Succeeding at Succession—It Takes Time
Senior executive succession planning is a current priority for many construction companies. Baby boomers are reaching ages where they seek to retire or work significantly less. To custom tailor exits or cutbacks, where there is a legal “change of control,” requires deep, strategic thinking, guided by experienced, neutral, outside advisors. Tough facts must be faced objectively. Both the financial and human consequences of succession decisions are high, so thoroughly developing the right transition plan takes regularly scheduled blocks of highly focused executive time, preferably over several years. The purpose of this article is to create an awareness of the major areas that must be considered. Future articles will suggest some guidelines. While CEO succession is the primary discussion, transitions at all levels need plans.
The first step is to get real clarity about what you want to do personally and whether you have realistic options that will allow you to achieve that goal. Can you transition the leadership and the ownership internally to a younger group? Can you sell it externally? Nonbonding, self-performing contractors are the most salable externally, according to industry investment bankers; most other types of contractors require internal sales, except for some in preferred geographic locations or with special client bases. Under any scenario where the business continues, it will be the people who remain and their current competencies or future potential that will be the critical determinants of value and success. Hence the need for time to truly gain confidence in the plan. Hard questions remain, even with very competent people. Do they really want all that comes with being the CEO or senior officer roles? Guarantees? Exposures? Are they willing to put skin in the game, using their own funds to purchase the shares? If the transition occurs in a family business, particularly where there is more than one sibling currently employed, in addition to the competency question, there are often difficult questions related to the ownership transfer question. Experts often advise approaching things from an “equitable but not equal” basis.
The need for time to prepare future leaders, even for construction companies that have made generational transitions in the past, is exacerbated by the increasing force of the VUCA environment (Volatility, Uncertainty, Complexity and Ambiguity). When things change rapidly, often violently, the anchoring foundation is the company’s core ideology, its core purpose and its core values. These create a culture that will attract and retain the people who can lead. The company will service (Is that the right word? Sounds awkward to me) and thrive through these inevitable cycles. This is particularly true if these future leaders have been developed and seasoned by experience, exposures and education, that in addition to increasing their competencies, give them clarity into who they are as leaders, their strengths and weaknesses. Strong value-based cultures and strong value-based leaders are the essential combination for successful transitions.
This article is the first in a series that will discuss all dimensions of succession. Thinking about preferred timing and people and their potential are the first steps!
Houston’s Monthly Metrics
Recent employment numbers show Houston MSA added a surprisingly strong 18,700 jobs in April. Maybe too strong, according to Patrick Jankowski, vice president of research at the Greater Houston Partnership. The long-term average April job growth is around 8,000, and while early indicators, like employment services shown in the chart to the right, suggest Houston is recovering, Jankowski believes the April number will be revised down significantly, as 18,700 is stronger than what the city experienced when oil prices were at their highest. Reinforcing Jankowski’s reservations are the recent revisions to the 2016 numbers, which look to wipe away all the job growth last year, as well as the recent release of the Super Bowl impact numbers, which show sales tax revenues less than projected, possibly a sign that Houston’s economy was weaker than we realized.
Nevertheless, the Purchasing Managers Index jumped to 54.3, suggesting expansion in our area. And while the Architecture Billings Index is at a relatively flat 50.9, the southern region, where Texas is located, was significantly stronger at 55.3 – also suggesting expansion. The new project inquiries and new design contracts indices also posted strong numbers, with AIA Chief Economist Kermit Baker noting that the “new project activities [have] pushed up project backlogs at architecture firms to their highest level since the design market began its recovery earlier this decade.” Additionally, the U.S. Census Bureau recently announced the February and March total construction spending numbers, which were the first to exceed the previous high, set in February 2006. These indicators suggest that the rest of the nation is picking up speed, while Houston is growing at a more measured pace.
The primary drivers of our measured pace in construction continue to be the general purpose office space and multifamily markets, though hospitality is also waning and medical work may be hazier, given the activities in Washington, D.C. Office has dropped from its more than 17 million square feet to 1 million square feet, and multifamily, with 30,000 units still in lease-up, expects 14,000 units total to be delivered this year and 3,000-5,000 units for all of 2018 as the pipeline finally dries up. Keeping us afloat are the residential, educational and retail markets, which continue to catch up to the population growth experienced in Houston this decade. Homebuilders are targeting smaller lots with homes priced under $300,000 to reach the highest demand of homebuyers. The Grand Parkway, along with edge cities like Conroe, continue to grow at a significantly faster –pace, driving school and retail demand.
This newsletter is intended to provide our clients with the latest leading indicators and industry issues. If there are metrics or topics you would like us to include, or if you would like to discuss any of the information contained herein in more detail, please contact our office at 713-840-1775.