In my last installment to this blog series on development contractors I reflected on my own experience managing a USAID contracting business from inside a large public company. I thought it would provide some helpful context for today’s post on AECOM International Development.
My last post concluded with the argument that, while there are certainly more complications to overcome inside a public company than a private company, a USAID contracting business can indeed be viable inside a publicly traded company. Today’s post completes the argument.
My last post concluded with the argument that, while there are certainly more complications to overcome inside a public company than a private company, a USAID contracting business can indeed be viable inside a publicly traded company. Today’s post completes the argument.
AECOM International Development
USAID 50 Ranking: #8
Average Annual Obligation: $111 Million
Imagine we’re having the following conversation:
Me: I read an article earlier this year that suggested AECOM might be the biggest company you’ve never heard of. Is that true? Have you ever heard of AECOM?
You: It’s true ... I’ve never heard of AECOM. Who are they?
Me: AECOM is the largest architectural and engineering design firm in the world, responsible for some of the most iconic building projects in recent history.
You: Really. Any big projects that I might recognize?
Me: Well, how about the tallest office tower in North America: One World Trade Center.
You: Wrong! I happen to know One World Trade Center was built by the same company that built the original World Trade Center - Tishman Construction.
Me: Nope. AECOM bought Tishman in 2010.
The conversation is a great example of why a lot of people have never heard of AECOM … it didn’t really exist until the early 1990s. The company’s growth has been mostly driven by acquisitions. It’s what securities analysts refer to as a "roll up.” In AECOM’s case, it’s the end product of over 40 firms being rolled together over the last twenty odd years.
AECOM International Development is just a small part of the larger AECOM. It was created back in 2004 by AECOM’s acquisition of Planning and Development Collaborative International (PADCO), and then expanded by AECOM’s acquisition of The Services Group (TSG) in early 2008. AECOM acquired PADCO and TSG in order to cultivate a special foothold for building up its business in emerging markets.
From the looks of things today it turned out to be a smart decision. As I’ve already hinted at in the last installment to this blog series, AECOM International Development is living proof that a USAID contracting business can be viable inside a publicly traded company. According to data that I pulled off usaspending, it looks like before AECOM started the acquisition (~2003), TSG and PADCO were pulling in combined prime contract obligations of somewhere around $30 million annually.
Now fast-forward ten years. In 2013, USAID’s obligations to AECOM totaled just over $170 million. So under AECOM the USAID contracting business grew from around $30 million to $170 million in 10 years. That’s an increase of over 500%, i.e. that’s some pretty serious growth. And, as I described in the last installment about my own experience managing a USAID contracting business from inside a publicly traded company, that’s not an easy thing for a public company to pull off.
Now fast-forward ten years. In 2013, USAID’s obligations to AECOM totaled just over $170 million. So under AECOM the USAID contracting business grew from around $30 million to $170 million in 10 years. That’s an increase of over 500%, i.e. that’s some pretty serious growth. And, as I described in the last installment about my own experience managing a USAID contracting business from inside a publicly traded company, that’s not an easy thing for a public company to pull off.
So what has enabled AECOM to succeed where IBM failed?
First, it’s important to remember that all acquisitions start and end with people, so I think you’ve got to take your hats off to the folks at AECOM, TSG and PADCO that managed to figure out how to make the USAID business work inside AECOM Corporation. It’s some impressive work.
Of course there were some important differences too. For example, AECOM’s acquisitions of PADCO and TSG were not accidental (i.e. not part of something much larger like IBM’s acquisition of PwC Consulting.) PADCO and TSG were both specifically targeted by AECOM for their work with USAID. And AECOM generally gives the companies it acquires a relatively large degree of flexibility and independence to continue running the company, i.e. AECOM has tended to focus less on integration post acquisition compared to a company like IBM.
The regulatory environment has also been a bit less complicated. Remember that IBM’s acquisition of PwC Consulting came right on the heels of Enron’s collapse. As a result, the financial and capital markets were particularly nervous at that time about the possibility that companies were failing to properly disclose potential liabilities that could arise from offshore entities and subsidiaries. And, despite the fact that USAID field projects have nothing in common with the kind of off-shore entities that took down Enron, there were enough cosmetic similarities (e.g. foreign bank accounts, foreign hired staff, foreign procurements and sub-contracting) to trigger a lot of extra caution, due diligence, and general “noise” around the time IBM acquired PwC.
But I think the biggest reason that AECOM International Development has succeeded is the fact that there are some real synergies between what AECOM does commercially on a global basis and what USAID has been looking for from its contractors over much of the last decade … particularly in countries like Iraq, Afghanistan and South Sudan, which is where most of AECOM International Development’s growth has come. AECOM has also been successful in securing USAID work around climate change adaptation and natural resource management, and these are also both natural extensions of AECOM’s commercial practice and corporate capabilities.
Whatever the key reasons for its success are, there have clearly been a lot of things working in AECOM’s favor, and there are a lot of things that AECOM does well. So much so, in fact, that I have thus far been unable to pinpoint a unique signature that differentiates AECOM International Development from everyone else. And I’m not the only one struggling to figure it out. Daniel Safarik, the publications editor at Council on Tall Buildings and Urban Habitat remarked earlier this year that; "It's hard to find the heart and soul of what AECOM is … it's hard to get a grip on from an identity perspective because they're massive and acquisitive." Or, as Jacob Herson, an AECOM spokesman himself said, “AECOM is still a work in progress.”
I’m interested to see how this “work in progress” finishes its story. It could go a variety of different ways, and I think the path it takes from here will ultimately end up defining AECOM International Development's unique signature.
Where do I see it going?
The optimist in me looks at all of AECOM's potential and my jaw drops. I think that if AECOM can start focusing more of its time, resources and energy towards organic growth, and towards integrating the firms it has already acquired, it would present a real opportunity for AECOM International Development to substantially strengthen its Project Enabling Environment (PEE), and its capacity to deliver results for USAID. I saw the potential for this first hand during my tenure with the company on its Southern Africa Trade Hub project. While I was there AECOM introduced its proprietary One Source platform to the project. I thought the introduction of that system, complete with its automated workflows for procurement and travel logistics, completely revolutionized those critical aspects of its PEE in the field.
And, when you think about the fact that there are literally 40 companies that AECOM has rolled up in the last 20 years it’s hard to even fathom the kind of gold mine that now exists within the company in terms of useful tools, practices and knowledge. AECOM has the kind of in-house resources that, if harnessed and adapted effectively, could literally transform AECOM International Development into one of USAID’s best in class implementing partners in terms of applying the science of project management to international development engagements.
AECOM also has a secret weapon … something that none of its competitors in the development industry have. It’s called AECOM Capital. AECOM Capital is a unit that the company has established specifically to differentiate itself from its competitors. It's a mechanism that enables AECOM to make direct investments in real estate and public private partnerships (PPPs) that complement and support its traditional service offerings for clients. It’s a great concept and I think it would be awesome if AECOM figures out how to deploy it in support of its USAID programs. It would make a great unique signature ... something catchy. Maybe something like “AECOM puts their money where their mouth is."
Unfortunately, it looks like the road ahead may get a little bumpy for AECOM International Development, especially its business with USAID. One of the Wall Street analysts that follows AECOM noted earlier this year that AECOM had started restructuring its Management Support Services (MSS) line of business (which includes AECOM International Development) to make it more profitable. The report indicated that AECOM is looking to shift away from higher-volume, lower-margin international work towards more lower-volume higher-margin work in the United States. And, in a conference call earlier this month to discuss its most recent quarterly earnings, AECOM management reiterated its plans to reposition its MSS line of business away from higher-volume, lower-margin international work.
Now, I don’t think this means that AECOM International Development is going anywhere; I think the emerging markets are still very important to the company overall. But, I think AECOM's business strategy for international development work could change. I can imagine AECOM diversifying the business and shifting more of its focus towards the other big bilateral donors, and especially the multilaterals, many of whom take a more holistic "value for money” approach to development partnerships than you find at USAID.
It’s a good reminder of why running a business inside of a public company can be so unsettling. Companies like AECOM and IBM have tens of thousands of owners that aren’t even remotely involved in managing the business, but they all have expectations. At the end of the day public companies are ultimately going to do whatever they think is best to drive up their share price … If you're running a low margin business inside one of the companies you just have to keep hoping that things continue to break your way.
- DS
Next Up … Process Makes Perfect
Now, I don’t think this means that AECOM International Development is going anywhere; I think the emerging markets are still very important to the company overall. But, I think AECOM's business strategy for international development work could change. I can imagine AECOM diversifying the business and shifting more of its focus towards the other big bilateral donors, and especially the multilaterals, many of whom take a more holistic "value for money” approach to development partnerships than you find at USAID.
It’s a good reminder of why running a business inside of a public company can be so unsettling. Companies like AECOM and IBM have tens of thousands of owners that aren’t even remotely involved in managing the business, but they all have expectations. At the end of the day public companies are ultimately going to do whatever they think is best to drive up their share price … If you're running a low margin business inside one of the companies you just have to keep hoping that things continue to break your way.
- DS
Next Up … Process Makes Perfect
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