Word on the Street: Issue 150

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.

Four Things That Make Difficult Conversations Difficult

What are difficult conversations for you in the AE workplace? What do they look like?

How about when someone in your company is complaining to you because you did something wrong? Or maybe someone did something to you, and now you’re the one complaining. Are these easy conversations to have? Usually not.

What makes them difficult is that we have relationships with people in our companies. Sometimes we’ve known our co-workers for decades and spend more time with them than our own families. It’s a much different scenario when a cashier short-changes us. We typically don’t mind immediately pointing out the problem, often with gusto. It’s the same when an airline bumps us from our flight. When that happens, we don’t say, “Thank you! May I have another?” It’s more like, “Are you (insert your favorite word here) kidding me? I have to get home! My (insert your real or made-up crisis here) if I don’t get home tonight!” In situations like these, we have no problem complaining and voicing our dissatisfaction. But with our coworker who has performance issues—well, that’s a different matter. You are with that person all the time—coffee, lunch, any number of social situations, etc. It’s not so easy to tell the guy you’ve been working with for 25 years that he’s slacking and needs to pick it up. So, what is it that we fear in these difficult conversations? A number of things. They might resent you, take it personally, or not perform the best they can for you. All those things could happen, or at least we imagine they could.

But think for a moment. If the roles were reversed, would you risk the position you hold in your firm to punish that person? Make no mistake—there are people who will do that. They’ll give you an attitude, give you the cold shoulder, or try to marginalize you in some way. It’s all part of punishment. 

But one of the things that makes difficult conversations difficult is that our imaginations get the better of us. While it’s true some people don’t forgive and forget, or forgive but don’t forget, most people have good intentions and want to stay in good relationships. Sure, there are jerks. We have all met them. They do what they do and justify their actions, and we should rid our organizations of them. Oftentimes, for whatever reason, we put up with them, and we all have to suffer—but that’s another article. 

In the end, thankfully there are not that many full-fledged jerks. Now make no mistake—none of us are perfect. Even the best of us exhibit jerk behavior from time to time. What is jerk behavior? Doing something we shouldn’t be doing even though we know we shouldn’t be doing it—changing lanes without signaling (that’s pretty much everyone in Boston), leaving the cap off the toothpaste, or leaving the shopping cart in the middle of the parking lot. We know better, but in the moment, we are distracted by what usually turns out to be our own interests (e.g., the person who moved from lane to lane is late for a flight, which got in the way of him doing what he knows he should do—use his signal).

Put the jerks aside. Let’s talk about the majority of people—people like us who, while not perfect, are well-intended. What makes difficult conversations difficult for our group?

1.  In some way or another, we can forget we are talking with human beings. They may be irrational or emotional human beings, but human beings, nonetheless. All too often, we forget we can treat each other like people as opposed to micro-managing jerks, short-fused hot heads, or sneaky phonies. In the end, we’re just people. To move from what is difficult to something not so difficult, just remember we’re having a conversation with a person who, like us, carries with them things that are great and not so great.

2. No practice. The thing we don’t do very often looks hard. If we only make a pie at Thanksgiving, it’s difficult. If we make pies all the time, it’s easy—because we’re well-practiced. The same goes for difficult conversations. It’s much easier, some of us think, to just avoid them. But the more practiced we are, the easier they become.

3. We make inferences about the circumstances of the other person. We can see or hear what happened, but we don’t know what the person’s intentions were. Maybe we infer that our partner is trying to undermine us. She was? Really? How do we know that? All she did was say the staff meeting we just ran wasn’t one of our best, but since she said it in front of the other board members, now we’re filling in the blank. With only partial information, we make inferences, and they are often negative. Why? It’s what we do (Congress does it all the time). It’s just the way our brains work. But if we’re conscious of it, we can check ourselves.

4. We take things personally. Taking things personally is a result of letting assessments (opinions) live like the truth (like assertions) in our minds. (“It’s a negative opinion and it’s about me, so it has to be true!”) Breaking that cycle will inevitably break the reaction of taking things personally. When we believe we’re each interested in the other doing well, productive conversations will replace angst and hard feelings.

Bring curiosity and the spirit of openness and good intentions to difficult conversations, and you’ll find they aren’t so difficult after all. 

What do you think? Email your take to [email protected].

Market Snapshot: Commercial (Part 2) 

Weekly market intelligence data and insights for AE firm leaders.

Last week’s post featured overview, size, and outlook information about the commercial market. If you missed it, you can check it out here. This week we will cover drivers, trends, and hot spots.

Drivers

• Office rental vacancy
• Value of private nonresidential construction
• Corporate profits
• Consumer spending
• Cost of construction materials

Trends

• Retailers have experienced challenges in recent years to maintain and further drive foot traffic. Design and construction in this sector will be impacted by frequent changes in consumer behavior, which may lead to projects moving rapidly from planning through design and construction.
• Many grocers are expanding and exploring new formats. 
• Market trends point to an increase in renovations and remodels, especially for buildings located near major population areas.
• With the increase in online retail and grocery shopping, more supply chain players are expected to help fulfill the demand for last-mile deliveries. This trend is likely to help the warehouse and distribution market to maintain increased activity. 
• Commercial buildings are responsible for about a third of carbon emissions. More owners and occupiers are embracing net zero energy and carbon initiatives.
• Successful new design and construction projects in retail, accommodation, and other commercial categories will be characterized by the implementation of automation features and efficiencies that will help businesses deal with labor shortages.

Hot Spots

• Areas that experienced single-family residential growth within the last 12 to 18 months.
• Urban area developments encompassing live-work-play communities.
• New concepts within indoor/active entertainment.

To learn what’s ahead for other markets, check out Morrissey Goodale’s 2023 Market Outlook for the AE Industry. Click here to access recording and materials.

To learn more about market intelligence and research services from Morrissey Goodale, schedule an intro call with Rafael Barbosa. Connect with him on LinkedIn.

Weekly M&A Round Up

Congratulations to Lilker Associates (New York, NY): One of New York’s leading MEP and fire protection engineering design firms joined IMEG (Rock Island, IL) (ENR #57). The acquisition expands IMEG’s footprint in the State of New York to more than 220 team members with full-service capabilities. We’re thankful that the Lilker team trusted us to initiate and advise them on this transaction.

Another congrats to Javan Engineering (Fort Washington, PA): The engineering firm serving the growing industrial, chemical, pharmaceutical, biotech, healthcare, and university markets joined industry leader and full-service engineering consulting firm CHA (Albany, NY) (ENR #69). The addition of Javan positions CHA for strategic growth in key advanced manufacturing markets. We feel privileged that the Javan team trusted us to initiate and advise them on this transaction.

Additional domestic deals in TX, FL, NM, IN, NC, MI, and PA: Last week we reported a total of 12 domestic deals and 7 international deals. Register today to join industry executives, dealmakers, and investors in Las Vegas on June 7-9 to learn more on the latest happenings in the industry at our Western States M&A, Strategy, and Innovation Symposium. You can check all the week’s M&A news here.