Word on the Street: Issue 184

Between Scylla and Charybdis: Three Perilous CEO Choices

In Homer’s Odyssey, Scylla and Charybdis were the twin perils guarding the narrow straits that Odysseus and his crew had to navigate to continue their voyage home. Scylla was a six-headed monster that snatched (and devoured) sailors from passing ships while Charybdis was a massive underwater beast that sucked in ships and destroyed them. If you wanted to get back to port safely, you had to chart a passage between them. Both options were fraught. Get too close to Charybdis, and it was game over. Too close to Scylla, and six of your team would end up as monster snacks. (Seems like an easy choice until you check your values.)

Time and time again in our strategy and executive coaching work, we see CEOs navigating their own sets of perils at various times in their careers. Sometimes these potentially calamitous choices appear out of nowhere. More often than not, they can be viewed in the distance on the horizon but only become clear when getting closer—when your options for evasive action have been reduced to “Oh, that’s not very appealing” and “Yikes, that’s worse.” Unlike Odysseus, most CEOs don’t have a witch-like Circe pay them a visit to advise on which course to take and its implications or accurately calculate its cost. (There is always a price to pay for the decision—be it in treasure or heart. And that price is paid by both the crew and the captain—you and your employees. But you never really know what that price is until you make the choice, and sometimes you don’t realize the full cost until a lot, lot later.) 

Here are some of those choices that we see CEOs wrestling with:

1. Should I stay or should I go? The existential conundrum of the 60-something-year-old CEO. He sure feels like he’s in his 30s and at the top of his game (“Plenty of gas in the tank!” “I’m in the gym six times a week—never felt better! Here, take a look at these abs!”) and all that. His firm is experiencing yet another record year of performance with two years of backlog (“that’s hard backlog, not soft, mind you”) in place. He and the firm have been winning accolades and awards left, right, and center—for his “leadership” and for being “a great place to work.” The serotonin and dopamine hits are flowing like it’s the encore set at a Taylor Swift Eras concert. It’s hard to walk away from “this.” Also (he tells himself) “nobody can do this job better than me. It’s the right thing for the firm that I continue to lead.” However, staying too long risks demoralizing or delaying the growth of the next generation (whether they are “ready”—what exactly does “ready” really mean?—or not). It also increases the risk that when times—for the firm, for the industry, or both—get tough again (note for our younger readers: sometimes the economy goes into recession—Google it), that he’s still in charge but with little, if any, gas in the tank (or charge in his EV battery). On the other hand, leaving too soon—without doing all he can to set the table for his successor (addressing internal politics, sorting out executive team dynamics once and for all, confronting successor-specific blind spots)—even in the best of times can be a recipe for disaster. Stay (too long) or leave (too soon). There is no perfect time. And the timing will have implications and costs down the road. (This decision is best made listening to the classic 1981 Clash song of the same name.)

2. Holding back the years: This is the existential choice faced by many a second- or third-generation CEO. She must choose between the twin perils of how closely to hew to the past versus embracing a new, rapidly evolving economic and industry order. Whether to be guided by “the values that the firm was founded on” 40 years ago or by the cacophony of signals from clients and competition that the future is now and is tech-enabled and digitally driven and the last firm to embrace it is as dead as the dodo. Overvaluing the past, placing too much value on loyalty, promoting—and protecting—talent based on tenure rather than performance for sure preserves the “family culture” that so many managers and employees claim to love about their firm. “That’s why we have such low turnover!” But these traits also tend to foster complacency and avoidance of accountability, which inevitably leads to sub-optimal performance—which leads ultimately to collapse. On the other hand, should she remake the firm for this brave new world? Invest in technologies that bring the firm to the leading edge? Throw out the well-meaning, underperforming boomers who talk more about “the good old days” than they do using generative AI to solve client problems (while being paid $300,000 plus bonus annually plus stock dividends)? Value performance over tenure? Vigorously embrace the new while violently jettisoning the old? Because. There. Is. No. Other. Way. “We’re not a family, we’re a team.” Many a second- or third-generation CEO takes the reins only to find that the firm’s financials are in such dire condition (“Who put this deferred compensation plan in place?”) and the only choice is radical transformation. But the risks of changing the engines on the plane while you’re flying it are well documented. And in many cases, these CEOs find that their management teams lack the competencies or commitment to enact the changes necessary—in large part because the management team itself is responsible for the status quo and benefits from it monetarily. (This decision is best made listening to the 1985 Simply Red song of the same name.)

3. A capital idea: This is the choice that many an ENR 500 CEO faces in 2024. Whether to recapitalize with private equity or remain employee-owned. There’s no end in sight to the good times (Or is there?). Her employees cannot afford to (or don’t want to) buy out the current ownership. (They’re good people; they’re just not that into you or into buying your stock.) The value of her firm just keeps going up. And day after day after day, she receives unsolicited overtures from private equity. And regardless of whether they are from New York, Miami, London, Boston, Los Angeles, or Chicago—the message seems eerily the same: “Let us be your partner. You know how to run an engineering firm. We don’t. We’ll be hands-off. Let us give you and your shareholder [INSERT UNIMAGINABLY LARGE NUMBER] dollars in cash so that we can become your financial partner and help you make the acquisitions that you need to accelerate your growth in pursuit of your vision, thereby creating even greater wealth for all and improved services for more clients.” What’s not to like? Seems like a surefire way to solve an ownership transition “problem” while at the same time buying a bigger boat than she was planning on. And with more and more of her peers making this choice each year, why not? Her team is finding it harder and harder to compete with the private equity backed competitors. On the other hand, this would mean giving up “pure” 100% employee ownership—something that has been at the heart of the firm’s makeup for…well, forever. Does she want to be known as the CEO who surrendered that? But what is the actual “value” of employee ownership? What if the new financial partner turns out to be less of a partner and more of a boss? But what if employee ownership does not allow her firm to meet its potential and a failed ownership transition plan results in a fire sale down the road? A perilous, perilous decision. What’s the right answer?

Today’s CEOs are leading their firms through the most exciting and turbulent of times. They have many choices to make. And plenty of the big choices may seem simple to make, but they are hardly ever easy.

If you’d like to hear how the CEOs of leading firms view the future of the industry, then book your spot in Miami this March for the Southeast M&A and Business Symposium. Register today to reserve your spot. 

To connect with Mick Morrissey, email him at [email protected] or text him at 508.380.1868. (And yes, you guessed it, he is “working his way” through Ulysses by James Joyce this month and is contemplating a Word on the Street article in the form of the Molly Bloom soliloquy.)

From Trouble to Triumph: Unraveling Three Fictitious Fiefdoms

The rise of fiefdoms within AE firms has been a persistent challenge since I started consulting to the design and environmental industry 30 years ago. These empires are often crafted by uber-talented, hard-charging principals who, over time, seek to carve out their own domains within their organizations—often resulting in unhealthy competition, siloed communication, and diminished collaboration. Because of their competitive nature, intelligence, and sheer will, they can be a handful. So, let’s delve into the stories of three fictitious firms, each featuring a principal who built their own empire, and see how their CEOs dismantled these silos to foster a healthier and more collaborative workplace.

Firm 1: Stupendous Designs Co.

The Empire-Builder: Maximilian Stone was the heart and soul behind Stupendous Designs’ cutting-edge designs and high-profile projects. Over time, Stone’s relentless pursuit of excellence transformed into a rigid hierarchy within his own studio, which operated in isolation. The rest of the firm was seen as an obstacle to Stone’s success.

The Rise of the Empire: Stone’s empire emerged from a desire to maintain control over every aspect of the design process within his studio. He centralized decision-making authority, relegating team leaders to mere implementers of his vision. This approach led to a culture of fear and stifled innovation, as employees were hesitant to challenge Stone’s directives. He gave no quarter and took none.

The Fall of the Empire: CEO Erin Tylor, a seasoned executive with a background in organizational psychology, recognized the need for a fundamental cultural shift within the studio. She approached Stone with empathy, acknowledging his contributions while highlighting the importance of collaboration for the firm’s future success. Tylor initiated one-on-one coaching sessions with Stone to help him understand the benefits of decentralizing decision-making and empowering team leaders. She also facilitated team-building workshops and cross-departmental projects to foster trust and collaboration among employees.

Behind the Scenes: One of the main challenges for Tylor was managing Stone’s ego and resistance to change. Stone initially viewed Tylor’s initiatives as a threat to his authority and was reluctant to relinquish control. It took time and patience for Tylor to build rapport with Stone and gain his trust. Additionally, Tylor had to navigate internal politics and resistance from other senior leaders who had become conditioned to the existing power dynamics.

Firm 2: Nailed-It Engineering, Inc.

The Empire-Builder: Olivia Masters, Nailed-It’s Southeast regional director, was renowned for building a practice based on technical excellence. Along the way to helping the firm achieve industry prominence in her territory, she increasingly favored a culture of cutthroat competition among the firm’s other regions—collaboration and opportunities for innovation be damned.

The Rise of the Empire: Masters thrived on competition and believed that pitting her region against the rest of the firm would drive performance within her group. She incentivized her team to hoard knowledge and resources to gain a competitive edge over the rest of the company. Quarter after quarter, the Southeast Division performed at the expense of the rest of the firm— and resentment continued to mount.

The Fall of the Empire: CEO Michael Johnson, a former military officer with a background in strategic leadership, recognized the need to address Masters’ competitive mindset while keeping her engaged in the firm’s collaborative efforts. He leveraged Masters’ competitive nature by framing collaboration as a strategic advantage in outperforming external competitors. Johnson worked closely with Masters to reframe performance metrics and incentives, aligning them with team-based goals rather than regional achievements. He also implemented regular check-ins with Masters to provide support and ensure alignment with the firm’s vision.

Behind the Scenes: Johnson faced resistance from Masters, who initially saw collaboration as a threat to her division’s competitive edge. Masters was skeptical, if not outright cynical, about the effectiveness of team-based incentives and was concerned about losing control over her division. Johnson had to navigate delicate conversations with Masters and address her concerns while maintaining a focus on the firm’s overarching goals. He also had to manage perceptions within the firm and ensure that other principals understood the rationale behind the cultural shift.

Firm 3: Urban Planners R Us, LLC

The Empire-Builder: Marcus Greene headed the firm’s newly established urban development division, aiming to establish its reputation as a leader in innovative urban planning solutions. However, Greene’s competitive nature drove him to vie for recognition and resources within the larger firm.

The Rise of the Empire: Greene’s ambition to elevate the urban development division to the forefront of the firm stemmed from his desire for personal recognition and advancement. He viewed other divisions as competitors, striving to outperform them and secure more prominent projects and resources for his division. Greene fostered a culture of competitiveness within his division, driving his team to excel and outshine other divisions in the firm.

The Fall of the Empire: CEO Samantha White, a dynamic leader with a background in change management, recognized Greene’s drive and ambition, but understood that his competitive approach was counterproductive to the firm’s overall success. She approached Greene with a proposition to align the goals of the urban development division with those of the larger firm, emphasizing the benefits of collaboration and cross-divisional synergy. White worked closely with Greene to redefine what success actually meant, emphasizing collective achievements rather than divisional rivalry. She encouraged and rewarded efforts that resulted in cross-divisional projects and promoted knowledge-sharing initiatives to foster a culture of collaboration across the firm.

Behind the Scenes: White faced resistance from Greene, who initially saw collaboration as a threat to the autonomy and success of his division. Greene was reluctant to relinquish his competitive stance, fearing it may weaken his division’s position within the firm. White had to navigate delicate negotiations with Greene, highlighting the advantages of collaboration while addressing his concerns about maintaining the identity and success of the urban development division. Additionally, White faced challenges in managing perceptions within the firm, as other division heads were already viewing Greene’s competitive approach as a threat to their own divisions’ success. She had to ensure buy-in from all stakeholders and effectively communicate the benefits of a unified, collaborative approach for the firm as a whole.

The Lesson

The strength of the team surpasses the allure of individual success. Time and again, it’s the combined talents and joint endeavors that yield the most enduring and remarkable achievements—especially in our great industry.

Need help reversing the unhealthy dynamics in your firm? Call Mark Goodale at 508.254.3914 or email [email protected].

Market Snapshot: AE Industry Assessment (Short Version)

Weekly market intelligence for AE and environmental industry leaders.

What’s going on in the AE industry?

1. Business sentiment remains positive for the engineering and design services industry. Firms’ backlog levels remain high. Within architecture, business conditions are softer, and more firms are experiencing project delays.
2. Mergers and acquisitions activity remains above long-term historical levels despite high interest rates and inflation, with 427 deals in the U.S. in 2023 (click here to access the 2023 AE Industry M&A Year-in-Review).
3. Nonbuilding infrastructure markets, such as transportation and water, continue to drive growth, supported by federal legislation and relatively healthier state budgets. Additionally, manufacturing and data center projects are still in high demand.
4. From a regional perspective, the Southeast, Southwest, and Rocky Mountain regions have the strongest economic performance and outlook.
5. The commercial real estate sector has a mixed outlook for 2024. Remote and hybrid work continue to limit demand for office projects.
6. There is increased focus on sustainability, renewable energy, and energy efficiency. These areas have been incentivized by the Inflation Reduction Act.
7. Demand for engineering and environmental services related to mitigation and restoration of areas impacted by extreme weather events continues to grow.
8. Many firms are placing additional focus on talent acquisition and retention strategies to help address workforce shortages.
9. Within technology, trending areas include cloud-based digitization, AI, large language models, machine learning, IoT integration, cybersecurity, and others. Concepts involving blockchain tech are also gaining traction.
10.  On the contracting and procurement front, alternative delivery methods (design-build, CMAR, CMMP, P3, etc.) and their applicability, as well as expansion of Qualifications-Based Selection, may lead to policy review initiatives (e.g., 1972 Brooks Act).
11. In construction, costs remain elevated, but increases are expected to ease. Other trending topics include autonomous construction equipment, modular and prefabricated construction, and self-healing concrete.
12. The House voted overwhelmingly to pass the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which highlights strong bipartisan support ahead of the Senate consideration of the $79 billion tax package. Restoring Section 174 will provide tax breaks for engineering firms investing in R&D.

For the latest insights on U.S. regions and AE markets, check out our 2024 AE Market Intelligence Webinar. Click here to access recording and materials. 

To learn more about market intelligence data and research services offered by Morrissey Goodale, schedule an intro call with Rafael Barbosa.  

Weekly M&A Round Up

Two more Southeast deals: Last week we reported two more deals in the red-hot Southeast, this time in Georgia and South Carolina. Additional domestic deals were reported in Indiana, Wisconsin, and Pennsylvania. You can check all of last week’s M&A news here.