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An Evolving Landscape

An Evolving Landscape

By Chad Clinehens, PE, President & CEO, Zweig Group

From The Zweig Letter

What it means to be an entrepreneur and run a smaller AEC firm in today’s competitive environment.

Ask any leader of a smaller AEC firm about the challenges they face in today’s climate and you’ll likely get an earful. From recruiting and retention challenges to feeling like they are constantly being stalked by larger serial acquiring firms, sometimes it’s not easy to stay focused on the aspects of the business that bring joy. For the purposes of defining a smaller firm in this article, we’ll focus on firms with around 75 full-time employees (FTEs) or fewer and/or $18 million or less in gross revenues.

Running one of these smaller AEC firms can have many benefits, both professionally and personally, including:

  1.  Flexibility. Not only do you have more control over your work-life balance, you are also more flexible inside the firm to make adjustments and adapt to changes in the marketplace. Additionally, the decision-making process in small firms can be faster as there are fewer layers of bureaucracy. This agility can also be advantageous in responding to staff and client needs.
  2.  Stronger financial performance. Firms in this data set tend to perform better than their larger peers in profitability (pre-tax, pre-bonus on NSR median 16.4 percent versus 15.5 percent for all other firms), return on owner’s equity (pre-tax, pre-bonus 47.3 percent versus 43.2 percent for all other firms), and annual growth rate (14.5 percent versus 12.6 percent for all other firms).
  3.  Specialization and niche markets. Smaller firms can specialize in niche markets or specific types of projects. Have you ever heard the phrase “there are riches in the niches”? Refer to the above stats as evidence. Specialization can create a competitive edge and attract clients seeking expertise in a particular area.

While we could go on citing other advantages smaller firms can have, many of them also face some significant challenges, including:

  1.  Lower overheads. Operating costs for smaller firms are typically lower than those for larger firms (overhead pre-bonus 148 percent versus 164 percent for all other firms). This can result in higher profit margins and increased financial stability, however, there is a dark side to keeping overhead low. Many firms in this category need to start building necessary business infrastructure to continue growth and struggle to do so as overhead costs are seen as bad. This is not true. Leaders in this challenging phase must strategically decide how to start making critical business investments to continue growth. Not growing is not an option, unless a slow death is your preferred route.
  2.  Firm valuation. Smaller firms also tend to have higher valuation multiples. Firms in this category post a $98,900 valuation multiple per full-time employee versus $89,909 for all other firms. Driving value should be the top objective of firm owners, however, like everything, there are tradeoffs. As values increase, it can be more challenging to internally transition ownership as it becomes more expensive. If the firm does not have at least a 20-year financial model of future transitions, many can find themselves in a situation where there is not enough time or funds to keep the firm owned internally. Thus, many smaller firms tend to be targets for larger acquiring firms or private equity groups looking for firms that don’t have other options.
  3.  Recruiting and retention. This is one of the greatest challenges for a lot of smaller firms right now. Disparities in compensation and the immense resources of larger firms is creating an extremely lopsided competitive market. The challenges in finding good people have never been greater and small firms are feeling it.

Running a smaller AEC firm and being an entrepreneur is more challenging than ever as the race for talent has created new and unbalanced dynamics between large and small firms. As outlined in this article, the rewards are significant and the opportunity to drive change and improve the competitive position of these firms is also greater than ever. Here are a few things to keep in focus as you navigate today’s business climate in our industry:

  1.  Focus on growth while maintaining agility and flexibility. Growth is essential to every business. “Grow or die” is a real thing, especially today. Growth is a critical strategy for recruiting and retaining staff. Remember, opportunities for career growth and development are important to all of your staff. Have a strategic plan that outlines a revenue growth plan, recruiting and retention plan, and a bureaucracy-free framework to accomplish goals while maintaining agility and flexibility.
  2.  Invest in the business. The pressure to invest in the business is especially strong in smaller firms and startups, but for those in the 50-75 FTE range, some need big leaps to maintain a competitive edge. If you don’t invest in the right people, it can harm your firm and create even more challenges for you to manage. Invest more in planning. Have a strategy for growth, ownership transition, and technology. If you need some high-level leadership/management help, consider fractional C-suite positions before committing to hiring or promoting into full-time positions.
  3.  Drive efficiency. With the talent crunch, efficiency is more important than ever. To approach this, think beyond recruiting and retention of people. Small firms are probably in the best position to take advantage of evolving technology and advancements around artificial intelligence. Every project and every phase, down to the task, can be examined to find where efficiencies can be gained. Fractions of a percent on people’s time can make the difference. Cut through the hype and fear around AI and look for tools that can speed up processes or repetitive tasks that can free up staff to focus on design and client service. AEC firms of fewer than 100 staff stand to gain the greatest competitive advantage with AI. Could it be the great equalizer for small and large firms?

The incredibly diverse business climate for small and large firms and the rapid advancements in AI are why we are putting more of a focus on this sector of the industry in 2024. Our inaugural AEC Small Business & Entrepreneurship Forum in Atlanta on May 21 will bring the greatest business insights and strategies for the firms we focused on in this article. Additionally, it is strategically positioned next to the AI & AEC Tech Summit from May 22-23 in the same location. With an incredible lineup of industry experts, we hope these two events will elevate the industry as we give some special focus on these areas. If you are interested in learning more, click here.

Chad Clinehens, P.E. is Zweig Group’s president and CEO. Contact him at cclinehens@zweiggroup.com.

AEC Small Business & Entrepreneurship Forum + AI & AEC Technology Summit The 2024 AEC Small Business & Entrepreneurship Forum is connects leaders of small firms to discuss the unique challenges of managing and growing a small business in the AEC industry. The one-day event will comprise keynotes, panel discussions, roundtables, and breakout sessions, all focused on the needs of small businesses. Stay an additional day-and-a-half for the AI & AEC Technology Summit. This event provides valuable insights into technological developments on the technical and business side of running an AEC firm of any size. Click here to learn more!