KP Unpacked

Industry Insights: Mick Morrissey on the M&A Landscape of the A/E Industry

March 25, 2024 KP Reddy
KP Unpacked
Industry Insights: Mick Morrissey on the M&A Landscape of the A/E Industry
Show Notes Transcript Chapter Markers

On February 13th Mick Morrissey, Managing Principal at Morrissey Goodale, shared “Industry Insights” in conversation with KP Reddy, Founder and CEO of Shadow Ventures and Shadow Partners. Listen in as they dive into the mergers and acquisitions landscape of the AE industry by clicking the play button above.

Mick brings over 25 years of experience advising leadership teams in strategy and organizational development within the architectural and engineering sectors. This fireside chat, hosted within the Shadow Partners Online Community, unpacks the latest relevant M&A activity in the AE industry and provides valuable insights.

Want more discussions like this? You can connect with KP Reddy at https://kpreddy.co/ and follow him on LinkedIn https://www.linkedin.com/in/kpreddy/!

Speaker 1:

You are listening to the Shadow Network with KP Ready, your gateway to innovation and architecture, engineering, construction and real estate, with a sprinkle of startups that are making a difference. In between, check us out on YouTube at Shadow Partners. Never miss a live stream fireside chat or talk that we got going on with the industry's most interesting innovators and leaders every single week. You can connect with KP Ready and other innovators in the AEC and CRE industry in the Shadow Partners community. Go to bitly slash shadow partners community to learn more. Today. All it takes is a few clicks for you to make a difference. Welcome to the future and welcome to the Shadow Network with KP Ready.

Speaker 2:

This is the first ever industry insights hosted live by KP Ready, where he has fireside chats along with his closest colleagues in the industry, talking about a variety of topics, and we are honored to have Mick Morrissey, who is managing director at Morrissey Goodale. Mick brings almost three decades of experience advising leadership teams in strategy and organizational development at architecture and engineering firms, so today is going to be a really fascinating conversation on the M&A landscape of the industry as well as just some other things that are going on at Morrissey Goodale. What Mick's up to. I know KP has a few surprise questions that you may ask and maybe we'll talk about some rock music as well. So with that I'm going to turn it over to KP to kick us off. Thanks so much for joining us, mick and.

Speaker 2:

KP All right.

Speaker 3:

Thank you, Ian Mick.

Speaker 4:

Great to see you KP, it's terrific to be here with you and with the community. Ian, thank you very much for teeing everything up there. It really is, though I'm super excited to be with you today. We're big fans of Shadow Ventures and Shadow Partners and everything you all are doing for the industry, so I'm excited to have this conversation. Thanks, mick.

Speaker 3:

Yeah, it's you know we get to talk here and there and I thought you know, if it's people can only get a glimpse of our text messages, they would learn so much about what's going on. So I think you're one of those folks. Whenever I learn something new or have a question, you're on speed dial with text to say, hey, what do you know about this, what do you think about this? So, yeah, thanks for being here, Tell us a little bit. I think for folks just like what is Morrissey Goodale, what do you guys do? I would say kind of, if you could explain it. You know a lot of people, you know a lot of people. We all live in these little ecosystems where we build vocabulary. A lot of our ecosystem may not actually know the terms of strategic planning or whatnot. So if you can kind of give us some background on Morrissey Goodale and kind of what it is you guys do, just for context, Sure.

Speaker 4:

So the elevator description would be we are an advisory firm that serves architecture, engineering and environmental consulting and related industries exclusively. So design and environmental consulting. So we work with the firms that design facilities and protect the environment. We don't work with the builders necessarily. As an advisory firm, really, our business is helping firms set strategy. You know, basically figure out how to get from point A to point B, and as part of that we spend quite a bit of time helping firms realize their goals through mergers or acquisitions. So in helping them set strategy we then also help them implement that strategy. Largely the strategy is to grow or take advantage of opportunities, and mergers and acquisitions are in many ways, a preferred way to do that.

Speaker 4:

So we've 30 folks, we're in all three time zones and around those two areas of strategy and mergers and acquisitions, we do a bunch of other things Team consulting, executive consulting, ownership, transition, capital strategy evaluation. We host three events every year, three symposiums, and we're looking forward to partnering with you and your team at our upcoming symposium in Miami, where I believe we're going to see your incubator in action. We're super excited about that. So that's really what we do. We're 17 years old now, we're almost adult, and yeah, so that's kind of a summary.

Speaker 3:

Very cool. You know it was. We met last, I guess last year we met and I felt like I had my head in the sand about what was going on in the industry. There's all these transactions happening and that private equity had entered kind of the engineering world. And you know which? There was an announcement last week, I think from solace or Brian, that Blackstone made a mind. You know, and growing up as a second generation civil engineer, I never thought I would see Blackstone and engineering in the same press release, Like it's always felt. Like employee owned, you build a small firm, even the A comes to the world. They just acquired a bunch of companies. But you know, I kind of grew up with this mindset that engineering firms are like local, regional. Maybe there's a few big ones. But to see, like this cap, I mean over the last, over your career, I mean, how has it changed? Because it feels like a totally different world right now.

Speaker 4:

So in many ways it is, but in many ways it's not. You described an environment. You're growing up as a second generation civil engineer and I'm a civil engineer by training myself but that's still the industry. There's still relatively few large firms, although large firms, although those larger firms and larger than when you were looking at them, I believe, but there's still a lot of, and the industry is predominantly smaller firms. It's a, you know, the phrase that's been kicked around forever is that it's a highly fragmented industry. Well, I think most industries are highly fragmented before they get consolidated, and that's where this industry has been headed and is headed, and so occasion point there to illustrate how it's still an industry populated by many small firms, the medium.

Speaker 4:

If we talk about, look at mergers and acquisitions as a way to kind of gauge where the industry is, the median size Of a firm that sold, not only last year but every year for the prior decade, has been about 3 million in revenue. That's a small firm. You know, kp, that's the type of firm that I think you're referring to, and so the industry is still populated in many ways with these smaller firms. If you look at the total number of acquisitions that took place in the industry. Last year it's about 427, which is down maybe 10% from the year before. We saw a record number of transactions the year before, 480 plus or minus. And again most of those acquisitions the median size was affirmed that are relatively small.

Speaker 4:

But what grabs the headlines and I think kind of informs people's understanding of the design and environmental industry are these larger either acquisitions of or recapitalizations of kind of the household names, of the brand names in our industry. So, related to your point about Salisle, brian, connecting with Blackstone, which is one of the largest private equity firms globally. I believe they're one of the largest purchasers of all of their portfolio firms, are the largest purchasers of healthcare services, software services, etc. So it's a whole bunch of benefits.

Speaker 3:

I think they're like a trillion dollars. I mean Blackstone's like, in one way, always joke around, we all work for Blackstone and something. Directly or indirectly we all work for.

Speaker 4:

Blackstone. So Blackstone is a data point, though on the journey that you were describing about this industry. 2013, decade ago, really not that long ago, couple of you, two albums ago, right, and so 2013,. 4% of all of the acquisitions or recapitalizations in the industry sorry, 7% were done with private equity backing. Fast forward a decade to 2023, 39% almost four in 10 of ever recapitalization or acquisition in our industry involves private equity money, either through an initial recapitalization of the platform or through an add-on acquisition of a platform that had been formed before.

Speaker 4:

Additionally, if you look at the, if we use the engineering news record top 500 list as a gauge or a proxy for the largest design firms in the industry, over the last three years, since the pandemic, 12% of the ENR 500 as of the firms in the ENR 500 have either sold or recapitalized. 90% of those have been recapitalized by private equity. Interestingly enough, prior to the pandemic, you would see maybe eight or nine, maybe eight or nine of the top 500 design firms sell or recapitalize. Since the pandemic, that has doubled every year, and so I think the question is why, right? So why is private equity in the industry? And that's an interesting question.

Speaker 3:

Yeah, I mean because I think you know I always think about services, business. You know your, your IP, walks out of the door every night and comes back in every morning. And you know the history of building a firm was, you know, people started a big firm and a couple of three people said, hey, I've got a client, let's spin off and do our own firm. And so there's been this, like I would say, this natural, this natural rhythm to how firms just kind of spun off other firms. And you know we used to joke around I used to work at law engineering and people would go out and start firms and we'd call them the outlaws. Right, there are always these outlaw people that went. And so there was always this like origination point that we all eventually worked at one firm and spun out.

Speaker 3:

And now these firms are growing and getting acquired and PEs coming in. But how do you know this idea of employee ownership or closely held ownership? It just seems like the millennials and the Gen Zs aren't that excited. You know, if they work at a tech company they get some RSUs and stock. But this idea of, like, I want to buy in ie, I have to write a check to be an owner into the firm. It seems like that's also not super exciting for the younger generation.

Speaker 4:

Yeah, yeah, I'd agree. I think there's a couple of trends to play in here. I think when you and I were kicking around in the engineering world 20 plus years ago, there was a when we look at strategy I think it was David Meister, who was a consultant to the industry, framed and it's particularly resonant in the architecture space. Whether you have a practice based business or practice focused business or a business focused practice. My recollection from 20, 30 years ago is that there was more of, there was more of a focus on having a practice based business, so business came second. It was all about the practice and the profession. That has clearly changed over the last 30 years as as there's more business acumen in the industry and there's a greater realization of the potential of the businesses that are in the design world and the environmental consulting world professional services.

Speaker 4:

20 years ago, I believe you're right I believe that most private equity or investors wouldn't look at making an investment in a professional services firms because the IP walks out the door every night Well, actually walks out about 5pm now, but but that has changed for a variety of reasons as well. The second trend is that the younger generations of scientists and engineers and designers and environmental consultants, starting with and we saw this back in the day with Enron they're, they are demographically less able to invest, they don't have the capital. They're taking care of aged parents, they're paying for outrageous school fees. So there's less capital, less available cash for them to sit down at the kitchen table with their spouse and say I'm going to write a big check to be an owner in my firm. So there's that impediment. But then beyond that, there's there's, I think, to your point, there's less, in many cases less trust in terms of investing in your own firm rather than making, you know, advised investments beyond your own firm.

Speaker 4:

So yes, there's a number of trends happening that make employee owned firms that capital model is seeing a decline. So again, if you just look back at the last 10 years, 10 years ago three quarters of all of the top E&R 100 were employee owned. Now that's less than two thirds. At the same time, the number of the percentage of the top five top 100 that are private equity backed has gone from 4% to its north of 25%. The number of the percentage of publicly traded firms has stayed the same over the last decade. So you know there are fundamental challenges to the employee ownership capital model and that's driving a lot of the mergers and acquisitions that we see in the industry.

Speaker 3:

And it's interesting, there's this narrative about the transfer of wealth from boomers to millennials, and Gen Z is targeted. They're saying like $70 trillion. The boomers made money, saved money, invested in the market. You know they've got it. They're sitting there and they have, you know, kids, millennials and Gen Z kids that are waiting it out. You know they're doing their day job and kind of waiting it out, knowing that, hey, you know, take care of mom and dad for a minute, and you know, but I'll be inheriting X, you know, and it doesn't have to be a lot right, and I think also, when you're 20 something, not that $5 million isn't a lot of money for most, but you know, when you're 25, that's an enormous amount of money to think about.

Speaker 3:

Although I don't believe that it 25, $5 million will live through your life that way. But there does seem to be this like no, I'm just going to work a job and you know, I have money coming to me.

Speaker 4:

Yeah, it's interesting. So quite a bit of our strategy work is involves developing next generation leadership teams and training next generation leaders to take over the reins of their firms. And you know, as an industry, it's somewhat humorous for us to see in our work that next generation leaders are often already in their 40s, so that that that's something we have to help firms with. But to your point about what maybe younger generations in the industry are interested in Past six months in our strategy work we have been updating emerging leaders programs or next 10 leaders programs are putting in place some new ones and a lot of those programs are essentially creating a forum for next generation leaders to share their ideas with the current leadership team and current leadership team is typically a boomer leadership team, with the next generation leadership team is a blend of millennials and why, and maybe some peripheral Gen X still still hanging on.

Speaker 4:

And what we're hearing, to your point about time, what we're hearing a lot of is next gen leaders, younger leaders, saying Listen, I will work really hard for this firm, I love this firm and I'll work 60 hours a week. I'll work 70 hours a week so long as in two weeks time, I can work 20 hours a week and no one's going to hold that against me. And so this, this whole concept of you know, certainly when I was in the industry and a lot of the work that we would do over the last 20 years in the industry is, yeah, you're salary, but you're going to work 50 to 60 hours a week and that's how we're going to make our money and that's what happens, right? I mean if, if you have everybody working overtime, then you've fixed overhead by and large and you that's when you crank out profits Generational shift, particularly since the pandemic, which is, well, no, you know, I work my 40, I'll work 60 or 70 hours this week, maybe next week or the week after, but then we're going to average that out and I'm going to get that time back.

Speaker 4:

The other thing we're seeing related to time and commitment with, particularly with next generation leadership teams and up and coming leaders, is that they already assume that AI is not to steal a branded name. They're co pilot and they're looking at a. They're assuming that AI is going to be infused in how they do their work and that it will save not only the company's time but their time again, allowing them, you know, to work, not have to work 70 hours a week. So that's a couple of interesting dynamics there.

Speaker 3:

What so in that, if we, if we broaden that out a little bit, if I, if I'm that young smart engineer, environmental consultant and I figured out how to harness AI. I've been doing this for a long time. I have my registration to have some clients like, and I've realized like I can do so much more just on my own with AI. Why not just like leave and start a, you know, in other words, like why do I want to contribute to this firm? Why not?

Speaker 4:

just walk out the door. Yeah, I think I think we are seeing some of those pressures, but I think we started this call with welcoming the community. I think still within design firms, even post pandemic, when firms on the coast are not all in the same location with each other, there is a sense of bonding and community and that's powerful, and it's powerful enough, I think, just to prevent spin offs, maybe at the rate that that you would anticipate. I also think and I got this first of all from some of your writings, kp, and it was a year ago, I think you wrote about this that this whole AI movement initiative in our industry, the design industry, is a CEO driven initiative.

Speaker 4:

I think you use some pejoratives about instead of CEOs playing wordle and connections in the morning I'm not going to go into the gumbra with that, because that's how I start off many with a lot of design firm CEOs but instead of doing that, ceos are finding, through their peer groups, the power and potential of AI, and that's what we're seeing as well as a CEO moment. And I believe to your point about why wouldn't an engineer or scientist who's figuring out or sees the potential of AI not go out and spin off by herself. I think it's that she sees many more seeing a connection with the CEO and that's a powerful connector within the firm. So instead of good ideas being buried within the farm, we see CEOs trying to build a bridge and reconnect with where work gets done, very much like Muscat going into the factory right and looking at everything and and and. I think that's that that's a way to make the firm a little more sticky for AI geniuses.

Speaker 3:

I think it's really interesting. You know, if you talk to CEOs always say, like you know, we're a timesheet business. That's the problem, right, they seem much more interested in shifting away from being a timesheet business and the martyrdom of I work 80 hours a week Like that's how you get your bonus, that's how you get recognition is I work 80 hours week. The CEO is actually seem to be shifting that culture and the younger talent is shifting that way to say like why does it matter how many hours I, we, I work, yeah, if I'm generating, if I'm being productive and delivering the clients and value build them. I think sometimes they're like it's the middle management, it's the problem. Like they're the ones that define themselves by running departments and looking at utilization reports and you know, so much ego tied to how many people they manage and and all of that that they it feels like sometimes they're the ones that are holding on to kind of the timesheet business.

Speaker 3:

I mean, when I talk to CEOs are like, hey, help us figure out how to get out of this timesheet business. I'm open to it. You know, we create so much value and the younger generation is in the same boat, saying it would create so much value. Why do you care how many hours I work? Don't, don't give me a promotion because I worked 80 hours a week. You should ask, like why can't I get my job done? And for, like, why am I incompetent that I have to work 80 hours a week? Yeah, yeah.

Speaker 4:

So you bring up two points, I think. Number one I think the answer always seems to come back to for to validate the time seat. It always seems to come back to the public sector wants it, or your public sector clients want it and it's your, coincidentally. I was just thinking about this topic recently, about what are the impediments to getting away from the time sheet model, because this has been a bugaboo in the industry, from from our consulting work for the longest time. So I do think the public sector you know that clientele, which is the largest purchaser of design services right is is a huge impediment. There could be fixed right Paper performance definitely could address that. That kind of then runs into some QBS issues which you know the industry in it of itself that have a challenge with such number one. Number two, though, by the way, it's been a QBS being qualification based selection.

Speaker 3:

Yes.

Speaker 4:

Yeah, thank you. So it's interesting. I you know it's hard for me to admit in a public forum like this, but you know I read your LinkedIn posts.

Speaker 3:

Oh, it's just us.

Speaker 4:

You know I look forward to reading them. I look forward to reading your, your stuff, and I was. I was musing this morning. I kind of lay out the article so I'm going to write for our community.

Speaker 4:

I had a time on one of the articles I was going to write. I had it in my head was what's wrong with this industry? And I thought you know, I'm going to have to check in with KB before I write this because it's going to be a lot of blowback, but it gets to your point. What we've observed has been wrong with our industry design industry for the longest time is the layers of executive vps, senior vps and vps Right, who oftentimes you are mailing it in, or who are administrators and who have managed to stick around for 20 or 30 years by virtue of You're not making mistakes, but at the same time they haven't innovated, they haven't broke stuff to make things better, and we see that oftentimes is huge issue in the industry and I think it probably is To some degree. It's that type of hierarchical model when you're not designing anymore, you know leaving the firm you are managing.

Speaker 4:

Is an impediment to breaking out from the time sheet.

Speaker 3:

It was interesting. I was on this industry a advisory panel last week and it was all CTOs and chief innovation officers of some of the biggest firms. And so we got into this debate and I said, how many of you have to fill out time sheets? Every hand went up. And then I said how many of you have billable goals? Every hand went up. And it was like fascinating that, oh, you're supposed to build innovation, be designing our future, be doing these things, and then in between you know lunch breaks, you're working on drawings, building time, and I was just fascinated that these are some very large firms. So in the world of like, oh, we can't afford the overhead, these people can afford the overhead.

Speaker 4:

Yeah, yeah.

Speaker 3:

I wondered if their EVPs were doing the same thing. Or are they playing golf that day? You know like.

Speaker 4:

So so the on the utilization goal thing right. So so there's, you've got your axiom. Doing my best to show axes here, I've got my X axis here, my Y axis here. So my Y axis, that's put sales. You know, if I can sell a million or if I can create value of millions on this axis, and then on the X axis we might have utilization, and there's a straight line between both of those. And if you can create lots of value being a CTO or a salesperson, you should have no utilization goal whatsoever. You should just be creating value. If you're one of those people that really is, is an introvert and a great designer, then you should be 100% utilization. You got to fall somewhere along that line, yeah.

Speaker 3:

I have a friend who's a partner at a big law firm and every day to breakfast, to lunches, drinks and to dinners literally every day Like this is what this guy does, right? I never take legal advice from him. It's like I don't know the last time he's actually done legal work right, but he drives all the revenue for the fund right.

Speaker 3:

He tried and he's rewarded for it. Like I said, I would never ask him a legal question, but if I need an introduction to somebody, he definitely knows somebody and I do think there's this weird kind of seller doer model. Let's shift a little bit. You know, like innovations being thrown around in our community, we have lots of chief innovation officers, but we also have a lot of tech startups that get perplexed with. They identified a problem. Everybody agrees it's a problem. I'm providing a solution to this problem, Yet the firms don't seem to care sometimes.

Speaker 3:

We'll just use a spreadsheet, we'll just do it this way, we'll do it the old way, we'll do it with pen and paper, whatever it is, and of course, they get super frustrated. So they have to like, keep going around and talking to more companies, more companies, till they finally find someone that is, I would say, is mission aligned with them. Do you think it's just the time sheet culture, like of unwillingness to just try things with technology, or do you think it's just hey, I'm just happy. You know contentment around, I'm happy just doing my work for the way it's always been done.

Speaker 4:

So I, I, I think it's a couple of things. So so we, we and our strategy work Saw, pre pandemic, a bunch of we would work with firms where ideas were being brought up or innovations were being brought up but they were getting no traction. Why were they not getting any traction? Largely it was a reluctance on the part of the major owners employee on firms who typically were of an older demographic A to really understand the ideas, be to really trust where the ideas are coming from. Oftentimes are coming from folks who are pierced or let tattoos and didn't have the same tenure at the firm that maybe got them legitimacy. So maybe they're relatively young Combined with really not understanding the investment required and then matching that up with we need to, we need to produce, to make money. We.

Speaker 4:

We've seen a shift since the pandemic in that regard, in that, from our perspective, the balance of power is shifted to the younger generation, to the generation that is coming up with these innovative ideas. Leadership wants to hang on. Leadership wants to hang on to those folks and wants to encourage those folks. You know, in one for one reasons because you just can't find people. So you don't want to lose anybody if they're good.

Speaker 4:

But the the the challenge to taking these ideas and turning them into either internal improvements or monetizing those innovations externally. Oftentimes you find the challenges with the firm CFO, or King Sunshine, as I like to call her, or Queen Sunshine, who generally will be looking through the lens of the time sheet and of production, and so we'll look. We'll find challenges with respect to funding those types of initiatives internally, particularly if they are in conflict with producing in the short term. But then also we find that internal marketing or marketing externally in the design industry is still largely in the ice age, and so firms can't figure out, when they have these great ideas, how to communicate them internally or project them externally. So we find those two barriers.

Speaker 4:

I do think as well, though, when I believe you and I have talked about this, the innovation model or the model for tech or tech products, the balance sheets of these professional services. Firms have a real, real hard time in figuring that out or making that work, and so then you get into, are you spinning it out? Are you doing it internally? Is the same brand? Is it's different brand? It's a whole bunch of stuff that has been solved before. Right, but it's it's, it's ready, it's not in the wheelhouse of boards or CEOs in our industry, to figure those items now.

Speaker 3:

You know it's interesting. I actually just last night finished writing my book, which will be out in a couple months, and one of the things I really studied that I think specific to our industry was when the spreadsheet came out right when Lotus one, two three yeah came out right.

Speaker 3:

I mean Quattro pro right, quattro pro Lotus, one, two, three and literally people called for the death of accounting. Counting's done, spreadsheets do everything. Then the accounting software came out, you know the. Then, all of a sudden, you know you have the ERP systems like SAP and all that. And at that moment in time, kpmg, arthur Anderson, all those names, they were like these. These folks are dead, like the only thing they have had to hold on to which I think the parallel to being a professionally registered person is. Well, everyone needs a CPA, everybody has to have someone to stamp their financials, much like the narratives we have today in our industry. But then you look at that and you say Arthur Anderson is really now Accenture, which is one of the largest profession publicly traded professional services companies in the world, right in the world. And but back when Spreadsheets came out, those are the same people.

Speaker 3:

The roots of that were we have to do something different. All this technology coming, you know, in accounting math is even less complicated than engineering math and these Spreadsheets could do everything. And they figured it out right. And part of I think they figured it out was how to have a trusted relationship with the CFOs. That, as they went from Spreadsheets let me help you with your story, so let me teach you how to do those. And then they bought accounting systems. Let me implement the accounting systems for you. And then they want off and bought big ERP systems and they said the same thing, like let me help you implement it and we'll write software for you and do all these things. And I just kind of the thing as I was. You know, in my book I kind of go through all this, like to to give people a little bit of comfort, that AI being the next thing, that there is a path forward, right, this isn't, oh my gosh, you know, let's all retire now if we can. What? What do you see that parallel in Canada? A world?

Speaker 4:

well, before I answer that, let me just make a note to. I need to get our company off of word perfect, just perfect. Get off of Lotus 123, because by the sounds of it, you're saying that those, those might be out of date, but and I still I think I still can remember. You know what else I need to get us off of blackberries. Don't know what I'm gonna do with that brick breaker and my business partner, mark Goodell, and myself still talk to each other in terms of word perfect, commands backslash, whatever it might be. I'm not sure what the parallel is in the industry. I'm not sure. I think there's I three conversations for this conversation today. They all were related to AI. I will have I look at my calendar tomorrow. I've got two conversations related to AI. I look at the leads that are coming into us through our online digital marketing as a feel AI features heavily didn't feature this time last year.

Speaker 4:

I remember being in Ireland when chat GPT came out and trying to experiment it with it. Then we couldn't get off so. So everybody's trying to figure this out and I think folks are. There's it's well documented, right lots of concerns about that will do away with jobs and there's, you know, the other school of thought that will make everything easier and we'd be more productive. One of the other conversations I had earlier today with somebody who's about the same age as me I'm 60, right so I've seen a number of economic cycles in our industry and I think anyone would be foolish to think that this industry will not go through an economic cycle sometime in the future not a good one. I believe.

Speaker 4:

Our industry has largely separated itself from the larger economy for the next several years and in many ways, we've just had this golden age in the design industry since 2013 2014, when we started coming out of the recession the great recession. Every year has expanded since then, so we've had a decade of growth. Right now, it's not just a great time to be in generally, an engineer and environmental consultant, it's the greatest time. There's some challenges for architects, without a doubt, particularly in the commercial and corporate space. But my point being, I think everybody is right now seeing AI as cautiously, really optimistic, that it can help us change the industry's business model from a selling time for money to reselling a value proposition, where we're selling intelligence and expertise and faster, better, stronger, and capturing that value because the clients want it and the clients will pay for it because it's better. That's all well and good.

Speaker 4:

Now, when times are good, several years from now, when the economy takes a downturn and we as an industry, traditionally were the first ones to go into decline and were the last ones to come out of decline, you know, I don't know if you remember the days when you know you'd have firms doing warehouse distribution centers and they'd get a call and you'd get the message stop production because the economy it got south, you have to lay off 200 people. I'm really interested in, you know, a future where we've become so conditioned to AI doing so much good stuff for us and helping us be better at a time when we can't find people, to a time in the future when it's slow, we're laying people off, we're not laying the technology off, and then what happens in the cycle after that?

Speaker 3:

yeah, no, I think that I think that lines up with my point, which has been if the AEC industry thinks they're gonna build the next generation of AI, they're, they're woefully mistaken. It's not about the technology as much as it is really business model innovation. And if you're just gonna use AI to do the same thing you've been doing for a hundred years, then that's a race to the bottom and the customer, the market, will get you that bottom. So it's one of those like how do you create new businesses and new business models? You know much like Arthur Anderson did, or, yeah, kpmg. You know, pete Marwick right, that you know that all these businesses evolved and I think right now I'm seeing a lot more of like how do we do what we've normally done, just do it cheaper with AI, because we don't have the talent, and doing all this without talking to a single customer to ask customers in the market what do they actually want?

Speaker 4:

Yeah, yeah, I know that's a huge issue for you that you key. We can do all of the smart stuff internally, but if the customers don't need it, if it doesn't add value, if it doesn't solve a bunch of really important problems for a customer, then where's it going to go? I will say this as well. To that point, throughout the design industry, it's almost like it's a cottage industry now of every firm trying to figure out some innovative solution for something, whether it's internally or whether it's externally. We have all of these wonderful young minds collaborating within firms. It doesn't matter if the firm is 10 billion or 10 people. We see that everywhere. In our strategy work, we get all of these plans that we get to look at for internal innovation or disruption. Everybody's trying to do it.

Speaker 4:

I tend to believe that we're smart enough and that more and more we've got access to capital, that the design industry will figure out a limited number of technological innovations, initiatives, platforms that will allow us to work faster, better, smarter and will allow us to do more with less people and will allow us to transform the business model and, just like it was 20 years ago with them, just like it was with Revit and everything else, some firms will adapt and some firms will not, and the firms that don't, I believe they will see value destruction within those firms and whoever the owners of those firms at that time, because this will take investment. If they don't make the investment, the value is going to go to zero, whereas the firms that do adapt and do invest and take the risk will see step function in terms of valuations. But along the way I think there'll be carnage.

Speaker 3:

Now I think that lines up. I mean, even when I talk to my startups, I'm like, really get them to shift their thinking of the market doesn't know about these new business ideas and these new business models. As a startup, you're well equipped to understand what these new models could be. So, instead of selling your product as, oh, I will help you do what you've normally done, but better, cheaper, faster how about start proposing? Have you ever thought about being in this business?

Speaker 3:

It's a new business that lines up with your core business and our technology will power it Right, which is that's kind of what the SAPs and the Oracle said. They went to these accounting firms and said, hey, like we'll help you be in business, go get in the consulting business and we'll, you know, we'll power it right. And so I've really been driving our startups to stop thinking about oh, we just solve the problems that you have. Versus, let me help you build a new business that maybe you've never imagined, because, as a startup, that's all you do is you think about the things that have not been imagined.

Speaker 4:

So it's really interesting. You framed it that way because a lot of our strategy work and I'm just again, I was thinking about this recently Strategy means different things to different people and strategy means different things to different firms, depending on where they are in their growth cycle.

Speaker 4:

But ultimately, strategy for professional services from design firm, environmental consulting firm is either going to be revolutionary or it's going to be evolutionary. And a lot of the thinking, most of the thinking in our industry is how to double in five years time. And the assumption is that, even even with all the market research, even with all of the information that's coming in over the transom to these leadership teams that the world is going to change, there's huge inertia in planning meetings and planning for the future. It's huge inertia. There is really the present bias to think that, okay, I've seen all this information, let's double in size, selling what we're doing, selling right now, everyone's five years older, we'll have the next generation leadership team, but really ignoring all of the, the, the, the, the warning signs better in the outside world. And so a lot of strategy is evolutionary rather than transformational, and I think it's. It's some firms really going to get hurt by that.

Speaker 3:

Yeah, that tracks.

Speaker 3:

I'm going to let Ian jump in in a minute and kind of help with the Q&A. But I have one last thing which I think we're so like. We believe that are deliverable to a customer is plans and specs. A customer wants a building or an asset and I think sometimes we lose track of that. We're so focused on getting the report or like we don't think about what the deliverable or what our deliverables are really being used for, and until we really start having those conversations it's really hard to serve a customer. They want a building, they want to waste water treatment plan. That's what they're buying and I think we're still we're sending them plans and specs and that's what we're selling.

Speaker 1:

Thank you for tuning in to another episode on the shadow network here with KP ready as always. Remember you can connect with KP and other innovators in the AEC and CRE industry in the shadow partners community. Go to bitly slash shadow partners community to find out more today. Until next time,

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