October 19, 2020

Success in 2021: Understanding the structural vs. cyclical changes facing your firm

The pandemic has changed everything. So, your business planning for 2021— including revenue and market forecasting and operations and management thinking— needs to change too. And fast. You can delude yourself that all will be good because your “backlog is holding for now” and that you “haven’t seen a slowdown yet.” But unless you are one of the 14% of firms that grows through a crisis or a recession, chances are you’ll need a new approach for next year.

    1. Structural vs. cyclical changes in 2021. The pandemic is inducing both of these— for your firm, the A/E industry, and your markets/clients. Structural changes are those that are permanent or have long tails. They are vaccine-agnostic. The pandemic has accelerated the structural changes that were already reshaping our industry (remote working, industry consolidation, technology-infused professional services, commoditization). Cyclical changes are those that are in play now and will continue until a cure is found and widely adopted in society. They are largely economic. It’s important that you distinguish between both types of changes to navigate 2021.
    2. What’s the most important cyclical change facing your firm and the A/E industry in 2021? Next year, the market for A/E and environmental services will shrink for the first time in a decade. 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. This cyclical change will reverse post-vaccine. And an infrastructure stimulus plan in 2021 will benefit some markets in the short term. But until then, it’s going to be a knife fight between you and your rivals for market share.
    3. What are your two most important strategies for success in a smaller market? First, you must protect your existing client relationships. That means intimately understanding the changes that your clients are facing (see bullet 6 below) and offering them services and solutions to match their new needs. Critically, you have to find new ways to connect with them in these socially distant times— ways that your competitors are not using and that reinforce your relationships (see bullet 10 below). Second, you have to take market share away from incumbents. That means smartly/aggressively amplifying your digital brand and finding new ways to sell at a time when traditional business development activities are in flux. It also implies making smart acquisitions to shut out/eliminate aggressive competitors and/or strengthen your market position.
    4. What is the most important structural change facing your firm and the A/E industry? It’s the new reality of doing business in a socially distanced world. The importance of offices will be diminished forever. This is a massive challenge with respect to building and sustaining your firm’s values and culture in 2021 and beyond. It’s tougher to do this when traditional in-person methods of building social capital have been replaced by endless, mind-numbing, attention deficit-amplifying “video meetings.” And this dynamic will become particularly corrosive should you have to make layoffs next year. You need to go beyond video to engage your remote workforce.
    5. Your 2021 revenue and earnings plan starts and ends with your clients. You need to understand what structural and cyclical changes they are facing and invest your resources (capital, people, time, brand) accordingly. Your client managers and business unit leaders have the primary responsibility for gathering and interpreting this intelligence. They need to talk with every client before the end of this year to establish how their habits, patterns, decision-making revenue models and priorities are being changed by the pandemic. This market information then must be factored into each business unit’s forecasts and rolled up for the enterprise financial plan.
    6. Interrogate every forecast. Do not let your business unit leaders “straight-line” their revenue and earnings projections from 2020. The 2021 plan for every business unit needs to be built on the following questions first:
      A. How will this target market be different next year than before?
      B. What are the structural and cyclical changes facing this market?
      C. Will the market grow, flatline, or decline? Why?
      D. Are we “in” or “out” of this market next year?  Why? (Justify the investment)
      E. How will we create and deliver value in this market?
      F. Do we have a winning strategy and leader?
      G. What new services/solutions will be needed that we must sell and deliver?
      H. What existing services/solutions should we stop selling?
      Only after these questions are answered should revenue and earnings projections be discussed.
    7. 2021 will be a year like no other for your firm. For sure, there will be opportunities for both growth and “safety.” But these will be outweighed by more threats and risks to navigate than ever before in a smaller market. Your success will depend on understanding the structural and cyclical changes facing your firm and your clients, retooling your business accordingly, and prosecuting the plan for 12 long months.
    8. Registration for our January Virtual Reality (VR) CEO Week is live. Meet with 100 A/E CEOs from around the country in bespoke VR meeting spaces and discuss best practices and industry trends with them over five days of curated discussions. 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. But don’t delay— registration is limited to the first 100 CEOs.
    9. Be the VR/AR Trailblazer for your firm. Virtual Reality and Artificial Reality (VR/AR) is a game-changer for professional services and can be a strategic differentiator for your firm in 2021. Are you curious about you can use Virtual Reality and Artificial Reality (VR/AR) 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.
    10. Industry M&A continues to surge in Q4. There have been a stunning 24 deals announced this month already. Anticipating increased tax rates in 2021, sellers are doing everything they can to close their deals before midnight on December 31.  Buyers are snapping up quality firms to navigate a potentially turbulent 2021. The pandemic is accelerating the trend of industry consolidation. The big will get bigger while smaller, less well-capitalized firms will sell or disappear. But the surge in activity won’t stop in 2020. We’re anticipating a 20% increase in M&A in 2021.

TOP 20 FUNDAMENTALS COUNTDOWN

Welcome back to the Top 20 Fundamentals Countdown. This week, we present #15 through #11.

#15:  Get Good at Making Negative Assessments

How do you react to negative assessments? Do you defend your behavior, actions, or performance? Do you make counter-arguments? Do you get upset? If so, you’re missing golden opportunities to improve yourself and your firm. Think about elite athletes. They don’t become elite if they don’t thrive on negative feedback. Yet we don’t behave that way in our professional settings. We hide from it. We suppress it in ourselves and others. We are conditioned, and condition ourselves, to not to bring things up, that it will hurt our career paths, and so forth.  But people don’t get very far when we have low expectations for one another, and we do each other and ourselves a disservice when we let each other off the hook by failing to seek and provide critical assessments. Not talking and not listening are two of the biggest wastes in far too many A/E firms.

#14:  Solve the Right Problems

No matter how successful your firm is, you don’t have the luxury of working on things that don’t matter. Yes, I know— “Thank you, Captain Obvious.” But it happens more than you might think.  Maybe you created a project management manual in response to quality problems or changed your organization structure around to deal with accountability— only to find that despite your best intentions, the problems still remained. There is a structured ways to address problems that yield much better results. One is called A3 Thinking (or A3 Learning). Essentially, it is a sequential way of working through a problem that prevents the problem solvers from jumping to conclusions (resulting in working on the wrong problems) and working collaboratively to figure out what the problem is, how things work now, the desired condition, causality, countermeasures, and how to follow up to the desired outcomes are achieved. The ultimate goal of the A3 approach is not just to solve the problem of the day, but to make the process of problem solving transparent and teachable in a way that builds a host of valuable skills.

#13:  Conduct Ongoing Client Monitoring

Whatever questions you have about the direction your business should take, chances are your clients have the answers. Periodically select a number of clients appropriate for the size of your organization and interview them. The purpose of these interviews is to test your firm’s assumptions about how your company is perceived in the industry and how it stacks up against the competition. Seek to get a sense of where your clients think their own industries/sectors are headed. Then share the information internally— the good and the bad.

#12:  Map the Client Experience

Disney does a fantastic job at consistently delivering a spectacular customer experience. No detail is too small. They are acutely aware of every interaction customers have with anything Disney and value is added at every intersection. For example, anyone who has been to a Disney theme park knows how long the lines for the attractions can be. But rather than being content to let visitors waste those minutes, Disney introduced interactive displays throughout the queue. Use this thinking to improve the client experience in you firm. Map the journey your clients take with you, identify the high-leverage touch points, and deliberately build value into them.

#11:  Get Serious About Risk

If you deal with risk by going into a project with a mood of hope, sooner than later you’ll find yourself cleaning up a mess— so understand your options. They are:

  • Avoid it.  You may or may not be able to avoid it.  You could just not take a job that you don’t already have the required staff working for the firm.
  • Reduce it.  Training, onboarding, and clear communication are examples of ways to reduce risk.
  • Transfer it.  This means, “If we miss it, you pay.”  That’s a classic transfer.  “I don’t want to deal with it, so someone else will.”  If you don’t want to deal with a particular environmental risk, for example, get a sub to take on that risk.
  • Allow it:  Think contingency in this case— that means stockpiling hours or money. In the event that whatever you don’t want to have happen actually happens, you have the wherewithal to deal with it.
  • Manage it. If you choose to manage risk, there are two assessments to make. The first is the likelihood and the second is the significance to the business (i.e., how much it would hurt).  There usually isn’t much, if anything, you can do about the significance.  But you can try to work on the likelihood.  If it’s unlikely, make sure it stays that way.  If it’s likely, focus on it try to drive that probability down

One more thing— many believe risk is, for example, losing a million dollars on a project. That’s an outcome. Instead, risk would be something like not being able to staff the project properly. In any case, you can’t manage risk if you don’t understand what it is and what it is not.

Mark Goodale ([email protected])

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