Word on the Street: Issue 203

The Most Perilous Decision for the Loneliest CEO

At 61, she knew better. She’d given up smoking 30 years ago. And yet, here she was, firing up a Marlboro, staring at a blank Word document, about to write the most painful speech of her career. She inhaled deeply, coughed (“There’s a reason why I chucked this habit.”), took a long swig of the Jameson she’d bought at the Total Wine on the way home from that terrible, terrible board meeting earlier in the afternoon, and set grimly to typing…

1. “We Built This City…”: As the third CEO in 60 years of her very successful, very well-known $500 million Northeast AE firm, she was an evangelist for employee-ownership. She walked the walk and talked the talk about why employee ownership was not just important, but necessary. She preached how the opportunity for everyone to be an owner resulted in superior client service, more and better growth opportunities, enhanced employee wellness, faster innovation, and meaningful community involvement. And she was no fool. She knew you needed to be a high-performing firm to remain independent and employee-owned. So, she and her C-suite relentlessly and professionally drove top-line growth (“If you’re not growing, you’re dying” was her mantra.) that had averaged 7% per annum for the past 20 years and achieved a sustained, bottom-line, pre-tax, pre-bonus of on average 17% of net revenues. (“Make a profit every month” was the credo her team lived by.) From day one of her tenure as CEO, she had done everything in her control to ensure that the firm could be master of its own destiny. 

2. “You could be my silver spring”: But try as she might (and she tried mightily), one thing remained beyond her control—CEO succession. Which was ironic because nobody took it more seriously than she did. She knew the stats (high failure rates), timelines (a decade to do it right), and ways to ensure success (start early, have more than one option). So, within five years of taking over as CEO, she set about identifying and developing the firm’s next CEO, with a goal of having that person ready to take over when she turned 60. (She took another shot of Jameson.) There were years of executive coaching, off-site team building, crucial conversations, and sharing of personal confidences. But, one by one, her candidates for succession either withdrew (“It’s too much pressure boss; I just want to run the new Mid-Atlantic region.”) or flaked out (“The big publicly traded firm offered me an S-Class Mercedes as part of the package, boss [everyone called her boss], how could I refuse?!”). Her last best hope had informed her that, given his wife’s success in sales for Nvidia, as a couple they were taking early retirement to follow Dead & Company on their next world tour. So, while she had worked hard every day to ensure the firm would remain independent and employee-owned with a fourth-generation CEO (to fulfil the leadership team’s vision of being a “generational firm”), her efforts were not matched by those who could have been that CEO. “I know I could have loved you. But you would not let me.”

3. Palace intrigue: For the past several years, her board of directors had been “exploring the firm’s strategic options”—a euphemism for selling or recapitalizing. Two camps had emerged within the board on the topic—and she had a foot in both of them. Objectively, as both a fervent capitalist (“The Wealth of Nations” sat on her bedside table ready for a quick perusal if needed any night before nodding off.) and responsible fiduciary, she wholeheartedly commissioned several studies on the matter and held numerous formal and informal discussions with third parties and potential investors. Not surprisingly, there was no shortage of interest from both strategic acquirers—domestic and foreign—and private equity. The valuations and terms discussed were very attractive. Attractive enough to convince the camp of older internal board members that a sale or recapitalization was the “right thing to do.” But not attractive enough to convince her younger board members, who placed a high emotional value on the firm’s culture and independence. Nor was her subjective, employee-ownership evangelist-self swayed. She had always been able to demonstrate that the firm’s continued high performance allowed the board to meet its fiduciary responsibilities to shareholders while also pursuing the firm’s vision to be a generational firm. And so, over the years she had politely shut down each and every overture to sell or recapitalize. But with no successor in sight, the vision of a generational firm slowly slipped away. As did her rationale for declining to fully explore another “strategic option.” 

4. One is the loneliest number: With no viable successor for her, with a heavy heart she reported to the board that it was her considered recommendation to proactively explore a sale or recapitalization of the firm. Her assessment? Given the demand she anticipated from investors and acquirers, the firm’s superior financial performance, and the competency of her and her executive team, she expected that they could easily achieve a valuation north of $1.1 billion for the firm. One camp on the board immediately began Googling “how big a yacht can I buy with $5 million?” The other felt betrayed, let down, lied to, abandoned. The board voted and gave her the “OK” to confidentially (“no leaks internally or externally”) explore the “strategic options” available to the firm. They assigned the code name “Project Mars” to the initiative. She felt conflicted and…lonely. She had spent all of her career pursuing the vision of a generational firm. She was filled with a sense of dread. This was a big departure, with no guarantee of a happy ending. “I’ll follow you down ’til the sound of my voice will haunt you.”

5. “Don’t say that she’s pretty”: “And did you say that she loves you?” As a CEO, she had never been more correct. Within a week of “going to market,” she and her team were overwhelmed with demand for the firm from both strategic buyers and private equity investors. It was flattering, reaffirming, and mind-boggling. In meeting after meeting (“It’s like speed dating!”) strategic acquirers talked about how an acquisition would create one of the largest and most powerful firms in the industry, while private equity suitors talked about how they would work with her team to create the next great national industry brand. Both strategic acquirers and private equity investors stressed the importance of “cultural and strategic fit” and promised ownership opportunities for “managers and key employees.” All of the suitors proclaimed that they saw meaningful positions for her and her team going forward. It was almost too good to be true. Within three months of going to market, she (and her advisors) had secured and negotiated what they understood to be the richest valuation available for shareholders with the most favorable terms with one of the world’s most prominent private equity firms. Now all that was left to do was secure a majority vote of the shareholders to approve the deal. The home stretch. A slam dunk.

6. Et tu, Brute? Except it wasn’t a slam dunk. The younger board members (who were a dynamic group of up-and-coming, popular principals) were united in their objections to a sale or recapitalization on any terms. (“We don’t do this for the money; we do it for our clients and employees and the ‘integrity’ of the practice.”) They canvassed the other shareholders heavily. The deal got voted down. The word about the failed transaction had spread internally and externally. Employees were confused. Competitors smelled blood in the water and were aggressively recruiting. Clients were calling their contacts to know what the heck was going on. “My city was gone.”

7. A most perilous time: So now, here she sat—revisiting some really bad habits—gathering her thoughts for a speech to explain just what had gone down and, more importantly, the way forward for the firm. But for once, she didn’t know the way forward. It was clear that leadership succession was not an option. It was also apparent that a sale or recapitalization was off the table. At 61, her appetite for rebuilding had seriously waned. Her board was fractured. Gone was her team’s commitment to pursuit of a generational firm. The sense of camaraderie and trust in each other that she and her team had worked so hard to perpetuate and that had driven the firm’s high performance lay in ruins. She had made one of the hardest decisions that any industry CEO can make, executed the plan, and failed. Leaving her firm dangerously exposed and likely on the cusp of collapse. (My experience is that most firms that go through this wrenching process shrink, shed their best talent, and die a slow death, destroying shareholder value along the way.) “You’ll never get away from the sound of the woman that loves you.”

8. Coda: Last week we wrote about how many CEOs bear a burden of loneliness as they make the toughest decisions for their firms with weak or broken support systems. Last month, we discussed how private equity is living rent-free in the boardrooms of many leading employee-owned and ESOP firms. The industry gets to read about and discuss the many high-profile sales and recapitalizations of ENR Top 500 firms that have created multiple multi-millionaires and unlocked “next chapters” for iconic industry brands. Given the gossip-girl nature of the industry, these good results (particularly valuations and “multiples”) are amplified beyond reality like a game of telephone. But in a darker corner of the industry, there are more than a few firms that after serious self-examination have gone to the market to seek a new path forward through a sale or recapitalization only to have painfully failed to secure it for whatever reason. Spare a thought for the CEOs of those firms, who now face a most perilous time. Note: This article is not intended to encourage industry CEOs to take up smoking or drinking.

Comments, thoughts? Email Mick Morrissey @ [email protected] or text him at 508.380.1868.

What AI Deployment Could Look Like in Your Firm (Part 2)

Welcome back to our exploration of AI’s impact on the AE industry. In the first installment, we delved into the fictional journey of Tenacious Architects Group, a mid-sized firm embracing AI to conquer complex design challenges. Now, in the second article of our three-part series, we shift our focus to Preeminent Precision Engineering, another fictitious firm facing real challenges.

The Story of Preeminent Precision Engineering

Preeminent Precision Engineering is a large engineering firm specializing in infrastructure projects. Known for its expertise in large-scale projects such as bridges, highways, and urban infrastructure, the firm had built a reputation for excellence over the decades. However, despite having advanced engineering software, Preeminent Precision faced significant difficulties in project management, often leading to cost overruns and delayed timelines.

Opportunities

The leadership at Preeminent Precision identified a significant opportunity in using AI for predictive analytics to enhance project management. By leveraging AI, they hoped to forecast potential issues, optimize resource allocation, and streamline their project timelines. This shift, however, was met with a mix of enthusiasm and resistance within the firm.

The Supporters and the Skeptics

CEO Robert Carter, a visionary leader with a penchant for innovation, was keen to adopt AI to solve their project management woes. He was supported by CTO Jessica Nguyen, who had a background in data science and saw AI as a transformative tool. Project Engineer Mike Stevens, a rising star in the company, was also a strong advocate for AI, excited about the efficiencies it could bring.

Conversely, there were notable skeptics, including COO Daniel Brooks, who had been with the firm for over 30 years. Daniel was wary of the reliability of AI predictions and feared that over-reliance on technology could undermine the expertise of seasoned project managers. Senior Project Manager Alice Turner was concerned about the potential disruption to established workflows and the risk of job displacement for project managers.

AI Strategy

Despite the resistance, Robert decided to proceed with implementing an AI-driven project management system. The system was designed to use historical project data to predict timelines, identify potential risks, and suggest proactive measures. Robert’s strategy was to start with a pilot phase, focusing on a few key projects to demonstrate the system’s value and address any issues before a full-scale rollout.

The pilot phase involved a major highway expansion project. Jessica and Mike led the implementation, working closely with a dedicated team to integrate the AI system into their existing project management framework. The AI system analyzed data from past projects, identifying patterns and predicting potential delays and cost overruns.

Initial Outcomes

The initial outcomes were promising. The AI system accurately predicted potential bottlenecks and suggested reallocation of resources to mitigate delays. The project was completed 15% faster than similar past projects, with a notable reduction in budget overruns. Robert and Jessica showcased these results in a company-wide meeting, emphasizing the system’s benefits in enhancing efficiency and reducing risks.

However, the transition was not without its challenges. Daniel remained skeptical, pointing out that some of the AI system’s predictions were overly cautious, leading to unnecessary resource reallocation. Alice highlighted the initial confusion among project managers, who were uncertain about how to balance AI recommendations with their own judgments. Some junior project managers struggled with interpreting the AI system’s insights and integrating them into their daily workflows.

Addressing the Challenges

To address these concerns, Robert implemented several measures. He organized extensive training sessions led by Jessica and Mike to help project managers understand how to use the AI system effectively. These sessions focused on interpreting AI predictions, integrating them with traditional project management practices, and balancing AI insights with human expertise.

Robert also encouraged a collaborative approach in which AI-driven recommendations were reviewed and refined by experienced project managers. This helped bridge the gap between AI-generated insights and on-the-ground realities. He established a feedback loop where project managers could provide input on the AI system’s performance, leading to continuous improvements and adjustments.

Further Integration

With the pilot phase deemed a success, Robert decided to expand the use of the AI-driven project management system to more projects. One significant project was a new urban rail system. This project posed complex challenges in terms of coordination among various contractors, tight deadlines, and budget constraints. The AI-driven approach allowed the team to anticipate and address issues proactively.

As the technology became more integrated, some of the initial resistance began to die down. Daniel, initially skeptical (if not outright cynical), started to see the value in AI when he realized it provided actionable insights that complemented his vast experience. Alice acknowledged that the AI system helped identify risks early, allowing for more effective mitigation strategies.

Long-Term Implications

While the integration of AI at Preeminent Precision Engineering has brought notable successes, it is still a continuous process. The firm is committed to investing in both the latest AI technologies and ongoing staff training to maintain its competitive edge. However, balancing AI-driven efficiencies with the personalized expertise that defines Preeminent Precision’s reputation remains a significant challenge.

Robert recognizes the necessity of staying agile in a rapidly evolving technological environment, which means not only updating AI tools to enhance accuracy and functionality but also ensuring that the team is well-versed in the latest advancements. Additionally, the firm needs to effectively communicate the value of AI to clients, helping them appreciate the enhancements it brings to engineering projects.

In next week’s installment, EcoFirm Environmental Consulting has to adapt or be left in the dust. In the meantime, text your AI strategy thoughts and questions to Mark Goodale at 508.254.3914 or email [email protected].

Market Snapshot: More on State Financials

Last week, we discussed how states are heading back towards a more normal budget environment after three years of spending increases. We also provided a few highlights related to capital spending over the past few years. Most states recently enacted budgets for fiscal 2025. We noted a few highlights:

Four states are increasing general fund expenditures by more than 10%:

• Kentucky
• Mississippi
• Kansas
• Delaware

Five states are budgeted to have general fund expenditures increases between 5% and 10%:

• Pennsylvania
• Nevada
• Washington
• New Mexico
• Maine

General fund revenue is expected to grow in most states, but only four states have budgeted increases above 5%:

• Oregon
• West Virginia
• Idaho
• Wyoming

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

Seven ENR-ranked firms announcing deals: Industry consolidation continued last week with seven ENR-ranked firms announcing new transactions in KY, NH, WA, TX, PA, MT, and MA. Overseas, we reported four transactions in The Netherlands, Ireland, UAE, and India. You can check all the week’s M&A news here.