Strategy rethink: how to win in the west

Strategy 101: Back in the good old days (pre-COVID, pre-hybrid, pre-crypto), most leading AE and environmental leadership teams incorporated the concept of U.S. Megaregions into their strategic planning. These were the 10 geographies where most of the 40% population growth anticipated in the U.S. between 2010 and 2050 would take place per the America 2050 prospectus from the Regional Plan Association.

Follow the growth: From an AE or environmental firm strategic planning perspective, these Megaregions were the equivalent of “follow the money.” Population growth drives infrastructure development drives construction drives AE and environmental services. Better for a firm to be in a growing region than a declining one. Much of the M&A activity that we’ve seen in the industry since 2018 has reflected the planned growth of firms into the Texas Triangle, Piedmont Atlantic, Gulf Coast, and Florida Megaregions. In the Western U.S. leading AE and environmental firms have focused their growth initiatives on the Arizona Sun Corridor, Cascadia, and the Northern and Southern California Megaregions.

But things are changing—fast: However, America 2050 didn’t (couldn’t?) anticipate the pandemic nor its impact on growth patterns—particularly those in the Western U.S. where now the fastest growth is not in those Western Megaregions, but in the Intermountain West—the states between the Rockies and the West Coast. The 2020 U.S. Census shows that 6 of the 10 fastest-growing states in the U.S. are in the West (Idaho, Arizona, Nevada, Utah, Washington, and Montana). Prior to the pandemic, these states were already seeing robust growth. Post-pandemic, they are red hot (or green hot as depicted in the Population Growth by County graphic below). Often this growth is at the expense of a number of coastal California counties.

With growth come challenges and more: Much like the rest of the AE and environmental industry, firms in the Intermountain West are booming. They are seeing record profits. Their backlogs are strong. They are confident about sustained growth given the diversity of factors contributing to the economic conditions in their states. Not for them the boom then bust fracking-driven cycle of last decade. They are also seeing a lot of interest from out-of-state firms that would like to acquire them. These out-of-towners are looking to position themselves on the ground for anticipated future growth.

An imbalanced industry: Over three-quarters of the ENR Top 500 design firms are headquartered east of the Rockies. And most of these have either zero footprint at all in the Western U.S. or are significantly under-represented in these fast-growing states. Firms that aspire to be “national” need to have a robust Western business. Without it, it’s impossible to be the preferred provider for clients with coast-to-coast demands. Or to claim national expertise in water, transportation, and energy infrastructure.

National strategy rethought: In the past, when these leading firms considered growth in the “West,” they viewed California and Washington as the primary entry points via acquisition or a new office. They were attracted to the large, diverse economies of both states. They took advantage of the more frequent non-stop flights to metro areas in those states (pre-pandemic these were a relatively more important factor in acquisition and organizational integration). Today that mindset is shifting, as a greater number of firms east of the Rockies view the entirety of the Western U.S. as viable for investment. However, being successful in the Intermountain West can be challenging for out-of-state firms that are unprepared for the unique geographic and cultural nuances of the region. Just because you’re successful in Butte doesn’t mean you can roll out the same plan in Billings, Bozeman, or Boise. Local partnerships and local knowledge are the key.

Regional competitive reshuffle: Firms in the West are adjusting their business models to these new growth patterns. More offices are being opened and projects pursued in the Intermountain West by firms that have traditionally thrived in coastal California. At the same time, firms in the Intermountain West are expanding beyond state lines to take advantage of opportunities in adjacent states for which they are well-positioned.

Consolidation stats: These changes are playing out in the industry consolidation patterns being seen in the Western U.S. Mergers and acquisitions in the West jumped a whopping 51% between 2019 and 2021. Six in ten of those transactions were completed by firms headquartered east of the Rockies. When looking at firms headquartered in the Western U.S., California firms were the most-active acquirers.

The upshot: The industry in the Western U.S. is booming—and changing. The opportunities for faster and sustained growth are expanding beyond where they have been traditionally. The competitive map is changing as firms from east of the Rockies seek to expand westward and Western firms look to position themselves in faster-growing regions.

Morrissey Goodale is a CFE Media content partner.

Original content can be found at Morrissey Goodale.

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