Metrics for Success: How Architects Should Measure Business Growth
Leading a successful design practice does not guarantee it is a profitable business. Do you know and track the key metrics (KPIs) to extract meaningful, relevant, timely and actionable insights to operate and improve your practice? In this helpful tutorial, learn about the quantitative measures of a successful architecture business, and begin tracking your growth towards your goals.
by Ray Brown & Bec Kempster
KPIs for Architectural firms: What metrics should you track in order to control your design business?
A Key Performance Indicator, or KPI, is a measurable value that demonstrates how effectively your design firm is achieving key business objectives. The key driver for utilising KPI reporting is to extract meaningful, relevant, timely and actionable insights that can be used to operate and improve your practice. KPIs provide trend information that is often absent from other forms of reporting.
Think of them as the numbers you’d like to know each week, or each month if you were basking in the sun on a remote, tropical island while your practice was being managed by others. The metrics that, even if you’re at arm’s length from the business, would provide you with reassurance that the business was in good heart.
There are two types of KPIs. The first is a lead indicator, which predicts what may happen in the future. For example, work secured in the month (but which may be delivered over two years), or the number of enquiries in a month which will be a barometer of future work.
A lag indicator points to what has happened in the past, such as revenue or profit in a month. It provides an indication of what happened after the event. Look to include a mix of both lag and lead indicators in your reporting.
When setting up your KPI report, we recommend you include data from the previous twelve months as this will immediately allow you to chart whether your practice performance is improving, or is poorer than the previous period.
Whilst KPIs can vary for different practices, there will be six to eight numbers that will give you a good indication of the health of your business.
Revenue is the first and probably the most obvious number your practice should be tracking. For most architectural practices, this will be the value you bill each month.
The second number is the margin in the business. Revenue less directly associated costs (such as staff salaries, printing fees and other project related expenses) will give you the margin. It can be a number, but is most often stated as a percentage of revenue.
The third financial metric you should be tracking in your firm is the level of expenses each month, stated as a number. Some owners may also like to pull out salaries as an additional metric, as for many practices this will be the largest monthly expense.
The next obvious metric is profit. Whilst you could turn to the Profit and Loss Statement for these figures, it won’t provide you with an indication of the how this number varies over time.
Most practice owners will be aware of their cash in the bank at the end of the month, however if you were asked what the cash in the bank was three or six months ago, there is far less likelihood of recalling this. Tracking this number in a KPI report can reveal seasonal trends, such as the months each quarter when tax payments might be made. This will allow you to forward plan to accommodate for these events.
Debtors and creditors are the final two numbers to add to your financial metrics. By deducting creditors from your debtors and adding the cash at the bank, you’ll have a balance sheet snapshot of the short-term liquidity of the business. That is, what you’d be left with (or possibly owe!) if you shut up shop today.
These KPIs begin to tell the real story when tracked together in one simple report or spreadsheet, over time. By marking any losses or negative numbers in red, you’ll easily be able to identify any downturns when reading across the report.
Sales & Marketing Metrics
In our experience, we find the pain point verbalised by most architects is a projection of when the work will ‘dry up’. For example, that there’s only enough work to the end of June. Having this information and forward commitment from clients is empowering. Put yourself in the position of a retailer. They don’t know who’s going to come into their store tomorrow, let alone next month. Knowing the workload of the coming months allows you to manage the pipeline of new business so that you’re hitting your financial KPIs and importantly, managing allocation of your team and resources.
To assist you in managing your pipeline of new business, we recommend the first metric you track is the number of enquiries received in the month. Because architects typically get so few new enquiries as opposed to other industries like law firms or advertising agencies, this is a reliable lead indicator of future work. You will quickly be able to determine an average number of enquiries per month and take action should the number drop below this average in any particular period. This metric is the best indicator of the success of your marketing activity, referrals and general awareness of your practice out in the market.
The next metrics will allow you to assess how effective your client engagement process is in converting enquiries or ‘leads’, to prospects. These are, the total value of proposals submitted in the month and the number of proposals. By tracking both these, over time you will be able to measure your average proposal value (total value of proposals divided by number of proposals) and track whether this is rising or falling.
You should also be tracking total value of live proposals as part of your suite of sales KPIs. That is, total proposals issued up until the date of reporting that are awaiting a response from the potential client. You should include two numbers here; both the number of proposals issued and the value of those proposals issued in the month. This metric is a good motivator for following up with potential clients to establish whether they are going to proceed with the project.
These numbers will allow you to assess the spread of future potential work. You don’t want to find your firm in a position where you’re reliant on only one or two overly big proposals.
The best lead indicator for design firms is work secured in a month. Work typically takes most firms eighteen months to two years to deliver, so if your practice is consistently winning a satisfactory level of work each month, you will be close to guaranteeing that you’ll still have a profitable practice operating in two years’ time. Not many other industries have this level of security in their business.
The final metric we suggest you track in relation to sales is the total value of unbilled work in progress. For this KPI, take all the work that you have on your books in the month and calculate the portion of the total project value that’s left to be billed. At Archibiz, we refer to this as a ‘sleep at night number’ as it can help alleviate any uneasiness about the work ‘drying up’.
This is a fear we regularly hear about from architects. Being in business is not just about delivering the work, it’s about bringing the work in. Investing focus, time and process into building a robust sales pipeline in your firm, will help shift your mindset from a place of unfounded fear to confidence and comfort.
That robust pipeline will result from implementing a basic marketing strategy that is executed consistently. This marketing strategy should include a content rich website that is updated regularly and social media activity. For those design firms that have this in place, you should be reporting on at least the following marketing metrics:
- Unique visits to your website
- Social media interactions such as comments, likes and shares
- Number of marketing activities occurring on other people’s channels, such as articles, blog or social media posts
Frequency for tracking KPIs
We recommend tracking these KPIs on a monthly basis, as a rule of thumb, as quarterly won’t forewarn you in adequate time to act on a negative trend. On the other hand, you may find yourself bogged down in the numbers if you try to track them on a weekly basis. That being said, cash flow is a metric that is worth reviewing on a weekly basis.
Cash in the bank at the end of the month can hide liquidity concerns taking place within the month. Take the example of the practice that pays wages on the first of the month, or even the 15th, but doesn’t receive payment on invoices until the end of the month. We recommend reviewing particular KPIs, such as cash flow, in line with the operating processes unique to your firm.
Even if you don’t utilise the KPI at this point in time, by keeping this list of metrics in your KPI report, you will be able to perform analysis on these at any point in the future with ease as you’ll have a historic record of the data.
Reporting on these KPIs presupposes that you have good bookkeeping processes and financial management in place in your design firm. It assumes that you have established systems and processes in place for delivering the product. Ask yourself, are you putting work out efficiently? Do you know when projects are running over budget? Have you got a six month plan in place for delivering the work that matches the right resource with the appropriate jobs?
The risk of not regularly reviewing a set of KPIs in your design firm is surprises. Being ‘busy’ isn’t a reliable indicator of long term sustainability, particularly if your operating processes aren’t optimal.
It is much more difficult to respond late in the piece to a negative trend that was established over a period of time. The earlier you receive a warning signal and can act, the easier it will be to take action to revert the situation.
Likewise, KPIs give you a reason to celebrate the good times, something we tend to forget. There’s more to celebrate than just landing a big win. For example, we used to be here and now we’re somewhere better. Or our average monthly work secured is now 20% better than in the previous year.
Above all, KPIs are about providing you with peace of mind. To understand that your practice is going in the right direction rather than relying on a gut feeling or worse still, putting your head in the sand and praying for the best.
Achieving control in your design firm
Though our lives are renowned for unpredictability, we as individuals crave a sense of control. The reality is that we don’t always have total control, particularly over external factors such as market forces or over other people, such as whether an employee chooses to remain working in our business.
Achieving true control is an unrealistic mindset that will only serve to keep us in a place of fear. A more realistic goal to strive for in your role as ‘Director’ or ‘Owner’ of a design firm (as opposed to your role as ‘the architect’), is awareness.
Being aware of trends through a set of KPIs will allow you to shine a light on the world of greyness you find yourself operating in as Director or Owner. It’s important to focus on understanding the levers in your business as opposed to achieving a feeling of control. —
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