For architecture, engineering and construction (AEC) firms, the outlook for 2023 looks decidedly mixed after almost a decade of robust growth. On the positive side, project pipelines are full and an abundance of new work likely will be in play as a result of pent-up demand from the lingering pandemic, a surge in government infrastructure spending and other factors. Yet the possibility of a recession looms large amid rising interest rates, inflation, geopolitical turmoil, continued supply chain disruption, labor shortages and other uncertainties.
“In short,” the International Monetary Fund’s economic counsellor Pierre-Olivier Gourinchas wrote in an October blog post, “the worst is yet to come and, for many people, 2023 will feel like a recession.”
When some of the world’s foremost economists and financial market observers go on record predicting a recession, it’s time for AEC firm leaders to take notice, and if they haven’t already, take solid, proactive steps to insulate their businesses in case those recession predictions do indeed come to pass. Having endured a few recessions ourselves during our decades in this business, we have gained valuable insight along the way about the measures a firm can and should consider taking to blunt the impact of an economic downturn. Here are seven such protective steps:
- Prioritize recession-resistant markets. During a recession, it’s the industries tied to “must-have” products and services that tend to yield more new business opportunities for AEC firm, while industries that provide “nice-to-have” products and services are less promising. So evaluate your firm’s book of business. How much of it is tied to clients in must-have markets: education, healthcare, life sciences, public utilities, information technology, food and beverage, lower-end retail, government services, etc.
The goal, ultimately, is to acquire talent and build a diverse client and project portfolio, so your firm is a significant enough player in these kinds of markets before a recession hits, putting it in a strong position to scale up in these markets during a downturn. The heavier a firm’s book of business is weighted toward clients in nice-to-have businesses — high-end retail, travel and tourism, hospitality, housing, etc. — the greater the sense of urgency to build a project résumé that demonstrates your expertise in must-have markets.
Winning business in these markets can be really difficult for firms that lack relevant experience. One way to build that experience and expertise could be via an acquisition of a firm that already has a solid track record with “must-have” work, or through a partnership, strategic alliance or joint venture with such a firm.
- Invest in people with expertise in recession-resistant AEC markets, and do what it takes to keep them around. A firm’s ability to land projects and scale up in “must-have” markets depends greatly on the talent it has within its workforce. It’s highly unlikely a customer will want to hand a project to a firm that lacks strong, recent experience in that type of project. So invest more to keep people who have experience in recession-proof industries and projects, while also working to add people with expertise in those areas. While you’re at it, also look to streamline your workforce, perhaps by force ranking employees and focusing on A- and B-level talent, because running a lean operation is particularly important in a poor economy.
- Put a finer point on sales, marketing and business development. Our experience suggests that during an economic downturn, the number of firms competing for a project could double or even triple. The firms that tend to fare best in such a hyper-competitive environment are those that demonstrate more discipline and focus on presell, sales, marketing and BD processes. That means creating higher-quality presentations and proposals to stand out from the competition. It also means keeping your current clients close, doing all the big and little things to let them know you value them. It’s also a good idea to focus more on leveraging the relationships and networks your people have to cultivate new clients and relationships.
- Be open to sacrificing a measure of profitability to land new business — but beware taking on bad work. This is about striking a delicate balance between doing what it takes to win high-priority projects by pricing projects more aggressively, without mortgaging the firm’s future by taking on “bad” (minimally profitable, less desirable client, etc.) work that could prove to be a big burden when the recession ends.
- Prioritize executing faster and more economically, without compromising quality or safety. In a competitive market, firms with better pricing and tighter project timelines in their bids will have an edge in winning more business. So look across the firm for ways to run projects and generally to operate more efficiently, but never sacrifice quality and safety. References and reputation are the key to future new and repeat business.
- Be ready with creative solutions to help clients overcome obstacles and bring projects to completion. To keep projects from halting due to budget, supply chain issues, etc., embrace an iterative, collaborative project approach, where you act as a partner, guide and advocate on behalf of your clients, helping them find solutions to issues as they arise — a design tweak here, a shift to a different material there. In these volatile times, a client should never go to management for funding approval without the input of a builder. The builder is in the market every day and has the pulse on the latest cost, labor and material nuances. Their insight can be invaluable in validating costs up-front, and later in a project with value-management when issues arise. By engaging customers, builders and other stakeholders throughout project execution, decisions about scope, schedule and resourcing adjustments can be made based on close collaboration and communication.
- Be alert to acquisition opportunities. As focused as firm leadership should be on navigating the economic downturn, that shouldn’t preclude them from being open and alert to acquisitions that can strengthen the firm in the longer term. That includes deals involving firms with a strong standing in “nice-to-have” industries that could be poised to tap pent-up demand when the economy rebounds, for example, or firms whose book of business would fill gaps in your firm’s portfolio. The good news is that the high acquisition price tags we’ve seen lately in the AEC market are likely to shrink as a function of diminishing project backlog.
There’s no guarantee a recession will come to pass in 2023. But if it does, AEC firms that are prepared and proactive in their approach, and that have these steps baked into their formal strategic plan in advance to guide decision-making through the various stages of an economic cycle, and across various time horizons (one-year/three-year/five-year and perhaps even further out) should be better equipped to weather a downturn than firms that leave the fate of their business to the whims of the market.
Dennis Cornick has worked in the AEC business for over 40 years. He recently retired after 33 years with Gilbane, a 152-year-old global provider of facilities and construction services with an annual volume exceeding $6 billion. During his tenure there, Dennis led strategic and tactical initiatives, resulting in consistent sales, revenue, and profit growth. Akshay Mahajan is general manager, AEC, at Unanet.