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Twilight Of The AEC Owner Managed Firm

Twilight of the AEC Owner Managed Firm

Quality, Consequences and the Construction Industrial Complex (part 219).

To paraphrase a great man, “It is not the end, but it is the beginning of the end”.

In my opinion, the days of the AEC owner managed, small and medium sized firm (SME) are coming to an end. Why is this?

I started work on December 1st 1980, shout out to all ex CTS Ltd, Rickmansworth, UK staff. The firm I started with was a 20 person SME with a hierarchy based on seniority and a wise, elder statesman in the top job. CTS worked on large complex projects with no real barriers to market.

Fast forwards to 2007 thru 2011 and I was an equity partner in a MEP design firm. When I was there we had about 160 people total but it was still a SME with a traditional partnership structure. However, the market presented the partners with challenges that the partnership and LLC model could not cope with.

As with all owner, managed firms the equity partners are the bank i.e. everyday we all had capital, houses and college funds at risk. Funding to expand or take on risky projects came from cash flow or the partners. With the advent of large P3 or PFI projects plus the trend towards project complexity at scale, the partnership model inhibited growth and risk taking i.e. chasing large complex projects.

Large, complex projects with high levels of insurance and bonding specified require large, well funded, well insured firms to bid. The days of small or medium sized AEC firms designing hospitals or mission critical data centres are over.

Take the Canadian market over the last 12 years. As SMEs realise they can no longer compete for large complex projects there has been massive consolidation in the AEC market. Plus, in the last 5 years property firms such as JLL and CBRE have been buying specialist project management and AEC firms to facilitate their vertical integration.

I believe the AEC market is now in a Darwinian phase where the weak will perish or be bought and the strong will survive. Strength in this market is defined by scale, funding and depth of talent pool.

The market now trends towards large, highly liquid firms or micro specialists. Small and medium sized business are being squeezed out. Large clients want to deal with large, well funded and insured firms. What to do?

1. Note that AEC firms are bought and NOT sold. Rarely do these firms sell at the top of the market when things are going well i.e. at a full valuation.

2. Get clear that if you are responding to RFP’s and are bidding you are a commodity with zero pricing power. Your business strategy is price.

3. Accept that products are a higher value business opportunity than professional services. Products can scale and benefit from network effects, people based services cannot.

4. Start to believe that professional services jobs are the new cubical, puppy mill jobs waiting to be automated.

5. Think about selling your small or medium sized firm before it is bought at a discount.

6. Acquire some unique, hard to automate skills or develop a product. Be clear on what your competitive advantage is. Are you or your firm an also ran or do you have unique skills and therefore an unfair advantage? What is your unfair advantage?

7. Understand firms that acquire, manage and repackage data will survive and thrive in the AEC market. Building design, construction, commissioning and facilities management is data intensive.

8. Understand that the ability to deliver consistently at scale plus add value via data analysis will separate the winners from the losers.

I think the screen grab below from Jonathen says it all. Life is more like Game of Thrones than we like to admit!

BlueRithm Brand Ambassador

Twitter: @BLDWhisperer

Related posts & links:

#220 – Insurance & Commissioning

#196 – If Navy Seals Ran Cx

#208 – Edifice Complex Podcast #029 Bill Gnerre – Why Does it Take So Long to Set up BMS? 

Edifice Complex Podcast

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