Word on the Street: Issue 204

The Most Perilous Decision for the Loneliest CEO (Part 2)

Last week’s Word on the Street lead article—“The Most Perilous Decision for the Loneliest CEO,” a fable about a CEO trying, and failing, to sell her successful, employee-owned AE firm—struck a chord with many of our readers. The topic seemed to hit home particularly with CEOs, soon-to-be-CEOs, and ex-CEOs (collectively known as the CEO-trifecta) of employee-owned firms.

The article prompted a mini flurry of emails, texts, and voicemails (people still leave those?) with questions and comments. Some of these were so insightful (and funny) that we’ve selected, compiled, and edited a number of them to allow for a deeper dive on some of the perils faced by the CEOs of employee-owned firms when pursuing “external” strategic options in today’s market environment.

1. Is the message from last week’s story to avoid seeking a sale until a majority of shareholders are willing to move forward? By its nature, a firm sale or recapitalization process needs to be as confidential as possible to maximize the chances of success. You don’t want your clients, competitors, or employees getting wind of things—“loose lips sink ships” and all that. So typically, when it comes to these matters, CEOs rely on a “circle of trust” that extends only as far as the board of directors—thus excluding many (most) of their employee shareholders. And while the board may approve the exploration of an external sale or recapitalization and also be an informed advocate for any proposed deal that results from said exploration, they may not necessarily—depending on the firm’s corporate by-laws—be the ultimate decision-makers. Oftentimes a firm sale or recapitalization requires either a super- or simple majority of all shareholders for approval. In such cases, there is always the risk that the CEO is unable to secure enough shareholder votes to move forward with the transaction. More than a few good CEOs have found themselves in this “no-man’s land” and failed to make it through. Unable to win the support of enough shareholders, those CEOs saw their deals head south, leaving them to pick up the pieces.

2. In the fable, the board gave the CEO the “OK” to pursue the sale/recap. Why then did the younger board members renege on that commitment and sink the deal? This narrative device is rooted in (a) actual, real-life experience in helping boards and leadership teams work through the strategic options selection process and (b) our forensic work helping teams heal and rebuild after a failed firm sale or recapitalization process. There are two critical success factors in this type of strategic decision-making. Get them right, and the chances of a successful deal are high. Screw up either one, and your CEO is likely going to be wondering why he or she ever took the job. The first success factor is the quality/competency of the decision-makers. Some of them are either unable or unwilling to voice their concerns or say “no” during the strategic deliberations—mostly out of fear (reference The Five Dysfunctions of a Team). They don’t want to be seen as “naysayers” or “devil’s advocates” (even though that’s actually their super-power). And so, when she gets the “yay, please proceed with exploring a sale or recapitalization,” the CEO erroneously believes that the board has her back, only to find out when it’s too late that they are not all on the same page after all. The second success factor is key individuals putting what’s best for the firm ahead of self-interest. This happens when key shareholders (in the case of last week’s article the younger board members) trade off their individual pros (generally economic) with their individual perceived cons (generally a surrender of individual autonomy and what they consider to be onerous terms of transaction-related employment agreements or non-competes). While the deal may be excellent for the overall firm, they feel it “doesn’t work for me.” And so, at the 11^th hour, they can cause the deal to be killed—by voting against it and influencing others to do so, too. I’ve seen it happen more than a handful of times. It takes a resilient, Solomon-like CEO to recover from this as he or she is dealing with a team that no longer trusts each other. 

3. So, are the perils facing CEOs exclusively internally generated? Not at all. While the article painted the picture of a board schism as the contributing factor to the deal going south, it’s equally plausible—even in the current market environment with record M&A multiples and favorable terms—that the “right” external strategic option, a sale to a strategic acquirer or recapitalization, may not actually be available. More than one CEO has overplayed their hand in negotiations over the past three years only to find potential investors walking away, leaving them holding the bag. An even more perilous—but equally realistic—scenario is the CEO “getting the call” from a buyer saying “the deal is off” for some reason or other. This is particularly perilous if the call comes AFTER the CEO has announced the deal is pending to employees.

4. For the employee-owned firm CEO, what is success? The article caused more than one reader to explore what success means for the CEO of an employee-owned firm. Is it defined by their legacy? Or is it what they set the firm up to achieve after their departure—be it voluntary or forced, planned or a surprise? Is it unfair to place the burden of “perpetual employee ownership” on the shoulders of the CEO? The struggle to successfully transfer from one generation to the next was a recurring theme in the comments we received, with an emphasis on just how difficult it is to pull this off today. 

5. The greatest peril of all – perceived betrayal: The CEO of an employee-owned firm is charged with the same firm capitalization responsibilities as his publicly traded and private-equity-backed peers – ensure the firm has the right capital model to support what it “aspires to do” (vision) and what it “has to do” (meet short-term and long-term obligations). However, the CEO of an employee-owned firm, particularly one in its second, third, or fourth generation of employee ownership, must also consider the significance of that generational legacy. And for many of those CEOs, this concern is what keeps them up at night. They wrestle with how they will be perceived. For instance, how will the prior CEO – the one who “entrusted the firm” to them to run – view them? How will their employee-owners feel about their decision? Will a decision to trade employee ownership for another model be seen as betrayal? As failure? “Uneasy lies the head that wears a crown.”

In our advisory and strategy work we constantly see the unique set of capitalization decisions that the CEOs of employee-owned firms face compared to those CEOs who run publicly traded or private equity-backed firms. All three must consider a range of capitalization options to help drive their firms forward on their chosen strategic trajectories. However, the CEO of an employee-owned firm must also weigh the importance of that legacy in their consideration of strategic options. And for many, this is what keeps them up at night. 

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

What AI Deployment Could Look Like in Your Firm (Part 3)

Welcome back to our final installment of AI’s impact on the AE industry. In the first two installments, we delved into the fictional AI journeys of Tenacious Architects Group and Preeminent Precision Engineering. And now we look at EcoFirm Environmental Consulting, a small environmental firm bogged down by slow data collection and analysis.

The Journey of EcoFirm Environmental Consulting

EcoFirm Environmental Consulting, an environmental impact assessment specialist, had been using traditional methods for data collection and analysis. These methods, though reliable, were time-consuming and prone to human error. With increasing demands for more precise and rapid assessments, EcoFirm found itself at a critical juncture: adapt or risk losing its competitive edge.

Opportunities

EcoFirm identified a significant opportunity in leveraging AI to revolutionize its field data collection and analysis processes. AI-driven drones and image recognition software could drastically improve the efficiency and accuracy of environmental monitoring. However, the idea of integrating AI met with a mix of enthusiasm and skepticism within the firm.

The Supporters and the Skeptics

CEO Laura Green, a forward-thinking leader with a background in environmental science, was eager to embrace AI to enhance the firm’s capabilities. She was supported by CTO Dr. Alan Pate, who had a strong background in AI and saw the potential for significant advancements. Field Technician Jamie Lopez, a young and tech-savvy employee, was also excited about the possibilities AI could bring to their work.

Conversely, there were notable doubters, including Senior Ecologist Dr. Margaret Owens, who had been with the firm for over 20 years. Margaret was concerned about the reliability of AI in accurately interpreting complex ecological data. Operations Manager Steve Harris worried about the high initial costs and the potential of eventual job displacement.

AI Strategy

Despite the resistance, Laura decided to proceed with integrating AI-driven drones equipped with advanced sensors and image recognition algorithms. Her strategy was to start with a single project to demonstrate the technology’s effectiveness and address any issues before a full-scale implementation.

The initial project focused on monitoring a wetland area that was being considered for a new development. Alan and Jamie led the implementation, deploying AI-powered drones to collect data on the flora and fauna, water quality, and soil conditions. The AI algorithms analyzed the data in real time, providing detailed insights that would have taken weeks to gather manually.

Initial Outcomes

The early returns were remarkable. The AI-powered drones significantly increased the efficiency of data collection, completing the task in a fraction of the time traditional methods would have taken. The accuracy of the data analysis was also impressive, providing detailed and actionable insights that enhanced the quality of the environmental assessment. Laura and Alan presented these results in a company-wide meeting, emphasizing the benefits of AI in improving efficiency and precision.

However, the transition was not without its challenges. Margaret remained unconvinced, pointing out that the AI algorithms occasionally misidentified species or environmental conditions, which led to inaccuracies. Steve highlighted the extra training needed and the interruption of a few projects that were already behind schedule. Some junior field technicians voiced their concerns about becoming obsolete and how additional training was cutting into their personal time.

Addressing the Challenges

To address these concerns, Laura implemented several measures. She organized comprehensive training sessions led by Alan and Jamie to help staff get comfortable with the new technology—and they paid the staff for their time. These sessions focused on operating the AI-powered drones, interpreting the data, and integrating AI insights with traditional ecological expertise.

Laura also emphasized a collaborative approach where AI-generated data were reviewed and verified by experienced ecologists. This step helped clean up discrepancies between AI-driven insights and human expertise, ensuring the accuracy and reliability of the assessments.

Further Integration

After the early success, Laura decided to expand the use of AI-powered drones and image recognition software to more projects. One significant project involved monitoring a large forest area for an ongoing conservation effort. This project posed complex challenges in terms of scale, biodiversity, and environmental sensitivity. The AI-driven approach allowed the team to collect comprehensive data efficiently and accurately.

As the technology became more integrated, acceptance grew. Margaret started to see the value in AI when she realized it provided comprehensive data that complemented her extensive field knowledge. Steve acknowledged that the AI-driven tools helped reduce manual errors and shortened schedules.

Long-Term Implications

While the integration of AI at EcoFirm Environmental Consulting has been largely successful, it’s not a panacea. In particular, striking a balance between AI-driven efficiency and human contributions remains a challenge.

Laura understands that the firm must continuously adapt to the evolving technological landscape. The AI tools need regular updates to incorporate new data and improve accuracy. The staff requires ongoing training to keep up with advancements and to ensure they can leverage the full potential of the AI system.

Conclusion

The journeys of our three fictitious firms illustrate the transformative potential of AI in the AE industry. Through a strategic and gradual integration of AI-driven tools, these firms were able to enhance their capabilities, streamline processes, and improve the accuracy of their work. However, the journeys were not without their challenges. The initial resistance from senior staff, the learning curve, and the need for continuous adaptation are realities that any firm looking to embrace AI must be prepared to face.

Text your AI strategy thoughts and questions to Mark Goodale at 508.254.3914 or email [email protected].

Market Snapshot: Which States Are the Most Attractive for Business?

We continue to gather and analyze data related to the economic health of U.S. states. Last week, CNBC published its annual competitiveness study, which takes into account categories such as infrastructure, workforce, economy, quality of life, and technology and innovation to determine the top states for business activity.

• The top five states for business, according to CNBC data, are Virginia, North Carolina, Texas, Georgia, and Florida.
• The most improved state compared to last year’s overall ranking was Alabama (climbing 22 positions) followed by Oklahoma (up 15 positions) and Missouri (up 14 positions).
• Utah and Oregon had significant performance improvement in terms of infrastructure metrics.
• Over the past year, Virginia, Texas, and North Dakota have made the most progress towards reducing cost burdens on businesses.
• When it came to economic output, the most improved states were Wyoming, West Virginia, and Alaska, despite being at the bottom half of the overall ranking.

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

Six new domestic deals announced around the country: Last week we reported six new deals in LA, TX, CO, NJ, and PA, highlighted by the growth investment in Ampirical (Covington, LA) by SkyKnight Capital (San Francisco, CA). Additionally, eight global deals were reported in Australia, the UK, Portugal, Finland, and Canada. You can check all the week’s M&A news here.