Executive Corner: Can the A/E Industry Re-accelerate Its Growth?
Ten years ago, 2006, was arguably the A/E and environmental-consulting industry’s peak of financial performance and achievement. Architects and engineers everywhere took advantage of unprecedented gains in commercial and residential building, while surging tax receipts and a post-9/11 world provided steady demand for new federal, municipal and security infrastructure. Institutional, educational, energy and telecommunication markets all flourished. Companies of all disciplines and sizes were inundated with profitable opportunities to choose from, and successful (and perhaps overconfident) owners enjoyed record levels of compensation and returns on investment. The rising tide lifted all boats.
We all know what happened next.
Fast forward to today, and we’re now six full years into our industry’s recovery cycle. Here at ROG, we characterize the environment as optimistic, yet uneven (at best). Yes, we have observed many great organizations and leadership teams having record-breaking years and “bucking the trend.” However, we also continue to observe firms that persistently struggle to break out.
At a macro level, we remain encouraged that overall construction spending is back to 2007 levels, the AIA billings index is consistent and resilient, and the ACEC Engineering Business indices are solid. Yet many presidents and principals will confess to a new era of client stops and starts, diminished risk taking, and an uncertain feeling of where and how this current cycle will run. Several admit the “long shadows” of those dark days in 2008 and 2009 still linger to some degree and continue to impact strategic planning and growth pursuits.
New Normal
Janus’ Bill Gross, the famed bond king and investor, years ago referred to this new and confusing global landscape as the “New Normal.” In fairness to A/E leaders, the overall U.S. economy has been tepid as well, and we can debate endlessly whether those problems are structural, cyclical, generational, global, political or financial (likely all of the above).
For design professionals who enjoyed 20-plus years of consistent growth and exceeding U.S. GDP performance, the last five years witnessed a stark and uncomfortable reversion. Property development, federal-government spending, global building and energy infrastructure—all of which have taken their respective turns driving our industry’s success the last two decades—to some degree now appear peaked and/or with lingering headwinds and murky outlooks.
The key long-term question arises: Is this as good as it gets?
From our consulting engagements as well as countless discussions and interviews with A/E and environmental-consulting leaders and board members, the ramifications of a slow-growth industry have resulted in the following:
• It’s simply been more difficult to make money—As many firms have meandered with low to mid-single-digit growth rates, either due to the inability to consistently raise rates or from intense competition for project opportunities, bottom-line contributions have increasingly come from operational efficiencies. Effectively, this has meant a focus on higher staff utilization, using flexible employees/staff, leveraging technology, closing underperforming offices, simplifying organizational charts and an overall “doing more with less” mindset.
• Growing performance gaps by market sectors and regions—Generally speaking, A/E firms that have generated the most-prominent growth have been in one of two categories: those that have 1) focused on oil & gas, pipeline and power/energy infrastructure as well as in the manufacturing and industrial sectors (until recently!) or 2) been located in states that experienced substantial economic declines (Nevada, Michigan, Arizona, Florida, etc.) but have snapped back. Firms with specialty niches also have thrived.
• Expansion through M&A is here to stay—As organizations seek to accelerate growth, either by penetrating new geographies, service lines or market sectors, it’s increasingly more productive to achieve that through acquisitions rather than organic means. Admittedly, we recognize that with more than 1,000 North American A/E and environmental deals this decade, some pan out and some don’t. However, with high opportunity costs of cold-starting branch offices and a younger workforce lukewarm on relocating for work/family reasons, the reality is that the “buy vs. build” calculus has steadily shifted to M&A as the more-impactful pursuit.
• New leaders are confronting a different world—Baby-boomer owners and executives are continuing to retire, and practically every week we read a new leadership succession announcement. Today’s incoming presidents and principals are starting their leadership positions in a much different climate than their predecessors did 25 years ago. Today’s executives are not only dealing with growth challenges, but also facing myriad 21st century issues, including a changing workforce driven by Gen Xers and Millennials’ different priorities; the growing impact of technology; social media and branding; new project-delivery methods; and increases in small-business taxes and regulations.
• Fewer new A/E businesses have started—Historically, poor economic conditions led fired or disgruntled architects or engineers to start their own practices. Tiny design firms that started in the stagflation of the 1970s or during deep recessions in the early 1980s or 1990s now constitute companies throughout the ENR 500. Unfortunately, we haven’t seen the entrepreneurial drive and start-up numbers like those prior cycles. Perhaps it’s just because there are simply fewer Gen Xers in their mid-30s to mid-40s or that Baby Boomers themselves showed greater tendencies toward new business formations. In addition, many A/E firms that started this decade seem content to just run as smaller “shingle” practices for lifestyle and self-employment rather than with larger ambitions to grow into multi-million-dollar design or consulting organizations. Who needs the headaches?
• Paradoxically, it’s a never-ending war for talent—CEOs, human-resource directors and industry recruiters everywhere tell us the same message: “we’re hiring!” Perhaps that’s always true in any human-capital industry and one with specialized skills such as A/E and environmental consulting, but firms can only grow with new clients and projects. Thus, winning and managing complex and inspirational projects means getting and developing the best and brightest talent. Our industry’s next generation of leaders is being hired today.
Given our reflections and postulations, please know that the intent of this column is not to come across as overly pessimistic or cautious. All economies and industries have cycles and, in a diverse sector such as ours, there will always be firms that over and underperform.
The upside potential is that there’s no shortage of building, environmental and infrastructure demands in our country, from the massive need for new and affordable single-family housing, major upgrades to transportation and water infrastructure, safer and cleaner air, and revolutionary investments as traditional and renewable power sources intersect. A/E firms and leaders throughout history have shown an amazing ability to adapt and endure, and we have no doubt they will continue to do so.
About Steve Gido
Steve Gido specializes in corporate financial advisory services, including mergers and acquisitions, business valuations, ownership transition plans, and strategic planning for engineering, architecture, environmental consulting and construction firms. He leads ROG+ Partners’ merger and acquisition practice, and has advised on a wide number of A/E/C transactions, representing buyers and sellers of all sizes and disciplines.
