Word on the Street – AE Industry Intelligence

May 16, 2022

In this week’s Word on the Street

AN Rx FOR FLOUNDERING FOUNDER’S SYNDROME
When firm founders stick around too long, bad things tend to happen

WHAT FOUNDERS NEED TO SEE BEFORE HANDING OVER THE BABY
Developing a pipeline of leaders who can take good care of the founder’s creation

50 IN 50: NEW MEXICO
New Mexico’s economic and infrastructure highlights

WEEKLY M&A ROUND UP
Industry M&A is up 41% over the past 12 months

AN Rx FOR FLOUNDERING FOUNDER’S SYNDROME

Floundering Founder’s Syndrome (FFS)—it’s one of the most pernicious ailments that plagues the industry. It occurs when firms should be transitioning in an orderly, agreed-upon manner to the second generation of leadership and ownership. But instead, the board room and leadership team dynamics resemble an episode of HBO’s dark comedy Succession.

Don’t leave me this way: When a firm’s Founders stick around too long, bad things tend to happen. The firm’s performance and culture suffer. Relationships become unhealthy. These changes don’t happen overnight. The degradation happens so slowly and subtly to be almost imperceptible. But everyone—including the Founders themselves—are aware of the drift. Unfortunately, most of the time leadership teams are not equipped to stop the slide. That’s why two-thirds of design and environmental firms fail to transition beyond their Founders.

Everyone’s not equal: We love our Founders—we wouldn’t exist without them. You only have to check out the “About Us” or “History” pages of the websites of the ENR 500 to see just how much reverence is paid to the (mostly) men who founded the firms 30, 40, or 50 years ago. So, we are more than willing to treat Founders in a special manner (e.g., Ford Explorer leases for managers, Mercedes leases for Founders). There’s a codified set of rules for a firm’s managers and employees. And then there exists another set of protocols—largely unwritten—for the firm’s Founders. Founders have a special place in our hearts, which translates into a healthy respect and deference. This generally works for most of a firm’s initial existence. But when Founders overstay their welcome, this dynamic can become unhealthy, and a firm begins to experience FFS.

The “Founder’s Card”: The first hint that a firm has FFS is when Founders begin to overplay their Founder’s Card. You’re familiar with the Founder’s Card, right? It’s like a special hall pass that only the Founders have. Need to take a call from a family member during a board meeting? Heaven forbid a non-founding manager like you would pick up and say, “Hello, my darling!” But the firm’s Founder sure can do it. That’s an example of the Founder’s Card being played. When the Founder’s Card gets overplayed in governance, strategy, and operations, it’s a recipe for dysfunction and sub-par performance.

Governance: Intentional or not, floundering Founders play an outsized role in corporate governance. The Founder’s Card is typically overplayed at the board level either in voting mechanisms (voting by shares owned vs. one person, one vote) or composition (packing the board with hand-picked “yes-people”—either internal or external—or family members). This type of behavior is a manifestation of Founders believing that the firm is “theirs,” that it belongs to them because they founded it—even when they themselves may own less than a majority of the shares. Most non-founding minority shareholders and next-generation leaders have neither the experience, capabilities, nor short-term incentives (“I don’t want to challenge this situation as the Founder sets my annual bonus. I’m no fool.”) to challenge the Founder’s Card when it’s played this way. This opens the door to poor governance decisions, and the rot sets in.

Strategy: When Founders stick around too long—especially when they have enough money in the bank to not worry anymore—and particularly when they don’t have enough going on at home to keep them grounded or occupied, it can lead to some serious strategy implications. In our consulting work we’ve seen it all. Founders passionately driving bizarre strategic initiatives (“OK, I know we are a transportation engineering firm and all that, but I believe we should buy multiple architecture firms to allow us better access to clients.”). Founders capriciously reneging on commitments made through good-faith and oftentimes contentious leadership team meetings. (“Yes, I know we agreed to invest in a technology partnership with that AI firm at our last board meeting, but now I’m not so sure, so let’s defer.”) When the Founder’s Card is overplayed in setting firm strategy, it leads to poor investments that drain a firm. It also erodes trust and confidence among leadership teams.

Operations: The Founder’s Card, when played at the governance or strategy levels, is hidden from employees. But at the operations level, it’s visible to everyone. This happens when a Founder lets personal bias undercut agreed-upon management decisions or protocols (“Let’s keep working for this client. I know they don’t pay us well, but I’m friends with the CEO’s mother. If your division director finds out and is upset, tell him I told you it’s OK.”) or is unable to recognize how business has changed (“Value pricing? That will be the end of us! Figure out the hours it will take and add a 5% profit. That’s how we do business here.”). When this happens, the dysfunction at the top of the firm becomes manifest to all. It’s lousy for morale.

Transition deferred/destroyed: When Founders flounder and hang around too long, they place the transition to a next generation of leaders and owners in jeopardy. Their persistent presence can delegitimize those who would be the next leaders. Their overplaying of the Founder’s Card in governance, strategy, and operations serves only to undercut and demotivate next-generation leaders.

Great brand, lousy performer: The sum total of FFS is a bizarre asymmetry between brand and performance. It’s shocking how many firms we see that should be consistently generating profits of 20%+ given their brands that are barely breaking even because of FFS.

Rx for FFS? The only medicine for FFS is a strong, cohesive, and skilled next-generation leadership. This team needs to make it clear to the Founders the terms under which they will commit to transition in terms of goals and timing. They need to acknowledge the special role and position of the Founders, while also making it clear what is acceptable and unacceptable behavior. They must call out the Founder’s Card when it’s played. Sounds easy, but it’s not. Transition is about dealing with power, mortality, risk transfer, and legacy relationships. It takes the Founders working in concert with the next generation to make it work smoothly. The longer Founders linger, the harder it gets.

Questions? Insights? Email Mick at [email protected] or text him at 508.380.1868.

WHAT FOUNDERS NEED TO SEE BEFORE HANDING OVER THE BABY

As you just read in Mick Morrissey’s article, “Floundering Founders Syndrome” can cause significant problems for a firm in transition. We see evidence of it on a daily basis. But sometimes founders linger because they haven’t done enough to create a pipeline of leaders who can take care of the firm’s main concerns, which include:

  • Sustainability—that the firm’s human and financial resources are used sustainably
  • Serviceability—that the firm delivers significant value to its clients as well as a great experience
  • Survivability—that the firm generates enough profit to pay for today and invest in tomorrow

When founders don’t believe that the firm’s would-be next generation of leaders can effectively attend to those three areas, they either have to stick around longer than planned or find an external buyer for their business.

Founders often feel like their company is one of their children. They birthed it, nurtured it, and cared for it through thick and thin. And they aren’t going to leave their baby to just anyone—particularly those who may be skilled in only the technical aspects of the business and may not have the interest or inclination to be an owner. After all, being an owner requires a big appetite for taking on leadership-level responsibilities, the risk profile to leverage opportunities without putting the firm in peril, and the behaviors necessary to galvanize an entire firm.

So what should founders look for in their next generation of leaders? In particular, they need people who own a) their experience of working in the company, b) the experience clients have working with the company, and c) the overall results the firm ultimately achieves. In this context, the word “own” means fully responsible.

My colleague, Hal Macomber, helped identify five behavior sets that are central to this notion of ownership. They include:

  • Responsible autonomy
  • Committed action
  • Cooperative consideration
  • Sound decision-making
  • Lean thinking

Together, these five behaviors provide a broad capacity for taking care of the concerns of the firm, as previously described. Let’s look at them one at a time.

Responsible Autonomy. All human beings are autonomous; that is to say they determine what they will do and when they will do it. The acts of assenting and declining to requests and direction of others is the fundamental capacity that has us be autonomous. “Responsible autonomy” is the capacity to act on one’s own, recognizing the limits of capability and with concern for the well-being of others. Unlike most of the general population, architects, engineers, planners, and environmental consultants are well-prepared for acting with responsible autonomy. These professions usually require licensing, continuing education, and membership in a society to be able to practice the profession. So why is this important? Because we can trust that these professionals have the background to act autonomously in the firm. While we know that junior professionals may not have the experience that develops knowledge and judgment, by the pledge they made when they became professionals we can expect them to act responsibly. “Responsible autonomy” is central to ownership. Founders must have the expectation of other owners that they will consistently act to take care of the concerns of the business, the people in the business, and the firm’s clients. If, however, they find that the firm’s future leaders must be told or asked to do those things, the baby stays with them that much longer.

Speaking with Intention. One way to describe leadership is accomplishing things through others. And that requires taking action in language—making requests and promises. Effective leaders take responsibility for the outcomes of their firms by creating networks of commitments with others, and doing so in such a way that people:

  • Say yes when they mean it
  • Say no when they must
  • Ask for clarity when they are unsure of what is being requested
  • Promise to promise later if they need more time to figure out if they can commit
  • Make legitimate counter-offers when they can’t deliver on the specific request
  • Make conditional promises (e.g., I will do this if you do that) when they need help to execute

Cooperative Consideration. Cooperative consideration is an expectation that each of us behaves with the consideration of others and acts to address those concerns. It is this concept that seems to be at the heart of making a company function well. We all know what it means to be considerate, whether it’s letting someone out into traffic, giving up your seat on a plane so a family can sit together, or simply holding the door for someone. When in action, we have the chance to consider the impacts our actions have on others. We can shape our actions so that we address others’ concerns while addressing our own. Unfortunately, all too often we observe a different behavior being practiced in AE firms—taking care of ourselves. It’s usually done out of the concern for risk and exploitation by others. Nevertheless, cooperative consideration can be cultivated with the knowledge that the considerate behaviors that have been fostered in us by family and friends are available in the workplace, as well.

Sound Decision-making. We hear some founders say, “I trust her. She makes decisions the way I do.” A company where next-generation leaders make decisions like the boss isn’t necessarily what the founder should seek. Far more important is that future leaders demonstrate the ability to make sound decisions as they establish strategies for the firm, prioritize goals and objectives, and commit company resources. The key to sound decision-making is using the right data the right way. But while we have numerous methods for weighing alternatives to choose a best alternative, most people aren’t trained to make decisions. We don’t know of any public K-12 school that teaches decision-making, nor do we know of any college programs that teach the most basic of skills to make a decision. However, we do know of one sound decision-making methodology called “Choosing by Advantages.” It was created by Jim Suhr, an engineer for the U.S. Forest Service. The simple but profound rule he discovered is that decisions must be based on the importance of advantages. Our common practice is to give importance to factors rather than advantages. For instance, how do you think a person would answer the question, “Which is more important in the design of a bridge: cost, aesthetics, or safety?” You’re right in guessing that virtually everyone answers, “Safety.” But the correct answer is, “The question can’t be answered.” It’s unanchored. Looking at the fundamental rule above, we can’t determine importance until we have found advantages. In any case, this decision-making approach has sound methods for all kinds of decisions and can be learned in a short time.

Lean Thinking. Lean thinking, the last of the behavior sets, provides a framework for addressing the long-term interests of the firm. It starts with two foundational principles: respect for people and continuous improvement. These principles are universal and the practices that are derived from these principles are equally so. “Lean leaders” deploy Lean strategies, methodologies, and tools to build firms that deliver highly valued services without the usual waste, and do so in a manner that systematically grows capability.

Founders won’t leave their baby until the next generation is ready, willing, and able to properly care for it. Embracing these five behavior sets will help them do just that. There is no hard part in adopting them. It just takes focus and effort.

For more insights on leadership transition, call Mark Goodale at 508.254.3914 or send an email to [email protected].

50 IN 50: NEW MEXICO

50 states in 50 weeks: U.S. states economic and infrastructure highlights.

NEW MEXICO

KEY ECONOMIC INDICATORS

GDP: $95.0 billion

GDP 5-year compounded annual growth rate (CAGR) (2017-2021): 1.6% (U.S: 1.6%)

GDP per capita: $45,602 (U.S.: $58,154)

Population: 2.1 million

Population 5-year CAGR (2017-2021): 0.3% (U.S.: 0.5%)

Unemployment: 5.3% (U.S.: 3.9%)

Economic outlook ranking: #42 out of 50

Fiscal health ranking: #28 out of 50

Overall tax climate ranking: #36 out of 50

KEY SECTORS AND METRO AREAS

Top five industry sectors by 2021 GDP:

Sector GDP ($ billions) % of total GDP
Mining, quarrying, and oil and gas extraction 15.0 15.8%
State and local 10.4 11.0%
Real estate and rental and leasing 10.4 11.0%
Professional, scientific, and technical services 7.6 8.0%
Federal civilian 6.9 7.3%

Top three industry sectors by GDP 5-year CAGR (2017-2021):

Sector GDP 5-year CAGR
Mining, quarrying, and oil and gas extraction 12.1%
Management of companies and enterprises 6.7%
Admin. and support and waste mgmt. and remediation services 5.3%

Top three metro areas by GDP:

  • Albuquerque
  • Las Cruces
  • Santa Fe

Top three metro areas by population 5-year CAGR (2016-2020):

  • Las Cruces
  • Santa Fe
  • Albuquerque

INFRASTRUCTURE HIGHLIGHTS

Infrastructure: According to the ASCE, New Mexico is among the U.S. states with the least percentage of roads in good condition, having each motorist pay an average $767 per year in costs due to driving on roads in need of repair. Like Nevada, which we reported on last week, New Mexico is a drought-stricken state. It is estimated that it needs nearly $1.2 billion in investments for drinking water infrastructure, along with $320 million for wastewater improvements. Additionally, school buildings need over $400 million in repairs, and officials are still working to determine how to allocate education funds from the American Rescue Plan Act (ARPA). New Mexico will receive at least $3.7 billion from the Infrastructure Investment and Jobs Act (IIJA) over the next five years, divided into the following categories of projects (additional funds may be deployed as federal grants get awarded to states):

Funds Improvement area
$2.5 billion Roads and highways
$366 million Public transportation
$355 million Water infrastructure
$225 million Bridges replacement and repair
$100 million Broadband (minimum allocation)
$90 million Airports
$38 million Electric vehicle (EV) charging network
$38 million Wildfires protection
$13 million Cyberattacks protection

Construction spending (Value of Construction Put in Place – CPiP):

  • Private Nonresidential 2020 CPiP: $1.6 billion; 9.0% 5-year CAGR (2016-2020), above overall U.S. CAGR of 2.0%
  • State & Local 2020 CPiP: $1.9 billion; 7.6% 5-year CAGR (2016-2020), above overall U.S. CAGR of 4.8%

AE INDUSTRY

ENR 500 firm headquarters (2022): 3

M&A activity since 2018:

  • 3 deals with buyers from New Mexico
  • 3 deals with sellers from New Mexico 

For customized market research, contact Rafael Barbosa at [email protected] or 972.266.4955. Connect with him on LinkedIn.

WEEKLY M&A ROUND UP

Industry M&A is up 41% over the past 12 months: Last week saw new transactions announced in CO, FL, NE, MO, GA, and TX. You can check all the week’s M&A news here.

If you’d like to know more about our M&A services, and how we can help you either confidentially sell your firm or grow through acquisition then please contact Nick Belitz, Principal, at [email protected] or 303.656.6151. Click here to see the over 150 transactions of design and environmental firms that we have helped make happen.

Click here for the full library of our Word on the Street articles.

Comments are closed.