TZL 933

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HR | FINANCE S U P P L E M E N T S Pages 9 - 12

O c t o b e r 3 1 , 2 011 , I s s u e 9 3 3

E D I T O R I A L

T R E N D L I N E S Group insurance stable

Growth AND profitability in the coming year Mark Zweig offers three strategies to attain both. I t seems to me that many – if not most – companies in our business today have given up on the idea that they can grow in this economy. Instead, they are all focusing on making a profit and maintaining their cash position – even if that means no growth. On one hand, this strategy makes perfect sense. Growth WITHOUT profitability and good cash flow can ruin your business. It is a fundamentally unsustainable position unless you are in a business like Pandora Radio or some other Internet-related entertainment or social media enterprise. For the rest of us, we have to make a profit and we have to maintain a decent cash flow. We don’t want to run out of money or jeopardize our credit facilities. Profits are essential. On the other hand, growth is essential, too. Employees expect –

in fact, they DEMAND opportunity (at least the best of ‘em do). Just try providing that opportunity in a stagnant or declining revenue scenario, not to mention management and ownership. We need to keep them motivated and

$5,500 $6,000

$3,000 $3,500 $4,000 $4,500 $5,000

Mark Zweig

2007 2008

2009 2010

2011

F I R M I N D E X ADD Inc.................................................................. 5 Baskervill............................................................... 5 Bernardin, Lochmueller and Associates, Inc......... 3 Buck Engineering................................................. 11 Degenkolb Engineers............................................. 2 GATE LLC................................................................ 9 JMA Architecture Studios................................... 11 JQ Dallas LLP......................................................... 8 Michael Baker Corporation. ................................ 11 Perkins+Will. ..................................................... 2, 5 RBF Consulting. ................................................... 11 The LPA Group..................................................... 11 TLC Engineering for Architecture.......................... 5 It should be no surprise that with the rising costs of healthcare, A/E firm spending on group insurance has been on a steady increase during the last few years. According to ZweigWhite’s 2011-12 Operating Expenses Survey, monthly group insurance costs per employee have climbed from a low of $4,340 in 2007 to a four-year high of $5,630 in 2010. This year, however, saw a slight decrease to $5,613. – Margot Suydam, Survey Manager 2011 AEC Mergers and Acquisitions Summit Date: Dec. 1 - 2 Where: Palm Beach, Fla. www.zweigwhite.com/events/ mergers/index.asp

keep them fresh. Growth is the best way I know of to ensure that we are addressing our managers’ needs, too. So let’s get back to now – late 2011. The year was about like 2010 – maybe a little better at the beginning of the year and a little worse now. No one thinks 2012 is going to be a whole lot different. How can you grow and still be profitable? Here are some ideas to consider: 1) Reallocate your marketing dollars. Maybe now is the time to take a fresh look at all of your sectors, marketing activities and budgets. Whenever I recast marketing expenses by market sector in an A/E firm, I usually find that what they sell the most has the lowest marketing costs as a percentage of revenue, and what they sell the least of has the highest. There may be some reasons for this to happen, but by and large, the opposite scenario will make more sense. Throw gas on the fires that are burning and stop wasting it on markets that aren’t buying. And maybe the activities have to be different, too. More e-blasts, more webcasts and webinars, more seminars for clients

See Mark Zweig, page 2

Growth WITHOUT profitability and good cash flow can ruin your business.

The secrets to staying Hot in chilly economy

I N S I D E

xz top player: Former banker leads firm to success. Page 3 xz Best firm: The ‘GATE’-way to education and retention. Page 9 xz M&A Profile: Like having a big brother. Page 11

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T H E V O I C E O F R E A S O N F O R A / E / P & E N V I R O N M E N TA L C O N S U LT I N G F I R M S

THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

A/E BUSINESS NEWS

RESOURCES Guide to ownership transition: Ensuring a successful transition of firm ownership requires an understanding of all the options available, careful preparation and long-term planning. Unfortunately, truly useful industry- specific information is difficult to find, and ill-informed advisors with ulterior financial motives abound. Finally, there is a comprehensive guide to ownership and succession planning developed specifically for firms in the architecture, engineering and environmental consulting industries. The Insider’s Guide to Ownership & Succession Planning for Architecture, Engineering & Environmental Consulting Firms provides detailed information about all the options available for ownership and succession planning, as well as real- life examples of firms both large and small that have successfully made the transition. Rather than being authored by one or two individuals, this guide represents the collective experience of over a dozen experts. The Insider’s Guide to Ownership & Succession Planning also contains 10 detailed case studies of A/E and environmental consulting firms of various types and sizes that have successfully executed ownership transition and succession plans. For more information or to buy a copy, call 800-466-6275 or log on to www.zweigwhite.com/zw-744.aspx.

Mark Zweig , from page 1

– along with better sales training – are some of the ways I would be spending my marketing dollars today. 2) Consider mergers with other, similar-sized firms in similar financial condition. BUYING may be hard now. Cash is tight and there’s a dearth of sellers, as many are waiting to recover the “value” they lost over the last three or four years of weak financial performance. Merging with another healthy firm is a different matter. Sure, there can be a loss of control as the “other guys” won’t be subject to your absolute control like they would be in an acquisition. But so what? Maybe merging is a better way to grow. A healthy company probably has competent managers and decent systems. And maybe there will be some combined synergies and cost savings to be had. Consider it. 3) Be more selective than ever about who stays on your team – and be more demanding of them once you’ve decided they’re worth keeping. This is essential. It is an employer’s market. You cannot afford to have anyone who is careless, sloppy, or less than 100 percent committed. Just doesn’t work in this economy. Nor can you afford managers who don’t get the job done, make excuses for poor performance or complain constantly. My experience is that many complaints, while justified, cease being constructive and instead become irritating IF solutions aren’t served up along with them. Do some recruiting of raw talent. You have to infill at the bottom. But be selective and only hire the very best and brightest! When you cut through all the discussion about what it takes to be successful in this economy, it makes me think of the pop culture management book of a few years back, Who Moved my Cheese? That book can be summed up in nine words: “What used to work yesterday probably won’t work today.” I just saved you from buying and reading the book – believe me, that’s the entire point of it. It’s a worthwhile idea, nevertheless! Mark Zweig is the founder and CEO of ZweigWhite. Contact him with questions or comments at mzweig@zweigwhite.com .

Haiti partnership: Build Change, the international, non-profit, social enterprise that designs earthquake-resistant houses in developing countries, has partnered with Degenkolb Engineers (San Francisco, CA), a leading structural design engineering firm, to provide technical assistance and training services to the Government of Haiti following the devastating Jan. 12, 2010, earthquake. Build Change and Degenkolb have been working with the Haitian Ministry of Public Works, Transport & Communications, to help increase its capacity to rebuild after the magnitude 7 earthquake left over 200,000 dead, displaced more than 1 million residents, and destroyed more than 80 percent of the country’s main capital of Port-Au- Prince and its surrounding towns. After an initial feasibility study on why so many buildings collapsed, Build Change signed a Memorandum of Agreement with MTPTC, agreeing to provide them with technical assistance, training services, culturally- appropriate para-seismic building codes, as well as inspection checklist systems that work for a government constrained by insufficient infrastructure, budget, time and skilled personnel. To help develop these systems and technical resources, Build Change partnered with Degenkolb Engineers, which has extensive expertise in the seismic performance of masonry structures. Product label launched: Construction Specialties and Perkins+Will (Chicago, IL) revealed the industry’s first building product transparency label detailing the complete make-up of a product, highlighting critical lifecycle information and potential human health impacts. This intensive effort, launched at Greenbuild 2011 in Toronto, is a collaborative step toward market transformation through increased disclosure on the part of building product manufacturers. C/S and Perkins+Will identified the industry need for such a product label based on the belief that chemicals generally harmful to humans, animals and the environment should be avoided in building products when there are reasonable alternatives. Designed to make environmental and health disclosure easier for any manufacturer who chooses to adopt the template, the label offers a forthright declaration of the make-up of a product and its potential impacts in multiple formats. Information is available at http://transparency.c-sgroup.com. The label identifies general product information, product content, ecological benchmarks, packaging information, the design process that went into the product and information on the product’s recyclability.

38West Trenton Blvd., Suite 101 Fayetteville, AR 72701 Mark Zweig | Publisher mzweig@zweigwhite.com João Ferreira | Managing Editor jferreira@zweigwhite.com Julie Kyle | Editor jkyle@zweigwhite.com Christina Zweig | Staff Writer christinaz@zweigwhite.com Tel: 800-466-6275 Fax: 508-653-6522 E-mail: info@zweigwhite.com

Online: www.thezweigletter.com Twitter: twitter.com/zweigwhite Blog: zweigwhite.blogspot.com Published continuously since 1992 by ZweigWhite, Fayetteville, Arkansas, USA. ISSN 1068-1310. Issued weekly (48 issues/yr.). $475 for one-year membership, $775 for two-year membership. Article reprints: For high-quality reprints, including Eprints and NXTprints, please contact The YGS Group at 717-399-1900, ext. 139, or e-mail TheZweigLetter@TheYGSGroup.com. © Copyright 2011, ZweigWhite. All rights reserved.

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© Copyright 2011. ZweigWhite. All rights reserved.

THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

TO P P L AY E R

Former banker leads firm to success

Michael Hinton says failure is a motivator, but only if you learn from it. K nowing thy banker has never been as important as it is now in the A/E/P and environmental consult- ing industry; something that will likely turn many firm leaders green with envy of Michael Hinton. Hinton, the president of Bernardin, Lochmueller and Associates, Inc.

duct weekly “rounds” where we share information about active and pro- spective projects and clients. We share problems and invite our teammates to offer thoughts and suggestions. It’s our way of reminding everyone that they are not in this alone. TZL: What is it in your DNA that drives you to success? Is it audac- ity and risk-taking; a can-do at- titude and a relentless pursuit of perfection; something else more abstract? MH: The greatest driver for me is the knowledge that hundreds of individu- als and families (including my own) de- pend upon me and BLA to be success- ful in order to allow them to pursue and enjoy the things that bring them happi- ness. I grew up playing team sports and I found great motivation in the notion that there were others depending upon me to do my job well in order for the team to succeed. TZL: In today’s difficult business climate, what does it take to suc- ceed? Is the spectrum of failure a motivator? MH: The spectrum of failure is, in- deed, a great motivator; but only if we keep failure in perspective and use it to guide us to success. Several years ago, I presented the commencement speech for a local college graduating class. I ti- tled the speech, “The Monumental Un- importance of Failure.” It referred to the fact that the most successful people of all time were also the most frequent “failers” of all time. Examples are Lin- coln, Edison and Babe Ruth. The differ- ence was that they used their failures as a roadmap to know what to avoid and to point them to success. They were never defeated by failure. The biggest reason that BLA is the successful com- pany it is today is that Keith Lochmuel- ler simply refused to accept that he had failed at a particularly tough early point in the company’s history. While others around him were wringing their hands, he figured out how the company need- ed to adjust to be successful and he just kept charging.

dent ends up leading a design consulting firm, but it’s really not so outlandish when you know the background. My career started while I was still in college in the mid-’70s. I worked nearly full-time in transportation plan- ning for the Evansville, Ind., M.P.O. The M.P.O. director at the time happened to be Keith Lochmueller, who lat- er founded Bernardin, Lochmueller and As- sociates, Inc. I worked there for five years and built a lifelong friend- ship with Keith, who served as my earliest mentor. During my 26 years in banking, Keith and I stayed close, and

Michael Hinton, President, Bernardin, Lochmueller and Associates, Inc.

“The biggest reason that BLA is the successful company it is today is that Keith Lochmueller simply refused

to accept that he had failed at a particularly tough early point in the company’s history.”

(Evansville, ID), a 160-person full-ser- vice survey, planning, engineering and environmental firm, is also a former banker. A combination of that strong banking background and business acumen have helped Hinton lead BLA all the way to No. 73 in The Zweig Letter 2011 Hot Firm List. In this interview, Hinton talks about learning from failure, teamwork, and a future that will become ever-depen- dent on architects and engineers. The Zweig Letter: What does it mean to be a Hot Firm? Michael Hinton: Being selected as a ZweigWhite Hot Firm is a confirmation that our hard work and dedication to the strategy we have pursued the past five years has paid off. The Hot Firm List is the industry’s most recognized list of the firms that are earning the fastest growth and greatest success. It’s gratifying to our leadership team, fun for our employees, and reassuring to our bankers. TZL: How did you get where you are today? MH: There are lots of people asking that question! Most people are con- fused about how a former bank presi-

my bank financed the growth of his firm. Upon leaving the banking indus- try, Keith was in a search for BLA. It was a great firm technically, but need- ed business experience. He asked me to take over as president, and the fit has been great for me and, hopefully, good for the company as well. TZL: Do you remember your first paid job? What did you learn then that still influences the way you work today? MH: Actually, my first job was selling shoes for the local Kinney Shoe Store. The manager was a stickler for a tech- nique he referred to as “turning over a sale” at least three times before let- ting a customer walk. If I had a custom- er who was about to leave without buy- ing, I was to ask the customer to allow me to bring over the specialist in men’s shoes, or ladies’ or children’s shoes – whatever was appropriate. Until we had performed this switch at least twice, meaning that three different individuals had tried to complete the sale, we had not met expectations. The key point was that we needed to act as a team and realize that we hadn’t done our best until we had asked for help when it was needed. At BLA, we con-

See top player, page 4

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THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

top player , from page 3

MH: The one trait I most admire is in- tegrity. Drive, determination and per- severance are important, but even the determined and hardest working in- dividual will find his/her success lim- ited if coworkers, clients and business partners cannot totally trust that indi- vidual’s words and actions. Note that integrity is not only about speaking truthfully, but it is about living truth- fully. The most successful business peo- ple I know are consistently respectful and considerate in their business deal- ings. Their own personal effectiveness is magnified by the loyal and dedicated supporters they earn among their em- ployees and customers because of their integrity. TZL: Describe the most challeng- ing thing you have ever done/the biggest challenge you have taken on outside of work. MH: I am vice chairman of the board of directors for our local catholic hos- pital, a member of the largest catho- lic healthcare system in the U.S. About seven years ago, I was asked to chair the search committee for a new CEO for the hospital. Being a nationwide system, it is typical to conduct a nationwide search and to require certain advanced degrees of candidates. While I would not typically differ with those direc- tives, we were facing a situation where the hospital had endured high turnover in the CEO position (four people in 10 years), was losing market share, and had declining employee satisfaction. We had a chief financial officer who en- joyed tremendous employee and physi- cian support and had spent his career advancing through the ranks at our hospital. His aspirations were not to simply use this position as a stepping stone. Initially, I was prohibited by the system governance form allowing him to be a candidate because he did not hold a master’s degree. I appealed all the way to the national system board, asking them reconsider, arguing that his 30-plus years in our system more than made up for his lack of an ad- vanced degree. I persisted through sev- eral denials to my request. Ultimately, he was allowed to be in the candidate pool if he agreed to pursue his master’s degree if selected. He was the unani- mous choice of the search committee, physicians, and board, and he is now in his 7th year as the very successful and popular CEO of our hospital, which has had significant share growth, is a sys- tem leader in profit margin and leads

the system in employee engagement. Successfully challenging a giant nation- al healthcare system was a time-con- suming and frustrating task. It would have been easy, but WRONG, to have given up. TZL: What question would you ask of another Hot Firm leader? MH: I would be interested to know what their “dashboard” for perfor- mance looks like. What do they track religiously, and how often do they mea- sure those things? How do they com- municate their performance on key success indicators to employees? TZL: What lesson learned would you pass along to a recent college graduate embarking on a career in the A/E/P and environmental con- sulting fields? MH: Never give up! View failures as temporary setbacks – not as defeat. Be willing to “pay your dues” and work hard on every assignment. It is those who willingly do everything that no one else wants to do whom we soon find we cannot do without. Financial Performance Survey: Updated in a partnership with the American Council of Engineering Companies (ACEC), the 2011 Financial Performance Survey of Architecture, Engineering, Planning & Environmental Consulting Firms contains more than 30 different major financial performance statistics so you can find out exactly where your firm stands among your peers. Use the data from the overall sample or take advantage of the details in the tables to compare your firm to others by type, size, region of headquarters, growth rate, and client base. Financial performance statistics are just the beginning of this comprehensive report – go beyond the revenue and profit data to chargeability, revenue factor, overhead rates, average collection period, backlog, staff turnover, and more to see which areas your firm could improve. Use the data on personnel expenses, rent and utilities, and professional liability insurance to see if your firm is spending more than necessary on overhead expenses. In addition to financial performance and spending statistics, the survey also shows data on top financial managers and finance and accounting staff percentages. For more information or to buy a copy, call 800-466-6275 or log on to www.zweigwhite.com/zw-1071.aspx.

TZL: Where do you see this indus- try in 10 or 20 years? What trends are influencing it? What about your company? MH: The comforting thing to me about our industry is that I can’t imag- ine a scenario where the services for engineers and architects would not be needed. That’s not to say that we will always be needed to do the exact same sort of work we do today, but for those firms that evolve with the market, there will always be a need for profes- sional designers. One major trend that we feel is the movement toward more “green” and sustainable solutions. BLA has just received a patent on its “Eco- Treatment System,” which is a propri- etary design using a constructed wet- land as the foundation for systems to deal with CSOs, waste from controlled animal feeding operations, and small development wastewater systems. We’re also preparing the sustainability plans for several communities and we have integrated sustainable design con- cepts in our design strategies. TZL: Do hold someone as a special mentor? How did this person influ- ence who you are? MH: Aside from Keith Lochmueller, whom I already mentioned, I would cite a previous bank president, Dick Schlottman, who recruited me to the banking industry. He was full of life and gregarious; a person who never lost his connection with the lower middle class neighborhood where he grew up. He re- lated to every employee and customer of the bank and spent time every day “in the trenches.” Dick took a special in- terest in me and I credit him with any success I had in my banking career. He used to say, “Don’t step on that cock- roach; it may be Lon Chaney,” which demonstrated that he recognized the potential for greatness even among those who appeared most unlikely. He was a beloved leader for whom his em- ployees willingly gave their all. I was privileged to deliver the eulogy for this great man upon his premature death in his late 50s and I vowed to do my best to emulate his regard for all people re- gardless of role, education or heritage, and I only hope I have modeled just a fraction of the character I so admired in Dick. TZL: What’s the one trait you most admire in people and why?

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© Copyright 2011. ZweigWhite. All rights reserved.

THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

T R E N D S

Volatile ABI equals lagging recovery

Industry leaders are looking for direction as some markets recover more quickly than others. By Julie Kyle Editor T he wild swings of the Architec- ture Billings Index and a collec- tive downcast mood among econo- mists means the A/E/P and environ- mental consulting industry’s suffering isn’t over yet. September’s ABI numbers reflect an- other drop in work after a high point in August. Many in the industry are not surprised by such swings.

just more competitiveness.” In such a highly competitive market, many firms have reduced fees, which Harrison feels may be another explana- tion for the low ABI readings. “You may be getting the work, but at a lower fee. So, the quarter-on-quarter billings are not that much better, if better at all.” Debra Lupton, CEO at TLC Engi- neering for Architecture (Orlando, FL), a 286-person firm, uses informa- tion reflected in the ABI as one of many sources of information on the econo- my. “As a predictor, it is far more valu- able to the CM/GC side, as our new contracts provide a leading indicator of work in the pipeline for construction.” Lupton says she typically views the ABI as a verification of what TLC expe- riences in the marketplace. “Our gen- eral shifts have coincided with the up- and-down swings,” she says. “I would like to see AIA provide mem- bership with data reflecting the future demand for design in various markets versus the put-in-place construction information, which is rearview mirror,” Lupton says. Vertical market analysis would be very helpful to position for the future, she says. “However, the AIA’s economic pro- grams do help us in understanding the factors that impact the economy and the statistics of design and construc- tion as a subset.” Baskervill submits to the ABI for peer comparison, not as a forecasting tool, says Robert Clark, president of the Richmond, Va.-based, 93-person architecture, engineering and design firm. “It seems to be relevant. But it is also backwards-looking. I think the ABI is more meaningful to those outside the A/E industry who view us as an eco- nomic indicator,” he says. Fred Kramer, president of ADD Inc. (Cambridge, MA), a 160-person archi- tecture and engineering firm, looks at the ABI frequently to simply raise con- sciousness and for a national overview, but not for regional activity. “In other words, if they polled Boston for a local ABI, it would be significantly higher! In Detroit, perhaps significant- ly lower,” he says. “It’s also not prod- uct-specific related to diverse markets – never mind diverse geographies.”

in four months, the ABI reversed direc- tion again in September to 46.9, drop- ping from a score of 51.4 in August. Industry speaks on ABI’s swings. Phil Harrison, CEO of Perkins+Will (Chicago, IL), a

1,532-person architec- tural, urban, and inte- rior design firm, feels business has been “me- diocre” for about the last two years.

“It’s stable. It’s not horrible, but it’s not getting better, either,” he says. “I think there’s a general dysfunction or malaise, where peo- ple are looking at inter- national, global news and what’s going on in Washington, and I think there remains a lack of confidence and hesitancy in decision making, in gen- eral.” Perkins+Will has experienced many stops and starts, which illustrate this lack of confidence, Harrison says. “Even projects on the books, planned by all types of clients, are frequently stopped for a variety of reasons, then, they re- start. It’s a difficult thing to manage from a staffing standpoint.” RFPs are active, and Harrison believes the ABI reflects this. “The new inquiries – it’s bounced around a lot, but it’s generally quite a bit higher than the work,” he says. “If you look at the billings index, the spread between inquiries and billings has increased. There are relatively high inquiries relative to billings, which, to me, I read that to say there’s more com- petitiveness. More firms are pursuing more projects, so where you would nor- mally compete against five or six firms for projects, you’re competing against 15 or 20 now. I think people are quite hungry and pursuing more work than they normally would. So it takes lon- ger to make selections, because clients are reviewing 15 proposals, opposed to three or five. That’s part of the reason. Therefore, firms have perceptions of more opportunity; but in fact, there’s Phil Harrison, CEO, Perkins+Will.

“Firms have perceptions of more opportunity; but in fact, there’s just more competitiveness.”

Sector economists from the Ameri- can Institute of Architects, the Asso- ciated General Contractors of America and Reed Construction Data who as- sembled during a webcast titled “Up, Down, or Flat? Where’s Construction Headed?” are not predicting a recovery in construction just yet. “Recovery is a process, not an event,” said Kermit Baker, chief economist for the AIA. Although some markets are exuding a little strength, the nation has not seen a true housing recovery get underway yet. Total construction spending is al- ready recovering and will improve next year, said Bernard Markstein, chief economist, RCD. Residential construc- tion is holding its own at a low level and will only recover slowly. Nonresidential construction building will strengthen throughout 2012 and 2013. An increase in the availability of fi- nancing could fast track numerous projects, Baker said. Most firms (69 percent) report stalled projects in the AIA’s “Work-on-the-Boards Survey,” and lack of financing is the most com- mon reason for delays. The slow construction is certainly be- ing reflected in the latest ABI num- bers. Following the first positive score

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THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

HOT F I RM

The secrets to staying Hot in chilly economy

Hot Firms share their practices, motivations, actions and thoughts for the future.

and 12 percent reported providing pro- fessional development opportunities. “By providing career-long profes- sional development and mentoring, we have developed a team that knows that the company is aligned with their desire to work on new things, to take on more responsibility, and to receive more recognition for the work they do to make us a best firm to work for,” one respondent said. They’re different. There’s no doubt though, these firms are different! Hot Firm leaders believe, for example, that a stronger emphasis on marketing and business development separates them from less successful peers. “We are not afraid to spend more re- sources on marketing and geographic expansion during a tough economic cli- mate,” one respondent said. “I am lucky that a few rainmakers decided to come on board from my competitors. These people are telling me that we are run- ning right.” Leaders also cited diversification as a differentiator. “Looking ahead for 12-18 months is the constant focus for us to be success- ful in maintaining growth. We need to be diversified in market sectors and geographically, to be able to capitalize the new opportunities,” one respon- dent said. Hot Firms are also successful because they focus on people. “We’d rather decrease expenses, not people,” said one. Actions really do speak louder than words, said another; “We walk the walk when it comes to the care we take to hire the right people and in giving them the opportunity to succeed. This means that we are strongly focused on hiring and developing graduates, rather than bringing in more experienced hires. This is more expensive in the short- term, but has shown a much greater success rate in terms of staff retention, pride in the company and the quality of work provided to our clients.”

most difficult decisions by Hot Firms

22% 6%

6%

24%

12%

By Christina Zweig Staff Writer W hat makes a Hot Firm “hot,” when most are not? Despite market uncertainty and the temptation to lay low and enter “sur- vival-only mode,” members of The Zweig Letter 2011 Hot Firm List pursued multiple strategies to grow the business. A stronger push with market- ing, diversification of clients and ser- vices, extra attention given to employ- ees, and a greater focus on bolstering expertise and innovation are just the beginnings of the many things that make members for the elite list stand out, according to an anonymous online survey of their leaders. Nevertheless, although growth num- bers reflected on the Hot Firm List may look impressive, leaders still faced tough decisions and fear the conse- quences of sometimes daring actions. Firms that submitted for the Hot Firm rankings were invited to par- ticipate in the survey. To be consid- ered for the Hot Firm List, companies were ranked according to their three- year growth rate in gross revenue from 2007 to 2010, with 50 percent of the ranking based on percentage growth and 50 percent based on dollar growth. Thirty percent of respondents to the “2011 Statistics of the Hot Firm Sur- vey” stated that the toughest decisions involved decisions about growth and investment. “Even though our industry is seeing lots of activity, it was hard to move out of the mindset of holding our ground to get back into an aggressive expansion mode,” one respondent said. Hot Firm leaders also admitted they share many of the same fears other firm leaders have. “Our biggest fear is continued stag- nation of the economy and impact of economic conditions as well as govern- ment cutbacks on available work,” one respondent said. (Thirty-eight percent of respondents shared those thoughts,

30%

Growth & Investment Personnel & Staffing

Downsizing

Bonuses & Salaries

Terminating Leadership Other

indicating “the government and the economy” to be their top concerns.) A significant number of respondents, 22 percent, cited backlogs and oppor- tunity pipelines as their main concerns, and 13 percent cited project funding. Offering some examples, some cited, “The ability of our culture to embrace a culture of change and continual im- provement” and “large projects that go south.” Getting the right people on the bus… When asked, “How do you keep your teams motivated and mov- ing in the right direction,” 38 percent of firms reported open-book manage- ment. Twenty-seven percent reported vision and planning as a method for keeping teams motivated. “At all times we keep our eye on the firm vision; have not wavered even in the poor economy,” one respondent said. “Decisions are made based on continuing our journey to reach our vi- sion. Our teammates have a better un- derstanding of where we are going as a firm and why, and how their great per- formance is key to survival, and can keep us moving in the right direction.” One quarter of respondents also re- ported that they keep their teams mo- tivated through compensation and bo- nuses, 13 percent reported culture, 12 percent reported providing an oppor- tunity to work on challenging projects,

“Even though our industry is seeing lots of activity, it was hard to move out of the mindset of holding our ground to get back into an aggressive expansion mode.”

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THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

F & A A D V I S O R

Reps and warranties They are a necessary evil, though often not met in full. I n almost every M&A deal that I have partaken, the seller has made certain representations and warranties about the business or asset they are selling. The seller typically guarantees that an asset or company has certain characteristics, will perform to a mini- mum level or guarantees that nothing negative will occur. Many of the stan- dard representations and warranties are basic guarantees to ensure the sell- er has not knowingly committed any fraud or malfeasance. For example, you have clear title to the assets, you have paid all your taxes, you are a duly formed legal entity, etc. The standard M&A convention is that the buyer drafts the definitive pur- chase agreement. The buyer’s attorney works with his or her client to draft reps and warranties in a way that mit- igates the transactional risk. For all firms involved in designing structures, a significant amount of time and ef- fort will be put into drafting language concerning liabilities for past projects. The buyer will likely spend quite a bit of time in due diligence going over the firm’s insurance policies and their con- tracts in order to understand any con- tingent risks that the buyer may end up with. Every firm and deal is differ- ent, so you are not likely to see the same set of reps and warranties, even in similar deals. This primarily has to do with how the seller approached their business. A firm that designs locks and dams is likely to have a to- tally different set of reps and warran- ties than a firm doing lighting design for retail clients. The business model is different, as are their clients, which af- fects the risk profile to the purchaser. People make guarantees all the time; however, they do not make any dif- ference unless there is a consequence for failing to live up to your word. If

a salesperson guarantees a product will work, but will not back it up in writ- ing – it is hollow. Reps and warranties typically come with a methodology for the buyer to get a portion of their money back if the sell- ing firm did not perform to

is grim, though, especially in today’s risk-averse environment. The fact of the matter is that the discount that a seller would impose on a firm selling without reps and warranties is so high that no one would undertake such an endeavor. As a seller, you have to come to terms that even after the deal is done, you will have some risk for months, if not years, after a deal is closed. This can be a tough pill for some sellers to swal- low; however, it is the inevitable real- ity of today’s M&A environment. Hav- ing a strong deal attorney and invest- ment banker can help negotiate a bet- ter deal for the seller, though the days of handing the keys over for cash are over, except in instances of extreme distress. W. Hobson Hogan is a ZweigWhite principal specializing in mergers and acquisitions, finance and strategic planning. Contact him at hhogan@zweigwhite.com. ZweigWhite Merger & Acquisiton Survey: Is your firm considering a merger, an acquisition or a sale? Or have you recently completed a merger or acquisition transaction? If so, then you’ll want to see the survey results in the 2011 Merger & Acquisition Survey of Architecture, Engineering, Planning & Environmental Consulting Firms. The 21st edition of this comprehensive report includes all the latest data on the state of merger and acquisition activity in the design and environmental consulting industry. Whether you want to get a projected value for your own firm or one you’re looking to buy, or you want to find out how the details of the deal you recently made compare to other similar deals, this report has the answers you need. For more information or to buy a copy, call 800-466-6275 or log on to www.zweigwhite.com/zw-1052.aspx.

Hobson Hogan

the terms of the purchase agreement. One of the most important parts of an M&A negotiation is coming to an agreement on the reps and warran- ties and the financial consequences of those. The liability of the sellers is typ- ically capped. In most cases, the worst- case scenario is that a buyer cannot claim more than what they purchased a firm for. If a firm or asset has a sig- nificant environmental liability and a low purchase price, there may be a case for a cap that is more than the pur- chase price. However, this is not likely to occur in an A/E/P firm. Often times in a transaction, the buy- er will hold back a portion of the pur- chase price and put those funds into escrow. The buyer has a defined peri- od of time to make a claim against the seller to deduct the money from the escrow account. JP Morgan Treasury Services recently released their annual survey on escrow activity in M&A. The survey revealed that only 21 percent of all M&A deals last year paid the full es- crow account to the seller and financial buyers never paid the entire escrow amount. The average claim was for 45 percent of the escrow account, which accounts for 74 percent of the original claim. These are pretty shocking statistics, considering the prevalence of hold- backs. If you are a seller, you should understand that there is a strong like- lihood that you will not get all of the escrow. There is likely to be a job that turns south or claim that arises out of nowhere. The alternative of mak- ing no representations or warranties

One of the most important parts of an M&A negotiation is coming to an agreement on the reps and warranties and the financial consequences of those. The liability of the sellers is typically capped. In most cases, the worst-case scenario is that a buyer cannot claim more than what they purchased a firm for.

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THE ZWEIG LETTER | OCTOBER 31, 2011, ISSUE 933

B E S T P R A C T I C E S

History and hindsight lead to innovation Foresight, action, and leadership can lead to transformation. H istorically, changes in engineering practices have occurred because of a failure. In my own state, the Engineering Practice Act in Texas was created after the New London School explosion in East Texas in March 1937. The Act set new standards to “safeguard life, health and property and protect the public welfare” – and to regulate the practice of engineering through licensing and rules of practice governed by the Texas Board of Professional Engineers. Changes in designing safer structures such as bridges, buildings, levees, and dams have been predicated on monumental failures that caused significant loss of life and property, and hindered economic prosperity. We have only to look at the events of 9/11 and Hurricane Katrina for examples. The A/E/P and environmental consulting community traditionally responds quickly to these extraordinary natural and man-made disasters. We are eager to embrace the work that not only provides short-term solutions but also puts us in the spotlight. We know how to fix what is in front of us. But how and when do we address the long-term view to prevent similar tragic events from occurring? We know our coastlines are vulnerable, yet we seem shocked when another hurricane ravages the area. Our West Coast is prone to seismic events, but millions of people continue to live there. We live in arid regions like Phoenix, but we panic when there are water shortages. Who is responsible for leading the serious, sustainable conversations about future planning, building, and the impact of population growth? We are. When the U.S. government reports that 36 states will face water shortages due to a combination of population growth, rising temperatures, drought, urban sprawl, waste, and excess, who is responsible for bringing long- term solutions to the table? The client? The planner? The politician? The engineer? Who is responsible for leading the serious, sustainable conversations about future planning, building, and the impact of population growth? We are.

One place to look for answers to this question is the first fundamental canon of ASCE’s Code of Ethics, which states, “Engineers shall hold paramount the safety, health and welfare of the public and shall strive to comply with the principles of sustainable development in the performance of their professional duties.” Isn’t it time to insist on the long view?

Stephen Lucy

Built-in conflicts of interest. If our first duty is to serve the public; above our duty to our clients and our- selves, how do we accomplish that effectively? We are sup- posed to protect the public, but also the interests of our cli- ents. There is political risk, especially in terms of infrastruc- ture work, as you may be challenging those who give you work, which is like walking the plank with the saw behind you. If we are to focus on the technical and ethical aspects of the engineering profession to pursue the greater good, then we must move to a level of discussion and policymaking that other organizations have mastered. AEC organizations have lobbying arms, but they pale in comparison to other lobbying powerhouses. Yet despite these powerhouses, engineers are the first go- to resource after catastrophic events. Given that position, we have the opportunity to lead for the long term, but only if we are prepared to embrace that role. We are already advising about the future, but our political system is mired in rehashing past events and ignoring developing disasters. While we are making advances in engineering, some driven by technology and by design, there is still a myriad of issues that should be addressed, including supplying water, improving transportation and communication networks, improving air quality, advancing agricultural practices, and other infrastructure needs to support our standard of living, economic growth, and prosperity. Sustainability is the key. Our industry has become apathetic about important drivers of sustainability. Now that many hold their LEED APs with various additional green credentials, we still accept five-year payback models for a project’s feasibility and marketability. Have we allowed the sustainability discussion to be a philosophical one, or one that slips away based on short- term ROI? In a world of 3 percent interest rates, does the payback still have to be 15 percent? Still no progress on infrastructure. Since ASCE produced its 2009 Report Card on America’s Infra- structure, little progress occurred. We are very good at eval- uating how bad we are doing, but as a profession, we have failed to lead efforts to correct or solve long-term problems. We keep working short-term and hoping for a silver bullet to solve the long-term problems. In 2011, ASCE partnered with the American Public Works Association and the American Council of Engineering Companies to establish the Institute for Sustainable Infrastructure. ISI has created a rating system that certifies the sustainability of infrastructure projects named

See LUCY, page 12

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HR A SUPPLEMENT OF THE ZWEIG LETTER

OCTOBER 31, 2011, ISSUE 933

B E S T F I RM The ‘GATE’-way to education and retention About Gate, LLC

Best Firm to Work For a desirable place to work, employees say. By Bryan Sullivan Correspondent E ducation may land you a job, but continuing education en- ables you to keep your job and to move higher up the ladder. It allows employees to develop the tools and knowledge needed to ensure that their clients get the help they need. This is one of the primary philoso- phies that make GATE LLC (Houston, TX) a Best Multi-Discipline Architec- ture and Engineering Services Firm to Work award winner… two years run- ning. Big-ticket compensation. “On top of a vigorous continuing education program, we also offer an incentive compensation program; competitive salary structure; full payment of med- ical benefits for employees and their families; and 529 and 401k plans,” says Lee Jordan, engineering manager. Jordan was originally attracted to GATE because he wanted to work in the deepwater oil and gas industry. He also sought the opportunity to join a young firm, where he could help make it the type of company for which people would be proud to work. “I have been at GATE for almost 10 years. For the last seven years I have been the engineering manager respon- sible for the day-to-day management of our technical staff and am currently transitioning into an operations man- ager role responsible for the company as a whole,” Jordan says. GATE University. GATE prides itself on maintaining a work environ- ment that stimulates staff to become the best they can be. The main items that make GATE a consistent Best Firm to Work For include their focus on em- ployee training and development and

Who are the founders? GATE was founded in 2000 by Grant Gibson to provide a level of customer service and staff development that he felt was lacking at established consultancy companies. What do they do? The GATE project portfolio is centered on deepwater operations – largely as a result of the increased risks associated with the design, installation, and operation of such facilities. It has a varied workload that ranges from new technology development and evaluation, pre-FEED (front-end engineering design) and FEED support, and commissioning and start-up, to troubleshooting of producing facilities.

the ensuing chance this gives people to quickly place new hires in positions of responsibility that challenge and stim- ulate them. GATE also fosters an open- door policy that assures that all staff is available on a more or less permanent basis to anyone who needs professional or personal help. The company also al- locates approximately 4 percent of its revenue for staff training and develop- ment. Internally, there is GATE University – a training program that brings new staff rapidly up to speed. The freedom to choose. While anything can be said about why a firm is a great place to work, it’s what the staff says that really matters. Mark Myhre, an engineering consul- tant who has worked at GATE for three years, reveals his favorite perk – the overall flexibility given to employees. “GATE provides the freedom to choose/change career paths, pursue personal interests, and to seek and at- tain project work that stimulates the individual engineer while working a flexible schedule. This freedom keeps work exciting and challenging,” he says. Another employee, Marla Perez, a hu- man resource and compliance manager who has been with GATE for 10 years, says, “GATE is committed to meeting the challenge of competitive pay as well as offering job security and a compen- sation package that is supportive of its employees’ lifestyles. And, being recog- nized as a Best Firm to Work For is a powerful tool for attracting graduates

to the company. It is an important re- cruitment tool.”

On the rise. GATE is growing rap- idly. With 30 staff members and a sin- gle office in Houston – the hub of the oil and gas industry – it has a global presence. “Our Houston office supports projects in locations such as the Gulf of Mexico, West Africa, Brazil, and Australia,” Jor- dan says. A few staff members have been with GATE since the beginning (2000). “A better measure of retention is prov- en by the number of graduates that we have hired who are still with us,” Lee says. “Since 2004, we have taken on 12 graduate engineers with an aver- age tenure, to date, of three years. Only one hire has moved on and is now one of our clients at a major oil company. Firm’s dual focus. While build- ing a successful firm in today’s econo- my is a daunting challenge to any se- nior staff members, GATE has a dual focus. Its first focus is to maintain the status of being a Best Firm to Work For. The second focus is simple – they want to be “hot.” “We want to be a great place to work for and also be a strong and success- ful company in years to come,” Jordan says. “On both counts, there is no com- promise.”

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