Made, Not Born: Preparing for the Next Generation of Leadership

The word “leader” might conjure up the image of a CEO who has been running a company for a decade or longer with multiple roles, a hands-on approach to clients, and a vision for the company that no one else has. They’re the kind of leader who seems irreplaceable — and just one of many industry leaders who are set to retire in the next 10 years, which is how long it may take to develop your next president or chief estimator.

In the engineering and construction (E&C) industry, it is quite rare to fill an executive-level position with an outside hire primarily due to the importance of cultural fit, so the talent pipeline becomes even more important. If companies want to succeed, then the current crop of leaders must become experts on cultivating the next generation — which means understanding a shift in industry culture.

Time Is of the Essence

The last of the Baby Boomers will turn 65 in 2031.1 And in 2020, 22% of construction workers and 27% of architects and engineers were already 55 or older.2 Therefore, the bulk of E&C companies must replace key leadership in the coming 5-10 years, but recent research by FMI and CFMA suggests that there is an ominous talent gap (Exhibit 1).

According to the 2021 FMI/CFMA Ownership Transfer and Management Succession Industry Survey (OTMS), 35% of respondents expect to have sold their ownership stake in the next 6-10 years, but only 51% of the 250 respondents said they have formally identified successors for the company’s most critical positions.3 Among those with chosen successors, two-thirds won’t be ready to take the reins for another 5-7 years. This presents a huge risk; a successful ownership transfer depends on continuity of leadership and talent, while a stalled transition can impede growth.

Anecdotally, FMI has found that just 5-10% of companies in the industry are truly salable. A potential buyer will look at the leadership team to determine if there is the depth of talent required to grow the business over the coming years. A retirement-age leader without an identified successor is a red flag.

To capitalize on the value of the business, typically the best option is to sell to the people you already have, which means talent development is crucial. If you don’t have identified ownership successors, or your successors are in their late 50s, you simply won’t have time to execute an internal sale; it can take years for them to accrue the equity.

The Talent Problem

The construction industry comprises many different generations: a small group of Gen Zers (under 25) who are entering the workforce at much more junior levels;4 Baby Boomers (ages 56 and up), which was once the largest demographic and often occupies senior roles;5 a slightly larger group of Gen Xers (41-56 years old); and the largest group — Millennials (25-40 years old).

Of the two million jobs lost from the industry following the Global Financial Crisis, younger workers6 took an outsized hit with lingering effects.7 The result is a smaller pool of likely owners and key business leaders in their 40s and early 50s.

For owners hoping to sell in the short to medium term, there may not be enough time to develop the upcoming talent. Respondents to the OTMS reported that even where successors have been identified, 47% won’t be ready for another 4-5 years (Exhibit 2). The survey also showed that mid-level and field leadership are often left out of the picture.8 Just 17% of middle management positions had formal succession plans — 18% of superintendent positions and 19% of project manager (PM) positions.9

The other issue with a shortage of Gen X leadership is that senior leaders may be too close to retirement themselves for companies to execute an equity transfer. Assuming a phase for an internal ownership transfer would take 7-10 years, leaders in their 50s find themselves in a tricky position. They may play a key role in the company without holding equity. The question is, then, how do you keep them engaged?

Companies in the best possible position when it comes to both ownership and leadership transitions have a stable of motivated, experienced people between the ages of 25-40. Those who have been intentional about attracting future leaders and developing them along the way are in good shape, but those who haven’t done so must prioritize it now.

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