Editor's Note: This second part of CSE's "Firm Management and the Law" roundtable focuses on employee retention, mergers and acquisitions. Go to www.csemag.com for more discussion on firm management issues including recruiting technology, codes and sustainable design.CSE: It has definitely been a seller's market for young talent in the engineering community as far as the job market has ...
CSE: It has definitely been a seller's market for young talent in the engineering community as far as the job market has been concerned (at least until recent events). Firms spend quite a bit of time and money recruiting young talent, so much so that there's been a flattening of salaries and other perks typically associated with seniority. Without question it's essential to bring in new talent, but at the same time, most firms will admit that experienced engineers are worth their weight in gold. How do you go about retaining experienced employees in the face of such aggressive recruitment measures?
STEPHENS: It's important that we pay people for the value they bring to the firm, not for the number of years they have been with us. Frequently, young people who have five years of experience can bring tremendous value, while somebody who has been with the firm 15 years may not be bringing the same value.
MARGULIES: A lot of it has to do with the services they are providing, because we are all developing specialities to diversify our business. For example, our IT group commands very different fees and salaries than our M/E engineers.
WALLER: I sit on our personnel committee, and when an IT person comes up for a raise, other committee people immediately balk, saying 'I have a guy 10 years as an architect and the IT guy is making more money.' It's just a matter of market drive and salary; you have to stay current with what's out there. We certainly look at equity with our existing employees, especially over the last couple of years, and it seems like we have taken a pretty active role of doing that on the personnel committee, making sure that we are competitive with other firms.
CHRISTODUOLO: Are you offering equity in the form of an ownership buy-in?
WALLER: No, I meant more equity in terms of salary, in making salaries adjusted to newer graduates and so forth.
CHRISTODOULO: But how about equity in the firm as an additional perk to differentiate people who are in comparable salary ranges? Could you use that for retention?
MAGLIANO: We began that process last year. We did a reverse leverage buyout, where we bought ourselves back from the Hennessy family, while at the same time, we did an equity distribution to a decent number of people in the firm. We were not sure what it would mean to people, but it was well received.
ZWEIG: It's an important milestone in our industry. We have to face that people want to be owners and will work for less and put up with more stuff if they get a share.
CHRISTODOULO: I do a lot of ownership transition work for clients. But they are also using ownership as an additional compensatory benefit because they are offering it on good terms, where they help a person buy in either through bonuses or by lending them money over time and awarding extra benefits. This helps differentiate people and serves as a hook to keep that person for the long-term and, ultimately, for overall transition down the road. This puts firms in a great position to continue intergenerationally, without having to face an external transaction.
MAGLIANO: The only problem is with the sense of a chain of command. I've had more than one person walk into my office and say now that I'm an owner, let's talk about this...but it's not practical to let them vote on everything.
CHRISTODOULO: You're right, and partial ownership is really something that's perceived as more than it might actually be worth. It's sort of like getting to sit at the adult table. But to be clear, I relay to new owners the analogy that if you own even five shares of General Motors you get a report at the end of the year, but you typically don't get a call from the president.
DERECTOR: We've just started allowing people to have equity positions in our firm. We are a relatively young firm, so it came as a surprise to some of the tenured people who were offered the opportunity. And, I must admit, the new equity partners have a new energy and invigoration. It has also allowed us to put our money where our mouth is in terms of the interview and the hiring process. Now, when a person comes in to interview and they ask about opportunities for growth, I can honestly say, 'If you stay here long enough and do your work you can sit in my chair.' So it strategically places us in a position to have a lot more people who want the responsibility.
CHRISTODOULO: That's what you want. You don't want them to just go to work every day.
DERECTOR: We did do something a little differently. When we added the new group of ownership, which included a woman, they were 'project people'—not project managers—and they still are project people. This way it's not a limited type of person or sex who can be an owner. It really went over extremely well.
CHRISTODOULO: To date, most new owners are required to be professionally registered engineers. But more and more firms are going to have numerous non-registered engineers, or even employees from the IT or financial realm.
ZWEIG: That was a big issue 15 or 20 years ago—whether somebody could be an owner who wasn't a P.E. or architect. We [ZwiegWhite] definitely are doing things differently. The last two people we made into part-owners were 23-year-old women, and that's something very few engineering firms can claim. In general, we pay out profits monthly to all owners and we pay it out as a percentage of cash-basis profits, which does get people connected with the success of the enterprise. In other words, if we want to have good cash flow, we say 'OK guys, get your bills out, get the money collected. Then you will see immediately you're getting a check.' It makes it so much more meaningful, and your profit distributions are not confused with your performance bonus. But it's also important to have a say or to have managerial duties. We started giving away managerial control participation because there is no clear benefit to being an owner that just ties directly into how much money you get or voting shares toward election of governors.
CHRISTODOULO: That's a good point. I find that the firms that have done internal ownership distribution have to face the issue of, 'What do I get from being an owner, beside my stock appreciating? Do I get a non-dividend stock or over time can I build up a really nice equity outside of my 401-K?' From a management point of view, this is real blurry. Some people equate becoming an owner with having the same rights as owners at different levels in the operational organization. For example, I might work for Alan [Zlotkowski] in his department, and we're both owners. So there has to be a clear understanding that just because we're both owners doesn't change the managerial chain of command. In other words, I still work for Alan—he judges my performance and he's going to tell me what my bonus and salary are, which is separate from the compensation or assets we get from being owners.
Growth, mergers and acquisitions
CHRISTODOULO: A natural segue from recruiting and ownership is mergers and acquisitions. If you don't do good things in recruiting and retaining, and develop an ownership spread, then sometimes there is a gap in internal ownership transition. That's one of the major reasons driving mergers or acquisitions. If you do have good recruiting, retention and internal ownership, then you are either an acquirer or a very attractive merger candidate, and you don't need to do either or you can do both. A lot of the mergers that I've been seeing are driven by one of the two entities needing to do something—whether they weren't staying up to date with technology, weren't recruiting well or had good people but were falling behind in the marketplace.
CSE: What if you're the one on the needy side and somebody targets you for acquisition, but you don't want to be gobbled up?
CHRISTODOULO: Well, first, there's good gobbled up and there's bad gobbled up. There are many good reasons to come together: career paths are expanded; maybe you could compete better for certain projects because of size or depth or areas of expertise; a feeling that you can always move one notch up in the size of a project you can deliver; or the ability to deliver multiple large projects. It could simply be that the firm has run up to a point that it needs to expand, and to do so means a huge infusion of capital and effort—a major risk for the owners. Coming together with another firm, however, might allow you to be able to do these things or create synergies in locations or disciplines you're lacking.
WALLER: Being a service industry, we try to look at mergers and acquisitions from our client's perspective. Is it going to be better for our clients? Will they get more service out of it, which hopefully translates into retention?
CHRISTODOULO: If you can go to your client and say you're merging or consolidating—or whatever euphemism—to make your firm stronger, you're essentially saying you can have everything you used to have, plus these other offices, expertise and depth. I think more firms are seeing that they can get to a different platform by doing so.
CSE: Let's say you have this happy-feely transition. Won't you have too many chiefs? You talked about how democracy on the ownership board doesn't work. Now all of a sudden there's duplicate management structures.
ZWEIG: That should be resolved prior to the merger.
CSE: What about in the case where X firm simply buys firm Y?
MARGULIES: That's not a merger, that's an acquisition.
MAGLIANO: That's a blunder. We've acquired people, and success occurs when you plan what each individual is going to be doing five years from now. If you gloss over it and say we'll figure that out later, that's a recipe for disaster.
ZWEIG: As George [Christodoulo] said, very rarely is a merger equal. Somebody has to take over, usually because somebody else has a problem. I think the financial aspects of the deal are the most fundamental. I'm not saying we don't want to have really good transition planning, but if the fund amounts aren't there, if the buyer is paying too much, there is going to be a problem. One of my clients loves to buy firms that need be 'rescued'—it's a way to get good people and good clients. They might have an owner that's retiring, a lawsuit that's going to bankrupt them or they can't make the investments in marketing and technology—there is a reason to come together, and there has to be a reasonable deal financially. Beside that, he also likes the rescue operations because then the employees don't say 'Gee, things were so much better before.' They say 'Gee, things are a lot better now.'
CSE: Alan [Zlotkowski], Flack +Kurtz became part of a bigger operation. How did it happen and how has it affected your office?
ZLOTKOWSKI: It certainly has had effects and all have been positive. I joined Flack + Kurtz in 1973, at which time they were four years old and a firm of about 30 people. In the almost 30 years I've been there, we've become a professional services business of somewhere close to 330 employees. During this time, we did our own form of acquiring for various reasons. In the professional services business, it's either because you want to be in a certain location, or you want to be in a certain market sector or you want to pick up a service related to what you do in the industry. You're looking at expanding your professional presence. The other side of acquisition is just expanding the business side: making more money, getting bigger—making something so big that when it's big enough, I'll sell it again.
ZWEIG: That's the next model.
ZLOTKOWSKI: To the credit of Flack & Kurtz' management, they saw the need for ownership transition as early as 1980. The founding partners started to let go of pieces of their action up until last year, just before we merged with [British developer/constructor] WSP Corporation. We already had 18 principal owners, Peter [Flack] had subsequently retired and Norman [Kurtz] was around 64. So we already had an ownership transition program in place. When we were approached, and George [Christodoulo] was in the middle of that, I was talking to a guy about acquiring his firm, so we were certainly not on the market. But over a six-month period of talking, we found that they happened to be in places we weren't and provided services we didn't; and correspondingly, we were where they wanted to be and we offered expertise in certain areas of engineering they didn't have. An agreement that was financially acceptable to all parties emerged, and as such, right now we operate as part of the WSP Corporation as Flack + Kurtz, Inc. But no one from WSP sits in our office. They basically let us run our show.
CHRISTODOULO: You have the same managing group.
ZLOTKOWSKI: I've been on the Flack + Kurtz executive board for 10 years.
CHRISTODOULO: And still are.
ZLOTKOWSKI: And still am. They look at us with the "as long as it ain't broke don't fix it" philosophy.
CHRISTODOULO: The hands-off approach was right up front in the process.
ZLOTKOWSKI: But there was also an extensive amount of due diligence done on the part of both firms. To the credit of Norman, the entire partnership of Flack + Kurtz was involved in the negotiations.
MAGLIANO: That's a good point. The acquisitions we've been involved with that have fallen apart have been those that have not been embraced by all of the partners.
CHRISTODOULO: And to the credit of WSP, when they came forward to make the presentation to the board, they did not view the senior two, three or four people as the decision-makers, but all 18 owners. There was definitely a big focus on the middle and young partners, because that's what they were buying long-term. In other words, they were smart buyers in that they were saying, 'We're going to give you all the reasons in the world to stay here. You're not being cashed out, you're just joining a different organization.'
ZWEIG: Einhorn Yaffee Prescott went through an interesting transaction recently. To me it was one of the fastest and biggest number transactions I've seen.
STEPHENS: It wasn't really a merger or acquisition. It was an investment and then a separation of two companies.
CSE: Who was the investor?
STEPHENS: TA Associates Investment Company from Boston. The money allowed us to do a couple of things and buyout the interest of most of the founding partners. It also allowed us to set up two companies that are in very different businesses.
CSE: Did your firm approach them or did they approach you?
STEPHENS: They actually approached us. We were interested in something like this, and we didn't exactly envision the deal as it turned out. They read about us in some publication and called us, and that's how it started. It was like all these deals we've talked about. It took a lot of negotiation, a lot of talking to a number of partners and principals in the company. In the end it turned out to be very successful, it allowed them to grow, which is what they are doing in a fast way and allowed the engineering division to have a new younger ownership and allowed us to bring a lot of new owners into the company.
CSE: In the big company picture, aren't you cutting off your right arm?
STEPHENS: We had planned for that because there were already two different divisions at Einhorn Yaffee Prescott, and both had independent management already. On the mission-critical side we still cooperated with the traditional branch of the company, but the formal separation has been a positive thing, because it allowed each of us to focus on different areas.
MARGULIES: We recently went through an acquisition that was similar to Flack + Kurtz's experience, in that we were a private partnership for many years and we weren't even looking to merge, but an opportunity came up.
Actually, it was fairly serendipitous, in that it stemmed from our senior principal slipping while getting into a taxi. The gentleman who picked him up happened to be from a company called Tetra Tech, who was there proposing on the civil engineering end of a project that we were proposing on as the building M/E/P engineer. So they had a discussion about the two firms and shared a cab back to the airport.
Since we do all the engineering inside the building and they do all the engineering outside the building, the two principals said maybe we can do something together.
There was a lot of due diligence and we spoke to a lot of firms that still operated autonomously under the Tetra Tech banner. But, what was unique for us is that we were the only M/E/P engineering firm in the whole group. So we thought there was a great opportunity for us to get into parts of the country where we had no presence. What was interesting was that we were a privately held firm for 48 years and now we are a public company—that was a learning process. Tetra Tech kept creating this image for us that our operation should be a three-legged stool: the client, the employees and the investor community. We said, 'Who are these investors and what are they interested in?' We learned that they are interested in growth, profit and you collecting your money. They've been preaching that gospel for two years, and in that time we never asked whether we wanted to grow or should grow, but we grew anyhow and our clients gave us more business. Now we have strategic planning, and all these other things that we used to treat fairly informally, that are now critical to satisfying all three legs of that stool.
ZLOTKOWSKI: One of our concerns was the reception of the staff. We were really surprised. The young guys quickly caught on that they would now have a larger opportunity to be the owners.
MARGULIES: We had a lot of the same concerns and we recently did a retreat for our executives. We interviewed a good sampling of our staff after two years with Tetra Tech to try to find out what their feelings were about it and what it meant to them. The response was interesting. One was that it was a great opportunity because we get to work on great projects, but more importantly, they feel that we now allow our staff to have more information about all of their projects than we ever had before. They appreciate that, and they like taking ownership. They also appreciate the fact that there are all these opportunities that they never had before such as stock purchase plans and stock options.
ZWEIG : I think you hit it on the head. We can talk all we want about what retains people. The fact is that most design firms are horrendous places to work because they do not inform people as to how they are doing as a corporation. We need much more open-book management than we have and it needs to be timely.
We don't involve our people in business planning; we are afraid to commit and say this company is a growth firm and, we're always going to grow. We [ZweigWhite] work with a lot of companies in the business of planning and a lot of people are afraid to grow. They say 'the last time we did that we got smashed down in the recession.' That's a crock to a young person. You're not going to have a career in a place that doesn't grow. And just because a firm does the 'best projects' doesn't make it the best place to work. I know companies that grind out convenience stores all day long, and are unbelievable places to work. Yet, I can go to some big-name firms working on high-rises, but there are egomaniacs that control the company and people get tiny little pieces of the job and never get any credit or recognition. So many companies are so stratified, the owners are like kings—their office doors are closed and communication is shut off. But if you want somebody to learn, you must sit in a cubicle with them and take them out with you when you go somewhere, because that's where the real learning occurs.
Game Date: 08/09/01
Played At: Grand Hyatt, NY
GEORGE CHRISTODUOLO, ESQ. head of business practice
Lawson & Weitzen, LLP, Boston
ROBERT DERECTOR, P.E. managing partner
Robert Derector & Associates New York
DONALD L'ABBATE, ESQ. partner
L'Abbate, Balkan, Colovita & Contini, LLP, Garden City, N.Y.
JOHN MAGLIANO, P.E. president and chief engineer
Syska & Hennessy, New York
STEVEN MARGULIES, IES, IALD chief administrative officer, director of lighting design
Cosentini Associates, New York
CAHAL STEPHENS, AIA, P.E. president/CEO
A/E Einhorn Yaffee Prescott, Boston
STEPHEN WALLER, P.E. director of engineering, HVAC and plumbing
CUH2A, Princeton N.J.
ALAN ZLOTKOWSKI executive vice president, New York director
Flack & Kurtz, New York
MARK ZWEIG president/CEO
ZweigWhite Associates Natick, Mass.
Manager: Jim Crockett