Metrics that Matter—to You, Your Company and Your Clients

Metrics every day. Not just when you close the books.

Architecture, engineering and construction (AEC) firms need business and operational metrics they can see and respond to everyday—not just when they close the books, as is the case with most firms today. What’s more, they need these metrics at different levels—staff performance, project performance and overall business performance.

The reason? Many firms are trying to improve operational efficiency by increasing the number, size or types of projects they can do with the same or even fewer resources. For AEC firms, which are basically the sum of their projects, there's only one proven way to do this—better project execution. But that requires applying a data-driven and metrics-based approach to projects. Since that's new to many AEC firms, they are often reluctant to make this change.

One challenge: It can be very difficult for AEC firms to understand and measure project execution metrics. Even in small firms, if you ask your staff what metrics they need to deliver projects faster and more efficiently—or manage the overall business better—you’ll end up with easily 50–75 metrics. Yet only a subset of these are really important and easily accessible from applications and information systems that firms currently have in place.

The AEC Top 10

What metrics matter for AEC firms? The answer will change from firm to firm, but most industry experts agree on a common core set that looks something like this.¹

Ten Basic Metrics

1) Backlog
The total value of contract commitments yet to be executed.

2) Bill Rate
Average billable rate achieved by class of consultant

3) Gross Margin (%)
The gross profit generated per dollar of service delivered. (Gross Margin = Total Services Revenue - Cost of Services Delivered (COSD), traditionally called "Cost of Goods Sold" (COGS).

4) Hit Ratio
The competitive success rate of companion proposals in the markets it chooses to compete in. Does not include single-sourced bids.

5) Load Costs
Total business costs that are not directly related to the cost of delivering services.

6) Profit per Project
The profit generated by a specific project. (Project Profits = Total Project Revenue - COSD - Sales Costs).

7) Rate Realization
The amount of revenue actually earned as a percentage of potential revenue represented by the list prices.

8) Sales Costs
The total costs for the selling efforts of each line of business. Total sales costs includes salaries, expense accounts, and commissions for sales management, sales people and sales support.

9) Total Services Revenue
Measurement of the different types of revenue, often measured separately by consulting, solutions and third-party pass-through.

10) Utilization Rate
Measures the organization's ability to maximize its billable resources.

Other useful metrics include:²

Net Multiplier—A measure of markup on labor costs, the net multiplier compares the actual net revenue obtained from each dollar of direct labor charged to projects.
Chargeable Ratio X Net Multiplier—This is a single-solution business indicator that combines the two preceding ratios. This ratio works well for managers needing one overall business indicator.
Overhead before Discretionary Distributions—Since the overhead ratio measures the relationship between general and administrative expenses and direct labor, it typically is an excellent indicator of potential profitability.
Current Ratio—This is a measure of how well a firm can meet current cash obligations.
Average Collection Period (days)—From the day an invoice is issued, this measures how long it takes to receive payment.
Completion to Billings (WIP) [days]—This measures how long it takes to create an invoice for time spent on a project

Choosing the right metrics mix for your business

Despite the above lists, most industry experts caution that there is no one-size-fits-all approach to AEC metrics. Every firm is different, and although most firms will monitor the same core set of metrics, there are other metrics that may be more important to your firm than to others.

After all, your company has its own unique attributes—culture, competition, lifecycle, and service offerings are examples—that should drive which measures are important. And if you track the wrong metrics, the Law of Unintended Consequences can wreck havoc with your change initiatives. It's like playing with a balloon—push in on one side, and the other side bulges out. Instead of moving forward, the problems just change shape.

So how do you determine the right metrics for your business?

First, define your metrics

Even if there are no objective measures in place today, most AEC firms can describe several dozen metrics that are important in helping them do their jobs better. But this raw list includes far too many metrics to measure and contains redundancies and overlap. You must develop a set that is realistic and directly relates to measuring and improving project performance and bottom-line profitability. You do this by looking at metrics in these terms:

Are all dimensions that the metric reflects balanced? As with a balanced scorecard, you want to be sure you don't give people incentives for behaviors that are potentially bad for the company. For example, if you just measure WIP and try to reduce it, project managers may attempt to reduce it by writing it off!
Are measures understood? It is important that everyone understands and agrees in very specific terms on WHAT is being measured, WHY it is being measured, and HOW people can improve their performance against these metrics.
Is the linkage to business performance clear? You have to be very precise about what business results and outcomes you expect from improvement on any given metric. Improved profitability? Increased revenues? Reduced charge off? Improved quality? Improved customer satisfaction? Again, metrics should be context-based, so people understand the difference they can make instead of just feeling compelled to comply.
Is the data available to drive these metrics? This data will be found in your business applications, such as ERP packages, project scheduling, tracking, billing applications, CRM, and sales management systems. If the needed data doesn't exist, can systems easily be built or modified to collect it?

Next, prioritize

This is a process that weighs the business value of a metric against the level of difficulty involved in obtaining and measuring it. A metric may have high potential business value, but if the data to drive it isn't accessible from existing systems, you may want to scratch it off your list or delay its deployment. You may think you absolutely have need a metric, but if it's going to take six months and cost thousands of dollars to extract data to get it, you may want to think again. Instead, identify the low-hanging fruit. These are high-value, easy-to-obtain metrics. For example, a set of metrics to improve project execution might look like Figure 1. The metrics in the upper-left quadrant have high value and the data to drive them is easy to get. It can be pulled from timesheets and other business management applications. This data is often easy to extract and load into whatever application you choose to compile and report metrics.

Utilization Rate has high value because it tells you how well you're using your personnel—your most important and expensive asset. Utilization rate is easy to establish. For example, if full-time employment equals 2080 hours/year, and you subtract 40 hours for training and 80 hours for personal time, it leaves 1940 hours as the 100 percent utilization mark. You can use data from timesheets and ERP applications to drive the calculations to report utilization at any level of the organization—individual, project, group and company.
Realization Rate tells you how profitably you are able to deploy these people. This is simply a measure of how much utilized time is actually chargeable at the employee's bill rate and, again, is easy to establish. (Most firms have labor multiplier targets of two or three times for employees). Again, using timesheets and ERP data, you can determine how much revenue any given employee has generated (given his or her bill rates and utilization) and compare this to the expected realization standard to determine his or her achievement level. Again, this can be generated and reported for any level of the organization.
Day Sales Outstanding (DSO) tells you how effective you are in collecting payment for your efforts. This is a standard measure that all ERP/accounting systems collect as aging invoices.

Likewise, the metrics in the upper-right quadrant have high potential value, but data will be less easy to obtain. Project profitability, for example, involves a lot of different factors, including your allocation of overhead, nonlabor (unit) costs and others. Extracting this information and loading it into metrics-reporting systems will be more challenging and will entail more expense. Similarly, when it comes to resource backlog, there are frequently many different people involved, assignments are not always clear, project changes are frequent, and people often contend for the same resources. Again, this makes it difficult to find a simplified and efficient way to gather the data needed to establish and measure this as a metric.

Next, look at standardization and process improvement

When you know what you want to measure, reviewing your most important processes can generate new ideas and opportunities to streamline, simplify and improve quality. This may sound like basic common sense. However, it helps to have skills and experience in structured process analysis techniques—still a luxury for many AEC firms today. What kinds of skills and experience are needed? An understanding of techniques such as value chain analysis, process modeling and simulation, root-cause analysis, scheduling and workflow optimization, benchmarking and best practice assessment, and financial analysis.

That's why it's often important to bring in outside consultants who specialize in process analysis, preferably ones with a solid grasp of your industry and who are committed to transferring knowledge to your staff.

One valuable byproduct of this process is that, along the way, it teaches your team to continuously improve other processes. And engaging your firm’s people in defining, designing, and evaluating the processes (and metrics) builds understanding, acceptance, and accountability.

Now tie them to performance

As this process unfolds, you’ll want to consider several additional elements to keep people involved and committed.

The first is performance goal setting. As metrics and process changes are developed, you’ll want to define current performance levels and develop targeted improvement goals. These goals are defined at the company, unit, project and individual levels. The company’s performance review process should be amended to include results against these metrics. Comprehensive implementation and communication plans should be developed to keep all staff informed, aware and engaged in the process.

And make them something employees use everyday

Metrics are driven by data contained in your application database. Once you identify these data sources and create methods to extract the data, you need to determine presentation and reporting requirements for delivering timely, role-specific performance information. Considerations here include:

Performance Views. Depending on your employees’ roles, they’ll need different metrics that reflect on different levels of performance. Individuals, for example, are most interested in personal metrics, such as utilization rates. Project managers need meet metrics on team utilization and WIP. Other managers need business-unit metrics. Executives need metrics, such as overall utilization, realization rates and day sales outstanding, as well as the ability to drill down to the underlying data driving those metrics.
Portals and Dashboards. Portals are the most effective way to present metrics to the various people in your company. Properly designed and implemented, they are secure, reliable, require little training, present role-specific information and allow users to drill down into the information. They also have the advantage of being a “one-stop shop” for your firm by serving as the core of your intranet. That means that every time employees sign onto the network, they can be presented with a customized portal page that displays real-time information regarding their specific activities and be prompted to take action to improve their performance outcomes—and your business results.

Metrics will change your firm's culture. Are you ready to make them stick?

Running your firm with a metrics-based approach isn't an initiative to be undertaken lightly. It will require fundamental change in the way employees do their jobs and they way managers evaluate and reward performance. You'll need a comprehensive training approach to ensure that new knowledge and practices are distributed and understood. This includes clarification of roles and accountabilities, definitions of metrics and KPIs, a new performance review process, and correct usage of information systems.

And there's another law of physics to be reckoned with—inertia. Any change in practices will cause friction in your firm. Some employees will understand the need for change and buy into it enthusiastically. Others will sit on the fence. Still others will resist any attempts to change their familiar routines and habits. As a result, careful change management will be critical to realizing business performance improvements through metrics. That will involve much greater levels of communication and explanation at every step of the way to ensure employees completely understand what's in it for them.

At Systems Consulting Group, we've found that developing an eLearning capability is also very valuable to AEC firms. This can be as robust or lightweight as appropriate, but investing in a means to inform and train your staff in the various measures, processes and systems you use has a tremendous payoff. This is especially true if your company is geographically dispersed or if you bring on significant numbers of new employees seasonally.

Still need convincing?

If you have any doubt about whether the effort is worth it, listen to the IT director of one medium-sized AEC firm we've worked with: "It's really changing our culture," he says. "Before, given the thousands of projects we were completing each year, we had only a limited understanding of how—and what—we were doing on a daily operational basis. We just didn't have the skills or the time to get things under control. So a lot of things just fell through the cracks, resulting in write-offs, poor utilization, long delays in billing and a host of other problems that were simply related to our inability to track operational and financial details on a proactive, real-time basis. Bottom line: we were a lot less profitable than we could have been."

And since they adopted a metrics-based approach? "Now we're delivering objective data every day to project managers and our leadership team that is dramatically reshaping our operational and financial efficiency. Everybody works differently. And because we compare current metrics with improvement objectives at an individual, departmental and overall company level, no one is just doing the same old job. Instead, they are always thinking of ways to improve their own efficiency and deliver faster and better service to clients."

¹White Paper, Thomas Lah, "Metrics that Matter."

²2006 Operating Statistics Survey, Deltek Systems