Our exclusive analysis of the RIBA Business Benchmarking report shows that as practices feel the effects of recessionary thaw, working to internal standards is vital to flourish
This year’s RIBA Business Benchmarking report, just released, highlights again the duality of the architectural profession.
The vast majority of practices are tiny, local, serve a residential market and focus on the challenge of running really very small, hand to mouth operations: more than half of the businesses in this survey consist of fewer than five people. However, most architects work in a handful of practices with more than 20 headcount, where the business challenges, client base and project types are completely different. Both business models are representative of the architectural profession and yet each could not be more different from the other. Between the two extremes, the medium sized practices look both ways, operating in the domestic world that suits the hands-on service provided by small practices, while also competing in the world of corporate and public sector clients, whose risk aversion and process driven procurement routes favour larger firms.
Given the diversity of the market place, those in charge of each practice need to know what kind of firm they want to create. Simply being a good architect is unlikely to be enough
Yet many of those running smaller practices want to break into the markets that prefer larger scale practices. If they are to succeed, the learning curve will be huge: of course, the architectural challenges will be new and stimulating but it will be their ability to rise to the business challenges and shrug off ‘small practice mentality’ that will determine their long term success.
Given the diversity of the market place, those in charge of each practice need to know what kind of firm they want to create. If the vision is to run a small, local firm, then the business ingredients of marketing, finance, technology, staff and clients will be quite different to that required in a large, international business with major civic and public sector clients – and it will be different again for any practice between these two extremes. Either way, simply being a good architect is unlikely to be enough. To run a successful and fulfilling architectural business, someone in the practice needs to focus on the strategic vision and have both the skills and the passion to develop the business side of the venture.
Measuring beyond money
If architecture were simply about making money then it would be easy to set a string of business benchmarks based on financial performance. However, each practice has a subtly different vision of its future and therefore its own version of what business success looks like. For this reason, the Colander benchmarks in this survey are limited to six core measures, addressing simple business targets that any well-run practice should hope to reach: profit as a percentage of turnover, salaries as a percentage of expenses, percentage of headcount that is non-fee earning, marketing expenditure as a percentage of turnover, jobs won as a percentage of jobs chased, and maximum percentage of turnover from any one client sector or client.
Across the country, practices average a healthy profit margin of just over 20%. However, this figure conceals some worrying variations in fortunes, especially at the larger end of the spectrum: almost 60% of the largest practices do not meet our benchmark for profitability, which is set at 15%; more than a third fail to muster even 10% profit. The percentage of practices falling below this benchmark is lower for smaller practices but in all, 40% of RIBA chartered practices fail to meet this important benchmark.
Of course, some practices perform very much better than this; just under half achieve profit margins that exceed the benchmark by 20% or more, and this includes almost 30% of the largest firms. So it is possible to return vigorous profits regardless of practice size.
Of course, in real money, larger practices’ profit is considerably higher than even the most profitable smaller firms: the handful of those with more than 50 people account for more than 40% of the profit achieved by the entire profession.
Colander has set a benchmark of 70% of expenses going on salaries, excluding bonuses and other ‘add-ons’. Bearing in mind the economic climate recently, it is not surprising that the average remains low: 68%. However, this is higher than last year and should continue to rise as the recession eases.
Practices that fall below this benchmark should review their business strategies: unless they are poor payers, they may be working with too few or too junior staff; alternatively, elements of their ‘other expenses’ may be too high. By contrast, if a high score against this measure is matched by a low turnover and profit per fee earner, then the practice may be over-resourced or top-heavy.
It is tempting to save on non-fee earning salaries and use junior fee earners to undertake admin and support functions. Assuming that architects earn more than admin staff, this is clearly a nonsense
Non-fee earner headcount
With the increasing use of technology, it is tempting to save on non-fee earning salaries and use junior fee earners to undertake admin and support functions that should be done by non-qualified staff. Assuming that architects earn more than admin staff, this is clearly a nonsense and is almost certainly a factor in the low average turnover per fee earner achieved by smaller practices.
Having too many support staff is inefficient – but so is having too few. Colander has set a benchmark of one non-fee earner for every five fee earners. Excluding those firms that have no employees, just over a quarter of RIBA chartered practices fall within 5% of this benchmark. Understandably, small practices tend to fare particularly badly against this measure.
Just under 40% have dedicated accounting staff; 20% have dedicated IT staff and 16% have dedicated marketing staff.
When it comes to marketing expenditure, conventional advice varies hugely: anything up to 20% of turnover! Determining factors include the size of the business, its maturity, the markets in which it is working, how established it is in those markets and the speed at which it hopes to grow, if at all.
On average, RIBA chartered practices spend 2% of their turnover on marketing, just hitting our benchmark of 2% to 5%. This includes the salaries of dedicated marketing staff but not time spent by fee earners pitching for new work. It is appropriate to maintain existing visibility or achieve steady growth. For practices looking to grow more rapidly the percentage could well rise.
Given that over 40% of practices say that they win 70% or more of the projects they chase, it is disappointing to see that there remains no correlation between success at winning work and profitability
Colander has set the benchmark for winning work at 50% of the projects chased. Of the practices in this survey, 70% meet this benchmark; on average firms win just under 60% of the projects they chase. These figures include repeat business (which accounts for almost 40% of new work) and projects won through direct, uncompetitive approaches.
Given that over 40% of practices say that they win 70% or more of the projects they chase, it is disappointing to see that there remains no correlation between success at winning work and profitability.
Risk and reliance
As in previous years, our benchmark suggests that no more than 40% of turnover should come from any one sector (or from any one client for small practices). This is about risk aversion: most practices can just about survive the loss of around 40% of their business; any more becomes a serious struggle.
On average, practices in this survey work in 7.6 sectors. However, this apparently varied workload masks a worrying reliance on single sectors, as most practices, regardless of size, fail to meet the benchmark. For large practices especially, meeting it should be a vital part of a risk management strategy.
The RIBA Business Benchmark report is an independent report based on returns by RIBA chartered practices and written for the RIBA by Colander Associates . www.colander.co.uk
Caroline Cole is director of Colander Associates
International work is increasingly important to RIBA chartered practices: 16% of their total income comes from projects outside the UK. The vast majority of this is earned by practices with more than 50 people – overseas work accounts for more than a quarter of their income – however, the large practices are by no means the only ones to benefit from UK design’s high global profile: last year, 20% of practices earned fees from international projects.
The Middle East; South, South East and East Asia; the European Union (excluding UK) and northern America each contribute 15% or more of the profession’s overseas income. The focus for smaller practices is the European Union (excluding UK), while the most productive region for larger practices is the Middle East.
Private corporate clients supply 60% of international income, while 15% comes from the public sector; 8% from domestic clients and 7% from not for profit organisations. In line with client types in the UK, smaller practices gain a large percentage of their international income from domestic clients, while the larger practices gain more from private corporate clients.
Mixed-use projects and offices account for the highest percentages of income earned on international projects. Smaller practices gain most from residential projects; medium-sized firms focus on retail, sports and leisure while for large practices, mixed-use and offices dominate.
Just under half of the practices working on international projects earn fees from a full architects’ service. However, the main emphasis is on front end services: over 60% earn fees for design services to planning only, and over half from feasibility studies and master planning; for larger practices the percentage is over 80%. It is worth noting that more than half of the practices working on international projects earn fees from consultancy and advisory services.