Success in planning for the downturn

February 2011 » Web Exclusive » BUSINESS STRATEGIES
Diversification pays off with large solar projects
Jacob Lipa, P.E.

After a decade of strong growth, it didn’t take an economist to know that a downturn was on the horizon. Fortunately, managers at Psomas saw it coming and planned ahead.

Psomas’ strategy of buffering the company against the recessionary cycle by diversification into new markets is paying off with the award of three major renewable energy contracts, one involving the largest school solar power installation to date in California. As a result, the firm’s experience might be useful for other engineering firms in preparing for the next recession.

Anticipating the downturn
Because the economy had been good for nearly a decade, to Psomas there was no question that a downturn was on the horizon. Recessions are inevitable, especially in land development where a recession hits every 10 years. In fact, land development typically is the barometer of a downturn and typically has been one of the first markets to suffer in past recessions.

Psomas has a history of cushioning the bumpy ride of the land development market through diversification. In the early 1990s, when the real estate boom went bust, the firm survived the downturn by targeting new growth areas, including serving the public sector in water and transportation. In mid-2000, it embarked on an aggressive strategy to expand its water and transportation groups through acquiring firms, moving into new geographic markets, and hiring senior people.

Evaluating diversification strategies
In evaluating diversification opportunities this time around, Psomas knew the option of further expansion into public works was not a long-term solution (although its land development group did move into site development for public-sector projects). It could see that the public sector would follow the private sector in falling into a downturn as well, and that has played out as cities and counties across the country are running out of money.

In 2006, the firm started thinking about entering the renewable energy market. This field made sense for a number of reasons. Clearly the country was moving into more clean energy: The sustainable movement was now in the mainstream and renewable energy was the obvious next step. Renewable energy also furthers our national security goals by reducing the nation’s dependence on foreign oil. Psomas has provided engineering services on a variety of renewable energy projects during the last few years, so this would not be an entirely unrelated field for it to enter.

Next, the question became: What would Psomas do in renewables? The firm hired two experts in the energy field to help it better understand this market and help it find its niche. Of the renewables — geothermal, wind, and solar — solar made the most sense for Psomas as a starting point. It is a known technology and a developing market with promise. Psomas could see the potential because of the growing use of solar energy in other parts of the world as well as in the United States. Federal, state, and local regulators are encouraging solar energy use through incentives and subsidies.

A big part of the decision to go into solar energy was the fact that the firm knew the client base well. Solar systems can serve to lower electricity costs on a wide range of projects, from municipal facilities such as water treatment plants, civic centers, and transit stations to schools and hospitals. These are the firm’s regular clients; it knows their needs and how they like to operate.

The obvious approach would have been to increase the suite of civil engineering services related to solar energy projects. Instead, Psomas decided to pursue an entirely new business model, one not based on providing engineering services on an hourly basis. The firm looked at the trend of design/build/finance/operate and decided to adopt that model for its new solar energy practice. Instead of only providing services on a small portion of a project, it would be managing the whole process from beginning to end. By providing a band of services to the client — planning, design, finance, and operation — the jobs are far more profitable; Psomas would be operating at a comprehensive level and taking charge of its own destiny. In the renewable energy world, the design/build/finance/operate contractual model is referred to as power purchase agreements (PPAs).

Psomas decided its niche would be PPAs for distributed solar projects, which are smaller onsite solar installations that replace electricity purchased from a utility. These projects are relatively straightforward to build because they do not require the extensive permitting of large utility-size solar projects.

PsomasFMG is formed
In developing a new business, Psomas knew that although it was strong in marketing, design, and construction management, financing was the missing link. Financing was the one area where the firm did not have sufficient expertise, yet this was the essential link in creating PPAs to fund the solar projects.

Psomas needed partners with this financial expertise to have the full package. To find people it could really trust, the firm networked in the solar and real estate development industries where financing is used a great deal. Once it connected with the right financial partners, it could see that it was a good fit in terms of knowledge base, character, and expertise. Psomas’ financial partners bring the collective experience and wisdom of a diverse and extensive set of veteran chief executives from large pubic and private companies as well as a large municipality.

PsomasFMG, LLC, a partnership of Psomas Renewables, LLC (a subsidiary of Psomas) and itsfinancial partners, First Management Group, LLC, was formed in 2010. Through PsomasFMG, the firm is providing the complete turnkey solar package: design/build/finance/operate. Most firms in renewable energy come from either the financial sector or the sustainability field. Psomas is one of the few engineering firms that brought in people with financial expertise to supply that part of the package, making the firm one of the only engineering companies providing PPAs in renewable energy.

PsomasFMG uses investor funds to build turnkey solar systems at no capital cost to the client. The return on this investment is derived from federal and state subsidies, tax benefits, services provided, and net cash received from the sale of electricity to the public agency.

In 2010, Psomas landed its first three projects:

  • PsomasFMG signed a contract with the Antelope Valley Union High School District for a 9.6-megawatt (MW) solar project in Antelope Valley, Calif. Construction is under way on the $50 million project, with the first systems installed already producing electricity. During the next 20 years, the school district is projected to generate a savings of more than $40 million.
  • Engineering design is under way on a $30 million contract with the Palmdale, Calif., school district for construction of a 6.4-MW solar power installation at 20 sites.PsomasFMG is providing PPA services and long-term asset management.
  • The Orange County, Calif., board of supervisors awarded PsomasFMG a contract for a 4-MW project at nine county facilities.

With these projects under its belt, the firm is looking ahead to the next level of development: targeting larger public agencies and private markets.

As a significant added bonus, its entry into renewable energy has created a renewed enthusiasm at Psomas. Its employees love new technology — and it is in clean energy, a market our people really believe in.

Lessons learned along the way
As with any new business venture, there were several valuable lessons learned along the way.

  • Be creative about your options and think outside the box. Renewable energy was not part of Psomas’ basic services. It needed to be open to a new business model to be successful in entering this market. The challenge was made somewhat easier, however, because it had the client base.
  • Be prepared to take a calculated risk. Solar energy is dependent on subsidies right now. But what happens if and when they end? Mired in politics, subsidies could end at any time. Psomas is developing its company for life after subsides by researching how it can build the systems more efficiently via more efficient procurement, a faster construction cycle, and more efficient design.
  • The engineering business is very traditional and conservative. You will deal with pushback when proposing new ventures. Unlike many other engineering firms, Psomas is willing to test and try out new business lines and launch incubators.
  • Set aside a budget for change. Psomas has a budget for new initiatives to support new ideas. This budget is separate and apart from the company’s operational budgetary needs.
  • It is necessary to have a progressive board of directors because you’ll need to make an investment up front to capitalize a new company. Psomas has a board that is open to change and believes in developing new initiatives.
  • When entering a new field, you will be hiring people that come from a different corporate culture. This can create conflict when people from different professional cultures come together. Psomas had to make several changes in staff along the way until it got it right.
  • Also, anytime you have a lot of people joining to form a new company, there are a number of issues that must be faced in working together and getting to know each other. Initially, everyone is on his or her best behavior. But inevitably territorial conflicts arise and it takes effort and cooperation to work out the issues. Top executives need the mental strength to manage these employee issues while dealing with the financing, marketing, and sales aspects of getting a new business off the ground.

Looking ahead
In the good times and bad times, it is top management’s responsibility to plan ahead. This means planning for downsizing in areas of the company serving markets susceptible in a downturn and expanding into new markets that clearly show promise.

With the success of PsomasFMG, the firm is strategically planning to be in the best position possible when the economic recovery finally gains steam. As our country begins to emerge from this recession, new initiatives such as Psomas’ entry into the renewable energy market will ensure that the firm is well positioned for strong growth in the years to come.

Thinking outside the box
What does it take to come up with an idea for a new business that is not fully in line with your current business plan or existing suite of services? What kind of person thinks outside the box?

1) A person who is never comfortable in what he or she is doing. Comfort is just not in their character. If you are comfortable with a certain salary, or your existing clients, then this is not you. This is someone who is never satisfied with the status quo, someone who wants more challenges, who feels like they haven’t arrived yet.

2) Someone with a lot of curiosity. What else is out there? What is my calling? What do I want to do?It might be new markets, new initiatives, or new movements.

3) People who think outside the box know where their expertise lies and recognize when to call in others for help. They understand the importance of learning from others. They don't reinvent the wheel; they are being honest with themselves and bringing in experts where they are needed.

4) A new venture is not a part-time job; it is not even a full-time job. It is essentially your whole life until you get the new company off the ground and running smoothly. Your entire support system needs to understand this and buy into it: your family, your friends, your management team, and your employees.

Jacob Lipa is the president of Psomas and the chairman of the board of PsomasFMG.

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