Neil Churman, Director and head of our Infrastructure, Industrial, Energy, and Environmental Services practice, recently sat down again with the Environment Business Journal to discuss a variety of topics impacting 2019 outlooks. While 2018 turned out to be a fairly unpredictable year for businesses, the macro outlook as we move into 2019 and beyond shows signs of stability and growth in environmental services.

A few trends that emerge throughout the conversation include:

• The need to diversify, both in terms of end markets and geography.
• The importance of prioritizing your workforce.  
• The need to embrace the evolving technological landscape.

While we can’t say for sure what 2019 and 2020 will hold in terms of the economy, there are steps that Environmental services firms can begin taking sooner, rather than later, to prepare in the case of significant changes. The three topics above are clear areas of interest, and will be discussed in additional detail through the conversation below. If you’re interested in speaking with Neil directly about opportunities surrounding growth or liquidity strategies, please reach out to Neil@7mileadvisors.com.

What is the general feel for the short- and long-term business outlook now at the end of 2018?

After a turbulent and often unpredictable 2018, the macro outlook for 2019 and beyond appears to be moderate to strong.  In the near-term, macroeconomic fundamentals (growth, unemployment, interest rates, etc.) all appear to be on reasonably solid footing.  For U.S. environmental firms, we expect a positive outlook across a range of markets, including petrochemicals & processing, industrial manufacturing & consumer goods, oil & gas (particularly in the midstream), and infrastructure.  Longer term, trends around energy, infrastructure, resiliency, and climate change all point towards continued growth in environmental services.

How much uncertainty or even trepidation in management teams and boards of directors is there surrounding the potential for a downturn or recession of some duration?

I think companies always need to be ready to respond to a potential downturn.  Most firms in the industry tend to “hire fast” and “fire slow”.  In most environmental businesses, costs are predominantly “people costs” and when the outlook changes, firms need to be prepared to modify their cost structure as necessary.  Firms that can “flex” their staffing models quickly will generally fare better in a downtown environment.  As far as uncertainty, I think we are observing cautious optimism in the near- to medium-term, with the expectation that some sectors may cool, while others remain solid.  Firms that can be well-diversified in their end-markets and have versatile staff that are cross-trained will be most resilient if we do hit a slide.

What sectors do you think pose the highest concern for environmental firms: oil & gas, federal markets, property development?

In general, firms that have all of their eggs in just one of these baskets should be concerned.  As I mentioned, diversification is generally a sound strategy to protect against a market downturn.  With that said, firms that are solely focused on upstream oil & gas development will rise and fall with global oil prices, which have been volatile.  Diversification into midstream and/or downstream operations will help O&G firms reduce the impact of commodity price volatility.  Anytime there is a government shut down in the conversation (as there is as of late December), there is cause for concern about Federal work, but for the most part, trends in the Federal environmental space, particularly with customers like the DoD, USACE, NOAA, etc. suggest that there is ample long-term opportunity, but firms need to be prepared for when work “moves to the right”.  Of these three, I’d suggest that development work is subject to the greatest level of volatility, as changes in interest rates, short-term economic conditions, including at the regional or local level, can impact projects.

What regions are more susceptible to a downturn, and which are safer than others?

Certainly, regions that lack diversification are subject to the negative impact of a downturn more than others.  Being based in Houston, our region definitely feels the impact of swings in oil prices more than most, but the city has grown substantially in healthcare, manufacturing, and technology, among others, which alleviates the impact of a downturn to a degree.  Other areas that may feel the next downturn more than others are areas that experience boom-bust cycles in their development or ones that have grown rapidly, but unsustainably.

Management consultants have often counseled firms to plan and staff for slower growth scenarios, then use contract employment to fill the gap if growth is at or above average. Does this still hold true, and does the persistent challenge to find qualified personnel render this approach too difficult?

Personally, I think that contractors are a tool in the toolbox, but not one to be overly relied upon.  At the end of the day, the most important assets in most environmental firms are their people and building a bench of strong performers is what builds long-term value.  My recommendation is that contractors can make sense for non-core personnel gaps, but for critical functions and roles where long-term institutional knowledge is key, firms need to be looking at permanent hires.

Larger firms seem to be back on the growth path a little bit more than the last couple of years, but seem to be challenged by margins and profitability. Is this oil & gas recovery or federal recovery, or do you see this as a trend of any duration, or is it more related to the cycles of acquisitions that the bigger players in our industry have undertaken.

I think some of the larger firms have been pretty ambitious in their strategies and are finally having a chance to digest some of the major acquisitions over the last few years.  Jacobs has all but transformed between the Ch2M acquisition and the divestiture of their ECR group.  Stantec is still working through their addition of MWH, as shown through the recent divestiture of the legacy MWH Constructors division.  NV5 remains active on the acquisition front, as well.  I think there is something to be said for integration and strategy formulation to take a little time to play out.  I also think that in both the oil & gas and Federal environments, there is a combination of competition and margin pressures that are real.  I believe that firms that are able to build long-standing repeat customer relationships, as well as get out of the model of just “selling hours” will win the profitability game in the long-run.

Retention rates and employee turnover have been key statistics in recent years. Is there a meaningful trend there?

The market has generally been good and as a result, a lot of folks have hopped around between firms.  There is probably a little more turnover than most firms would like and I know with our clients, they are generally unhappy when one of their team members leaves for supposedly greener pastures.  I’d suggest that firms keep tabs on their average employee tenure to see if there is a meaningful decline there.  If your more critical senior people are sticking around as opposed to less critical positions, then it’s less of a concern.

We have seen some engineering consulting and construction firms acquiring information technology or software to either broaden their service platform or else to make it more efficient. Do we see acquiring or owning specific information technologies as increasingly a differentiator and increasing an acquisition strategy in our industry?

Technology as a differentiator is only going to continue to become more important in the industry.  Firms need it to find ways to provide new and innovative solutions to their customers and in many cases, we are seeing crossover between companies traditionally in the engineering space or the technology space.  Services like remote sensing and geospatial acquisition, big data and predictive analytics, asset management, and system integration are all weaving their way into clients’ programs.  Firms that can bring novel and proprietary solutions to the table, that are backed by accelerators, reusable code and methodologies, or software, will be better positioned to both win work and execute on it.

What do you believe the consensus in our industry is for the potential of advanced information technology and machine learning and artificial intelligence and similar developments in reducing employment costs or increasing productivity, or even improving metrics like revenue per employee in a consulting & engineering or project management company?

There is no question technology is already reshaping the space and could add efficiencies.  I think about some of the repetitive tasks common in environmental firms – preparing permit documentation, submitting quarterly testing reports, working through samples and checking chain of custody.  These are all tasks where there are already emerging solutions with technologies like robotic process automation and blockchain to help make these processes more efficient.  There still needs to be a high degree of human interface and technical experience behind it, but I think firms that fail to embrace technology will fall behind.

About 7 Mile Advisors
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