Understanding the Benefits of Benchmarking for Your A/E Firm
October 4, 2022
When it’s time to do strategic planning and the topic of benchmarking comes up, architecture and engineering (A/E) firms often ask, “What’s the benefit of it?”
After all, the thinking goes, the vast majority of firms are privately held, and how their finances look is a byproduct of the owner’s philosophy and approach to measuring financial performance. Firms that focus on financial management are likely to have better numbers than those that don’t, so why assign “good” or “bad” to any firm’s results and use them as a measuring stick?
Our response to that reasoning is that it’s true that benchmarking for the purpose of comparing your firm to others may not be particularly useful, but there’s a use you aren’t considering.
Benchmarking to “Chart Your Course”
The reason that firms that utilize benchmarking tend to perform better than those that don’t is that they’re charting a course to a desired future outcome (a revenue goal, for example) and using data to keep themselves on that path.
Business plans aren’t particularly helpful when they’re subjective and rely on unmeasurable things, like, “We’re going to try to cut down on errors on drawings.” or “We’re going to diversify our client base this year.” Without metrics behind your goals, you don’t know if you’ve been successful until you reflect on the past year’s results.
If you’ve achieved your goals, that’s great. But if you haven’t, there’s nothing you can do about it at that point.
2 Ways Firms Use Benchmarking
Firms that benchmark tend to use the data in one of two ways. The first is benchmarking for informational purposes. They just want to know their multiplier, their utilization rate, etc., so they can compare outcomes to expectations.
The second use for benchmarking involves tying it to a strategic plan. A firm says they’re going to watch certain metrics over a period of time, and rather than comparing data to historical figures, they’re going to compare it to goals they’ve set. This approach provides more return on the benchmarking investment.
Unfortunately, a common occurrence is that a firm sets its budget for the year, and then a few months in, they’ve already fallen behind, so they give up on it. And after a few episodes like this, they just stop planning altogether. “Hope is not a strategy,” as they say, and the firm’s hopes never seem to pan out, so why bother?
"Quarterly benchmarking is a fairly foolproof system. You eliminate anomalies and identify positive actions you want to repeat."
Creating a Capacity Plan
Many A/E firms benefit from developing what’s called a capacity plan. It’s created by looking at:
● How many employees will be producing work
● How many hours they’ll work for a given period
● How much the firm will bill for their time
● How much revenue will result from the figures above
● How much the firm will pay employees
● Profit derived from revenue minus payroll
From that very basic spreadsheet, a firm can get six or seven valuable key performance indicators (KPIs). Hours of work expected out of total hours available is utilization rate. Revenue divided by cost is their multiplier. Utilization rate times the multiplier is revenue factor. And so on.
It’s math you could do on the back of a napkin in 10 minutes, but the figures can be very useful, especially for small firms. They often comment, “We’re so small that there’s no point in comparing our numbers to anybody else’s.” That may be true, but it’s much easier for small firms to set and focus on goals.
Maintaining a Macro View
The next bit of advice we give to A/E firms is to stay on the macro side of things when it comes to measurements. It’s common for people with technical backgrounds to want to get “into the weeds” and figure out exactly how things work. The problem with that at small firms is that the metrics in one month can be significantly different than those of the month before or after.
Consequently, you can’t benchmark yourself against your performance in one particular month. Our recommendation is to consider one quarter at one time. Often, two consecutive months may have very different figures, and you need a third to see how things normalize or average out. However, a three-month window should also be the largest you consider.
Keep in mind that your KPIs aren’t the problem, they point to the problem. At the end of a quarter, you should look at where you stand and decide if you need to modify your expectations one way or the other for the quarter ahead. And, by the time you’ve completed your review of one quarter, you’re probably almost a month into the next, and the results to that point should help you estimate where you’ll be in another two months.
A Simple, Self-Correcting System
Quarterly benchmarking is a fairly foolproof system. You eliminate anomalies and identify positive actions you want to repeat, and your budgeted and actual KPIs start to converge nicely. When they do, everyone is happy.
Plus, there are no ongoing conversations about, “Why are we doing this?” People see the improvement that occurs with this approach and quickly get on board.
Then, at year-end, owner disbursements occur, employees get pay increases, tax season is approaching, etc., and a firm that isn’t doing benchmarking feels like it’s in the dark. On the other hand, a firm that has been benchmarking all year knows that even those late-in-the-year financial factors can be considered and handled appropriately.
That’s especially true since a firm leveraging KPIs all year to improve performance will almost surely make a profit. Just as importantly, they’ll know how much money is in the bank or soon to be there and how it can be distributed. There are no nasty financial surprises for firms that do quarterly benchmarking throughout the year.
Not an Event, But a Process
Tracking KPIs and making course corrections as needed isn’t an event. It’s a process. Once you establish that mindset, things go much more smoothly and hitting your targets is easier.
And it’s important to remember that KPIs aren’t only used to promote growth. They can also help you achieve qualitative improvements. For example, if your utilization rate is particularly high, you probably need to make changes to keep your team members from burning out.
Ultimately, the time invested in benchmarking and tracking KPIs is time well spent. Because, if you don’t put in the effort, you’ll have no answers when you reach year-end and you’ve missed your goals by a mile!
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