AECOM’s $6-billion acquisition of URS, creating the second largest construction services company, continues the trend of consolidation among construction services players. The 10 largest design and engineering firms have tripled in size since 2003—largely through mergers and acquisitions.

The transaction creates a new global player with nearly $20 billion in revenue and nearly 100,000 employees across 150 countries.

At the same time, this transaction highlights the challenges of pursuing profitable growth in the sector, given the struggles over the past few years at URS, itself the product of serial acquisitions. 

DANN

In the past year, the share prices and financial performance of the top five design and engineering firms have diverged widely with Fluor up nearly 30%, URS down 5% (prior to the acquisition announcement) and the others in between.

This wide divergence is driven by the fundamentally different ways these firms have pursued growth and the resulting positioning across geographies, sectors and across the value chain.

In general, the design and engineering (D&E) marketplace is rapidly becoming more global, commoditized and constrained. With strong demand for new capital projects in emerging markets, we’re seeing greater risk exposures and viable threats around the world.

The Changing Marketplace

Other aspects of the marketplace are changing.

WARD

Not only are many projects growing in size and complexity (with the daunting classification “megaprojects”), but technology advances, such as BIM (building information modeling) and other software applications and platforms, have leveled the playing field for basic D&E work like roads and bridges.

As a result, buyers are soliciting multiple bids from a range of qualified suppliers, and professional fees, in turn, have fallen and continue to face pressure.

Survival is going to depend on getting bigger, but companies must choose carefully among the three primary growth strategies.

Most major D&E firms in the United States and Europe have already at least considered geographic expansion, and many have already moved into emerging markets.

A more creative way to grow is through value-chain expansion: going upstream into early-stage consulting, for instance, or downstream into areas like project supervision and facilities management.

The third opportunity is sector expansion: broadening architectural and engineering design work into natural industry adjacencies or going further afield.

What’s the winning strategy for your firm? The answer comes down to capabilities. Which expansion strategy is the best fit with your company’s strengths? What capabilities does your organization need to develop or acquire in order to execute its chosen path?

Geographic Expansion

Two differentiating capabilities have proven successful in international growth: (1) interregional transfer of work and knowledge, and (2) partnering and joint venturing.

The first involves situating different functions and areas of expertise in a way that maximizes a firm’s resources. The second entails developing emerging-market partnerships that provide critical connections to clients and help navigate foreign regulations and codes. Picking the right partner involves significant due diligence and is especially challenging in markets where corruption is rife.