High performing firms: By the numbers

Submitted by bmclean on Sun, 05/11/2014 - 15:37
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The report breaks\nout specific KPIs for \u0022High Performing Firms,\u0022 as well as KPIs for the industry as a whole, A \u0026 A\/E firms,\nE \u0026 E\/A firms, and different size firms. "]]],[1,"p",[[0,[],0,"For 2013, using criteria of a minimum 20 percent Operating Profit Rate and minimum 3.00 Net Revenue\nMultiplier, a full 25 percent of the firms were categorized as \u0022High Performing Firms\u0022:\n"]]],[3,"ul",[[[0,[],0,"28 percent of the small (1-50 employees) firms"]],[[0,[],0,"23 percent of the medium (51-250 employees) size firms"]],[[0,[],0,"20 percent of large (251+ employees) firms.\n"]]]],[1,"p",[[0,[],0,"Further, there is credible evidence to indicate that many of these firms repeat as High Performers\nyear-after-year.\n"]]],[1,"p",[[0,[],0,"As a CFO and a collaborator on the survey, I was particularly interested to see what other financial KPIs\ncould\u2014and those that did not\u2014point to other specific success factors. This article discusses primary\nKPIs for \u0022High Performing Firms.\u0022"]]],[1,"h2",[[0,[],0,"By the numbers \n"]]],[1,"p",[[0,[],0,"As mentioned, the criteria for \u0022High Performing Firms\u0022 were a minimum 20 percent Operating Profit Rate and\nminimum 3.00 Net Revenue Multiplier. The actual median KPIs for the \u201cHigh Performing Firms\u201d were:"]]],[1,"p",[]],[10,0],[1,"p",[[0,[],0,"We start with this KPI because it is the one with which virtually all owners are most familiar and pay first\nattention. Again this year, High Performers almost tripled the Operating Profit Rates of \u0022All Other\nFirms.\u0022 The other KPIs to be discussed will provide more insight into how such results were achieved."]]],[1,"p",[]],[10,1],[1,"p",[[0,[],0,"One of the primary reasons \u201cHigh Performing Firms\u201d were able to achieve such high Operating Profit\nresults was because of the efficient and effective billable production these firms derived on average\nfrom each employee. Net Revenues, which do not include any consultant, direct expense (whether\nreimbursable or not), or any bad debt or write-offs, are 20 percent to 25 percent higher per employee for \u0022High\nPerforming Firms\u0022 than for \u0022All Other Firms.\u0022"]]],[1,"p",[[0,[],0," "]]],[10,2],[1,"p",[[0,[],0,"The high Net Revenues per Employee achieved were a result of firms actively managing their way on\nprojects to these Net Labor Multipliers. Recognize that these multipliers are the overall results from all\nprojects worked on during the entire year. It is not possible here to determine whether the results were\nbecause of higher fees, greater effectiveness \u0026 efficiency, staff mix, technology, or other reasons, but,\nbecause the High Performers comprise a full quarter of respondents, it is probably a combination all of\nthese \u2013 applied continuously project-by-project. Collectively, the reasons could be summarized by calling\nit better overall project management."]]],[1,"p",[[0,[],0,"It is important to note that this high production was not automatically the result of higher Utilization\nRates or Direct Hours per Employee. These KPIs are only fractionally higher for \u201cHigh Performing Firms\u201d\ncompared to the more extreme differences in Net Revenue per Employee, Operating Profit Rate, and Net\nLabor Multiplier, but the differences help."]]],[1,"p",[]],[10,3],[1,"p",[[0,[],0,"Utilization Rate deserves a bit more discussion. It is a commonly-held misnomer that Utilization Rates\nshould be maximized. Based on research by PSMJ Resources, Inc., Utilization Rate has only an 11 percent\nstatistical correlation to Operating Profit Rate. The Net Labor Multiplier, as seen above where \u201cHigh\nPerforming Firms\u201d far exceed \u201cAll Others\u201d, has a 27 percent correlation, but the Total Labor Multiplier, below,\nhas a 47 percent correlation.\n"]]],[1,"p",[[0,[],0,"Utilization Rates measure Direct Labor vs. Total Labor (Direct + Indirect Labor). Granted, Indirect Labor\nincludes Vacation, Holiday \u0026 Sick time, but it also includes administrative (back office) staff \u0026 time,\ncontinuing education \u0026 professional development, and \u2013 most importantly \u2013 marketing time. These\nactivities, especially marketing, are necessary and appropriate. Also recognize that marketing is usually\nconducted by higher ranking (i.e., higher paid) staff, and the Utilization Rate is dollar weighted. As such,\n"],[0,[0],1,"Utilization Rates are something to be optimized rather than maximized."]]],[1,"p",[]],[10,4],[1,"p",[[0,[],0,"Here again, \u201cHigh Performing Firms\u201d do not have markedly lower Overhead Rates (Indirect Labor costs\nbeing the largest component of total overhead expenses). As broken out in the survey, there are no\nmarkedly different per employee expenses on the other major Overhead components, either: Other\nSalary-Related \u0026 Other Staff Expenses, Facility, Corporate, or even non-labor Marketing Expenses.\n"]]],[1,"p",[[0,[],0,"Further, High Performers do not markedly overpay employees\u2014except when it comes to Bonuses per\nEmployee:"]]],[1,"p",[]],[10,5],[1,"p",[[0,[],0,"Even their Salary-Related Expenses, including insurance programs, and 401(k) matches or pension\ncontributions are consistent with All Other Firms. [Note: These other Salary-Related Expenses add an\naverage of about 20 percent to all employees\u2019 salaries. In other words, on average, each employee is actually\npaid their salary plus another 20 percent for statutory \u0026 fringe benefits.]"]]],[1,"p",[]],[10,6],[1,"p",[[0,[],0,"As mentioned above, PSMJ cites the Total Labor Multiplier as the one KPI most highly correlated to\nOperating Profit Rate. Without going through the mathematics, the Total Labor Multiplier is the product\nof Net Labor Multiplier times Utilization Rate. The High Performers achieve their significantly higher\nresult by managing projects towards higher Net Labor Multipliers while optimizing their Utilization\nRates."]]],[1,"p",[[0,[],0,"Do high performing firms continue to out perform year-after-year? The data indicate, yes. "]]],[1,"p",[[0,[],0,"The Deltek report comments:\n"]]],[1,"p",[[0,[],0,"\u201cWe recognize that some High Performers are probably just \u2018one-hit-wonders,\u2019 having a good year\nbefore reverting back to the mean. However, in Deltek\u2019s experience working with thousands of A\u0026E\nfirms, we\u2019ve also found a top tier of companies that meet these high standards year in and year out.\u201d\n"]]],[1,"p",[[0,[],0,"\u201cA common thread is that these High Performers closely monitor their operating metrics, and their\nbetter visibility into the business gives them the insight to manage risk through good times and bad.\nThe result: They do a better job managing projects for clients, can charge higher fees, and are able to\nreward and retain their best people.\u201d\n[Author\u2019s Note: PSMJ has the same experience and draws the same conclusion.]\n"]]],[1,"p",[[0,[],0,"I draw the same conclusions as Deltek \u0026 PSMJ, however, it is based in more evidence from the \u201cHigh\nPerforming Firm\u201d data. Below are metrics that come from the Balance Sheet, and generally reflect the\namounts of money that Stockholders have invested and retained within the firm to finance operations\nand growth, particularly growth of staff. (Each individual new hire generally requires an additional $20K\nto $25K of additional Working Capital.)"]]],[1,"p",[]],[10,7],[1,"p",[[0,[],0,"Somewhat surprising was the extent to which each of these amounts are relatively the same for all firms\u2014regardless of size or type of firm -- with the exception of the High Performers. And we are not talking\nabout slight variances. The High Performers have 50 percent + higher amounts of Working Capital per\nEmployee, Retained Earnings per Employee, and Total Equity per Employee. The higher Retained\nEarnings per Employee shows that these firms already started the year with these higher investments,\nwhich substantiates that argument that they already were previously in the High Performers category.\n"]]],[1,"p",[[0,[],0,"This article started with the statement, \u201cYes, architecture \u0026 engineering firms can make good profits\nand provide stockholders a very good return on their investment.\u201d We have seen that \u201cHigh Performing\nFirms\u201d had triple the Operating Profit Rate of \u201cOther Firms\u201d, but even after paying employees essentially\ntriple as much in bonuses, the \u201cHigh Performing Firms\u201d still realized a Pre-Tax Return on Equity almost\ntriple that of \u201cOther Firms\u201d:"]]],[1,"p",[]],[10,8],[1,"p",[[0,[],0,"Are these returns good? Yes, because this is a number that one can compare to stock market, 401(k),\nand most other financial investment types.\n"]]],[1,"p",[[0,[],0,"Lastly, this year\u2019s \u0022High Performing Firms\u0022 plan to keep up their above average profit performance. With\nbasically the same Net Revenue growth estimates (6 percent) for 2014 as \u201cOther Firms\u201d, the \u201cHigh Performing\nFirms\u201d forecast continued Operating Profit Rates in excess of 20 percent:"]]],[1,"p",[]],[10,9],[1,"h2",[[0,[],0,"Conclusion\n"]]],[1,"p",[[0,[],0,"A recently published AIA Best Practice, \u201c7 Characteristics of High Performing Firms\u201d, states it best:\n\u201cInherent in [High Performing Firms] is a business mindset and discipline to grow revenue and make a\nhealthy profit year after year. \u2026 In a High Performing Firm, attention to these financial performance\nissues becomes as much a focus of the leaders and managers as does design and managing the\npractice. Having a principal or a Chief Financial Officer with a strength in financial management is not\njust a huge asset, but a necessity for monitoring and maintaining the financial health of a High\nPerforming Firm.\u201d"]]],[1,"h3",[[0,[],0,"About the author"]]],[1,"p",[[0,[0],1,"Mike Webber started A\/E FINANCE after years as a CFO. He works with A\u0026E\nPrincipals, PMs and Boards on project \u0026 overall operations management, firm-wide \u0026 operating unit\nbenchmarking \u0026 financial analysis, strategic planning \u0026 turnarounds. "]]]]}
Learn the key indicators for analyzing how some architectural and engineering firms achieve and maintain high financial performance.
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