Leveraging KPIs to Drive Change with Deltek Clarity
The architecture & engineering (A&E) industry has experienced nearly a decade of strong financial performance, and the most recent fiscal year was no exception. But the uncertain economic outlook highlights the need to frequently monitor key performance indicators (KPIs), improve visibility and enhance business intelligence.
The Deltek Clarity Architecture & Engineering Industry Report delivers an in-depth analysis of industry KPIs and benchmarks to see how firms compare to other firms in the industry. According to the report, firm performance in the last fiscal year showed steady financials, but firms continue to face challenges with maintaining profitability, retaining qualified staff and managing growth. Although the outlook and challenges may evolve in coming months, firms can continue to focus on key initiatives to better position their business for success in the future.
In a recent deep-dive webinar, we look a closer look at financial metrics and benchmarks impacting the architecture and engineering industry from the 41st Annual Deltek Clarity Report. Highlights include:
- Operating Profit on Net Revenue (15.8%): Firms have seen an average increase of more than six percent in the last decade with a 1.4% increase compared to the previous fiscal year. High-performing firms averaged 24.3% operating profit, while architectural firms saw an overall increase to 17.8%, up 3.9%.
- Net Labor Multiplier (3.03): With an overall increase of 0.02, the average is the highest it has been in 10 years, and high-performing firms reported an average 3.40 – significantly higher than all other firms.
- Total Payroll Multiplier (1.78): Often referred to as revenue factor, the total payroll multiplier remained unchanged compared to 2018 and has remained relatively consistent in the last several years.
- Overhead Rate (154%): Overall overhead rate dropped six percent with significant decreases for small firms and architectural firms. This is expected to be the result of an increase in billable hours.
Although these numbers are a snapshot in time, how can companies use these metrics effectively, especially now? The Deltek Clarity benchmarks and KPIs are a glimpse into what’s happening around the industry with companies that are similar in size, type and complexity. But, the story is what’s really behind the numbers and what the KPIs tell a firm about their business. Once a firm knows where their numbers are, it’s imperative to dig deeper to understand what the numbers mean.
In this year’s report, there are three key initiatives that financial leaders identified for the next three years. By looking at these initiatives, firms can identify ways to better leverage these numbers to help their businesses succeed.
Financial leaders identified their top three initiatives to address their biggest challenges in financial management:
- Business Process Improvement
- Training Project Managers on Financial Management
- Better Forecasting
Business Process Improvement
Process improvement was a theme throughout the Deltek Clarity report this year, with project managers, business developers, human resource managers and financial leaders struggling with processes. And, it’s no surprise that accounting and financial management is often one of the most paper-based and process-driven areas of the business, leaving many opportunities for improvement.
Firms saw a slight decrease in average collection period, down two days to 73 days this year. For some firms, this may be the result of improving time collection and invoicing processes or setting better expectations with clients about payments.
But, there are numerous firms that are still facing outdated processes and aren’t leveraging technology to implement small changes that can make a big difference. A simple example – does your firm still require project managers to request a project number from someone before they can start a project? Simple business process improvements can eliminate frustration and streamline processes so teams can capture time faster.
When looking at the top challenges, a critical one for financial leaders is increasing profitability. Even when there is uncertainty, firms have an opportunity to improve processes that can potentially increase profitability. For example, nearly a third of respondents identified inexperienced project managers as one of their top challenges, and only 46% of respondents reported using a clearly defined project management process for more than three fourths of their projects.
When projects aren’t managed efficiently, it can have a detrimental impact on the project’s bottom line. In some cases, better technology and better tools can help make project managers and project designers more efficient and effective. So, what business processes will you improve in the next three years, and what technology do you need to make that a reality?
Training Project Managers on Financial Management
A company’s most important asset is its people and again this year, many of the top challenges financial leaders are facing are not just invoices and general ledgers, but are the people side of the business. More than half of firms (52%) in the Deltek Clarity Report identified finding and retaining talent as one of their top three financial challenges, while 37% identified increasing the financial savvy of project leaders as a top challenge.
As the economic uncertainty looms, firms may increase focus on maintaining cash flow, but it’s critical the people side of the business is not overlooked. As firms are looking for ways to address their top challenges, investing in their employees is a key area to be considered.
More than 50% of firms selected training project managers on financial management as one of their top initiatives, which is an investment not only in the financial stability of the company, but also in the future leaders of the firm. By improving the overall financial savvy of project leaders, project managers can become advocates for the firm and better stewards of project KPIs, rather than just reviewers of data.
How involved are project managers in monitoring project profitability, outstanding AR or other project metrics? Although training is an imperative piece to this, accessibility is vital. Only 44% of respondents indicated that they have high visibility for project managers into project-specific KPIs.
How can your company help project managers be more accountable for project KPIs in their control? What do they need to learn, what do they need to access and how can you measure success?
This year, 39% of respondents indicated that better forecasting is one of their top three initiatives for financial management. Better forecasting starts with the three Cs – coordination, communication and collaboration. Forecasting is a collaborative effort that has to be more than just the financial leaders setting growth targets or setting goals based on the previous year’s performance. It requires the business development teams proactively managing their opportunity or project pursuit data, project managers actively managing project data and financial managers ensuring teams have proper access to manage their information.
How accurate is your forecasting? If you are only setting your forecast based on last year’s performance, you may be setting your teams up for failure. This year, the overall net revenue growth forecast was only 2.1% compared to last year and while some of this is a result of strong financial performance in previous years, it’s also shows a more conservative approach coming into 2020. And, although many firms develop their forecasts at the outset of the year, many do not compare their forecasts to their actuals year over year. If you look at your revenue growth forecast over the past five years similar to the chart below and compare that to your actual revenue growth, how far off are your forecasts? And, how granular is your information?
Net Revenue Growth Forecast
Too often, forecasts are based on target revenue numbers and not actual project pursuits or client intel. Forecasts also often lack a schedule or time-based element. Having $2 million in the backlog doesn’t help your teams plan effectively if only $500,000 is anticipated to impact the current year. If an opportunity has a six-month schedule, but the majority of the work is expected in the first three months, the forecast needs to reflect that so teams can plan resources, anticipate potential revenue and prioritize projects accordingly.
Although potential projects don’t need to be scheduled down to the day, the more granular detail, the better. This detail also allows teams to review data in different ways – by office, department, project manager, client, industry or any way that helps teams better plan and adjust as project priorities and client needs change and evolve.
And, this isn’t just business development’s responsibility. Effective coordination with operations managers or resource managers enables them to properly prepare for the project award.
Another challenge many firms face is accuracy of data in the pipeline. Although responsibility may be assigned to keep the pursuits or projects updated, often times leaders aren’t held accountable and data gets outdated quickly. A project pursuit or active project may be put on hold or phases may get cut. Competitive intel may indicate it’s not a good fit for your company or a client may be struggling financially and needs to cancel a project. How can you help leaders keep project pursuits and project details updated and accurate? How can you leverage technology to keep the right projects and pursuits top-of-mind and keep all teams coordinated and connected? Focus on how the firm can improve accuracy at every stage of the project lifecycle so financial leaders have the confidence to make better, more informed business decisions as economic uncertainty unfolds.
Leveraging KPIs and Business Intelligence to Drive the Business Forward
With hundreds of financial and project metrics that can be monitored by your business, it’s imperative to focus on the ones that highlight challenges and can drive change. When looking at the top challenges your business is facing in the coming years, are your top initiatives addressing your biggest challenges? And, once you have your key initiatives, what KPIs can be positively impacted through strategic initiatives? Today’s environment highlights the need for companies to monitor top KPIs and metrics more frequently to understand potential process improvements, changes in the industry, where technology can help improve operations and where action plans may be needed.
By monitoring KPIs, your firm can focus on process improvement, improve employee engagement and protect cash flow, bettering positioning your firm for the future.
Deltek Clarity A&E Industry Report delivers a glimpse at industry benchmarks, trends and market conditions to empower firms to compare their performance against peers in the areas of business development, project management, human capital management, financial management and technology trends. While these benchmarks are a snapshot in time, they serve as a catalyst for conversation within the firm to help better position your company for the future.
Ready to learn more? Take an in-depth look at key challenges, bright spots and future trends in the Clarity Webinar Series.
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