Business Management

When Big Firms Play in Small Sandboxes,
It’s Not Necessarily Bad News for Everyone
By Ed Hannan

There’s an interesting editorial in the September 2009 issue of Building Design + Construction about small AEC firms getting eaten alive by larger firms. I read it the day after attending a Society for Marketing Professional Services program where Rusty Sherwood of McGraw-Hill Construction shared his outlook for 2010 in the AEC industry, but the points made were similar.

During Sherwood’s discussion (and in the Building Design + Construction editorial), someone in the room raised the notion that larger firms are competing with smaller firms for projects and using their larger size and experience to win work that was going to smaller firms.
If you play this scenario out over time, what happens?

The larger firms will add to their backlog and look busy, but those new projects don’t bring in enough revenue to keep the lights on, desks filled, doors open and generate adequate profits. This brings about layoffs, office shrinkage and possibly firms going out of business, or at the very least, a merger with or sale to another megafirm.

Meanwhile, in smaller firms, those projects that fit their smaller overhead structure stop coming in. That means the few people working for these small firms have nothing to do, and the firm owner has little choice but to either close the doors or sell to the larger firm that is stealing their lunch.

However, PSMJ Resources consultant Brad Wilson, who specializes in mergers and acquisitions, sees this trend as a positive for the AEC industry.

“The industry is consolidating. It’s been way too fragmented for far too long. Little tiny firms have been beating on each other on price alone for decades, but at some point, the industry has to mature. There’s not enough room in the United States for all the A/E firms we have to be financially viable and healthy.”

Wilson uses the term “constructive destruction” to describe what is happening. “It rips the industry apart, but it’s actually a good thing. I ran across another huge example of it this week. A tiny senior living facility was up from Virginia for selection, and a client of mine, another mid-sized firm, and a megafirm got shortlisted. The megafirm put together a complete BIM schematic, with 4D modeling, animation with people walking through the facility. They spent probably close to $200,000. Neither of the other two firms have the capability to do it, nor the money to spend on it. The client was so blown away by the ‘wow’ factor that they gave it to the megafirm. Even without the expertise, big firms are throwing big dollar weight against these small projects because they can. The total fee was $2 million. The megafirm would have to make 10 percent on it just to recoup their marketing dollars. What they are trying to do is build a reputation in the senior living market and chase out the little guys.”

Wilson continues, “and the client thinks, ‘If the megafirm did that much work to win our business, they must really want our work.’ I would imagine with the drawings and if they built it up right, they could have construction documents ready for the client to sign within a week or two. You collect the schematic design fee after you’ve already spent it and you’re ready to go. Meanwhile, my client has to lay off 10 more people because they didn’t get the job.”

What must happen to prevent this scenario from occurring is what is sort of playing out right now. Megafirms such as Balfour Beatty, AECOM and URS are gobbling up firms such as Parsons Brinckerhoff, Ellerbe Becket and Washington Group.

Some of this is strategic positioning on the part of the acquiring firms but there are two sides to every sale, and the reason PB, Ellerbe Becket and Washington Group decided to sell is because there just isn’t enough work out there to keep them busy.

Wilson sees a future of the haves and the have-nots dominating the AEC industry. “It’s never going to get to the level of the car industry, where we have five big manufacturers dominate the world, but I think the Engineering News Record 500 and no smaller could be very much the future. It will take a very long time, but I’ve always advocated that we’re going to end up with very large firms and very small firms–the ones with principal connections (locally) and can live on that, and then the multinational firms that only market very big work. I’m not sure that is valid anymore, because they’re not just marketing very big work."

Ed Hannan is vice president of publishing at PSMJ Resources, Inc. in Newton, Massachusetts. For a look at other major issues likely affect your business, check out PSMJ’s 2010 AEC Firm U.S. Market Sector Forecast, www.psmj.com.