Chief financial officers of design firms meeting in New York City on April 24 offered perspectives on managing company growth and profitability amid new risks ranging from oil-and-gas market uncertainties to currency fluctuations and fixed-price contracts.
The event that drew more than 100 CFOs was sponsored by industry financial management consultant EFCG.
CFOs remain optimistic on results for 2015, predicting median growth of 7% and 10.9% profit, based on EFCG's separate survey of 110 firms.
But its president Paul Zofnass noted that similar CFO predictions made last year were not borne out by actual results. Respondents had predicted 7.1% median growth in 2014, but firms' actual growth was 4.7%, a 30% difference, according to survey data he presented. Actual 10% median profit for last year was 15% below the median of 11.4% predicted by the CFOs last April for the year.
CFOs also noted that medical expenses are the most difficult to control, cited by 27% of respondents in EFCG's survey, followed by marketing and IT-related costs.
CFOs pointed to market changes they did not predict. Stantec CFO Dan Lefaivre said the Canadian firm managed 13% growth last year, but half was from acquisition. He said the rapid drop in oil prices "surprised" company executives, noting impacts in the 25% of firm revenue generated by work in midstream oil-and-gas work.
HNTB saw 2014 as a "recovery year" from a challenging one before, with 8% growth and improved margins and backlog, said CFO Terry Campbell, but growth this year will be slower amid uncertainties of federal transportation legislation.
Losses in its power sector work impacted CH2M's results, prompting the firm to exit that sector and cut its workforce by 5%, but CFO Gary McArthur expects better results in 2015, including a "return to our highest profitability" generated by a corporate restructuring, he told attendees.
Several CFOs noted delays in clients okaying projects to move forward, which challenged design firms in converting backlog numbers into actual revenue. Eric Hartmann, CFO at CDM Smith was "cautiously optimistic" on the firm's outlook for 2015.
Tetra Tech experienced a "rough year" last year, with profit challenges in "high risk" EPC work and impacts from oil and gas changes in a sector that makes up 15% of it business, said CFO Steve Burdick. The firm sees better potential in water-related work in state and local markets and continuing strength in private sector work. "We expect to hit profit and revenue targets at the end of the year," he said.
Several CFOs expected merger and acquisition activity to slow this year, but some such as Stantec's LeFaivre and CH2M's McArthur noted some pressure to add capability. Lefaivre said the firm's M&A strategy in North America would continue to keep from "falling behind."
CFOs pointed to key factors in successful M&A transactions, with integration emerging as No. 1, cited by 52% of respondents in EFCG's survey. Culture was second, chosen by 29% of CFOs, followed by employee retention at 18%. According to EFCG, the CFOs differed from CEOs in a similar survey conducted last year, who "overwhelmingly" ranked culture as the leading success factor, with culture in fourth place.
CFOs also note their more critical role in firm risk management. Zofnass urged attendees to be proactive in managing risk and to be "on the lookout for company killers."
CDM Smith's Hartmann said his company's risk management team is meeting more frequently on project proposals and "a lot of projects are getting no-gos." HDR's Terry Cox added that his company's involvement in more complex alternative project delivery approaches presents risk profiles that "jump up to a different committee review."
Pat Sheridan, CFO of the newly merged PB/WSP, noted a need to better educate more staff in risk review of contract payment terms. HNTB's Campbell said firms "must be more aggressive to get paid for the the risk we're taking on."
CFOs weighed global market turmoil such as foreign exchange rate fluctuation, slow client payment, fixed price design and tight mobilization schedules. Said one exec: "We don't have a balance sheet big enough to hedge all the currency changes."
CFOs also noted pressure from clients to dispatch top managers quickly to global sites but also pushback from employees concerned about disruption in two-income households.
One Australian executive noted his firm's decision to exit markets in Vietnam and Malaysia, citing the "corruption environment." Another noted that implementing more robust global ethics programs that will "pass muster was expensive."
"Anti bribery is drilled into us day in and day out," said one U.S.-based CFO, who added that the firm's refusal to pay a bribe delayed a project award for months.