Word on the Street – A/E Industry Intelligence

November 8, 2021

It’s not the Great Resignation that’s reshaping the A/E industry

It’s the Great Reassessment. And it’s playing out in two ways that will have massive impacts for years to come as a result of (a) baby boomers “finding” themselves as if it was the Summer of Love all over again and (b) the most useless employee manual ever written.

The boomer reassessment: There are still five million fewer Americans employed than before the pandemic lockdowns. And three million of those are baby boomers who retired early. Many of them left the workforce for good because of pandemic-related health concerns. Many more, though, chose to retire early because they could—and that choice is playing out in the A/E industry big time.

Retirement (and serenity) now: Baby boomers own over 53% of the nation’s wealth—primarily through real-estate and stock investments. Both asset classes soared in value during the pandemic. This allowed many boomers to move up their planned retirement from somewhere between “three to five years” down the road to, well, now. Boomers also control the majority ownership positions in most A/E and environmental firms. And guess what? Those valuations also soared during the pandemic—on average about 20%. So, A/E industry boomer owners and principals are wealthier than ever before. And they are thinking seriously about how to enjoy it while they are still healthy enough to do so.

I’ve always wanted to paint in oils: And who can blame them? After dedicating 30 years of hard work to building their firms—including navigating the Great Recession a decade ago (exhausting and scary for the firms that survived, bankruptcy for those that didn’t) and making it through the last two crazy years—many are reassessing their lives and are eager to hang it up and embrace the next part of the journey earlier than anticipated. They want to do the things that they sacrificed when they worked 50-to-60-hour weeks growing their firms. Spend time with their grandchildren to make up for the hours they didn’t devote to their own kids (while driving to and from town planning board meetings, which are now held on Zoom anyway, making boomers even more resentful of the time they gave up in the past—don’t get me started). Travel to “the homeland” (everyone has one). Work on their golf game. Volunteer in their communities. Become the artist they always wished they had been. With greater wealth on paper, all of these are now not just a reality—but also affordable (supply chain issues aside). And since the pandemic, boomers have been running—not walking—to the exits.

Transition plans accelerated: Starting this year (seriously, the calls started coming on January 4, after the New Year’s resolutions were made) many owners—let’s call them post-pandemic sellers—decided they were done with the stress, risk, and hassle of owning and running their firms. They wanted to sell their ownerships and de-risk. (These apparently are really good times for folks who sell tail insurance.) They envisioned a mask-less, stress-free future (which often included either a lakeside cabin or a 30-foot yacht) where if (when) there was another public health or economic crisis they wouldn’t be the ones on the hook and scrambling to keep everything together. For many, their first choice was to try to accelerate their internal transition plan. But more often than not, they encountered Gen-X and Millennial next-tier leaders who were not on the same accelerated schedule. They had neither the accumulated wealth nor leadership skills (nor the desire nor risk tolerance, let’s be honest) to take over the firm.

Flooding the market: Unable to transition internally, these owners have taken to selling their firms externally. This new cohort of sellers is a sizeable percentage of the record number of M&A transactions that the industry is experiencing. They are also benefitting from the record-high valuations currently at play in the market. (If you’re gonna sell, sell high.)

This trend will continue into 2022 and beyond: These are crazy times for the industry. Demand for A/E services nationally continues to be off the charts and outstrips the supply of qualified technical and managerial talent to do the work. Clients want everything now. Owners are stuck in the middle. They are enjoying record profits. But for many, their business is all-consuming—and exhausting. More and more boomer owners will reassess their lives and choose to sell—and most of those sales will be external. Forty percent of those will be to private equity. The reassessment by A/E industry boomer owners and the choices they are making will accelerate the migration of the industry from employee to non-employee ownership.

The work reassessment: If your employee manual was last updated before February 2020, it’s likely hurting—not helping—your ability to retain and recruit talent. First, it doesn’t incorporate all of your new (and ever-changing) client- and government-required pandemic-related protocols (check it—it doesn’t). Second, it fails to recognize just how dramatically the work-life dynamic of your employees— and importantly their families—has changed over the past 18 months.

Family matters: (Dear reader: I just wrapped up the final chapter of Ulysses—so, fair warning, long sentence ahead.) No matter where your A/E firm is located, what type of work it does, whom it serves, or what size it is, your employees and their families are navigating a post-pandemic world of new and sometimes conflicting professional and personal opportunities (my spouse can work from anywhere at a time of their choosing, so we’re relocating to Canada, but I still want to work for this firm because I Iove the work we do and the team), constraints (my spouse and I are unhappy with what’s happening in our public schools, so we will be homeschooling our kids, and I’ll be working less hours for the next year), choices (I hate commutingit’s a waste of my time and detrimental to theenvironment; I can be more effective working from home, my boss and I both know that, and I’ll only work for a company that offers me that option, so don’t tell me to come “back” to the office because both you and I know that it makes no business sense, and don’t tell me we need to do it for our great culture, ‘cause we both know you can’t define culture, and I know you like to work from home too…), and options (our family’s stock portfolio has blown up over the past year allowing us to work just two days a week, and now I want to dedicate my time to taking care of my aging parents; I’m essentially a professional gig worker and will supply my highly transportable technology skills on my terms to whatever firm I wantlet’s talk). This massive socio-economic reset in their personal lives is causing employees all across the A/E industry to reassess their relationship with “work.” Your employee policies and procedures manual has to recognize this new world that your employees and their families are navigating.

Intentionally flexible: The talent supply for the A/E industry is not going to get better any time soon. So existing talent is at a premium. The A/E workforce is in a curious “post-burnout” mode, with utilization continuing at record levels as it has been since June 2020. With the passing of the Infrastructure Bill, this dynamic is going to continue for years. Designers and scientists love the work that they do and want to keep doing it, but if they are going to be working flat-out, they want to do it on their terms that work for them and their families. So, instead of looking to their managers to organize how they work, designers and scientists are dictating the terms of how work gets done. All of our strategy work right now is pointing to a future that belongs to those firms that can be intentionally flexible in their business models and talent management/development systems, many times using variations of a holarchy structure (see Mark Goodale’s article below). Leadership and management teams are in for several years of deprogramming from the old ways.

Industry M&A at record levels: This week we saw another dozen A/E industry mergers and acquisitions in the U.S. There were deals in every sector with—encouragingly—multiple architecture firm transactions. Industry consolidation shows no sign of slowing down.

Missed our Texas M&A Symposium? Want to catch up on the latest M&A trends and deal multiples? Would you like to know post-pandemic best practices for buyers, sellers, and integrators? We can help! We’ve recorded the entire Symposium and will be making it available soon. Sign up here to be notified when the video recording of the Symposium is available for purchase.

Early-bird registration for the Southeast States M&A Symposium is open: Interested in growing through acquisition in the Southeast? Or are you based in the Southeast and considering a merger or sale? Or would you like to have a business-justified reason to spend a long weekend in Miami this January (average temperature for the month is 74 degrees) to better understand how M&A can benefit your business? If you answered “Yes” to one or more of these questions, our Southeast States M&A Symposium in Miami, Florida, is for you! But don’t delay—like our Texas event last month—it’s going to sell out soon.

Don’t look back in anger: It’s not just a great Oasis song. Next Monday we’ll be revisiting our 21 predictions for 2021 article from last November to see just how poor our soothsaying was. The Monday of Thanksgiving week we’ll release our team’s 22 predictions for 2022. If you have predictions you’d like to have included in that article, please email me at [email protected].

Questions? Insights? What, if any, reassessments are you seeing with respect to “work” at your firm? What reassessments have you made? Email Mick Morrissey at [email protected] or call him at 508.380.1868.

Organizational Structure—Now is the Time to Change Your Thinking

A/E firm leaders have done a remarkable job of not only keeping their firms on the rails since COVID hit, but guiding them to healthy, if not record, growth and profits in 2020 and 2021. They shifted their companies to a work-from-home environment literally overnight, kept client commitments, and showed the staff what “steady at the helm” looks like during a storm. In many ways, it’s been their finest hour.

But there’s more work to do, particularly when it comes to organizational structure. The traditional structure in our industry is a hierarchy, where people at the top set the strategy, managers figure out how to implement it, and the staff gets it done. How well does it work? Given the literally thousands of complaints I’ve heard over the years from industry professionals about how top-down and bottom-up communication is inadequate, I’d say not all that well. And like with just about everything else, COVID shined a big, bright light on it.

The move to remote work has loosened this rigid structure, and while it’s caused a myriad of challenges in one sense, it has hastened the shift from “push”—where job roles and expectations are clearly defined, finite assignments are doled out, and utilization is king—to “pull” which is predicated on project flow efficiency, and “my work” and “your work” is replaced by “our work.” In traditional hierarchies, divisions, departments, and teams are more or less considered to be static, stable units, but in the A/E world, they are the complete opposite. A/E firms are project-driven organizations, and the vast majority of those projects are small, a very small percent are large, and the rest are somewhere in the middle. Project teams form around project needs, and once those needs are met, the team disbands, and new teams form once again. It’s an entirely fluid dynamic that is not reflected in traditional organizational structures.

To help open your mind to how your firm’s organizational structure could work better, here’s a quick look at some of the structures that are already in play:

Hierarchical Structure: As mentioned above, this traditional top-down model features a vertical chain of command with different levels of decision-making authority. People are grouped by role, function, geography, or type of service. It’s the dominant organizational structure in corporations, government, and other large organizations. While the lines of authority are clear, and there’s a ladder to climb for those that value such things, hierarchies tend to create bureaucracy and limit collaboration and innovation.

Matrix structure: This structure is essentially a grid in which employees with similar skills (think disciplines for the A/E industry) are grouped together and report to more than one manager—for example, a regional manager and a discipline manager. The matrix, and variations of it, are commonly seen in the A/E industry. The benefits can include a flexible work environment and balanced decision-making, while drawbacks are often seen to be confusion around authority and difficulty in tracking performance.

Flat structure: In a flat organizational structure, middle management is all but removed, and there isn’t much of a layer between upper management and the staff. Employees are trusted that they will use their autonomy responsibly and are expected to take care of themselves, each other, clients, and the company. This organizational structure is often seen in smaller to mid-sized industry firms. Advantages include faster decision-making and flexibility, but achieving alignment around a clear company vision and resolving conflicts can be tricky.

Team-based structure: In the team-based structure, the firm is organized primarily around client or project-based teams. Each team is comprised of a team leader (in the A/E industry, the team leader is akin to a “super PM”), with a core of dedicated staff that has the requisite technical skills to perform all the work necessary to successfully serve its client or project type. The composition of any team varies given the specific demands of the client or project type that it serves. The upsides are significant, including the development of market-specific knowledge and expertise. But it does require a critical mass of staff and can encourage unhealthy competition between teams if incentives are not carefully designed.

Holarchy structure. A holacracy embodies decentralized management, where an organization comprises units or teams that work autonomously to achieve company-wide goals, and decisions are made by people closest to the work. In a holacracy, the idea is to decentralize decision-making and innovation through self-governing teams as opposed to a classical hierarchical system, where authority and decision-making are concentrated at the top. The advantages include quicker decision-making and the potential for greater innovation. On the other hand, it can be difficult to implement in very large organizations—Zappo’s success story notwithstanding.

No single approach checks all of the boxes. Alternatives must be considered in tandem and in the context of all that continues to change around us. The purpose of an organizational structure is to help a firm deliver on its purpose, whatever it may be. But if your firm’s structure is hindering more than helping, it’s time to change your thinking.

Need help structuring your firm? Call Mark Goodale at 508.254.3914 or send an email to [email protected]

FOUR FACTORS TO WATCH

1. Infrastructure bill  

After several months of debates and hurdles, The House finally passed the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA). The long-awaited bipartisan deal authorizes current spending and commits approximately $550 billion in new federal dollars towards the following:

As part of negotiations, centrist Democrats committed to voting for the Build Back Better Act in late November pending resolution of deficit concerns and other issues that have been source of disagreements between moderates and progressives for months. The Senate would then go through their work on the bill before it goes back to the House for another vote, making it likely that lawmakers will be working on this piece of legislation until the end of the year. As for the IIJA, it will take time for resources to be allocated but it is nonetheless a step in the right direction and certainly encouraging for the AEC industry.
 

2. Vaccine mandate  

The new COVID-19 vaccine requirements released by the Labor Department last Thursday were quickly countered by several lawsuits. The measure was then halted by a New Orleans-based federal appeals court citing “grave statutory and constitutional issues.” If defended in court, the rules would take effect on Jan. 4 and apply to more than 80 million employees. Employers with 100 or more workers would have to ensure those who are not vaccinated present a negative test weekly and wear a mask at work. The rules do not apply to employees who work from home or those who work exclusively outdoors.
 

3. Service sector  

The Institute for Supply Management (ISM) published its services index for October, which rose to 66.7% from 61.9% in September, signaling expansion of the sector. The result comes as the effects of the pandemic have diminished and the economy is “overheated.” The broader scenario continues to be characterized by overwhelming demand, limited supply, and shortage of workers.
 

4. Unemployment   

The unemployment rate fell to 4.6% in October from 4.8% the month prior. A total of 531,000 jobs were added but labor force participation remains unchanged. The scarcity of applicants helped drive wages up by 4.9% from a year ago.

 

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