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.

Financial Metrics

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:

1. Unique visits to your website
2. Social media interactions such as comments, likes and shares
3. 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?

Avoid surprises

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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Architects in general have a tendency to underestimate the importance of marketing in creating and running a successful business. Even those who claim to understand the role of marketing in acquiring clients and building relationships, they often fail to fully utilize its potentials. Principals of small architecture firms often get caught up in trying to keep their practices afloat and end up treating marketing as a luxury that they will be able to afford once they achieve stability, thus missing the true role of marketing as being a catalyst for growth. Architects need to apply marketing to their practices from the onset and treat it with the same amount of dedication as they do with their floor plans, sections and 3D models of their building designs.

Marketing is a complex discipline, but its fundamentals can be broken down to a few simple concepts. As long as you keep these in mind at all times, your marketing efforts will be more successful, and easy to analyze and adjust. You need to be able to answer these three relatively easy questions and communicate them effectively to your audience:

Who are You?

In order to define your place in the industry and your target demographic, you need to determine who you are and what you do. Vague phrases about quality services, multidisciplinarity and “cutting-edge design” on your About Us page will not provide any useful information on what your company actually does. What do you stand for? How is this vision reflected in your office culture, design, and the type of projects you take on?

What Need Do You Fulfill?

Answering this requires you to formulate a value proposition. A value proposition explains how your service or product can help to solve your client’s problem and must be formulated in a concise and clear way, showing concrete results where possible. Even if you offer great value, if you fail to communicate it, your business will not attract new clients.

How are You Different?

Being able to differentiate yourself from your competition is a huge advantage. This is not easy, but your efforts have to go beyond mere sound bites. It can be achieved either by simply offering services in a more organized, client-oriented and reliable way, or by creating a unique, game-changing product or service.

Once you can answer these three questions, your marketing efforts basically filter into four-step process:

1. Attracting potential clients
2. Converting visitors to leads
3. Closing the deal
4. Cultivating relationships

These steps may seem straightforward, but there are several schools of thought on how to apply them. With the recent widespread adoption of social media and online tools, marketing has expanded to exciting new ways that architects can engage with and build an audience, and then successfully convert them to leads.

Today’s users have much more control of their media, and this has leveled the “marketing playfield” by offering businesses the opportunity to organically reach audiences by using relatively affordable channels and winning them over with engaging content. This phenomenon has introduced the concept of  “inbound marketing,” which contrasts with the traditional “outbound marketing” in almost every significant way.

Before coming to a verdict as to which is better, let’s see what each entails:

Outbound Marketing

Outbound marketing includes traditional advertising practices, cold calling, email and newsletter blasts, sponsorship, and word-of-mouth referrals, to name a few. It is generally known as an interruptive marketing practice that has become less effective in the last few decades. Spam protection tools and blocking techniques, along with the development of new communication trends through social media, have empowered users and limited many of the elements of outbound marketing.

Inbound Marketing

Inbound marketing embraces new media tools, and promotes creating and sharing content that appeals to specific demographics. Publishing the right content at the right moment is at the core of inbound marketing. It focuses on building communities and relies on organic search traffic. It uses blogs, social media, calls-to-action and landing pages to convert visitors to leads.

Data is also an important element of inbound marketing as it uses surveys and social monitoring to find out where your target audiences are and what they want.

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Most architecture firms will not have to choose between inbound and outbound marketing. Despite hyperbole from proponents of both concepts, they actually work best in combination. You will probably need to keep sending out newsletters and press releases, publishing in magazines, and attending seminars and conferences. However, inbound marketing will allow you to track your return on investment (ROI) more easily, and thus build your reputation. Just remember, there is no single marketing solution that works for everyone.

To learn more about how some of the leading architecture firms use social media, networking, blogging and other marketing tools, check out Archipreneur’s book on new business models for architects, “The Archipreneur Concept”.

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