October 12, 2020
IN THE CLEARING STANDS A BOXER…
- Employee-owned firms have a fight on their hands in 2021. Their capital models will face a sustained series of punches throughout the year and possibly into 2022. Critical to survival will be firm leaders who are 100% prepared to go 12 tough rounds for the concept of employee ownership. They cannot let down their guard next year. Here’s what they’re up against.
- High unemployment lands the first punch – a jab. Twenty nine weeks after mass layoffs started to hit the economy, the official unemployment rate remains stubbornly high at 7.9%. The real unemployment rate is likely higher. Hardest hit sectors are in hospitality, entertainment, and leisure – about one fifth of the economy. Vaccine or not, relatively high levels of unemployment will persist through 2021.
- This will directly impact employee-owned A/E firms. Higher unemployment will mean less cash available for most households. In 2021, there will be a higher probability that the spouse or partner of a minority or potential A/E firm shareholder is out of work and not earning. There is also a higher probability that their child graduating high school or college can’t find a job and remains on the family “payroll” through 2021 putting additional pressure on household finances. Both of these factors will crowd out the capital that minority shareholders or potential owners were planning to use to buy into their firms – a critical element of all employee-owned capital models.
- Then comes the cross punch – market contraction. The fiscal condition of most state and local governments will be more challenged next year. Likewise, huge swaths of the commercial markets will see declines. Combined these will herald a smaller market for A/E & environmental services in 2021 with downward pressure on fees. The result will be an industry that will move from median double-digit profits last year to about 7% to 8% in 2021. This downward pressure in profits will negatively impact the available earnings stream employee-owned firms rely on to fund ownership transition.
- We saw the impact of this combination of punches during and after the Great Recession. There was a steady increase in sales of employee-owned firms starting in 2008. This was most notable in 2010 when a record number of employee-owned ENR 500 firms sold (many to overseas buyers) because they could not meet their internal ownership commitments in a challenging market for their services.
- So, what’s the game plan for employee-owned firms in 2021? Leadership must intentionally commit to being a high-performing firm and make this clear to all employees continuously. “High-performing” means high-profit AND growing. The first is important to preserve the engine to fund transition. The second is important to continue to foster demand for shares. Both sound simple, but neither are easy – particularly in a down market. The first will require tough decisions, the second will require smart client management and business development.
- At the front-end management will need accurate forecasting. Far too many management teams have gotten sloppy about revenue and profit projections. The last several years of growth have conditioned many business unit managers to “mail in” growth projections that similar to the prior year’s and leadership has readily accepted the good news. But that’s not going to work in 2021. This year requires an honest forecast in real time (not monthly!) that may show a flat or declining business. It’s only with this accurate information that leadership can make the tough decisions to quickly reallocate or reduce resources to preserve earnings. You snooze you lose in 2021.
- High performance is not optional, it’s the only way forward for employee-owned firms. 2021 will be a year like no other. Employee-owned firms will face particular challenges to their capital models. To survive, their leadership must be intentional about high performance. In a down market this likely means shared sacrifice for all owners in many firms – as the most enduring employee-owned firms realized a decade ago navigating the Great Recession.
- Virtual Reality CEO Week Version 2.0 registration is live! It’s bigger (we’ve expanded to 100 CEOs) and better (more custom designed VR meeting spaces and VR applications for A/E firms). Dates are January 25 – 29. Attend for the week or pick the days that work for you. You have to experience VR to believe it. Early bird registration is available now.
- Be the VR Trailblazer for your firm. Are you curious about how you can use VR at your firm to get closer to your clients, build and sustain your culture, take training and development to the next level and separate you from the competition? Then select one of our VR Trailblazer packages to explore a whole new world of possibilities for your firm.
- Industry M&A continues its wild ride. Having been down close to 20% earlier in the year, frenetic deal-making in recent weeks means that the 12-month pace of consolidation is now down just 3%!!! Everything we are seeing now points to another blowout year for industry transactions. Find out what’s behind the remarkable resurgence in M&A, hear from the firms that are making it happen, and connect with buyers, sellers and investors at our 4th Quarter Livestream U.S. M&A Symposium on Oct. 22 and 23.
To see last week’s “Word on the Street” report click here>
TOP 20 FUNDAMENTALS COUNTDOWN
All teams eventually face adversity. Some are consumed by it while others somehow emerge stronger. The teams that fail tend to panic, point fingers, and self-destruct. The teams that win, on the other hand, circle the wagons and focus on executing fundamentals at a high level.
Firms in the A/E industry have had their fair share of adversity in 2020 and could find themselves lining up for a whopper of a second helping in 2021 when most markets will be scratching and clawing for funding and investment. So when the road gets bumpy, will your firm buckle under the pressure or will it keep its composure and continue to march down the field?
Over the next several weeks, join us as we count down the Top 20 business fundamentals that, if executed well, could see your firm through what looks to be tough times ahead.
#20: Re-rack your Mission
Now is a very good time to get clear on why your firm is in business. No, it’s not to make money. No, it’s not to provide a great place for people to work. Those are simply beneficial outcomes that are produced by your organization’s consistent track record of coming through on the promises it makes to its clients. Understand that your firm’s phone rings for one reason and one reason only— your clients have an itch, and they think your firm can scratch it better than anyone else. If you can get clear on that, you can focus on building an organization that consistently creates lasting competitive advantages. Here are some tips for framing a mission the right way:
- Spell out who you are
- Describe what you are doing
- State how you’d like to go about doing it
- Deal with the question of why you are doing it
- Go shorter on “statement” and longer on “mission”
- Don’t confuse your firm’s mission with the results that accrue from fulfilling that mission
- Use concrete language (stay away from ambiguous/fancy words)
- Don’t become a 12th grade English teacher and sentence your mission to death by wordsmith
#19: Test Your Firm’s Value Statements
Values knit the fabric of a firm together. They are the DNA that runs through an organization. To promote and live your firm’s values, they have to be actionable. Honesty and integrity are fine virtues, but by the time you are a professional, you either have them or you don’t. So focus on values you can foster and practice throughout your organization, like continuous improvement, ownership mentality, and respect for people. Revisit these values at least twice a year and assess whether your company is living up to them— and if not, why not.
#18: Paint an Attractive Vision for the Future
Keep the faith that there are better times ahead. Sure, things may get rough in the next 12 to 18 months, but know that your firm will persevere— and periodically communicate that positivity throughout the organization. Think about what you want your firm to look like when the world comes back online and share it with the firm. There may never be a better time to circle the wagons.
#17: Embrace Responsible Autonomy
Command and control assumes people must be managed. The belief is that management’s job is to give directions (as opposed to giving direction) and motivate staff using a combination externally applied forces (a.k.a., carrots and sticks). It’s old-fashioned thinking and a sure-fire way to drive the best and brightest out of your company. In contrast, responsible autonomy is based on the trust that the firm’s professionals will use their autonomy responsibly. This type of environment inspires smart people to work hard and do all they can to help move your firm toward its vision. Responsible autonomy assumes people can self-manage within effective systems— and are capable of improving those systems over time.
#16: Become a Learning Organization
A learning organization is one that is dedicated to the learning and development of its staff. It is skilled at creating, acquiring, and transferring knowledge, and rapidly evolves. Learning organizations are capable in five important ways:
- Systematic problem solving— relying on the scientific method (plan-do-study-act), rather than guesswork, for diagnosing problems.
- Experimentation with new approaches— systematic searching for and testing of new knowledge. Experimentation is geared toward transformation. It often starts with a blank slate and requires a significant amount of learning by doing, and making adjustments along the way.
- Learning from experience and past history— methodically reviewing successes and failures, documenting lessons learned, and institutionalizing that knowledge.
- Learning from the experiences and best practices of others— the AEC industry can be provincial. Many in the industry seem to only learn from those in their own discipline or profession. Few firms have practices for learning from those outside the industry. Learning organizations develop the habit of engaging more broadly in the world around them as a basis for learning for and with each other, and innovating.
- Transferring knowledge quickly and efficiently throughout the organization. A learning organization is “high-velocity.” That is to say, they learn a lot fast, they improve, and they grow. Their know-how is routinely circulated throughout their organizations.
Next week, we will reveal #15 to #11.
–Mark Goodale ([email protected])
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