What’s the biggest challenge facing your firm?
Some recent answers I’ve heard: “staying afloat,” “getting through the summer,” and “making payroll.” A lot of AEE firms are doing just “OK” this year, while many others continue to struggle – week to week, month to month – with thin backlogs, weak utilization, and a still uncertain forecast. Most continue cutting costs, closely managing cash, and looking hard (though not always effectively) for new work.
But far too many firm leaders are over-focusing today on the short term. Yes, stabilizing and restructuring the firm has been critical (and much needed) for short run survival. Still for many the hardest work (reducing staff, closing offices, ending non-productive client relationships) is (or should be) mostly done. What I see now, and all to too frequently, is leaders who continue to focus primarily on worrying – especially about issues and threats they can’t control – rather than on getting up, getting organized, and getting going. By all accounts the economy has settled in to a more stable, slow, and (probably) bumpy recovery ahead. Sharp management of the firm – staff, clients, projects, new work, and cash – will remain critical. But beyond, successful leaders must begin to spend more of their time preparing their organizations for ongoing, sustainable success. And over the longer term horizon (more than a year or two) no issue looms larger than transition – of the firm’s leaders and owners – to those who will follow.
I’ve said now for years that success in the professional services firm boils down to constantly asking and answering two fundamental questions. The first question is “how do we grow?” Prior to the 2008 collapse nearly all firms were spending most of their energy here (either on growing or on arguing about growth). Today the relevance of growth is the same – though it feels very different – as AEE teams struggle to capture new work and keep the firm level (as maybe you’ve heard – “zero is the new growth”).
The second question of fundamental importance is “who will run this thing after us.” Few firms were working much on this one before the recession, and fewer still are focusing on it (properly) today.” Indeed, our phones have been ringing lately with frustrated, tired, and worn out firm owners who, having seen much of their work and worth tumble back in the last couple of years are now seriously interested in selling, or at least in taking some of their chips off the table. Obviously this is not the best way to approach a maximum value transaction, but it is what it is.
Now, here’s a tough message that I’m afraid is going to be very bad news for many owners of architecture, engineering, or environmental consulting firms: you are not entitled to a smooth, successful, and valuable transition and exit from the firm. You will not automatically receive top dollar (or even a fair shake) in and for your efforts. In fact without a great deal of care – visioning, planning, researching, networking, and deal making (mixed in with a good portion of luck along the way) – you and your firm are much more likely to fail completely [as in caput … dead … out of business].
Sound ridiculous? How can I so casually claim such a thing about you, your firm, and the highly appreciated work you’ve been doing for your clients over the last two or three decades?
You and I may not (yet) even know one another – this critique is not personal. Instead my assessment is rooted in a handful of structural components of the economy and AEE industry; the strengths, shortcomings, and constraints of most small to mid size professional services firms; and the challenge of operating in a weak and uncertain market – which probably will be with us for at least a couple more years. These factors are here now and real, and are largely already ‘baked into the cake’ of our future path. Consider:
1) Industry fragmentation – you may not fully realize it, but according U.S. Census Bureau’s Business Database, there are some 100,000 to 120,000 domestic A/E and related professional services firms. This amazing total includes around 25,000 architecture, 45,000 engineering, and 8,000 environmental consulting firms – among others. This group is radically distributed towards smaller organization sizes (with less than 1% of firms employing more than 500). In fact over 80% of all firms report a staff of less than ten, and 90% less than twenty. How challenging will it be for a firm of ten to find a suitable, capable and willing leader (or leaders) from among its ranks, or to spend the time and effort necessary to capture the right person from outside? Will these small firm owners even acknowledge the challenge, get busy, and take action – or instead stay focused on day to day work while hoping for a solution to (somehow) appear?
2) Age demographics – similarly according to U.S. Census projections, the country will in the next several years experience an age group reversal not seen before – in which the cohort of citizens ages 55-65 will surpass in numbers the group ages 35-45. This relative age ratio will then remain as such for at least the next 30-50 years, and perhaps much longer. Relevance? The current group of AEE owners (primarily ages 50-60+) will now (and in the future) have fewer potential internal buyer candidates within the conventional (ages 35-45) category.
3) Economic outlook – of course the recent recession has really stirred up the AEE industry. As mentioned current owners are fatigued, many have lost their joy in work, and more are strongly considering exit. Other firm principals and managers are working harder, worrying more, bickering with each other (or maybe keeping quiet), and constantly frazzled. Some wonder if it’s all been worth it, and when (or if) their own payoff will ever come (and these folks often represent current owners’ best prospects for internal transition). Others on staff, while keeping their heads down now (thankful to have a job), are beginning to dream about a new tomorrow- with a change for themselves in role, company, or even career. And, on top of all of this anxiety, concern, and uncertainty (one client calls it ‘the churn’) we’ve seen a pretty substantial reduction in the values of the companies themselves (closely related to the loss of firm profits) – challenging the price expectations of many potential sellers.
I believe the obvious (though stark) conclusion is this: half of the firms in the AEE industry are headed for the scrap heap. Yes, that means that 50-60,000 companies currently in business will cease to exist. Clients will be OK (there’ll be plenty of remaining and competent firms), and employees will be largely OK (with plenty of client demand most will simply move over to new employers). But many, many (thousands) owners will not be OK, and will experience exit outcomes well below the optimal, and certainly below their own expectations. These poor outcomes will include selling the firm at lower than fair value, highly distressed or forced sales, ill-conceived or risky mergers, clunky and awkward client transitions, planned or inadvertent wind-downs, and bank-forced foreclosures.
Depressing as this outlook is, let me also leave you with two points, and some really good news!
First, nearly everything I’ve shared here is potentially irrelevant to your firm. As an owner or senior manager you don’t have to worry (too much) about the economy, industry, or market context. It doesn’t matter what’s happening or not happening in the rest of AEE firms. What matters most of course is what’s going on in your firm. And frankly, designing and executing a successful ownership/leadership transition in your company creates a powerful competitive advantage, and positions the firm well for continued success. Second, though successful transition and succession of leaders and owners is hard and challenging work, the process itself is fairly straightforward, definable, and action-oriented. The secret for winning is designing a plan that’s properly scoped and scaled to match your firm – and its vision, strategy, and team. And in a subsequent post, I’ll share with you what I believe that means.
Cheers!
John
