Working at the margins

In theory, profit is a pretty straight­forward concept: maximise your income, minimise your outgoings and you’ll make a healthy one. In practice, it’s all a bit more complex.

In the 2012/13 Business Benchmarking Survey of RIBA Chartered Practices, we were pleasantly surprised to see that practices aver­aged almost 22% profit, substantially higher than the benchmark of 15%. An encouraging headline – but this figure conceals dramatic variations in fortunes across the country.

In the West Midlands a remarkable 70% of practices exceed the benchmark; and 68% in the North East. But it drops to only 47% of practices in Yorkshire and 56% in the North West. Both these regions, alongside Wales and East of England, also have an alarmingly high percentage of loss making practices. However, on its own, profit to turnover is rather meaningless and has little bearing on the profit that practices achieve in real money. So more interesting are turnover and profit per fee ­earner. 

Across the survey, turnover per fee earner averages £80,000, but in East of England and Wessex this plummets to £60,000. In Northern Ireland, Scotland, South West and Wales the figure is still below £65,000. Four regions average £70,000-£75,000: North East, South East, North West and Yorkshire. In London, practices average an enviable £98,000. 

So why this discrepancy? The bench­marking survey does not delve into the ­details of fee levels. However, we know from previous surveys that some client sectors deliver considerably higher fees than others. Equally, it would be fair to assume that within the ­domestic market, where most small practices operate, fees will vary in line with the local economy. We know that larger practices, ­operating nationally and internationally, ­average almost twice the turnover per fee earner of small practices. So it is hardly surprising that those in East of England, for ­example – where 84% have fewer than five people and only 5% have above 20 – average such a low turnover per fee earner. By contrast, 14% of practices in London exceed 20 people.

Danger within

However, many internal operating factors also affect profitability: the practice structure – the ratio of different fee earners – headcount, salaries and charge out rates; the amount, ­value and level of spare capacity; the ratio of fee earners to non-fee earners; and the level of fixed and variable expenses.

Looking at profit per fee earner, London practices top the list with an average  £23,000 profit per fee earner, around 23% profit, which is good but not that good: practices in West Midlands average a 27% margin, as do those in Northern Ireland and South East; in Wales this is 25%. At the other end of the scale, practices in North West average only 11% from a very reasonable turnover per fee earner of £74,000; as a result, they average one of the lowest profit per fee earner figures: ­under £8,200. Similarly, practices in Yorkshire achieve only 16% from a healthy £75,000 turnover. However, the region suffering most is Wessex. Here, practices average one of the lowest turnover per fee earner rates, and scrape 12% profit per fee earner: just £7,300. 

It is worth noting that all figures quoted here are averages and in some of the smaller regions loss making practices and a few larger practices can affect the overall figures. In every region some practices perform very much better, and some very much worse, than these figures suggest. So, if you are thinking of setting up shop in another region, do your homework at a local level. It goes without saying that you should also aim to be as efficient as possible so, even if your income is relatively small, you make it work as hard as possible.

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Caroline Cole is director of Colander

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