- MICK MORRISSEY
The slowdown that many design and environmental firms are already facing and the recession that the industry as a whole will likely experience in 2009 will probably last longer and be more severe than the last two downturns. The recovery will likely be a slower process as well. The implications for many firms in the industry have already begun to play out: flat or declining revenues and earnings, and staff and salary reductions.
However for all of the contraction that the industry will see, there will be firms that will continue to grow and expand through this slowdown. As I wrote in a 2003 article, “Managing the Dip”, many firms had record years from 2001 through 2003 while others in the industry contracted during that recession. Those successful firms could attribute their growth to a combination of (a) being in the right markets with a strong brand, (b) reframing their service offerings, (c) having a strong and high-performing team culture and (d) running very efficient and tight ships. For more on what it takes to be successful in a slowing economy see the next article “Be a Short-Term Thinker...For Now”
However, the importance of this slow-down is that it will be both an accelerator and catalyst for further significant change in our industry, and firms would be well advised to take note of and anticipate the following trends:
A new golden-era of public works: The next administration will likely pump significant dollars into infrastructure rehabilitation and development as part of an economic stimulus package. Concurrently, given the fiscal challenges facing federal, state and local governments, there will also likely be greater willingness on their part to allow and encourage private participation in infrastructure development and funding. Combined, these initiatives will result in significant funding and work for firms that specialize in transportation and water and wastewater design. Their challenges will lie in finding the right talent and navigating the nuances of working in a public-private delivery model.
Have degree, will fly 24 hours in coach: While the domestic commercial development markets will be weak over the next two years, the relatively higher growth rates of international markets will continue to provide opportunities for U.S. design, engineering, and environmental firms large and small. Many firms who sought to pursue opportunities in the United Arab Emirates only twenty-four months ago are already anticipating greater than 50% of their work coming from this market within another two years. Critical to being successful in these international markets is the ability to build teams of ex-pat talent, on-the ground expertise, and U.S.-based managers. Those in the latter group function as the “bridge” between the domestic and international operations and are largely responsible for fostering the trust necessary to be successful. The best candidates for these positions are senior managers who are empty nesters. They’ve got the experience and lack the home constraints that can inhibit international travel.
Different- not faster- industry consolidation: The recent decline in the stock market from its 2007 highs and the likely bottom-bouncing that it will experience over the next two years as it recovers will change the way the industry consolidates. With the publicly traded industry firms trading between 12% and 79% below their highs of a year ago, they will have to be more selective in their targeting and deal structures. Given that these firms represent approximately one quarter of the deals that occur in the industry annually, we can expect to see a slowing of deal activity. This will be compounded by the fact that many ENR 500 firms are dealing with far more uncertainty about their backlog and near-term future than they have since 2002. Until the dust settles, many of the top firms will be reticent to pursue M&A investments. It’s worth noting that it took two years for industry deal activity to recover from the last downturn.
A new capital model for industry. The sudden and significant loss of wealth in the stock market recently and a feeling of uncertainty will hit particularly hard at highly leveraged, “next-generation” owners in our industry. Already trying to figure out how to pay for children’s college tuition and mortgages, this group will be less eager to step up to the plate and make the investment needed to fund internal ownership transition plans. Firms will look more and more to private equity firms– many of which will be the “winners” in the new financial landscape– to solve their capital needs. This will begin to separate the seemingly inextricable link between ownership and leadership transition that has been at the center of so many firm’s perpetuation strategy over the past 30 years.
While you are focused on the short-term and immediate challenges of this slow-down, be sure you and your team are also aware of the bigger picture changes and transitions that are occurring in the industry. By positioning your firm to take advantage of these, you will increase the chances of success in the future.
- MARK GOODALE
If you haven’t yet had your finest hour as a leader in the A/E and environmental industry, now is a good time to shine. While we know of firms that are actually thriving in this tumultuous time, it’s much more likely that your company is seeing project after project grind to a halt. And it’s going to get worse (see article above).
Nevertheless, you need to keep making adjustments and adapting no matter how bleak things look. To quote a client, “If everything tanks, then play taps. Until that happens, let’s keep looking for ways to succeed.”
To weather the current financial downturn, there are several critical areas you will need to focus on in the short-term:
Cash Flow
Stay solvent. If you have a collections process, enforce it with your accounting department and managers. If your process doesn’t already include it, have your accounting department call clients ten days after a bill is sent to make sure it was received and to answer any questions your client might have. And send those invoices electronically when possible. It’s faster (and greener). Finally, forecast cash-flow on a weekly basis— project what cash will come in and go out over the next four to eight-week period. This will allow you to see where you need to speed up collections and/or slow down payments to avoid dipping into your line of credit. If necessary, talk to creditors before bills are past due to persuade them to extend payments of your current bills. Reduce or stretch out debt, and build up your capital reserves as quickly as possible so you can continue to operate the business.
Cost Control
Press your client and project managers to report on projects that are at risk, put on hold, or cancelled. Adjust your labor costs immediately and cut discretionary spending to the bone. Understand, however, that marketing is not discretionary spending. A/E and environmental firms typically slash marketing expenditures before reducing fixed costs during hard times. However, those firms that maintain or even increase marketing activity during this slowdown will win critical market share (see “Winning Work” below) and be in a better position not only to survive, but to thrive once the business environment improves.
Banking Relationship
Strengthen your banking relationships by letting lenders know the company's financial position and determining what level of borrowing will be possible in various scenarios. Also, keep an eye on the condition of your bank’s solvency. Talk with multiple banks to increase your options.
Winning Work
Maintain communication with your best clients. Find out what is critical to their success (or survival), and draw on every bit of expertise your firm possesses to meet their needs. Cross-selling will be critical, so educate your seller-doers on everything your firm does. If your organization structure creates barriers to cross-selling for any reason, tear it down and build a new one that rewards individuals based on firm-wide performance. To reach new clients and reinforce your firm’s expertise and value to existing clients, start a high-impact, informative e-marketing communications program. E-marketing is fast, cost-effective, and easily monitored and tracked.
Credit-Worthiness of Clients
Determine the credit-worthiness of your clients— even your steadiest. Ask them how they are faring in the downturn and run credit reports on prospects with whom you are less familiar.
Project Execution
In this climate, your clients likely have you on a short leash; therefore, you must execute on your existing contracts. This will be even tougher than normal if your firm is in the midst of labor reductions. But regardless of whether your firm is downsizing, stabilizing, or even growing, consider simultaneously “trading up” in critical positions. While the best talent will typically remain employed with competitors during an economic downturn, you now have a much better chance of finally landing that key hire you’ve been looking for if you can effectively sell your firm’s stability and longer-term prospects.
Labor Reduction Damage Control
If your strategy is to reduce labor and/or hours, let key managers and employees take a lead role in how that will play out— particularly how client and project responsibilities will shift and how work hours will be reallocated. Encouraging this level of involvement will help boost productivity and foster a team spirit during a tough time.
The Health of the Leadership Team
If there is unhealthy friction within your leadership team, stamp it out. You cannot afford to hold onto anyone who puts his or her own agenda ahead of the team. Many of you will be challenged like never before in your careers. Your partners need to be able to engage in healthy debate and make good decisions fast. And they need to present a confident, unified front to the rest of the firm to keep up productivity and morale. As Benjamin Franklin once observed, “We must hang together, or we will surely hang separately.”
The folks in your company are depending on you. Stay on top of current conditions, make adjustments quickly, and do the best you can.
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