President of JCJ Architecture, a local, national, and global architecture, planning, and interior design firm based in Hartford, Connecticut.
By Liisa Andreassen Correspondent
Stevens is responsible for managing the “business of architecture.” His focus is on the company’s overall financial strength and growth, including the development of new business and market strategies that align with the firm’s long-term vision and goals.
A CONVERSATION WITH PETER STEVENS.
The Zweig Letter: Internal transition is expensive. How do you “sell” this investment opportunity to your next generation of principals? How do you prepare them for the next step?
Peter Stevens: Over the past 20 years, JCJ has transitioned 100 percent of its ownership/shares twice. The first transition was done internally with after-tax dollars for the firm’s third generation of ownership (the firm was founded in 1936). Buyers of shares would personally finance their purchase shares with post-tax dollars. As an S-corp, individuals could use their annual distribution (based on percentage of ownership) to pay down their personal loans taken to pay for their purchased shares. Year-end distribution of profits to shareholders were fully taxable, so purchasers were buying the shares with after-tax dollars. In addition, all shareholders would loan back to the firm their portion of the operating capital required to start the new year (ranging from $2 million-$3 million) based on their ownership percentage. This “operating capital” loan was paid back to the shareholder (without interest) during the course of the year based on the performance of the firm during the year. The “selling” of this process is two-fold – performance/reward. Such an internal transition can’t occur without the firm being significantly profitable. Secondly, a majority of the profits (up to 85 percent) were to be distributed to the shareholders during the “buyout term” based on the number of shares owned.
The second transition occurred when the firm converted ownership to a 100 percent ESOP (S-corp structure). Selling shareholders had the choice of short- and long-term loans, with short-term loans (five years) earning a lower interest rate on their outstanding shares and long-term loans (beginning in year six) earning a significantly higher rate of interest. In case of the ESOP shares, there was no selling of the concept to employees. There was a significant selling to the existing shareholders to go the ESOP route. The earned interest rate on their shares was a big incentive to go forward with the ESOP. In the case of a 100 percent ESOP, the ESOP’s purchase of shares is done with pre-tax dollars.
TZL: What actions do you take to address a geographic office or specific discipline in the event of non-performance?
PS: JCJ has intentionally operated as a single profit center and uses the individual project as the common denominator for project-related performance (financial and other) evaluation. We have a highly evolved system of work share among our nine offices and don’t include corporate overhead assignments/costs to our offices. If we see negative trends in market share and/or profitability for a particular office and/or market sector, we initiate discussions with leadership and take a deeper dive on the specifics of underperformance, including what factors may be causing a lack of results: Are the indicators isolated or systemic? Are these results part of larger patterns in our industry or our target markets? We try to strike a balance between a desire to improve results with analysis of underlying causes. Once we have further information we take action accordingly. By having a full range of metrics – operational/performance goal for each office that includes its potential market and our expected market share, cost of operations, project profitability, client relationships, and opportunities for future growth – we get a holistic picture of the office’s viability. If negative performance on the above occurs in consecutive years, closure of that office is analyzed and an appropriate action is developed.
TZL: When did you have the most fun running your firm, and what were the hallmarks of that time in your professional life?
PS: During most of my 38-year career, I’ve been the perpetual “growth guy.” It’s in my DNA. This has been tempered somewhat recently with more focus on efficiencies and profitability. I’ve had two “most fun” times in leading the firm. The first was when we engaged in a growth mode from 1995-2008 and went from a regional single office firm with annual revenue of $10 million to a three-office firm generating $54 million in revenue. Much of this growth was on my shoulders (when I was 39 to 52 years old) along with a few others. We had annual growth ranging from 15 to 30 percent. While this growth was significant, the depth of firm leadership was relatively thin. Leadership was more reminiscent of the single office parochial firm, $10 million revenue firm then of a fast-growth multi-office national practice. This would not have been sustainable in the long run.
The second “most fun” time is where we are today. We’ve rebounded from the recession and are on a “medium-plus” growth trajectory. Over the past five years, we’ve significantly built our leadership team both from within and with strategic hires. We now have the required multi-generational bench depth to continue our future growth. It’s very gratifying to see our current leadership step forward and embrace our future.
TZL: Describe the challenges you encountered in building your management team over the lifetime of your leadership? Have you ever terminated or demoted long-time leaders as the firm grew? How did you handle it?
PS: We’re a very culture-based enterprise. I’ve learned along the way that “culture trumps strategy.” We were able to grow largely on strategy from 1995-2008, but this time also highlighted that our culture had to change in order to sustain this type of growth and the firm’s success. With such rapid growth, geographical diversification, and creation of new markets, it was inevitable that situations of non-alignment would arise. A bit of entitlement also crept into some of our shareholders, especially after some years where we generated 30 to 40 percent profits on NSR. We took a very fair, but firm approach to this situation. The combination of going from a closely held S-corp with 10 to 14 owners to a 100 percent ESOP was a significant change resulting in a holistic “repositioning” of the firm. Some of the leadership moved and/or were moved on for various reasons. Some of these former shareholders still have loans with the ESOP. Seven years into the ESOP, the firm has met its obligations to all former shareholders who are no longer with the firm.
TZL: How do you promote young and new leaders as the firm grows?
PS: We have a very clear and defined career “lattice of development” that is published for all employees’ consideration. We have an annual promotion/nomination process for the firm-wide designations of associate, senior associate, and principal designations. We actually just completed this effort and announced this year’s promotions. This effort coincides with our annual employee performance evaluation which allows such decisions to be tied to the most current performance evaluation.
TZL: In one word or phrase, what do you describe as your number one job responsibility as CEO?
PS: To place JCJ Architecture in a “most sought after” status in our industry based on our practice and financial performance.
TZL: There is no substitute for experience, but there is pressure to give responsibility to younger staff. What are you doing to address the risk while pursuing the opportunity to develop your team?
PS: Progressing younger staff is an inherent obligation of our firm. It must be done in a planned and monitored process. Culturally, we must accept an “it’s alright to make mistakes/fail” mentality, but under a very controlled basis. Our risk management procedures and firm-wide QA/QC are geared to this process so that such mistakes are discovered/corrected in-house before going to our clients. This process requires an openness between managers and staff without pre-judgement.
TZL: Engineers and architects love being engineers and architects, but what are you doing to instill a business culture in your firm?
PS: As a non-architect leader of an architectural/interior design firm, I am very cognizant of this issue. Given my background in planning and business and 38 years in the industry, I am aware that architects and interior designers are largely not exposed to the business aspects of running a business. As president of an employee-owned firm, it’s my obligation to make sure that all of our employee-owners are exposed to the financial metrics/KPIs and have the business acumen that goes hand-in-hand with the success of our firm. We are very transparent in the financial/business aspects of the firm.
TZL: The seller-doer model is very successful, but with growth you need to adapt to new models. What is your program?
PS: We are very much a seller-doer organization. I could spend hours on this issue. Given our size, I’m a very strong advocate of this approach. That said, we have created a hybrid approach that celebrates a “seller/doer-doer/seller” model. Depending on the strengths (BD, design, PM, client relationships) of the individual, the expectations and responsibilities will be placed along this continuum. I agree, that at a certain size a firm will have to move into a more compartmentalized structure where seller/BD roles are differentiated from the doer/project roles.
TZL: A firm’s longevity is valuable. What are you doing to encourage your staff to stick around?
PS: As a 100 percent ESOP, our success and the firm’s value is tied directly to what our employees will benefit from through their tenure with the firm. Employees become fully vested in the ESOP after five years. Long-term employees will benefit from this as long as the firm is profitable and the valuation of the ESOP shares remain strong. In addition, we continue to evaluate our overall benefits package and we’ve been able to maintain our position as a leader in our overall benefit offerings.
TZL: How have the tax cuts impacted your firm’s valuation? Do you plan on doing another valuation due to the tax cuts?
PS: The ESOP share valuation for 2017 was significantly impacted by the federal level tax cuts. As reported to us in our third party’s (Empire) valuation, our ESOP share value increased from $21.33/share (2016) to $41.67/share (2017). Empire’s analysis stated that $12/share (60 percent) was attributed to the firm’s financial performance and $8/share (40 percent) was attributed to the Federal Tax Reform. We are required to do an annual evaluation and we will be completing this effort in Q2.
