Eight questions for the AE industry in the fall
Eight frequent questions pertaining to the A/E industry are highlighted with advice for industry CEOs and investors.
As the A/E industry heads into the Fall, there are a series of very similar questions coming from industry CEOs and investors. Here are some of the most frequent and the responses we get when we shake the MG Magic 8 Ball here in the office (which is not actually in an office, it’s virtual – well, digital really, and we don’t shake it, we use the app – but you get the idea).
1. When will I see the money? When will the IIJA funds start entering into the system in earnest? When will these dollars flow to the bottom lines of industry firms? It’s been 10 months since the bill passed, and while there’s been plenty of planning done at the state and municipal levels, most industry CEOs don’t expect to see a meaningful positive impact for their firms until “sometime in 2023.” Magic 8 Ball says, “Cannot Predict Now.”
2. And exactly how much gets wired to my account? What will be the measurable economic impact of the IIJA for the AE and environmental industry? By how much will we expand? 1%? 10%? Will that growth be a quick hit over 12 or 24 months? Or will it be a more gradual absorption by the industry over a decade? What does the post IIJA world look like for the industry? A quick recalibration to 2019 levels? Or a slower decline to some steady state? Investors would like to know. Magic 8 Ball says, “Reply Hazy, Try Again.”
3. Is there a recession coming? The “everything, all the time” mix of negative/concerning economic indicators would suggest there’s trouble ahead. Some CEOs don’t want to utter the “R” word. Others see one coming but not impacting them. Still others are pushing to recalibrate their market mix to scale back their exposure to residential and commercial development. For most, however, concerns about a possible recession are crowded out by current good times for the industry and the expectation that any negative impacts will be countered by IIJA funds. Magic 8 Ball says, “Signs Point to Yes.”
4. Will rising interest rates impact industry consolidation and valuations? Individual investors in employee-owned firms and smaller PE/FOs are the most impacted by rising interest rates. The first group will have less ability to finance investments in their firms – putting more internal ownership transitions in jeopardy. The second group are curtailing their investment activity as the financing they need for their investments becomes more expensive or unavailable entirely. So, more supply, less demand – the result is downward pressure on valuations—especially for smaller firms and underperformers. Magic 8 Ball says, “Most Likely.”
5. Where are all the people? Well, there is a good chance they are among the growing number of employees who are blowing up (in many cases, doubling) voluntary turnover rates around the country. While firms continue to hire, many have been experiencing a step-function increase in (good) folks voluntarily up-and-leaving for more money, or a workplace where they can be in person with co-workers (oftentimes, this is a move from a national firm to a smaller local or regional one), or a remote or semi-remote gig, or to be where they feel more love. Is this voluntary churn going to continue? Magic 8 Ball says, “You May Rely on It.”
6. Is dynamic pricing here to stay? In the before times, firms would look to adjust billing rates annually, often with a lot of handwringing and worry (What if our clients push back? What if they take offense and use another consultant?) and much benchmarking (“OK, let’s increase our billing rates, but NOT more than our competitors! Find out what their new rates are!). Those days are gone. In this wild inflationary environment, CEOs are asking their leadership teams how fast and how frequently (quarterly?) should billing rates be increased. Magic 8 Ball says, “It Is Decidedly So.”
7. Will saying “no” to work damage my reputation? The constant balancing of trying to keep current and future clients happy while not having nearly enough staff to do the work is taking its toll on CEOs. Sure, they worry about staff burnout (see #5), but they’re also losing sleep about their firm’s brand. Their dilemma is what to do when the client comes to them after being turned down or let down by a competitor. When they are already operating over capacity with no end in sight, do they take the work and stress their team out further, or do they refuse to take the project and live with the longer-term consequences? Magic 8 Ball says, “Without a Doubt.”
8. Will the labor market return to normal soon? CEOs are wrestling with questions related to the fast-rising cost of labor/cost of talent on multiple fronts. How can we afford higher-than-budgeted pay raises when we have multi-year contracts and can’t pass the increased cost on to our clients? How do we recruit new talent when we have to pay the new recruits more than we’re paying our current staff for the same position? Will labor costs decrease if/when the economy slows down? Magic 8 Ball says, “Very Doubtful.”
Morrissey Goodale is a CFE Media content partner.
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