The (Mostly) Unstoppable AE Industry

Industry CEOs and investors are bullish on the future. There’s a palpable sense of confidence when you speak with them about the state of their businesses and what lies ahead for them. Many see these “good times” lasting for another “five to seven” years. If that were indeed to be the case, it would speak to a remarkable 15-year run of expansion for the industry.

While concerns about the larger economy get all the headlines—Inflation! Interest rate hikes! Layoffs!—the AE and environmental industry continues to hum along. And positive indicators about the future are everywhere. Still, as readers will learn later in this article, some concerns remain regarding industry morale. But first, the good news.

Optimism abounds

Over three-quarters of the 200-plus attendees at this year’s Southeast M&A, Strategy, and Innovation Symposium expect 2023 will be an even better year for their firms than 2022. This confidence pervades the hot-off-the-presses ACEC Research Institute’s 2023 Q1 Engineering Business Sentiment Study. It finds that “current sentiment for firms and the industry remains extremely optimistic.” The over 500 respondents were “very optimistic within all market sectors” with sentiment strongest in the roads and bridges and energy and utilities sectors. Sentiment improved in two-thirds of market sectors compared to last quarter. This sense of optimism was echoed by the over 300 respondents in the 43rd Annual Deltek Clarity Architecture & Engineering Industry Study who saw growth or stability in almost every single market sector over an 18-month forecasting period into 2023.

Visibility is good

Median backlogs for Morrissey Goodale clients stand at 11 months. This correlates with a median backlog of 10 months from the ACEC Research Institute 2023 Q1 study. Across the country, most CEOs can count on a year of “guaranteed’ performance. This allows them the latitude to make investments to improve their operations and fund innovations. From an investor’s perspective, it makes it easier to deliver premium valuations with a greater proportion of the investment in cash or notes as opposed to earnouts.

Industry leaders concur

On February 23, when announcing the firm’s financial results for the full year ended December 31, 2022, NV5 Chairman and CEO Dickerson Wright indicated, “We anticipate a successful year in 2023. We enter 2023 with a strong backlog to drive organic growth and profitability, and we anticipate the best year for mergers and acquisitions in our history.” Similar optimism was expressed by Stantec President and CEO Gord Johnston on February 22 when the firm announced its stellar performance in 2022. In discussing the upcoming year he stated, “Stantec is well positioned for another year of solid growth. Significant backlog and strong tailwinds of public and private investment, along with Stantec’s focus on project execution and operational efficiencies, support Stantec’s confidence for delivering on our strategic plan and 2023 targets.” And from a global perspective, Arcadis, in announcing their 2022 results on February 16, indicated that “with the continued strong client demand, combined with our record backlog, predictable performance, and financial discipline, we are confident we are on track to deliver on our strategic targets in 2023.”

Investing in the future

It’s not surprising then that CEOs are placing big bets on expansion and improvement. With over 70% of the attendees for this year’s Southeast M&A, Strategy, and Innovation Symposium citing staffing and retention as their biggest challenges, their firms are planning to make acquisitions or merge (72%) to continue growth or generate revenues through digital offerings (50%) to offer clients more services with less staff.

Not all plain sailing

For sure, there are headwinds in the broader economy that are proving challenging for some AE firms. Design firms with exposure to the tech sector are experiencing project shutdowns. Indeed, the January AIA Billings Index declined for a fourth straight month, albeit at a slower pace. Some private equity investors are factoring the impact of interest rates into their exit timelines and choosing to pass on certain sectors. Industry M&A has cooled from the heady days of last year and looks to be approximating what we saw in 2021. What this means for M&A valuations is still a work in progress, but we expect to see a continuation of the bifurcated market that emerged in 2018—with top-performing firms continuing to see strong valuations and also-rans seeing continued erosion of value.

5 Morale Killers

Even though the AE industry continues to thrive, it does have an Achilles’ heel. Truckloads of data and anecdote after anecdote tell us that finding and keeping good people is far and away the biggest concern for AE firm leaders—bigger than most of their other concerns combined. Yet in the face of an obvious imbalance between the supply and demand for talent, we still witness plenty of morale killers in AE firms of every type and size. Here’s what playing with that fire looks like.

Throwing “thank-yous” around like cinder blocks

AE principals are quick to criticize (not necessarily a bad thing if the criticism is constructive), but they’re much slower to say “thank you,” assuming they say it at all. The vast majority of your employees are well-intended and want to work hard to contribute to their firm’s success. They also want to be respected and have their efforts acknowledged. Sure, they’re as interested in making a buck as anyone else, but appreciation isn’t just about the dollars. If employees feel unappreciated, all money does is make their decision to move on that much easier. So, say “thank you” more often. It’s free, after all.

“Giving” people autonomy

This philosophical argument has come up in our industry more than once. You can’t give people something they already have. People are autonomous. They show up that way. They do or they don’t do. They agree or they don’t agree. They follow or they don’t follow. You’re not giving them anything they don’t already have. If a firm “gives” its employees autonomy, the company is likely a command-and-control organization, and autonomy is often stifled, much less “given.” The assumption in a command-and-control company is that people need to be told what to do. They need directions as opposed to direction. Responsible autonomy is found at the other end of the spectrum. It’s the expectation that people will use their autonomy responsibly—and that within robust systems, they will self-manage, self-organize, and consistently act to take care of the concerns of the business, the people in the business, and the firm’s clients. Undoubtedly, morale is much higher in firms that practice responsible autonomy throughout their organizations—not just at the upper levels.

Playing favorites

It may sound childish, but we all know it happens. For whatever reason, you might feel like you connect with some better than others, or perhaps you trust only a select few to be in your “inner circle.” Or perhaps you think it uncouth to connect with folks at the “lower levels.” That kind of behavior can be disheartening and create a feeling of exclusion. It’s the opposite of equity, and it encourages the same behaviors in others who are following your lead. Be aware of your own behaviors. Spread opportunities and goodwill around your organization at all levels. Be generous with your knowledge, your network, and your compassion.

Idea stomping

Yep, it’s exactly what it sounds like. We’ve all experienced it, and we’ve all seen it happen to others. The overly self-assured boss comes up with the good ideas, and everyone else brings the dumb ones. Perhaps even more damaging is when that same boss solicits ideas and either summarily dismisses them or doesn’t bother responding at all. It only takes a stomped idea or two for your most creative people to stop giving them.

Extended grumpiness

We all get grumpy from time to time. It happens to the best of us—it’s human nature. We’ve all got a million things going on inside and outside of work, and we all have our triggers. The occasional bad mood is understandable, especially given all of the responsibilities and pressures we deal with these days. But when the testiness lasts for weeks or months at a time, you owe it to yourself and your company (and possibly your family and friends) to step back, find out why you are emitting negative energy, and address whatever’s got you feeling, thinking, and behaving in unproductive, damaging ways.

In the AE industry, there’s a mountain of work to do and not enough people to do it. Your employees have choices—and they know it. So, if these and/or other morale killers have manifested themselves in your firm, eliminate them before your highly sought-after people finally decide to talk with that pesky recruiter.

Questions or comments? Contact Mick at mmorrissey@morrisseygoodale.com or 508.380.1868 or Mark Goodale at 508.254.3914 or mgoodale@morrisseygoodale.com.

 

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