An Industry and a Firm in Beta Mode—What Could Possibly Go Wrong?
Thursday, April 27, 2023. This was it. THIS was the big day. She had cleared her schedule ahead of time. Cancelled all her meetings. The lunchtime Pickleball women’s league would have to pop, pop, pop and throw back post-pickle prosecco without her. Because today (as the kids say) the new ENR Top 500 Design Firm list dropped.
For her, as the CEO of AE2Env+, a leading AE and environmental industry firm, this is the equivalent of the Fortune 500 list for Jeff Bezos or the U.S. News & World Report Best Colleges list for the president of Princeton. And—although neither she nor any of her peers would ever say this out loud—the list has become a not-so-informal way for CEOs to compare their relative performance (“See, we jumped 10 places while those guys over on the other side of town dropped—again!”) and importance (“As one of the Top 100 firms, we’re seeing…) in the industry. The list is nothing short of affirmation and recognition of all of the hard work she and her team have put in over the year.
Everything now: And what a year it had been. As she and her CFO finalized the firm’s financial package in Q1 to send to the good folks at ENR—an annual ritual that coincidentally also involved prosecco—she finally grasped the enormity of what AE2Env+ had achieved in 2022. A 20% revenue increase year-over-year. The fifth 20%+ growth year in a row for her and her team. What a blur 2022 had been. Things had moved so fast. Time had compressed so quickly (what DID she do for the summer months last year?) that she had failed to fully appreciate just how much—and rapidly—the firm had grown. Her firm—now at just over $200 million—was unrecognizable compared to the one she took over a decade ago.
Beta mode: Then it hit her—the 20% growth in 2022 was a continuation of a decade of her and her team operating in Beta mode. Since 2013, the pace of firm growth had been rapid and relentless—doubling in size every three years. At the same time, the changes in the industry and economy had been massive and unprecedented—from digitization to hybrid work and everything in between. She and her executive team had to throw out the old firm management playbook and replace it with an app that was constantly being updated. They were—for all intents and purposes—constantly running the firm in Beta mode. At any given time, they were well aware that they were incomplete and unfinished, with errors and mistakes being made. They were constantly in rapid learning and experimentation mode. They were compelled to focus on progress and not perfection. This is what was needed to navigate this fast-growth, rapidly expanding environment. None of this would have been OK in the past. Now it was the only way. They were like Magellan or Columbus or Vasco da Gama exploring and navigating a new world—every day, nonstop. They were always looking ahead. Never able to rest or catch a breath it seemed. She wondered how AE2Env+’s performance stacked up against the industry. She assumed their growth would put them in the Top 75. She opened the report…
An industry pushing the envelope: As she read the ENR Top 500 Design Firm list and report, she realized that it was not just her firm that’s operating in Beta mode—it’s pretty much the entire industry. Total revenue for the ENR Top 500 Design Firms grew by 14.4% in 2022 to north of $122 billion. It was the seventh consecutive year of growth and the largest revenue jump for the 500 since a 15.8% pre-Great Recession bump from 2006 to 2007. The industry continues to expand—rapidly. She scrolled to find where AE2Env+ was ranked. She was surprised to see that at $200 million they were ranked at only number 100-and-something. What was even more surprising was that her firm’s 20% growth fell short of the average growth rate of the 450 firms that grew over the year. Indeed, one-fifth of the firms on the list grew by over 30% last year. That’s not evolution; that’s revolution.
Brave new world: Across the industry, leadership teams are navigating their own individual Beta mode choices. Some are thriving and relishing the challenge. Others are failing—and through either their incompetence, dysfunction, or hubris—destroying shareholder value.
Organization structures buckling: Rapid growth. Record backlogs. Not enough staff. Elevated turnover rates. Hybrid work models. Growth outstripping the leadership and managerial capabilities of even the most well intentioned and loyal managers. Not enough time—ever. All of these factors are combining to pile massive pressure on organization structures. And they are showing the strain. CEOs everywhere are losing sleep trying to figure out how to adapt their organizational models to this environment. They know they need to change because their backlogs are at record levels and are placing greater demands on their organizations. But organizational change when you are operating at full tilt is like changing the engines on the plane when you are flying it. Beta mode.
Money, money, money: Firms have never been so profitable. Leadership teams are struggling to figure out what to do with record cash flow. For many it’s an existential crisis at the intersection of rewards, firm values, firm management, optimism, and realism. Bonuses? Sure. Let’s pay lots of them. Raises. Well, yes, but…what happens when things slow down? Do we really want to raise our “fixed” costs? And can we pass the increased cost onto clients? Rainy day fund? Definitely, sounds prudent, but what about the taxes? Digital/AI/software ventures that our next-gen leaders are advocating for? Yeah, let’s do that. Hold on, that’s going to take all of our cash. Let’s go back to bonuses. Our biggest ever. We deserve it. What’s that about bank failures? Beta mode.
Aging out: The last decade has gone so quickly that many CEOs are only fully waking up to the fact that their leadership team is now in their mid- to late-60s (how did that happen?), and the gas in their tanks is getting low. The pandemic caused many of them to reassess their priorities. And the pace of industry change has found many of them to be wanting in the business skills or mindsets required to be successful to lead a firm in Beta mode. The average age of an industry CEO is a very un-spring chicken-like 57. Succession planning is more important now than ever. But in Beta mode, leadership teams have less bandwidth than ever to plan for and implement succession, less time to mentor, less time to listen. Because it’s all hands on deck all the time to navigate the next business challenge, the next massive project that will “change the firm forever.”
Terminator 1, 2, and 3: Over the last couple of years, CEOs had carved out bandwidth to study and craft their digitization strategy (which generally fell into one of the following three categories: ignore, hope, invest everything and cross fingers) and were ready to get back to focusing on priorities 1 (staffing) and 1A (succession). But then ChatGPT appeared, and now—in classic Beta mode form—CEOs are scrambling to figure out what AI means for their firms. The pace of change is relentless.
The guinea pig experiment? While experimentation is the name of the game for individual firms in 2023, the industry as a whole is either conducting—or is the subject of—one massive ongoing field experiment in recapitalization. Since 2017, the number of private equity backed firms among the ENR Top 100 has grown from 4 to 21, while the number of employee-owned firms has declined from 74 to 63 and the number of publicly traded firms has dropped from 22 to 16. We are all in the test tube to see what a new capitalization model for the industry will yield. Happier clients? More fulfilled employees? Improved industry performance? Who knows how this experiment will play out.
Reflection: She closed out the 2023 ENR list and report and opened up her KPI dashboard on her tablet. She saw that they had just been awarded the billion-dollar battery plant project in Michigan. She saw the email from her COO titled “Early retirement.” Before she opened it, she checked her phone to see the text warning of an AI bot impersonating the AE2Env+ brand and scamming clients out of confidential information. She took a deep breath, booked a pickleball court for later that evening, and sighed. Beta mode.
Questions, comments? Email or call me at [email protected] or 508.380.1868. Or even better, join Mark Goodale and me for Word on the Street Live! next month in Las Vegas at our upcoming Western States M&A, Strategy, and Innovation Symposium.