Are You Tracking The Right Metrics For Your Firm?
Are You Tracking The Right Metrics For Your A&E Firm?
I stopped counting at about 200. That was the number of metrics, aka key performance indicators (KPIs), I found in various publications that track financial results for the design profession. Though the sheer number was overwhelming, they all seemed perfectly fine and most of them understandable. So, if they are all useful, which ones are the right ones for your firm? The simple answer is the ones that drive action toward the results you want. Said another way, the metrics you use should show you what actions you need to take to reach your goals.
Let’s begin by saying that metrics are a powerful tool for running your business. Combined with timely and accurate accrual-based financial statements, they are key to driving the value of your firm. If you are not using metrics, I encourage you to start. If you are using metrics, now is the time to explore the ones you are using.
Working as a professional in architecture and engineering, you are probably very familiar with the usual utilization rate, direct labor rate, overhead rate, net multiplier, etc. Those are the industry favorites, and you might be tracking those right now. I would challenge you to ask yourself if those are driving action in your firm. If they are not and are just merely nice to know, then you should start taking action on them or ditch them in favor of some that will create action.
Here are my suggestions for deciding which metrics are right for your firm. First, I suggest that you limit the number to no more than 10. By limiting to 10, you can focus and prioritize within your business. Next, I suggest you pick five to six that are based on getting the work, doing the work, and getting paid for the work. To that end, I would suggest the following metrics as a foundation:
Key Metrics for Architecture and Engineering Firms
New Contracted Work (in $s) – It’s important to know if and to what extent your marketing, sales and business development programs are working.
Proposals Let (in $s) – This will let you know if you are too busy doing the work to find new work. You need to know the dollar volume of proposals that have been sent out.
Capture Rate (in $s) – This metric will let you know how effective you are in actually turning proposals into contracted work. Use this in conjunction with Proposals Let and New Contracted Work to get a very good indication of how you will “Get the Work” and “Do the Work.”
Revenue Factor – This is net revenue divided by total - the king of all metrics. If you were to only use one metric, this would be it. It tells you how effectively you are using your labor cost to produce revenue. Make sure you use revenue factor on actual revenue AND forecasted revenue. Using forecasted revenue will let you know if you need to increase or decrease staff cost. Also, if you choose to use utilization rate as a metric (and I’m not able to talk you out of it), you will also want to use revenue factor to get a more complete picture of labor efficiency.
Direct Labor Percentage – This is direct labor divided by net revenue. It’s another labor efficiency measure but at the project level. If your rate is too high, it could be that you have inefficiencies in producing the work, or you have the wrong cost mix of labor on the projects. It could be that your fees are too low. In any case, monitoring this metric will create action.
Pre-bonus, Pre-tax Profit (as a % of net revenue) – This seems obvious, but you’d be surprised in how many financial statements or metrics presentations this percentage never appears.
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Percentage of Total Accounts Receivable under 91 Days (in $s) Or it could be 75 days or any other amount that works for you. I prefer this to Average Collection Period (ACP) or Days Sales Outstanding (DSO) which are expressed in number of days. It is more impactful to see money than days, and it’s a lot simpler to calculate and much easier to explain, particularly to non-financial types, than ACP or DSO.
Pick 10 Metrics for your A&E Firm to Track
Now that you’ve picked five or six from among the categories above, it is time bring the total number of metrics to 10. You do this by adding four or five metrics that are specific to driving your strategic plan, eliminating a problem, or simply putting focus on areas of your business that need specific attention.
Let’s say that one of your strategic goals for this year was to diversify your client types, and in particular, you wanted more government work. You could use a metric that measures the amount of new contracted work in government. Or you could track the percentage of government revenue or sales to total revenue. If you have an initiative to diversify your client base. You could use a metric that tracks the revenue from new clients. If you are having trouble with your employee retention rate, how about a metric that tracks employee attrition? If you have debt covenants, how about a metric that tracks those covenants? Any aspect of your business that you want to call attention to and drive results in is worthy of a well-thought out metric.
Establish your A&E Firm Targets
Once you have the 10 metrics you are going to track, you need to set a target for each metric. What should your targets be? Your targets should be congruent with your goals. For example, if you have a goal of 20% profitability, does your target metric for Direct Labor Percentage get you there? Similarly, what does your Proposals Let metric target need to be to support that 20% profitability? An easy way to determine what your targets should be is to take your budget (goals) and calculate the metrics based on your budgeted or forecasted amounts. For example, if your Direct Labor Percentage is budgeted for 30%, then that is your target.
Word of caution: your target metrics need to not only be congruent with your goals, but they should also be realistic and achievable. It’s frustrating and demoralizing to hold people accountable and to be accountable for targets that can’t be hit. So, you will want to check your targets against industry benchmarks as a reasonableness test.
One thing to bear in mind when using metrics is that they are typically historical in nature. That is, they measure results that have taken place in the past and, therefore, have value in spotting trends. To really up your metric game and drive the results you want, consider using forward-looking metrics. These are metrics based on anticipated levels of activity. For example, let’s say that you can reasonably predict what your net service revenue and total wages will be for the period three, six or 12 months from now. Then, you know what your revenue factor will be. If it is lower than your desired target amount, then you can act now to correct it. If you decide to use forward-looking metrics, you will need to invest the time to develop your forecasting abilities. Many of the metrics you decide to use can be forward-looking – others might only be historical. Both will be a powerful weapon in your financial arsenal.
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Assign Accountability for Each Metric
So, now you are tracking the right metrics, have established targets, and are reporting them in the correct way. The next step is to assign accountability for each metric. That means someone in your firm owns the responsibility for making sure that the target for that metric is achieved. Holding someone accountable can be uncomfortable, but it is essential to the successful use of metrics and, specifically, to taking action on those metrics. If your New Contracted Work metric is below target, whose responsibility is it to get it in line? Your director of marketing? A certain principal? Do they know what action needs to be taken and are they committed to taking it? Accountability is the key to successfully using the right metrics.
There is an endless number of metrics that you could use. The main points to keep in mind when choosing the right ones and when implementing their use are:
- Start with a few from the basic groups of getting the work, doing the work, and getting paid for the work.
- Keep the number of metrics you use to no more than 10.
- Make sure they are simple and understandable.
- Track them against specific targets.
- Make sure they create action and accountability.
- Track them on a monthly, year-to-date (or better yet, latest twelve months) basis and, to the extent you can, on the next three, six or twelve months.
- Assign accountability for corrective action.
The right metrics can be a powerful tool in achieving operating excellence. If you are not using metrics and would like help getting started, or if you are already using metrics, but maybe not as effectively as you would like, please contact us.
Interested in learning more? Watch the On-Demand webinar, “3 Ways to Drive Value Within Your A&E Firm” and listen as Carl takes a deep dive into the top levers that drive value in addition to practical changes that can make a positive difference within your own A&E firm.
About the Author
Carl has fifteen years of experience working with A&E firms. Prior to joining Rusk OíBrien Gido + Partners, Carl served as CFO for two of ENRís top 150 design firms where he provided leadership in turn-around strategy, mergers and acquisitions, international expansion, systems and process implementation, pre-sale preparation, and post-acquisition integration.
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