Four Ungrounded Assumptions Prevalent In The AE Industry Today

We like to think that the decisions we make as leaders of AE and environmental firms are made based on facts and data. But more often than not, they are based on emotion, gut feelings, personal biases, and ungrounded assumptions.

Here are four of those ungrounded assumptions that are at play in the industry right now:

  1. Things will never get better than this: With profits and backlogs at all-time highs, many leadership teams figure this is as good as it gets. Even if there was not a recession lurking around the corner, a prevailing assumption among many teams is that their firms are at optimal performance. But that’s far from reality. There always lies within reach a higher level of financial performance and organizational health. However, leadership teams need to think differently about their businesses and their own behaviors to achieve them. Whether it’s discarding a legacy practice, changing out a stalled principal, or making better tech available to staff, there are always changes that can be made to improve the firm. The first step on the journey is recognizing it’s not as good as it gets. (Hard to believe that movie came out in 1997.)
  2. We all share the same vision for our firm: A leadership team works hard to establish a “shared vision” for the future of the firm to provide context for investments and changes. Check in with that leadership team 90 days later and it’s as if collective amnesia has set in. Team executives either cannot remember the vision at all or—more likely—each have different recollections of it and are carrying different messages into their interactions with managers and employees, creating confusion and sub-optimal decision-making. It’s no longer a powerful shared vision, but rather an individually reinterpreted siren call. While this myth has always existed in the industry to some degree, it’s more prevalent now given (a) the increased pace of market and industry volatility combined with (b) the social media-fueled shortened attention spans of many leaders and managers. To keep everyone rowing in the right direction with the proper cadence, leaders need to revisit and recommunicate the firm’s vision constantly.
  3. Our firmwide culture is…: The more I work with AE and environmental firms, the more I see that “culture” is subjectively interpreted and exists at a micro-level, not a macro one. Most firms have a set of stated values (either created by the firm’s current leadership team or inherited from a prior generation of leaders or the founders), which are ostensibly the foundation of their culture. However, the effective communication of those values—and the assumed universal culture that will follow—is in most cases, at best inconsistent and at worst non-existent. So instead of a unified firm-wide culture, you find “pockets” of distinct cultures that are primarily influenced by location, discipline (of work), personal values of a manager, or collective social norms and preferences of specific teams. This balkanization of cultures is now the norm in many multi-office, multi-discipline AE and environmental firms, particularly in this post-pandemic world. It’s not unusual to find firms in which most architects are working remotely and engineers are in the office. Or where offices in the South are seeing elevated levels of in-office participation while those in the Northeast or Pacific Northwest are still ghost towns. Believing you know your firm’s culture is likely self-delusional and makes for flawed decisions. Assuming you know the culture of an M&A target based on a single meeting with their leadership team is downright malpractice.
  4. We’re all 100% committed to employee ownership: The CEO champions employee ownership and talks it up constantly as a differentiator. And why not? It’s been a great capitalization model that has allowed the firm to thrive for 60 years. It’s the model that she inherited. She believes passionately in the concept. She inherited it from the prior leadership team. She believes her managers and employees are as invested in the concept as she is. However, she looks 10 years down the road and cannot see a successful transition of the firm’s ESOP. She’s worried that if she opens up the discussion about a different model that she’ll be seen as a traitor to the firm’s legacy. Meanwhile, her direct reports keep hearing from their peers about the big checks they deposited and the even bigger plans they now have for the future when their firm recapitalized last month with RiverLakeMountainMoraine Capital Partners. But they’re uncomfortable suggesting a recapitalization because they don’t want to be seen as greedy. The firms’ employees go about their work, each with a different degree of engagement and skill and each with a different understanding of—or awareness of—the pros and cons of their firm’s employee ownership model. For many it’s the last thing on their minds. Everyone assumes that everyone else is committed to employee ownership. However, in many firms that assumption is incorrect and may be leading to sub-optimal outcomes.

Questions, thoughts, summer plans? To connect with Mick Morrissey, email him at mmorrissey@morrisseygoodale.com or text/call at 508.380.1868.

Ceo Spotlight – One Ceo’s Reaction To Recession Rumblings

Last week I caught up with Stewart Osgood, the thoughtful President & CEO of DOWL, the full-service engineering firm that ranks #204 on the ENR Top 500 list. DOWL has offices throughout Alaska as well as in the Southwest, Pacific Northwest, and Mountain states.

We talked about the recession that appears to be parked right outside our front door— and the potential implications.

Here’s the transcript:

MGOOD: Stewart, thank you for contributing to Word on the Street!

STEWART: I’m happy to share my thoughts.

MGOOD: We’ve all heard the warnings. It’s like the Midnight Ride of Paul Revere—“A recession is coming…A recession is coming!” What, if anything, do you think is bluster and what, if anything, has got you concerned?

STEWART: Like most of the folks you talk to, if I shut off the news and only look at our company’s indicators, it’s all systems go. We’ve never had more backlog, cash, and runway in front of us. But when I look externally, I see a schizophrenic message of problems with inflation, interest rates, and a growing deficit. The next 12 months will significantly change our economic outlook, and probably for the worse. But how much worse, and how much of an impact will it have on our industry? As a leader, I need to send the message that things are not as good or as bad as they seem. It’s cautious optimism, but let’s not get drunk on the present.

MGOOD: What kinds of things do you tell them?

STEWART: We’ve got to coach our people who haven’t been through it. We know a recession is coming. It might be five months from now or five years, but we’ve been around long enough to know that it’s inevitable. We are using it as a teaching moment. Certainly, I don’t want to be the one that throws the washcloth on the party. But I talk with our leaders about the moment we are in. We are in a good spot—not much debt and lots of backlog—so we have a strong wind at our backs going into whatever we face. As long as we stay focused, we will get through it. It’s a balanced message—not gloom and doom, but at the same time, we have to make sure people are mentally prepared for what could happen.

MGOOD: On one hand, you’ve got rising labor costs due to the demand for talent, and on the other, a looming recession. How do you walk that tightrope?

STEWART: The last time we did cost of living adjustments was about 40 years ago, and now we’re doing it again. Most of our staff, except for the owners and highest-paid folks, will see salary increases in the 8-10% range (and we are educating our clients so they don’t get shocked). I suspect like a lot of firms in our industry, we can get into a mode where we throw money at a problem. Sign-on bouses have gotten out of control, for example. My message is let’s recruit aggressively, but let’s also be careful of $25-45K sign-on bonuses. It really is tough, though, to preach constraint when all the lights are green.

MGOOD: So many firms in the AE industry are up to their necks in work. Will that be enough to get us through potentially rough waters?

STEWART: One of the concerns I have is we are getting construction bids that are double the engineers’ estimates. Clients are shelving projects because the return isn’t there. Increased borrowing costs and 50-100% jumps in construction costs compared to just two years ago could concern DOTs and private clients enough that they slow down projects until the smoke clears. We are seeing that already. I have seen clients with enough money to do a project not go forward because to them, it feels like extortion in the moment. The frothiness could cause clients to possibly say they are taking a little break.

MGOOD: What else are you seeing in the markets?

STEWART: We stayed out of residential because of the ups and downs. Given how strong the market has been in the last five years, it’s been a hard thing to do. But friends in real estate are telling me the more expensive houses are coming on the market because those homeowners know the party is over. Unfortunately for them, they are probably three or four months too late. So on the residential side, we are going to see that pull back soon, at least at the upper end of the market. We do commercial. But if there’s no residential, there’s no commercial, so it will still affect us, as well.

MGOOD: What was your experience in previous recessions? How, if at all, could this situation be different?

STEWART: If you’ve seen one recession, you’ve seen one recession. This time around, I think the banks are certainly in a much better position than they were during 2008-2010. Forgetting about Europe for a second, things are relatively stable. But the pandemic and lots of spending created too many dollars chasing too few goods, and that has to come into balance. We actually had a little recession in 2016-2017 when oil dropped to $20 a barrel. That actually hit us harder than the Great Recession. As a result, we downsized, got more resilient, and got away from resource extraction markets. We expanded into other states to diversify our revenue streams. This time around feels a lot different to me. We won’t see Bear Stearns and banks failing and all that. Financial institutions and banks are in a better spot. But 75 basis points this month and again next month is unprecedented, and we’ll see how much things cool off with interest rates at 6-8%.

MGOOD: Are any firms in our industry recession-proof?

STEWART: Any CEO that says they are good and are going to sit out this recession, should it come to pass, are kidding themselves. You can convince yourself if you work for DOTs or government clients that a downturn won’t impact you. But it’s all intertwined. Maybe you work on schools and you’ve got a significant backlog of school projects. Those school projects are based on tax receipts and other factors that tie together. No one is totally bullet-proof to a recession. Everyone feels it, albeit maybe at different levels.

MGOOD: How, if at all, should companies prepare for what might be coming?

STEWART: Start by prepping the leadership team for the uncertainty that might come. Then figure out what you are going to monitor to get early warning signs. Talk to clients and forecast work that will hit the streets, and find out whatever pain they might be feeling and how they will respond. Find out what work will go through and what will be put on hold. It’s actually a great way to develop trust with your clients and let them know you will be there through thick and thin. It’s a good reason to connect.

MGOOD: Where does DOWL focus that outreach?

STEWART: We spend a lot more time with private sector clients because they will feel the effects of a downturn before the DOTs or federal government. We look for the canaries in the coal mine by connecting with the big box retailers and warehouses.

MGOOD: What else should be done to brace for impact?

STEWART: Develop contingency plans, and try not to tie yourself into long term expenditures. Labor is 70% of our costs, so we try to do more with bonuses and temper salary increases, but it’s a balancing act. Employees want the guarantees, and we walk that fine line of being responsive to our staff and tamping down really high salaries as well as mitigating salary compression, which is a constant challenge. Also, recognize and put together at least a mental list of the rainmakers in your organization that you absolutely need to retain, no matter what. You don’t want drivers of your company’s success leaving, especially in a downturn. Taking care of those people first is critical to long-term success—at least it is to ours.

MGOOD: Are you going to put the brakes on growth?

STEWART: No. We are going full steam ahead on acquisitions. We will continue to be bullish on that. We don’t make acquisitions for this year or the next. It’s a long-term play for us. We can get through today and still be a buyer in the market.

MGOOD: How important is it to gain strategic perspective by bringing the outside world in, so to speak?

STEWART: Very. I think our business partners outside of the AE industry often feel things differently and have a different perspective. We can get very insular and hyper-focused on our own industry. I try to talk to lawyers, bankers, real estate agents, and others. We are part of an overall system. I encourage people in our industry to do more of that; otherwise, it’s an incestuous echo chamber where we all say the same thing because we are all in the same industry.

Would you like help with your firm’s leadership transition? Call Mark Goodale at 508.254.3914 or send an email to mgoodale@morrisseygoodale.com.

50 in 50: Georgia

50 states in 50 weeks: U.S. states economic and infrastructure highlights.

Key Economic Indicators

GDP: $568 billion

GDP 5-year compounded annual growth rate (CAGR) (2017-2021): 2.0% (U.S: 1.6%)

GDP per capita: $53,764 (U.S.: $58,154)

Population: 10.8 million

Population 5-year CAGR (2017-2021): 0.9% (U.S.: 0.5%)

Unemployment: 3.0% (U.S.: 3.9%)

Economic outlook ranking: #15 out of 50

Fiscal health ranking: #23 out of 50

Overall tax climate ranking: #32 out of 50

Key Sectors and Metro Areas

Top five industry sectors by 2021 GDP:

Sector
GDP ($ billions)
% of total GDP
Real estate and rental and leasing
79.5
14.0%
Information
62.2
11.0%
Manufacturing
53.3
9.4%
Professional, scientific, and technical services
42.7
7.5%
Wholesale Trade
41.2
7.3%

Top three industry sectors by GDP 5-year CAGR (2017-2021):

Sector
GDP 5-year CAGR
Management of companies and enterprises
12.2%
Administrative and support and waste management and remediation services
5.5%
Information
5.1%

Top three metro areas by GDP:

  • Atlanta-Sandy Springs-Alpharetta
  • Augusta-Richmond County
  • Savannah

Top three metro areas by population 5-year CAGR (2016-2020):

  • Warner Robins
  • Gainesville
  • Atlanta-Sandy Springs-Alpharetta

Infrastructure Highlights

Infrastructure: ASCE Infrastructure Grade (2019): C+

Georgia will receive upwards of $12 billion in funds from the Bipartisan Infrastructure Law (BIL), which will help the state address critical transit, wastewater, and dams infrastructure issues. Georgia performs relatively well in terms of percentage of roads in good conditions and bridge improvements. The City of Atlanta, however, faces an estimated infrastructure backlog of over $1 billion. Weeks ago, a funding program that amounts to $750 million and is believed to be the single largest infrastructure investment in the city’s history, was approved. Additionally, the state was recently awarded two federal railways CRISI grants for two separate projects: along the Heart of Georgia line and along the Georgia Southwestern Railroad, totaling $9.2 million. Over the next five years, Georgia’s BIL funds will address the following categories of projects (additional funds may be deployed as federal grants get awarded to states):

Funds
Improvement Area
$8.9 billion
Roads and highways
$1.4 billion
Public Transportation
$913 million
Water infrastructure
$619 million
Airports
$225 million
Bridges replacement and repair
$135 million
Electric vehicle (EV) charging network
$100 million
Broadband (minimum allocation)
$24 million
Cyberattacks protection
$22 million
Wildfires protection

Construction spending (Value of Construction Put in Place – CPiP):

  • Private Nonresidential 2020 CPiP: $10.4 billion; 4.4% 5-year CAGR (2016-2020), above overall U.S. CAGR of 2.0%
  • State & Local 2020 CPiP: $7.8 billion; 3.5% 5-year CAGR (2016-2020), below overall U.S. CAGR of 4.8%

AE Industry

ENR 500 firm headquarters (2022): 12

M&A activity since 2018:

  • 29 deals with buyers from Georgia
  • 62 deals with sellers from Georgia

For customized market research, contact Rafael Barbosa at rbarbosa@morrisseygoodale.com or 972.266.4955. Connect with him on LinkedIn.

Weekly M&A Round Up

Industry M&A is up 27% over the past 12 months: Last week saw new transactions announced in FL, NY, UT, AZ, NV, IN, and CA, while U.S. M&A surpassed 260 deals this year. You can check all the week’s M&A news here.

If you’d like to know more about our M&A services, and how we can help you either confidentially sell your firm or grow through acquisition then please contact Nick Belitz, Principal, at nbelitz@morrisseygoodale.com or 303.656.6151. Click here to see the over 150 transactions of design and environmental firms that we have helped make happen.

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