“Behold the turtle. He only makes progress when he sticks his neck out.”
– James Bryant Conant
This year our team has spent a healthy amount of time interacting and consulting with A/E and environmental owners, executive teams and boards of all shapes and sizes on evaluating various strategic alternatives and ways to enhance shareholder value. Like a football coach drawing plays on the chalkboard, every option potentially looks like a touchdown until you actually have to play the game.
For some organizations, it’s been another year of frustratingly slow progress, of gains that come in fits and starts and the breakout momentum that rarely happens due to a never ending list of “almosts” and “shoulda beens” (e.g., fewer mega projects to pursue, key contracts still on hold, etc.). However, other firms are having a banner year of record top and bottom line performance despite a 2% GDP climate, a moribund single family housing market, federal and state budget blues, and a tougher competitive environment than anyone can remember.
Talk to leaders in the latter group and what leaps out at you is that there is no one ideal model to consistent, profitable growth. Some have grown through organic means and tighter organizational and project discipline, some via acquisitions and bold ventures, while others have benefitted from cyclical market timing and just plain luck. However, these organizations are also embracing something that has been seriously lacking over the last few years – taking risks! I’m not talking about the “bet the house” type of risk with win big/lose big ramifications, but the steadfast courage and leadership to not become paralyzed by inaction and watching competitors pass you by.
Fortunately, the A/E industry is in a healthier financial position today. Cost cutting exercises are mostly in the past and many firms are well capitalized and possess strong cash positions. Leaders seem more eager than ever to reinvigorate or maintain their growth pace. Getting your firm from here to there in this environment takes planning (of course), communication, execution, as well as a certain (healthy!) paranoia to not become complacent when things seem to be going their best.
Here are some of the growth alternatives firms are utilizing:
Certainly there are other growth avenues A/E firms are pursuing. However, keep in mind that all of these initiatives require a foundation of sound firm and project management discipline, such as open book management, timely cash collection, effective client communication, and investments in new information technology. As organizations look ahead to 2013, it helps to have an “everything on the table” mindset in terms of growth possibilities in your playbook. Happy New Year indeed!
“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:
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.
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:
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:
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.
Table: Representative Mid-Sized A/E and Environmental Consulting Transactions, 2010-2011