Publicly-owned consolidators remain dominant in the architecture, engineering and construction sector in terms of revenue and market diversity, but they lag on some key profit indicators and are workplaces that don’t fit all employee psyches, according to an industry trends report based on a survey of 230 design and design-build firms.
The update by New York City-based AEC Advisors Inc, a financial and M&A advisory firm on Sept. 18 at a Manhattan forum for about 250 company leaders, indicates that they are planning for market falloff as soon as 2020, for the first time in several years, as they also battle still stubborn workforce inclusion challenges.
Public firms make up 11% of survey participants in number but 56% of its $130-billion revenue total, according to the data. More than half remain employee-owned, but not by employee stock ownership plans (ESOPs), and generate 15% of revenue.
AEC Advisors President Andrej Avelini said that based on performance metrics, bigger has its own challenges.
While the structure allows “access to cheap, permanent capital" and a focus on more market sectors, he notes the “greater pressure to deliver results” and size-generated “bureaucracy that engineers don’t like.”
At least one C-suite panelist agreed. "Being large brings its challenges—intimacy," said Steve Morriss, president of AECOM Design & Consulting. "You have to work overtime to recognize individual capabilities. We are focusing on that—to make the absolute most of what we have.”
Public firms appear to lag in most profit categories measured by AEC Advisors compared to ESOPs, private-equity owned firms and others with private or employee ownership. The consultant's data indicate that in measuring company margins after bonus payments are included, public firms' median profit between 2016 and 2020 was 12.9% compared to levels ranging from 13.1% to 15.4% for the three other key ownership groups.
But Avelini speculated that with results showing median margins “getting closer” across revenue-size categories, “perhaps megamergers are beginning to realize some of the expected cost synergies.”
While acquisitions have propelled growth across the industry ownership spectrum, organic growth has been strong since 2016, "and even the largest firms are growing internally, which we have not seen since the Great Recession," said Avelini, noting strong global economies.
The survey shows, however, that firms are expecting some bumps. They anticipate 7.2% growth in 2020, but it is down from 2019 and 2018 estimates, which Avelini said "is somewhat concerning, as it indicates some pessimism in outlook," which he termed "a rarity in the AEC sector."
Michael McKelvy, CEO of Gilbane Building Co., predicts a downturn in 2021. "We came up with a list of businesses that could transcend a slowdown and asked employee groups to analyze how to offset it," he said. "2020 is the year to invest in those initiatives, although you still have to keep overhead flat.”
Avelini counseled that "management prowess is more important than chasing market sectors." He urged firms to focus on interactions between key company performance indicators—including working capital, incentive compensation, growth of voluntary turnover and profitability that can determine whether firms are “virtuous” or “vicious.”
He noted that firms deemed "virtuous" in AEC Advisors' analysis are four times more profitable, 3.3 times faster growing and had 33% less turnover with staff more evenly distributed in length of tenure.
Ironically, AEC Advisors data indicates that public firms beat other ownership types in employees retained for 5 or more years.
Despite efforts, diversity issues still are prominent, with surveyed firms lagging other business sectors and the general population on race and gender measures. Firms in the survey's top quarter are on par with other sectors on race-based diversity but drag business peers on gender even at that level.
The industry’s median for women staff makeup is 29%, compared to 42% in other professional services and 53% in finance.
Jeanne Cormier, CEO of design firm Lachner and the only woman leader on the panel said: "This is very important to me. I have enlisted think tanks in the firm to determine how to fix this."
She said while she was the firm's "only woman" at the beginning of her career, "now we’re 50-50."
McKelvy noted the need for more outreach to student and practitioner groups for minority professionals, "but you still must have something in your culture to retain and develop them. You have to take a chance.”
Technology development is key to the industry but still slow moving. The median of current net revenue spent on all technology and digital processes was 3.1%, but just .5% on new or innovative technology.
"Technology hasn’t disrupted that much but that definitely will change. We're still in early days," said Arcadis CEO Peter Oosterveer. He said a business assessment by consultant McKinsey on technology disruption in industry sectors "had construction still second to last."
James Miner, CEO of design firm Sasaki, noted that a key challenge for professional service firms on technology "is how to charge for the value you create."
Firms still are moving ahead. "We created an organic structure that has taken off called technical communities. They communicate their own way no matter where members are globally," said Hisham Mahmoud, CEO of Golder. "Anyone can join, and we are requiring everyone to join at least one."
AECOM's Morriss described the firm's interractions with artificial intelligence (AI) as "incredible, It's a really powerful tool," but he noted "now we have to prioritize. We have to bring it back a bit.”