The Principals Academy
Day One
JUNE 2022
Everything we do is in pursuit of elevating the AEC industry, bringing awareness of the incredible impact that engineers, architects, environmental professionals, surveyors, planners, landscape architects, and related professional service providers have on the world. Empowering organizations with the resources they need to perform better, grow and add jobs, pay better wages, and expand their impact on the community, Zweig Group exists to advance the profession. ZWEIG GROUP’S VISION: ELEVATE THE INDUSTRY
DIVERSIFY - CELEBRATE - CHANGE - PROMOTE - EDUCATE
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ADVISORY PUBLICATIONS LEARNING CONFERENCES
AWARDS
BEST FIRMS TO WORK FOR HOT FIRM MARKETING EXCELLENCE TRIFECTA TOP NEW VENTURE RISING STARS IN THE AEC JERRY ALLEN COURAGE
ELEVATE AEC CONFERENCE & AWARDS GALA ELEVATEHER SYMPOSIUM AEC EXECUTIVE ROUNDTABLE M&A NEXT SYMPOSIUM
SURVEY PARTICIPATION RESEARCH REPORTS BOOKS CIVIL + STRUCTURAL ENGINEERING MEDIA THE ZWEIG LETTER
THE PRINCIPALS ACADEMY PROJECT MANAGEMENT LEADERSHIP SKILLS
MERGERS & ACQUISITIONS STRATEGIC PLANNING MARKETING, BRANDING & BUSINESS DEVELOPMENT EXECUTIVE SEARCH RISK MANAGEMENT OWNERSHIP TRANSITION VALUATION
DRIVEN BY DATA WEBINAR SERIES
IN LEADERSHIP EXCELLENCE IN CLIENT EXPERIENCE
zweiggroup.com
UNMATCHED VISIBILITY AND INDUSTRY RECOGNITION Broad exposure across multiple channels
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LEADER IN RESEARCH & INDUSTRY STATISTICS Over 20 surveys published annually covering every major topic in AEC fi rms today
20+ research reports published annually covering every topic in the AEC industry
Structure & Operations
Financials & Performance
Valuation & Transactions
Culture & Benefits
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IN-DEPTH KNOWLEDGE OF FIRM ORGANIZATION & OPERATIONS Zweig Group awards provide an in-depth understanding of firms culture
2,000,000+ data points gathered annually from the top firms in AEC
Our research and awards programs yields an in-depth knowledge of the services firms provide, their full capabilities, and the people that work in those firms.
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ZG’S NEWEST PLATFORM
As a Best Firm to Work for Award program participant, access employee survey data and industry benchmarks in a new seamless platform environment
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Zweig Group Learning & Events
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Chad Clinehens President & CEO Zweig Group
Phil Keil Principal and Director of Strategy Zweig Group
Will Swearingen Principal and Director of Ownership Transition Zweig Group
Meet your Instructors In order of appearance
Principal & Director of Executive Search Zweig Group Chad Coldiron
Principal, Start 2 Rise Strategic Training and Advisory Partner Zweig Group Justin Smith
Jordan Wilson Corporate Tax Advisors
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Agenda – Day One
TITLE
INSTRUCTOR
START END
WHAT IT MEANS TO BE A PRINCIPAL
CLINEHENS
8:30
9:30
STRATEGIC AND BUSINESS PLANNING KEIL
9:30
10:30
BREAK
10:30
10:45
DRIVING FINANCIAL RESULTS
SWEARINGEN
10:45
12:00
LUNCH/TAX CREDITS
WILSON
12:00
1:00
MARKETING AND BUSINESS DEVELOPMENT CLINEHENS
1:00
2:30
BREAK
2:30
2:45
RECRUITING AND RETENTION
COLDIRON
2:45
4:30
RECEPTION
5:00
6:30
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Agenda – Day Two
TITLE
INSTRUCTOR
START END
PROJECT MANAGEMENT & LEADERSHIP FOR PRINCIPALS SMITH
9:30 10:30
BREAK
10:30 10:45
OWNERSHIP TRANSITION AND M&A
SWEARINGEN
10:45 12:00
ZOOMING OUT: LEADING SUCCESSFUL FIRMS
SWEARINGEN
12:00 12:15
LUNCH & PRINCIPALS ROUNDTABLE
ALL
12:15
1:30
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Let’s get to know each other
• Name • Firm • Role • What would you like to get out of this course?
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What It Means To Be A Principal
Principal Demographics
What percentage of principals are owners in their firms? a. 50% b. 72% c. 89% d. 95%
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The thing that binds this group together
The need to drive value
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Things you cannot directly control •Health of the overall economy •Health of your industry and that of your clients •Investment climate Things you can directly control •Your company Drivers of Value
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Drivers of Value - Company specific
Growth rate (Revenue) Financial condition/performance
Brand name Competition Quality of management and staff Diversification (size, geographic, customers) Intangible assets (marketing database, intellectual property, etc.)
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Dependence on one or a few clients Dependence on one or a few key sellers Dependence on one or a few key leaders Drivers of Value - Company specific
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What is the common element that can help with all of these drivers? Growth
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Growth rate (Revenue) Financial condition/performance Drivers of Value - Company specific ✔ ✔
✔ ✔ ✔ ✔ ✔
Brand name Competition Quality of management and staff Diversification (size, geographic, customers) Intangible assets (marketing database, intellectual property, etc.)
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Dependence on one or a few clients Dependence on one or a few key sellers Dependence on one or a few key leaders Drivers of Value - Company specific ✔ ✔ ✔
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At the highest level - what must we accomplish over the next two days?
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Enhance our ability to drive value and growth
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WHY GROWTH IS GOOD
Growth drives return on investment
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WHY GROWTH IS GOOD
Higher growth rate creates opportunities for people
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WHY GROWTH IS GOOD
Growing organizations pay more across every job category
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WHY GROWTH IS GOOD
More competitive and resilient in varying economic conditions
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WHY GROWTH IS GOOD
Growth solves problems
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Issues employees have with growth
Some see growth as a threat to the culture Seems risky due to overhead commitments Decision making must be faster and faster as the firm grows People fear change
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Ownership in AEC
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Principal Profile
22%
23%
Equity concentration
11%
Non-owner 0.1%-9.9% 10%-24.9% 25%-49.9% 50%-99.9% 100%
11%
12%
19%
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Principal Demographics
What percentage of principals are less than 40 years old?
a. 4% b. 8% c. 10% d. 15%
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Ownership in an AEC Firm
41%
Borrowed money to purchase stock.
Didn’t buy as much stock as they were offered. Principals who thought not buying all stock offered shows a lack of commitment or belief in the firm.
15%
85%
0%
25%
50%
75% 100%
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Ownership in an AEC Firm
Signed a personal guarantee for some or all of their firm’s debts.
49%
Feel that the risks and rewards of ownership are well balanced.
46%
Believe the rewards outweigh the risks.
43%
0%
25%
50%
75%
100%
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Ownership in an AEC Firm
Signed a non-compete agreement (typical 1-2 year term).
46%
Have a buy-sell agreement with their firm.
71%
Have their stock value tied to how they leave the firm.
32%
0%
25%
50%
75% 100%
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Ownership Strategies
57% of firms carry life insurance on owners
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Ownership and Leadership
Ownership should not be a seen as part of the career ladder!
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Management Issues
• 21% of principals feel there are other principals in the firm that abuse their position and do not pull their weight. • 33% of principals would NOT choose the same partners if given the chance to do it all over again.
• 62% of firms have NEVER fired or laid-off a principal in their firm’s history.
• Only 38% of principals are subject to regular performance appraisals
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Where principals spend their time
Principal Profile • On average, principals are 32% billable • Typical work week = 50 hrs • 81% frequently or occasionally work on weekends / holidays
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Organizational Structure
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8
6
3
0
1-24
25-49 50-99 100-249 250-499 500+
# of people who report to me directly
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Board of Directors Profile of AEC firms: • 66% of firms have a board of directors • Typical # of seats: 5 • Only 26% of firms have external board members • Typically meet 4 times per year
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Board of Directors What a board should do:
• Primary responsibility is a fiduciary one - to maximize return on investments for the firm’s shareholders • Governing the organization by establishing broad policies and objectives • Selecting, appointing, supporting and reviewing the performance of the CEO • Ensuring the availability of adequate financial resources
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Top challenges for principals
1.Staff recruitment and retention 2.Ownership transition 3.Business Strategic Planning 4.Business development/marketing 5.Communication and Time Management
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Characteristics of a principal - Not just for owners!
• Role model. • Responsibility is to the firm first • Honesty and a strong sense of ethics including a strong work ethic. • Discretion and confidentiality
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Characteristics of a principal - Not just for owners!
• A collaborative spirit • A desire to learn about and help the firm • Financial Literacy • Understand risk vs. reward with ability to take risks.
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Characteristics of a principal - Not just for owners! • Higher expectations for what you will contribute as a principal. • Creativity. • Excellent communication skills. • Team Mentality - can lead and be a part of a team.
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Characteristics of a principal - Not just for owners!
• Understand the importance of value creation. • Responsibility for all of the firm employees. • Big-picture thinking about the company overall
vs office / department. • Long-term thinking.
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WHAT IT MEANS TO BE A PRINCIPAL
Questions?
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UP NEXT: Strategic Planning with Phil Keil
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Strategic Planning
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High performance AEC firms are…
Executing a strategic G R O W T H plan that…
Aligned around a mission and vision and embracing a shared set of values
Effectively balancing competing pressures put on them by clients, employees, and owners.
• Capitalizes on strengths • Differentiates themselves in the marketplace • Creates and maintains a sustainable competitive advantage • Is SMART – specific, measurable, attainable, realistic, and time-bound
Operating with thoughtful policies, practices and procedures – broadly communicated and understood – that can scale without breaking
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Types of Planning
There are many planning processes. The hierarchy is presented here and how they inform each other.
Strategic Plan
► Strategic plans provide purpose and direction for accomplishing the firm’s goals in the mid-long term horizon. It focuses on values and aspirations. ► Business Plans are about the details of how the strategy is executed. How will you accomplish what you set out to do in the coming year? ► The marketing/BD plan is one component of the business plan.
Business Plan
Marketing/BD Plan
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Strategic planning: An overview
Strategy is a set of goal directed actions a firm takes to gain and sustain a competitive advantage.
A competitive advantage is always relative, never absolute. It defines the best way for a firm to create value for its stakeholders, both internal and external.
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Strategic Problem Solving: An overview
Strategy (Outcome-based) • Strategy is an integrative set of choices that positions you on a playing field of your choice so that you win. • A strategy must be coherent and doable. • Specifies a competitive outcome that you hope to achieve. Planning (Action-based) • The specific objectives that you will need to accomplish to achieve your desired position.
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Poll
What percentage of the workforce, on average, does not understand an organization’s strategy?
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Poll
What percentage of firms with a formal strategic planning process outperform their peers?
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Poll
How much more profitable are firms using strategic plans?
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Strategic planning - Just the stats
PROFITABILITY
EXECUTION
UNDERSTANDING
TIME SPENT
95%
70%
12%
86%
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Cynical? We get it.
“It’s been 5 or 6 years since we developed our plan and I’m not sure where we are on those action items”
“I have seen our strategic plan but it is 75 pages of text and I have too much to do to try and decipher it”
“We have a strategic plan, but nobody follows it”
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Why have a plan?
We need roadmaps if we are to build a legacy or purpose driven organization.
Builds a common sense of direction aligning your entire team with your firm’s vision, mission, values, goals, and culture. Guides your future helping make the firm more sustainable, able to withstand market fluctuations and other “threats.” Reduces the stress of owning and operating a business enabling the firm to maximize resources and avoid wasting time, effort, and money on activities that are not profitable, or are holding the firm back.
Builds confidence with lenders, creditors, investors, and employees. Trains employees in how your business operates and makes money.
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Strategic & Business Planning research
• Definition of markets being pursued. • Client research.
• Competitive research. • Employee research. • Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis. • Financial modeling (pro formas, balance sheets, cash flow, stock value). • Org charts. • Realistic budgets for everything from recruiting to training. • Other back up materials and exhibits.
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STRATEGY
RULES OF THE GAME
OBJECTIVES
ANALYSIS
H C S W
SUCCESS CRITERIA
FIELD OF PLAY
WHERE WILL WE PLAY?
HOW WILL WE WIN?
SKILLS
STRUCTURES
CAPABILITIES
SYSTEMS STRUCTURES
CAPABILITIES SYSTEMS
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5 Strategic Planning Frameworks
• The balanced scorecard – great for larger organizations who want to ensure their goals cover the main aspects of a successful business. • The Ansoff Matrix – great for organizations who are about to embark on an aggressive growth strategy and need help defining their plan of attack. • McKinsey’s Strategic Horizons – Great for organizations who have decided that innovation is a crucial part of their strategy. • Value Disciplines – Great for organizations who are looking to fundamentally reposition themselves in their marketplace. • The Stakeholder model – great for organizations where stakeholders are the core of what they do, such as non-profits.
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Strategic problem-solving framework.
What is the problem that we need to solve to advance our strategy?
Problem Statement – What is the problem and why is it important? Vision – Why do we exist? Mission - Our core purpose. What are we doing to achieve our vision? Values - How do we do things? Unwavering principle’s that through action define our culture. Objectives - statements that indicate what is critical or important in your organizational strategy. Strategies - What are the basic philosophies that guide us in critical business areas? Initiatives - What are we going to do? Specific programs, procedures, or processes. Goals – How will we measure performance? Actions - Who, what, when, where, why, and how?
The leadership lens : What are the rules that govern our behaviors?
Solution framework: Which field do we want to play on and how can we build it? Strategic Direction 1. Where to play 2. How we will win 3. Capabilities needed 4. Management systems 5. Achievement logic
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Strategy framework
Strategic Objectives
Long term, broad objectives Typically focused on one key domain
High level “philosophy” that drives decision making in the immediate term.
Strategies
Specific programs or processes to advance a strategy or achieve a strategic objective
Initiatives
Specific steps taken to advance toward achievement or the initiative
Actions
• Vision • Mission • Values
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The framework in action
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Zweig Group’s MVV
To be the leaders in driving performance and purpose for the AEC industry MISSION
VISION Elevate the industry
CORE VALUES Remastering is our mantra : Lead with curiosity, choose to be gutsy, make a difference Hustle is our method : Forge your own way, step up and own your actions, figure shit out Grace is our way : Celebrate often, remain open, be politely persistent
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Vision
Definition: An aspirational description of what an organization would like to achieve or accomplish in the mid-term or long- term future. It is intended to serve as a clear guide for choosing current and future courses of action. In other words, A vision statement is an articulation of a view of the world that your company and your people are working towards (A just cause/purpose), not what they are expected to do now. It is a vivid picture of where you are headed to motivate others to take that journey with you.
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Vision
“Dominate the day to create tomorrow”
“We will be a highly respected national design firm consistently providing leadership, expertise, innovation, and entrepreneurial thinking.”
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, governments are instituted among Men, deriving their just powers from the consent of the governed…”
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Mission
Definition: A written declaration of an organization's core purpose and focus that normally remains unchanged over time. Properly crafted mission statements (1) serve as filters to separate what is important from what is not, (2) communicate a sense of intended direction to the entire organization. In other words, this statement is intended to describe what we are doing to achieve our vision. The difference in the two being that the vision is a description of an end state and the mission is what we are doing to get there.
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Mission
“Make the world a better, safer place.” -Miyamoto International
“Provide a culture that inspires people to deliver exceptional results.”
“Building and connecting our communities.”
“We the People of the Unites States, in Order to form a more perfect Union, establish justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”
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Values
Unwavering principles that infuse culture with purpose or fundamental beliefs that guide a person's decisions.
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Best of intentions, but incapable
Very best chance of winning
THE BEST COMPANIES ARE THE BEST ALIGNED
Strategy must be in sync with mission, vision AND organizational capabilities
Not long for this world
Boldly going nowhere
NOT ALIGNED
ALIGNED
Alignment of strategy with organizational capability?
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Strategic Problem Solving
“At its core, Strategy means choosing to do some things and not others.” - Roger Martin Professor of Strategy Harvard Business Review Contributor
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Strategy framework
Strategic Objectives
Long term, broad objectives Typically focused on one key domain
High level “philosophy” that drives decision making in the immediate term.
Strategies
Specific programs or processes to advance a strategy or achieve a strategic objective
Initiatives
Strategic Advantage
Specific steps taken to advance toward achievement or the initiative
Actions
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Strategic Objective
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The Balanced Scorecard
A framework for identifying, measuring, and improving performance through a simplified reporting tool.
The core financial performance data that demonstrates the company’s financial performance. FINANCIAL PERSPECTIVE
A representative measurement of customer sentiment when working with your company. CUSTOMER PERSPECTIVE
Measurement of the efficiency and effectiveness of the processes through which your services are delivered. BUSINESS PROCESSES
Measurement of the effectiveness of the company’s ability to develop and retain talent. LEARNING AND GROWTH
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Strategies
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Goals – SMART and DUMB
▶ SMART - Specific, Measurable, Achievable, Relevant, and Time Bound. ► “Win ‘Best Firm to Work For’ each year.”Values - How do we do things? Unwavering principal’s that through action define our culture. ► “40% of revenue from non-land/site development in 5 years.” ► “Client feedback study shows ‘responsiveness’ score of 4.5/5.0 each year.” ► “Develop a firm-wide training program tied to career progression with a budget in 2019 to implement by Q2 2020.” ► “Win two national design awards annually.”
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Actions
► The single most important thing you can do to affect change and to advance your firm is execution. That’s where the actions come in. ► As a leader, you must play a role in this and aid the CEO in the execution of your strategic plan (so you better know what it is). ► This is the weakest part of the strategic planning process.
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A tool
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Strategic plans should be growth campaigns
Marketing supports and promotes the plan
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Implementation Science
Prism, EPIS, CFIR, Behavioral Theories, Diffusion of Innovation, Organizational Readiness for Change…the list goes on.
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Change Management Models
MODEL
DESCRIPTION
BENEFITS
LIMITATIONS
PURPOSE
Steps to encourage new behaviors for successful organizational change Strategies for managing the emotional transitions of change
Lack of measurement processes and time consuming
Kotter’s Change Management Model
Provides an eight step, actionable checklist
Organizational change management model
Includes a step by step guide to foster emotional acceptance
Not a framework for operational change
Organizational change management model
Bridges Transition Model
Model to define the change adoption timeframe
Defines a timeline for workforce change acceptance
Not a framework for operational change
Organizational change management model
Rogers’ Tech Adoption Curve
Model based on the emotional journey - five stages of grief
Most change frameworks address these stages
No clear guidance on operational change
Individual change management model
Kubler-Ross Model
Five step process: Awareness, Desire, Knowledge, Ability, and Reinforcement Seven structural model that focuses on holistic approach to change
Rewards individual change in organizational change process
Cumbersome process for large organizations
Individual change management model
Prosci ADKAR Model
Provides guidance and focuses on the whole organization
Organizational change management model
McKinsey Model
Very complex
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Change Management Models
MODEL
DESCRIPTION
BENEFITS
LIMITATIONS
PURPOSE
Method advocating the benefits of behavior modification Individual leadership development through adopting better habits Model for improving family relationships Techniques and examples on three interconnected elements of change Six steps - Envision, Activate, Support, Implement, Ensure, and Recognize An ongoing process advocating “plan, do, study, act” Three steps - unfreeze, change, and refreeze process of change
Positive reinforcement method to drive individual change More leadership within rank and file to drive organizational change
Depends on a custom response to each change circumstance No framework for operational change
Individual change management model
Nudge Theory
Individual change management model
Stephen Covey’s Model
Focus on the family as a unit rather than individuals
No framework for operational change
Individual change management model
Virginia Satir
Good overview/stories for modeling change
No framework for operational change
Individual change management model
Switch Framework
Checklist on operation and emotional elements to organizational change Structured framework for organizational change Simple steps to combat emotional resistance and opposition
Relies on leadership effectiveness and response No process to factor emotional resistance or opposition forces No mechanism for ongoing change
Organizational change management model
EASIER Model
Organizational change management model
Deming Cycle
Organizational change management model
Lewin’s Model
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Leadership Variables in Strategy Implementation
Dependent Variables Success Criteria:
Independent Variables
Communication Leadership Style Interpersonal Characteristics Innovation
Time Cost
Quality Scope Team
Moderating Variables
Conflict Management Change Orientation Self-monitoring
Organizational Structure Organizational Incentives Organizational Management Maturity
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Executing your plans effectively
► Be open to change – Unless firm leaders are sufficiently open and willing to consider all options, nothing will get done. ► Think and act holistically – Always have the big picture in sharp focus and have it lead your daily actions. ► Be nimble – Be willing to adjust along the way when new environmental conditions (political, market, competitive, etc.) or data suggest to do so. ► Develop a system and process – ensure that you approach the build and implementation in a structured way. ► Local ownership – push accountability, decision making, and implementation authority as far down the org chart as possible. ► Use the plan often – Everyone needs to know it and understand it.
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What you should be doing today ► Know everything in your strategic plan. ► Make business planning a yearly activity. ► Set goals, track results, share information, and continually make changes based on the data. ► Use planning documents and goals in reviews/meetings. ► Rethink everything continuously. ► Grow with intention!
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Phil Keil Principal | Director of Strategy
Questions?
pkeil@zweiggroup.com
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Up next: Driving Financial Results with Will Swearingen at 10:45
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Driving Financial Results
1. Financial literacy –speaking the language of business 2. Finance and accounting departments –personnel and tools 3. Driving financial performance in your AEC firm 4. The Contract to Cash process
Financial Management
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Why do you need to know this?
Finance and accounting is the language of business Principals are business people–not just technical people Proper internal controls require that not just the finance and accounting staff understand the numbers
The business of architecture and engineering supports the profession of architecture and engineering
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FINANCIAL LITERACY
Financial Statements
The three main financial statements: • Income Statement • Balance Sheet • Statement of Cash Flows They are used by: • Management and Board of Directors • Lenders
“We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!” Well, that’s what financial statements do. They show you the money. They show you where a company’s money came from, where it went, and where it is now.”
From the US Security and Exchange
Commission’s “Beginners Guide to Financial Statements”
• Creditors • Investors
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Income Statement
Guiding Principles Revenue is recognized when the activity that generates it is fully or essentially complete. (this is a complicated topic) There must be a level of certainty that payment will be received. Expenses associated with the revenue should be booked to the same time period Expenses are costs that have a short period of economic benefit. (this is a complicated topic too)
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• Revenue (Sales, or Income) • Expenses • Net Income (Profit) (= Revenue – Expense)
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The income statement describes activity over a period of time
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Income Statement Cont.
Income statements look different for different types of companies For AE firms, most are constructed similar to this
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Income Statement Cont.
Net service revenue (NSR)
•Many firms use the services of specialty sub-consultants •Typically, firms bill the services of the sub-consultants to the ultimate client. •NSR is the revenue of a firm that is attributable to the effort of its own employees. Direct and reimbursable costs are those expenses that can be specifically attributed to a project. Examples include
•Direct labor: employee time that has been associated with a client project •Meeting travel, report reproduction
Indirect costs are those that cannot be specifically attributable to a project. They are also referred to as overhead costs. Examples include:
•Indirect labor: employee time that is not associated with a client project •Corporate insurance •Team building events
“People Costs” represent more than 60% of the total costs of an AEC firm
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Balance Sheet
Guiding Principles 1. Assets are “things” that the company owns that have economic value (cash, property, equipment, patents, etc.) 2. Liabilities are moneys owed to others 3. Net worth is what would be left over if the business owner sold all of the assets and paid off all of the liabilities
Assets Liabilities Shareholder Equity (Net Worth)
The balance sheet shows the financial position of a company on a certain date
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Balance Sheet
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Balance Sheet Cont.
• Assets inside AEC firms are mostly Cash, Accounts Receivable (money owed by clients) and Work In Process (WIP, or the $ value of work completed by not yet invoiced to clients) • Fixed Assets include computers and software. Some AE firms do have meaningful equipment inventories
• Liabilities generally small • Accounts Payable (AP, money owed to vendors, including sub- consultants) • Maybe some debt
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Statement of Cash Flows
Reports on the flow of CASH that results from: • Operating Activities (the business) • Investment Activities (buying assets with future economic benefit) • Financing Activities (creating liabilities) Prepared using either:
• Direct method • Indirect method
CASH FLOW IS A DISTINCTLY DIFFERENT CONCEPT FROM ACCRUAL ACCOUNTING
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Statement of Cash Flows Cont.
• The indirect method starts with Net Income from the Income Statement and derives the change in Cash from adjustments needed based on income statement accounts and balance sheet changes • Understanding the difference between accrual accounting and cash accounting is important
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Accrual accounting - recognizes revenue when earned or billed and expenses when incurred or billed . Cash basis accounting - recognizes revenue when collected and expenses when paid . METHODS OF ACCOUNTING
JANUARY 1
THROUGHOUT YEAR
NOV 30
A firm is founded and capitalized with $500,000 of the founder’s own money
The founder hires people and works on a client project. The firm spends $490,000 on payroll and other things
The firm invoices its client in the amount of $750,000!
The firm shows an accrual-based profit for the year: $750,000 in revenue and $490,000 in expense = $260,000 in profit! On a cash-basis, the firm showed a loss of $490,000! The client hadn’t paid the invoice by Dec 31. With $10,000 in the bank, what is the founder going to do?
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DISCUSSION
What does “revenue” mean at your firm?
• When you charge time to the job? • When you invoice?
• When you get paid?
What financial information is shared with you and the other members of your firm?
DID YOU KNOW? 82% OF ZWEIG GROUP’S “BEST FIRM TO WORK FOR” WINNERS SHARE REVENUE DATA WITH ALL EMPLOYEES, COMPARED TO 23% OF ALL AEC FIRMS OVERALL.
ORGANIZING THE FUNCTION
Things to be done
There is a lot to be done… • Time/hours must be tracked • Client invoices need to be generated, and payment there of tracked • Inbound bills need to be processed and paid • Employees need to be paid • You need to know how much cash you have so you don’t run out • You have to complete income tax returns (federal, state, local) • You have to comply with a host of other administrative details that require financial information Insurance Business licenses Government procurement The larger the firm, the more there is to do, and the more complex many of those things are
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Growing the finance & accounting functions
100-250 Total Staff
< 50 Total Staff Accounting and finance function handled by small staff with high level of Principal and PM involvement
50-99 Total Staff
Financial management and accounting break out Firms are adding a CFO
Firms start adding a Controller
Taking on some debt Considering merger & acquisition activity
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Roles & Responsibilities
Billing, AR and collection staff – billing and collection, project contract management. AP staff – payments to vendors and sub- consultants. Payroll staff – handles payroll. Accounting manager – general ledger. Controller – manages accounting staff, responsible for historic reporting functions. Treasurer – manages staff responsible for the management of cash CFO – financial strategy of the firm, banking and credit relationships, capital structure.
Accounting focuses on historic review and nuts and bolts of running a business.
Financial management focuses on predictive measures and goals
Strategic financial management is the link between daily activity and overall firm direction.
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The financials themselves are also organized
“Profit Centers” are the units of the business that management expects to contribute to the bottom line (profit) of the company. Revenues and expenses are tracked for the profit centers. There are many ways to organize profit centers inside a company’s financial system. Geographic profit centers (Dallas, Fort Worth). Market sector profit centers (education, healthcare, airports). Discipline-based profit centers (civil engineering, mechanical engineering). Understanding how your firm is organized financially can tell you a lot about incentives, pressures, etc.
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DISCUSSION
How big is your finance and accounting department? How does your company organize itself financially? What finance and accounting system does your firm you use?
DID YOU KNOW? 82% OF THE FIRMS RESPONDING TO ZWEIG GROUP’S FINANCIAL PERFORMANCE SURVEY USE A DELTEK SYSTEM (VISION, VANTAGEPOINT, OR AJERA). 7% USE QUICKBOOKS
DRIVING FINANCIAL PERFORMANCE
Excellent financial performance is a team sport
The challenges: • Getting the staffing leverage right • Calibrating the company financially in other ways • Getting the cash to flow Driving the “get the work, do the work, invoice the work, collect cash for the work” cycle • Allocating capital wisely – creating value Remember, the business of AE supports the profession of AE
Everyone has a role to play in delivering desired financial outcomes And everyone should benefit from excellent financial performance
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Staffing leverage
Core tenets of leverage models:
• Clients want their problems solved consistent with how they view its complexity • People want careers • Work should be done at the most junior level practical to drive business performance
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Calibrating and Monitoring Performance
Operating metrics • Net Multiplier
• Utilization • Overhead
Income Statement
• Revenue Factor Profitability metrics • Pre-tax, pre-bonus profit on NSR • EBITDA Liquidity metrics • Current Ratio • ACP Growth and Predictive metrics
Balance Sheet
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The fundamental determinants of profitability
Net Multiplier Utilization Overhead Revenue Factor Revenue (NSR) Direct Labor Indirect Labor Other Expenses Total Expenses Net Income (Profit) Profit % on NSR
3.00 60.0% 150.0% 1.80
• Net Multiplier • Utilization • Overhead
$ $ $ $ $ $
10,800,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 1,800,000.00 16.67%
• Net Service Revenue • Direct Labor Cost • Indirect Labor Cost • Other Expense
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Net Multiplier
Net Multiplier = Net Service Revenue Direct Labor Cost
• The actual mark-up that firms achieve on direct labor costs. • Most firms have a target multiplier – their standard billing rates are constructed using it. • The income statement shows realized Net Multiplier. • High net multipliers are signals of pricing power and fee discipline
Fast Growth Firm Median
Very High Profit Firm Median
2018 2019 2020 2021 2022
Survey Median
3.15 3.34 3.25
3.08 3.17 3.09 3.02 3.15
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Utilization (or Chargeability)
Utilization = Direct Labor Cost All Labor Cost
• The ratio of direct labor cost to all labor cost • Includes the indirect labor cost of traditionally “non-billable” personnel. • Influenced by not only the utilization of project staff, but the number of (and compensation of) those non-billable staff.
Fast Growth Firm Median
Very High Profit Firm Median
2018 2019 2020 2021 2020
Survey Median
59% 60% 62%
62% 60% 62% 61% 59%
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Revenue Factor
Revenue Factor = Net Multiplier x Utilization = NSR / Total Labor Cost
• A hybrid metric • Recognizes that – for a given number of staff people – there are two ways to increase profitability all other things being equal • Have everyone work more billable hours (increase utilization) • Charge more for each hour (increase net multiplier)
Fast Growth Firm Median
Very High Profit Firm Median
2018 2019 2020 2021 2022
Survey Median
1.89 1.97 2.14
1.84 1.86 1.90 1.80 1.89
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Overhead
• The ratio of indirect costs (including labor) to direct labor cost • Can include bonus expense – useful to measure including and excluding • Data below excludes bonus expense from calculation Overhead = Total payroll exps+G&A overhead+Indirect Labor Cost Direct Labor Cost
Survey Median Very High Profit Firm Median 165% 177% 162% Fast Growth Firm Median
2018 2019 2020 2021 2022
167% 164% 159% 144% 165%
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-Multiplier, Utilization, and Overhead are the dials you turn to calibrate profitability. -Your multiplier is limited by the competitive environment you’re in – it’s not practical to think you can charge as much as you’d like -Utilization and Overhead
Generating Accrual Profits
Increase Net Multiplier and Utilization by 5%
Increase Net Multiplier by 5%
Increase Utilization by 5%
Base Case
Net Multiplier Utilization Overhead Revenue Factor Revenue (NSR) Direct Labor Indirect Labor Other Expenses Total Expenses Net Income (Profit) Profit % on NSR All Labor
3.00 60.0% 150.0% 1.80
3.15 60.0% 150.0% 1.89
3.00 63.0% 138.1% 1.89
3.15 63.0% 138.1% 1.98
$ $ $ $ $ $
$ $ $ $ $ $
$ $ $ $ $ $
$ $ $ $ $ $
10,800,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 1,800,000.00 16.67% 6,000,000.00
11,340,000.00 3,600,000.00 2,400,000.00 3,000,000.00 9,000,000.00 2,340,000.00 20.63% 6,000,000.00
11,340,000.00 3,780,000.00 2,220,000.00 3,000,000.00 9,000,000.00 2,340,000.00 20.63% 6,000,000.00
11,907,000.00 3,780,000.00 2,200,000.00 3,000,000.00 9,000,000.00 2,907,000.00 24.41% 6,000,000.00
$
$
$
$
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Profitability Metrics
EBITDA, defined as earnings before interest, taxes, depreciation, and amortization, is a metric used to evaluate a company’s operating performance. It can be seen as a proxy for cash flow. It adds those four items back to a firm’s net income
Pre-tax, Pre-bonus Profit Margin on NSR
Survey Median Very High Profit Firm Median 16.0% 23.2% 24.9% Fast Growth Firm Median EBITDA Margin on NSR Survey Median Very High Profit Firm Median 17.0% 24.1% 27.2% Fast Growth Firm Median
2018 2019 2020 2021 2022
12.7% 13.9% 15.0% 15.6% 16.0%
2018 2019 2020 2021 2022
14.2% 16.3% 16.7% 16.3% 17.0%
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Current Ratio
Current Ratio = Current Assets Current Liabilities
• The current ratio measures the ability of the firm to meet its short-term (less than one year) current liabilities with the conversion of current assets (including accounts receivable, work in process, and cash). It is the measure of the firm’s liquidity. — the higher it is, the greater the ability of the firm to meets its obligations and withstand a decline in revenue (and future cash flow)
Fast Growth Firm Median
Very High Profit Firm Median
2018 2019 2020 2021 2022
Survey Median
3.41 4,25 3.41
2.83 2.51 2.45 2.64 3.40
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Average Collection Period
ACP ( or DSO) = Accounts Receivable
Annual Gross Revenue/365
• Measures how quickly revenue is turning into cash • Expressed in terms of days (metric is also called Days Sales Outstanding (DSO) • Using trailing 12 months revenue keeps number current
Fast Growth Firm Median
Very High Profit Firm Median
2018 2019 2020 2021 2022
Survey Median
81
91
83
77
70
70
71
81
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Growth & Predictive Metrics
Firms typically measure growth rates of revenue, net service revenue, and profit They also peer into the future Backlog – the dollar value of work under contract but not billed. What do we know is in front of us? Prospective project pipeline / leads / sales funnel. What else do we think is in front of us?
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DISCUSSION
What metrics do you have regular access to? What metrics are particularly important to you or your firm? Do you know what your firm’s revenue and profitability targets are?
DID YOU KNOW? IN 2021, FIRMS WERE TARGETING PROFIT MARGINS BETWEEN 10% (LOWER QUARTILE) AND 16% (UPPER QUARTILE). THE MEDIAN PROFIT MARGIN TARGET WAS 13%.
CONTRACTS TO CASH
Getting the cash to flow
A firm can be structured to create profits – but not generate enough cash to actually pay for things. You cannot run out of cash The process of turning people’s time into a cash collection is one (or should be one) of the most important processes at your firm.
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How does a project become cash? • Orders/jobs are booked • Work is performed or subbed out • Work is completed • Timesheets are submitted • Invoices are generated • Invoices are approved by project managers • Invoices go out • Invoices from subs come in
• A/R is booked for the invoices from firm to the client • A/P is booked for the invoices to firm from subs • Cash is collected from the client • Subs are paid, firm is paid, and we move on to the next project!
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Managing the cash to flow
• Working capital is a metric that represents operating liquidity. It includes current assets such as cash, AR, WIP, minus other current liabilities.
• Getting billings out the door faster and collection of accounts receivable are the most important elements of managing cash flow for the typical firm.
• Reducing your firm’s average collection period begins at home (meaning stuff you can control!), including managing scope, time sheets, reviewing billable vs unbilled time, speeding up the invoice draft/approval process, bringing more NSR in house vs subbing it out, and improving WIP.
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The project to cash process
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Doing the work – Managing staff and sub-consultants and delivering output
Generating Invoices –
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Timesheets, Sub invoices, Drafts, Finals
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Contracting
Contracting – Establishing Scope , Fee, Schedule and Payment Terms
Generating Invoices – Timesheets, Sub invoices, Drafts, Finals
Doing the work – Managing staff and sub-consultants and delivering output
Collecting Payment - Diligent, persistent follow-up
Paying Sub-consultants
Weak contract language and scope definitions set your project up for problems before you even get started. A tight scope makes it easier to identify out of scope requests and allow you to protect your margins and provide a consistent client service approach. Make project descriptive language tight and consistent in all forms of communication –proposals, interview, contracts, team meetings, project reports, etc. Clarify the billing process right up front. Who gets invoices? What format does the client require? What other requirements exist (like registering as a vendor or using a portal). Get those details into your billing system. Ask for retainers – especially from new clients. You won’t get one if you don’t ask.
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