consulting talent seems so readily available, yet so scarce. Unflinching clients are demanding more for less. The number of mid-sized firms is shrinking, but many are not going down without a fight.

Is your organization feeling a bit like Jan Brady today? Tell us what you think. ROG Partners brings years of seasoned financial and business experience in navigating A/E and environmental clients through strategic and ownership alternatives in an ever changing landscape.

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Table: Representative Mid-Sized A/E and Environmental Consulting Transactions, 2010-2011

Unintended Consequences of Poor Financial Reporting

A client who called me to inquire about updating her firm’s valuation began our conversation by saying, “Not only are you going to be happy with our recent financial performance, you’re going to enjoy this engagement more than you have in the past!” Before I could express my curiosity (and perhaps more importantly, let her know I’ve always enjoyed working with her and her firm), she began singing the praises of the firm’s newly implemented accounting /project management software. Aha. Without prompting her to further explain her opening remark, I recalled our most recent project. Although highly profitable and seemingly well-organized, several cracks in her firm’s foundation had been exposed during the due diligence phase. At the time, given that many of her competitors were struggling to remain afloat, her firm remained buoyed by its high profit margins. After thoroughly working through the valuation process, we easily identified one key area that required immediate improvement: financial reporting.

Our scouring of spreadsheets and printouts a mile long revealed that while the firm’s financials were (thankfully!) prepared on a quasi-accrual basis, there was no way of easily discerning where labor dollars were being spent, what any of the non-interest “other expense” items were comprised of, or why there was no accounting for deferred tax liabilities (they’re a C-corp) – to mention only a few of the issues! The client, while briefly acknowledging the problem, countered by exclaiming, “But we’re still bucking the trend!” Nevertheless, I highlighted certain pitfalls that her firm would surely face if it continued to neglect putting forth a better effort in producing quality financial statements – she promised to look into my recommendations of software providers.

As it turns out, immediately after the engagement wrapped up, the firm made an investment in a suitable accounting/project management software suite, a decision that proved timely as revenues and profit were on the verge of a descent. During the implementation and training period, an open-book style of management was adopted and in the months following, all key managers of the business had the tools to make better decisions. Utilization, overhead rate, average collection period – these were just a few of the many metrics now trackable thanks in part to accountable financial reporting. Not completely out of the woods, yet, the firm also required debt financing at the time, the securing of which, in her words, “would have been a nightmare if we hadn’t gotten our numbers in order.”

Because most A/E firms aren’t capital-intensive, they have fewer reasons to enter into loan agreements than do firms that carry large fixed asset balances. As illustrated above, however, there is often a very real need to borrow money, and although professional service firms typically aren’t required to have a large ratio of assets-to-size, it isn’t uncommon to see them with some level of debt (various notes payable, non-compete covenants, acquisition funding, to name a few), or unreasonable to anticipate a day when borrowing will become a necessity for those who have never required it previously.

Creditors want a clear picture of the historical, current, and future cash flows and earnings of a company; the strength of the company’s asset base; and any outstanding loan agreements. The statements of income and cash flow are generally considered sufficient when gauging whether a creditor will be repaid, and the number most often focused on is EBITDA, because it highlights a company’s core profitability (by removing non-cash charges and non-operating expenses from earnings). Because of the insignificant amount of fixed assets carried by firms in our space, the two areas of a balance sheet that generally come under scrutiny are existing loan agreements and liquidity. Where a creditor will fall (senior or subordinate) to the borrower’s other debt, as well as the company’s short-term ability to meet its obligations and remain a viable entity are of particular interest to a creditor. Every bit of this type of data must be easily presentable and understandable to its intended users.

In the case of our client, the borrowed money helped get the firm through a difficult (albeit short) period, and because of improved financial reporting, the firm now has the ability to seek out areas that need greater focus before it’s too late; a benefit that might lessen the likelihood of a scramble to access capital in the future.

Banks aren’t the only external parties who rely on a company’s financial statements to make key decisions. In the stage of courtship when an acquirer gains access to a target firm’s financial statements, the quality of reporting can have a significant effect on how to further pursue the opportunity. At best, poorly presented financial statements can be a big headache for both sides, and can often lead a seller to incur additional costs related to providing satisfactory reporting. At worst, the integrity of an organization can be called into question when transparent statements aren’t available.

We recently advised a client on a potential acquisition candidate, which included providing an estimate on the fair market value of the target. Our analysis was based on less-than-ideal financial documentation, and when we requested supplementary data, were told that it wasn’t available. After discussing our findings with our client, a firm with deep M&A experience over the years not only through acquisitions, but also through divestitures, the response to our number was, “Let’s come in 25% below what we normally would’ve offered as a starting point.” I explained that our estimate of value (which was approximately 20% higher than what they intimated as their starting point) already took into account the risk associated with murky financials. The response? “We realize that. But without some sort of verification of their numbers, we don’t feel comfortable going anywhere near fair market value, given the implied risk.” Eventually, the deal broke down (due to an unrelated issue), but the lesson here had been learned – the absence of quality financial statements will do no one any favors.

There’s no good reason to engage in the practice of scant financial reporting. Preparing accurate and timely financial statements for internal AND external use should be a priority of any closely-held company’s finance/accounting team. Users of these statements should require accuracy and transparency to effectively assess financial and operational performance; poor reporting can lead to anything from a degradation of internal controls to missed opportunities for shareholders, managers, and their employees.

Constant communication of financial performance is critical to a company’s long-term success. While there isn’t a need to have financial statements audited (many of our clients don’t), they should be reviewed, or at a minimum, compiled by a CPA annually. Internally, accounting/project management software is a must for firms who need to track performance from the project level to the overall firm level.

Deferred Compensation – Know The Risk

Two decades ago a business trend caught my attention that was a foreshadowing of things to come. I was doing a considerable amount of advisory work with companies that operated in the steel industry as it was on the precipice of the pension benefit meltdown. Years later, when my former firm served as an advisor to the UAL ESOP transaction, I saw it again – the airline industry was experiencing a meltdown of legacy costs. Over the past decade, I saw the effects of pension obligations and how they impacted the financial stability of automobile manufacturers in the U.S. For every car built in Detroit, there were significant legacy costs due to ongoing pension obligations. Today, we are seeing the problems of pension obligations, and how they’re influencing the workforce. In fact, Governor Christie (NJ) has expressed the idea of converting public pensions from defined benefits to defined contributions. But what do pension benefits have to do with deferred compensation?

First, I’d like to discuss the economics of pensions and how they can affect a company’s future financial condition. Then, we’ll take a closer look at how the same can be attributed to deferred compensation plans. Companies that sponsor employee pension benefits generally do so because they believe that such benefits reduce the cost of goods and services that are tied to the overall compensation of employees. By deferring a portion of an employee’s compensation for the future, the current costs are reduced by the present value of the future liability (which is realized at the time of payment). As an example, if an employee is making $75,000, and his company promises to pay him 50% of his income upon retirement, he would effectively be receiving $37,500. Depending on the age of this employee, the actual cash outflow might not occur for decades. Furthermore, if the company were to make a contribution to this employee’s retirement plan, the investment wouldn’t be $37,500, but significantly lower. Why? Because of their expectation that initial investment and future investments will grow overtime to meet the employee’s future retirement obligations.

Trying to capture the value of the future pension obligation is an exercise in futility, because there are too many variables that impact its present value. Life expectancy after retirement can have the greatest influence on value – in other words, the longer a person lives, the greater the liability becomes. This life expectancy assumption is what is killing Social Security and Medicare. When Social Security was first implemented, the number of years the typical recipient received the pension was less than one year. Now, people are living decades past their first benefit check. Secondly, future market conditions impact expected returns, which in turn impacts the value of the plan assets. When I began developing my own personal model for retirement a decade ago, I made certain basic assumptions of my expected future returns; one primary assumption was that I could realize a 7% annual return on investment while in retirement. If I were beginning my retirement modeling in today’s climate, I believe that what I had originally assumed as my return would be flawed. In 2001, 30-year treasury notes were yielding 5.5% – today, many would be glad for 3.5%.

So, how does this compare to deferred compensation plans? Companies sponsor deferred compensation plans as part of a total compensation package for their employees – the most common plan being the 401(k). However, some firms will implement other forms of deferred compensation for a variety of reasons, the least of which includes wanting to reduce the threat of flight risk by the most valued and productive employees. Typically, these compensation plans are agreements between the employees and the company in which the company promises to pay, in the future, an amount predetermined by a formula – much like a pension. Doing so creates a liability that negatively affects the equity value of the sponsoring company, because the promise to pay the liability in the future is recorded on the balance sheet. However, the company is not required to set aside funds to satisfy this obligation. In fact, firms must exercise care when establishing a deferred plan, because if there is any guarantee of the delivery of deferred compensation, then the plan’s beneficiary has obtained constructive receipt of the deferred compensation and must recognize taxes immediately, even though he did not actually receive the funds. On the other hand, the company is able to deduct the amount of compensation that is being deferred in the year it was incurred. Why would firms do this? In addition to golden handcuffs, firms often use deferred compensation as a tool to reduce the value of equity in the company. As the value of the liability increases over time, the growth of value of the sponsoring company is limited. This means that acquiring shares by future employees becomes more affordable, and therefore will increase the likelihood of a successful ownership transition in the future.

So, why not implement deferred compensation plans? In short, whether you pay for a high value stock with no deferred compensation today, or a low value stock with deferred compensation in the future, the share purchaser will still pay for the high value. With a deferred compensation plan, a company is only delaying the inevitable, as the payment will ultimately come from company funds. Simply put, less cash means less bonuses and profit distributions.

At the crux of any promise, whether that promise be deferred compensation, bank debt, or shareholder notes, is that the obligation created today will require payments that rely on future cash flow. It may be possible to reasonably predict future payment obligations, but it’s a much more difficult task to predict future cash flow. My colleague, Ian Rusk, discussed the risk of using aggressive leverage in our August 2011 ROG + Perspective – deferred compensation is just another form of leverage that creates a strong key employee retention plan and helps manage ownership transition planning.

If Governor Christie (NJ) is proposing to convert public pensions from defined benefit plans to defined contribution plans, it won’t happen soon, but I wouldn’t be surprised if we begin seeing more public plans move in this direction. Following suit will be more companies coming up with creative ways of mitigating the flight risk of key employees, balanced with the need for feasible stock ownership plans.

Your Board of Directors May Be Holding You Back

Poorly structured and unfocused corporate governance in A/E firms both small and large is a frequent contributor to poor financial performance, lack of growth, and stalled ownership transition plans. Governance issues we frequently encounter include:

  1. Management by committee: This happens as first generation firms begin to add new shareholders and fall into the trap of giving every shareholder an equal voice in corporate governance, no matter how small their investment. Pretty soon you have the sort of gridlock that would make the U.S. Congress look efficient.
  2. Confusion over roles of managers vs. directors: When the board of directors overlaps completely with operational management, board meetings are often consumed by operational topics. The board should instead be focused on big picture strategic discussions. Directors that cannot shed their operations hat should not be on the board.
  3. Turf Protection: Related to the above, when your board includes “representatives” of every office or department, meetings often devolve into turf battles, with each representative defending their office or department, or lobbying for what they want or need, often to the detriment of the company as a whole.
  4. Not applying the best talent: Often firms choose their highest ranking, closest allies and most tenured leaders to make up a board rather than those who are the most strategic thinkers and will constructively challenge the board and bring different perspectives. And there is often no mechanism in place to continually refresh the team that comprises the board.
  5. Lack of Outside Perspective: In other industries and in larger firms, you frequently see boards made up of directors from outside the company. They might include consultants, attorneys, accounting/finance professionals, or retired executives—in other words, people that can bring unique and valuable perspective. But for some reason, most boards in the A/E industry seem to be composed entirely of members of the company’s senior management.

Gerry Salontai of the Salontai Consulting Group is the former CEO of Kleinfelder and currently sits on the boards of several successful A/E firms. According to Salontai, “The key to a great board is getting the right people as directors or advisors and focusing on the right topics. A great board will ultimately drive exceptional results for the shareholders of the firm.”

The Case Against Aggressive Financial Leverage in A/E Firms

I’ve noticed that some industry experts have recently been advancing the idea that A/E firms are under-leveraged—suggesting that firm owners should consider borrowing more from banks and other lenders because debt is a cheaper source of capital. The other logic cited is that utilizing debt capital allows an owner to finance growth without diluting their own equity interest.

My personal opinion is that this is misguided advice (at least for all but the largest most stable firms in the industry) and fails to take into account some basic characteristics of the A/E industry.

It’s true that debt is often cheaper than equity capital, and the associated interest expense is tax deductible (for now anyway). But over-leverage your A/E firm and you’re begging for trouble. Earnings can be very volatile in this industry, and professional service firms typically have very little in hard assets to collateralize a business loan. In fact, many owners must personally guarantee even the modest credit facilities they already maintain. It’s one thing to fail to make a profit distribution to your fellow owners. But default on your bank loan payments or bust a loan covenant, and you’ll be in a world of hurt.

Even moderate debt levels can become problematic when a firm is hit with an unexpected downturn or faces collections issues with its clients. Cubellis, once an extremely successful and fast-growing architecture firm, is such an example. “Speaking from first-hand experience,” says Len Cubellis “while growing my A/E firm I always felt that my leverage was safe at 70% of my receivables under 90 days. Then the world turned upside down with the Lehman Brothers collapse. Once you’re outside your loan covenants, managing your firm’s finances is no longer within your control. The bank steps in and takes steps that protect their interests first.”

There are many examples of A/E firms that had to shut their doors over the last two years ONLY because they found themselves in default with their lenders after the recession caused their revenue and earnings levels to decline. These were very good firms with solid reputations, great people, great portfolios, etc. If these firms had been capitalized less with debt and more with equity, many would still be around.
So how much debt is appropriate? Some industry statistics might be helpful here. According to a 2010 study conducted by the accounting firm DiCicco, Gulman & Company, the median total liabilities-to-equity ratio for the industry is 1.24. Other studies, such as those by the industry research and publishing firm PSMJ Resources, put this ratio at a median of 0.9. When only bank debt is included, the ratio falls to just 0.2.

There are a number of reasons for the modest levels of debt that most A/E firms operate under. To begin with, A/E firms are not capital-intensive. Without large amounts of fixed assets, there’s less need to borrow and, as previously stated, less tangible assets to use as collateral.
Earnings volatility is another factor. A/E firms, particularly smaller ones, often have highly volatile earnings levels. This is the nature of the project-based professional service industry we operate in. Debt is not a wise source of capital in a firm with volatile and unpredictable earnings due to the aforementioned default risk.

Finally, the ownership structure of most A/E firms must be considered. The vast majority of firms in the industry are owned by a small number of senior managers. In most cases, these owners must personally guarantee their company’s debt. It’s no surprise, therefore, to see these owners exhibit conservative borrowing patterns.

To grow and sustain your A/E firm you need to be willing to provide opportunities for ownership to key people. Don’t try to finance your growth by taking on debt out of a fear of diluting your equity. Apply such a strategy, and the following is likely to happen: The most talented folks you have will leave; you’ll fail to attract new talent; and you’ll ultimately be left with a 100% equity stake in nothing (or worse, you’ll owe more to the bank than your company is worth).

By contrast, if you adopt the opposite strategy and “share the wealth” you’re more likely to be rewarded with the loyalty of high-quality employees as well as the ability to attract top talent. Most owners I know would rather have a smaller equity stake in an investment of real and growing value than a 100% equity stake in a stagnant, over-leveraged business.

We’re interested to hear your thoughts on this subject, to voice your opinion, join our LinkedIn group or email me at irusk@rog-partners.com.

Mid-Year CEO Outlook

 

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As we enter the 2nd half of 2011, we thought it was a good time to check in with 6 CEOs of leading architecture, engineering and environmental consulting firms across the country. We were curious to see how their organizations were faring so far in 2011, where they see opportunities for growth, what challenges lie on the horizon, and if their leadership styles have changed throughout this recession.  

 

Howard Birdsall, Chairman, President & CEO, Birdsall Services Group, Sea Girt, NJ

birdsallHow has Birdsall’s performance fared so far this year?

Our profits are up 10% from last year; however, sales are basically the same. Some of our services such as site civil, geotechnical, and traditional MEP are experiencing lower profits and sales. Services to public clients in the municipal, transportation, structural, water resources and environmental areas are relatively flat. Services in our marine and energy disciplines are growing both in profits and sales. So it’s very much a mixed bag depending on each service or market.

In what market or service areas are you seeing promising opportunities for growth?

We see opportunity in the energy market, both in renewable energy and sustainability. The other area is in marine engineering, but that’s very much a niche market. Another area is project management and design build, but to really do this effectively the risk factor goes up significantly, but so do the profits. In the long-run, we believe the health care services market will be growing due to demographics, but ObamaCare has slowed down hospital work this year. Long-term care and “out of hospital care” facilities should continue to grow. Work in the urban areas and cities will continue to grow as work in the suburbs and rural areas decline. However, our major cities are suffering from capital constraints and political challenges.

What business and/or industry challenges most concern you?

Raising prices and billing rates continues to be an issue as customers know it’s a buyer’s market. Without more job creation nationally, the “new normal” will continue for at least another 3-5 more years. For our industry that will mean lower growth and young engineers and other professionals will always gravitate to where there are better opportunities. Finding qualified people for the few areas where there are growth opportunities will continue to be a problem even with high employment. The other concern with an extended period of little or no growth will be finding employees who have enough wealth and are interested in acquiring significant ownership in the companies where they work in order for ownership transition to effectively take place.

You’ve acquired a number of firms over your career. How do you measure if a deal was successful?

First, the deal must turn out to be accretive to your net income and ultimately to your net worth. Second, the number of key people from the target who remain (the more the better) for a period of time post-acquisition, say three to five years, is critical. Third, both firms should meld together so that the culture of the new entity moves in a positive direction rather than upsetting the apple cart.

Have you had to change your style of leadership over the last few years due to the economy?

Not my style, but communication on many levels, both internal and external, has become more important for me. I’ve tried to spend more time being a good listener rather than a good speaker.

What’s on your summer reading list?

The Endgame, and Impact 2020 for business, Ted Bell books, and The Final Storm for leisure.

 

Kurt Fraese, CEO, GeoEngineers, Inc., Seattle, WA

fraeseHow has GeoEngineers performance fared so far this year?

We are having a very good year relative to budget and an extraordinarily good year compared to last year; generating more revenue and higher returns with fewer staff. We attribute these excellent results to the slightly better economy, focusing on our fundamentals and simplicity in our operations, keeping expenditures in check, and deploying four top managing principals back into client development and project management roles.

Since your firm serves a range of public and private sector clients, are you seeing signs of an uptick in economic activity?

We’ve seen some improvement in economic activity, particularly in the Puget Sound, Intermountain and Gulf South regions.

In what market or service areas are you seeing promising opportunities for growth?

Our energy and water/natural resources markets represent the most promising growth opportunities. Environmental, ecological, micro-tunneling, and applied technology services show promise for further growth.

What business and/or industry challenges most concern you?

The unsettled nature of the economy continues to affect confidence in the marketplace. There also is continued downward pressure on rates, more onerous contract conditions, and fierce competition. This has the potential to adversely affect our multipliers and loss prevention as well as recruiting and retention of key staff.

Have you had to change your style of leadership over the last few years due to the economy?

Yes. I have shifted my focus from strategic growth that emphasized picking the “right” markets and services to “be in” to strategic readiness with emphasis on being able to take advantage of opportunities that align with our strengths and passions. It’s a more natural path. I also have made sure to communicate with the entire firm at least once a week through an email called “Friday Focus”. The communication is an open letter to all staff and can include important market, service, training, management and philosophical news, encouragement and guidance on almost any topic.

What’s on your summer reading list?

The Big Short by Michael Lewis. It’s the true story of the early stages of the financial collapse and those who saw it coming well in advance and profited. This story is much scarier than any true crime account I’ve ever read, only it involves financial weaponry with most Americans as the victims!

 

Rich Bub, President & CEO, GRAEF, Milwaukee, WI

bubHow has GRAEF’s performance fared so far this year?

We saw an upturn in business during the 4th quarter of 2010. Our industrial client base started to generate work once again, our transportation market remained steady, and we continued to work on healthcare projects. As we’ve come into 2011, the industrial base has continued to improve, the transportation market remains good, higher education work is still there and commercial work related to healthcare is promising.

Since your firm works across a range of technical design disciplines and public and private sector clients, are you seeing signs of an uptick in economic activity?

There have been signs — especially from the industrial segment. The housing market continues to struggle. New jobs, always an indicator, seem to be on again, off again, with no serious traction at the present time. Given the results of budget issues at state levels, we’re watching closely for their effects at the local level.

In what market or service areas are you seeing promising opportunities for growth?

The water and energy markets. We happen to be located in an area of more abundant water supply than elsewhere in the country, so market increases here will be from companies moving into or expanding in the area who are high water users. Energy and energy management related business will be expanding regardless of where you live in the U.S. There is still a pent up market demand due to the needs of aging infrastructure. Once the challenge is met on how best to fund this type of initiative, the upgrading of the nations’ infrastructure will be a very robust market.

What business and/or industry challenges most concern you?

As a profession, our services have become more and more viewed as a commodity. The value of our expertise is never fully tapped when you have to provide the lowest cost proposal. We routinely review who we are competing with for projects and determine whether we want to provide a proposal. When all the talents of our profession are used, the best designs and results are apparent.

Have you had to change your style of leadership over the last few years due to the economy?

I believe my style of leadership has not really changed. What has occurred is I am more in need of back-up to push forward with an initiative due to the pressures on spending the capital of the firm wisely. We continue to invest in people, technology and upgrades, but they are reviewed more closely than in the past.

What are your plans this summer for rest and relaxation?

I’m a sports nut and a die-hard Milwaukee Brewers fan, so I’ll be attending a number of Brewer games throughout the summer. I also really like to golf, though my handicap is not really where I’d like it, and I’m losing distance every year. But it is relaxing, it gets me out with friends, colleagues and clients, and the laughs and fun are worth more than the score!

 

Ralph Hargrove, President, Hargrove Engineers + Constructors, Mobile, AL

hargroveHow has Hargrove Engineers + Constructors performance fared so far this year?

Due to our diversity in the industries we serve, and the proactive steps and investments we’ve taken to enhance our market share, we have seen an increase in business opportunities presented to us. In short, we feel we are in a good position.

Since your firm serves a range of industrial and energy clients, are you seeing signs of an uptick in economic activity?

So far, yes, and specifically in the specialty chemicals segment.

In what market or service areas are you seeing promising opportunities for growth?

Most recently, services relating to enhancing and increasing the reliability (life cycle) of our client’s existing assets.

What business and/or industry challenges most concern you?

For all the industries we serve, meeting our clients resource needs based on their expected start-up dates can always be a challenge. Having and utilizing quality planning tools and technology is critical for us.

Have you had to change your style of leadership over the last few years due to the economy?

No, not in the true sense. We have increased our training efforts to raise the bar on our technical capabilities and leadership skills of our teammates. We have made a conscious effort to distribute and disseminate the leadership throughout the company.

What are your plans this summer for rest and relaxation?

Spending as much time as possible on the Alabama Gulf Coast, enjoying all that it has to offer – boating, fishing, kayaking, swimming and scuba diving. The Gulf is back, and I’m taking advantage of being fortunate enough to live here and enjoy it!

 

Mike Matthews, President & CEO, H&A Architects & Engineers, Richmond, VA

matthewsHow has H&A’s performance fared so far this year?

Our revenues are up over last year but we are having difficulty obtaining our historically high margins due to increased competition in one of our core markets. We are also focusing our attention on successfully integrating firms we have recently acquired.

As H&A serves primarily a range of federal clients and projects, what design issues are critical to those agencies today?

Green design, security, dependability, constructability, life-cycle cost, and primarily, cost. Most of these aren’t new. There is certainly a bigger focus on green design and we have made changes in our business to address those client needs.

In what market or service areas are you seeing promising opportunities for growth?

We are seeing the private sector work coming back to life – particularly in the planning phases. Economists typically track new construction starts. I see our industry as a leading indicator of construction starts. My current experience and anecdotal evidence in the industry leads me to believe the commercial markets are a good place to be right now. Much of the competition is gone with only the strong surviving.

What business and/or industry challenges most concern you?

Economic growth is my biggest concern. There seems to be a lot of anti-business rhetoric coming out of Washington, with increased regulations and an appetite for burdensome reporting requirements. Unfortunately, health care reform will likely have a negative impact on our employees, our firm, and our industry. Small and medium sized businesses will certainly find themselves absorbing much of the cost for the current uninsured. We will also no longer be able to differentiate health coverage for employees at various levels in the firm. I’m afraid many could lose family coverage with no way for us to compensate them for the lost benefit.

Have you had to change your style of leadership over the last few years due to the economy?

No. But we have had to constantly communicate to our employees how we are doing. While we have seen growth over the past two years and have not had a single layoff, our employees remain nervous, having seen our industry hit hard by the recession and their friends and family members losing their jobs.

What’s on your summer reading list?

If Aristotle Ran General Motors by Tom Morris and The Breakthrough Company by Keith McFarland

 

John Thomas, CEO, SWCA Environmental Consultants, Phoenix, AZ

thomasHow has SWCA’s performance fared so far this year?

We are on-plan for the year at the mid-point, so good performance. Our 2011 plan was not aggressive, essentially a continuation of 2010 total revenues with an increase in net and earnings.

In what market or service areas are you seeing promising opportunities for growth?

The energy sector in its various forms leads the pack for us, with oil and gas being the most robust with a lot of activity in renewable and electric transmission.

What business and/or industry challenges most concern you?

Ironically, the renewables market, particularly wind. We are seeing a sorting out of the players and projects and changes in tax and other government policies, such as rolling back of tax credits for renewables in Oregon and the California RPS requirements for in-state generation, are reducing the number of projects with some booked work being cancelled.

How does your recent acquisition of Northwest Archaeological Associates benefit SWCA?

NWAA was a good acquisition for us in a number of aspects. We have a well-developed and successful Cultural Resources practice so there is immediate connection with our ongoing programs and our managers speak their language. Their geography, Washington State, is immediately adjacent to an existing SWCA presence in Oregon, and they provide us with a platform to leverage our other services in Washington. This completes our west coast coverage, which is a goal of our strategic plan. Lastly, they are a competent and well respected firm — so we acquired good reputation and client relationships.

Have you had to change your style of leadership over the last few years due to the economy?

Not so much style as what I focus on, that being: costs, which for us is largely employees, and increased competition and price pressures. We have had to become more disciplined with our staffing decisions and more effective in our business development.

What are your plans this summer for rest and relaxation?

A bicycle tour in the Colorado Rockies in June and another bike tour in the Basque Country of northern Spain in August. Maybe not restful, but certainly exciting diversions. I don’t seem to rest much!