Highlights of Deltek’s 41st Annual Clarity Architecture & Engineering Industry Study

ACEC:

Early on in the study, you say the changes that we’ve seen in the market over the past few months due to the pandemic make benchmarking even more critical for a firm’s success. Why is that?

Miller:

When you look at what happens with benchmarking, a lot of times companies are looking not only at industry benchmarks, but also evaluating their own numbers on an annual basis, or as they prepare for strategic planning. And as things are changing so rapidly, it just becomes more important that companies are keeping a closer eye on those metrics more regularly, because those things are, as we know, going to change and they’re going to evolve. And as you’re looking at those numbers and you’re monitoring what’s happening in your business, then you’re able to adjust or able to make decisions based on what’s happening in your business more quickly, if you’re seeing those changes happen more frequently.

ACEC:

On that, is it, as the pandemic, the impact of the pandemic works its way through the market, it’s going to affect those numbers, isn’t it? I mean, how do you pick the numbers that you want to benchmark against because the market is changing as we go along,

Miller:

Right? So when you’re looking at the numbers, it’s really, you know, the number itself is a piece of the story, but it’s really understanding what that number is telling you about your business. So if you have a certain utilization rate, you know, looking at that and knowing what that was pre-pandemic times and looking at 2019, you’re going to want to caveat that when you set your targets as you go into 2020 and figure out what the actual impacts are going to be of this. That’s still your target, but you have to be realistic. And knowing that may not be achievable now, but if it’s dropping drastically, is that something that you expected and do you know why in each of those metrics, just so that you better understand the details behind it, not necessarily the number itself.

ACEC:

So you’re basically using it as a, I guess, benchmark and saying that it’s what you’re comparing your performance to. And as time goes on, you say, is this a reasonable performance versus what we thought we could do,

Miller:

Right. And I think part of that, you look at it too and say, as you look at multiple KPIs, if you’re seeing a significant drop in one in your business, but not the others. So if you’re looking at the benchmarks in the report and you’re 20% below what that number is in one area, but not in the others, then that tells you that there may be some imbalance in something you need to address in the business. If you’re having a consistent decrease across those metrics then you’re probably where you need to be across the business, but seeing how those impact each other really becomes a key piece of that story.

ACEC:

In this study, you’ve covered a lot of key performance benchmarks. In a time like this, which ones would you recommend the firms focus on?

Miller:

Some of the ones that we really recommend focusing on are those that allow you to look at different aspects of the business. Often times when it comes to KPIs, firms really focus on financials, especially in an uncertain times like this, but it’s really looking at the whole story. So while the operating profit and looking at your utilization and how your collections are happening is vital to seeing what’s happening in the business, it’s also important to be monitoring what’s happening in your pipeline. What’s coming down the pipe or not coming. You can monitor some of that through your win rates or in some of those win rates, making sure that you’re digging a little bit deeper and seeing if there a lot of “No” decisions that are happening in those projects. That may be an indicator of some things that are happening in those particular markets. Some of the other metrics that we always encourage people to monitor closely are those around projects specifically. So there’s a couple in there in terms of projects on or under budget and projects on or ahead of schedule. So making sure that you’re keeping track of that and that project managers can see that information readily. If projects get delayed, if there’s changes to what’s happening in those projects, as a result of this uncertainty, it’s important that they’re able to proactively manage that and see what’s happening and adjust accordingly.

ACEC:

To take the project schedule benchmark as an example. A lot of projects have been delayed. Is it basically a situation of a starting up again once you get started and sort of just take that delay as having been a “Deus ex Machina” situation that just came in and now it’s gone, or is that something you incorporate into your numbers?

Miller:

So I think when you’re looking at those, when I look at the project schedules and whether they’re on track, are there indicators that you have the ability to influence? So are you not scheduling appropriately? Do you not have the resources you need that’s impacting those delays? If there’s projects that have been put on hold or they’re delayed, I would look at those as a project stop and a start. Not that they’re necessarily delayed, but if you start to keep track of those and you find that, for example, I’m looking at the healthcare market and out of the 10 projects we have, eight of those have been delayed that can start to tell you different things that you may need to do in that market for your business. So tracking some of those can really provide some key insights to your business as well.

ACEC:

In the financial area, you, the firms had a current ratio of 2.87 and a debt to equity ratio of 0.76, which as you mentioned in the study suggest that they’re well situated for the economic slowdown. Is there any other data in the study that’s supports that conclusion or contradicts it?

Miller:

I think some of the things that we looked at,specifically is around the trends over the past several years, and especially looking at the financial side of it for those benchmarks We’ve seen an increase in many of those for the last eight years. We’ve seen that strong financial performance. So we haven’t seen a lot of fluctuation. We haven’t seen large dips in the operating profits and other areas. So we really see that’s showing that firms have been strong. They’ve had a lot of work and projects and financially they’re in a good position. We also look at some of the challenges that firms look at and the top challenges this year really show us that if the financial stability of the industry was a challenge, then we would see more focus on cashflow and unpredictable spending environment. And some of those challenges that we’ve seen probably seven years ago or so that those became the top focus. Now we’re seeing firms focused on increasing profitability and really on the financial challenges. The second one that’s identified this year is finding and retaining qualified staff. So having that strong financial position means that those companies can start to focus on other areas of the business and address some other things that may be impacting their businesses.

ACEC:

Does it also speak to the health of the industry? Because I think I recall that the operating profit has gone up for seven or eight consecutive years.

Miller:

Yes. So if we look back at the trend there. We look at the last 10 years and I could go back further than that, but at least for the last 10 years, that number has grown every year in the past 10 years for operating profit. The other thing that we also look at is the factor in what a high performing firm is. And we look at those that have an operating profit above 15% and the net labor multiplier above three. This is the second year in a row that our net labor multiplier average is above that 3.0 threshold. So again, just pointing to the strong financial performance, our operating profit on average was also above that high performer threshold on average. So we’ve got some firms that really have had some strong financial years that I think is putting them in a good position, but I do think firms were a little bit more conservative going into this year totoo. When we start to look at the net revenue growth forecast, we saw a little bit more conservative approach to that going into this year, even before the pandemic.

Miller:

And so I think firms are we’re already a bit hesitant of maybe not reaching those same thresholds and those same numbers coming into 2020. So hopefully they were already starting to prepare and plan for if something would happen and how that would impact their business

ACEC:

Because of that strong financial performance we’ve seen over the past several years. Is that a function of the market or is it a function of how firms are improving their operations? I know that’s a tough call.

Miller:

I think it’s a little bit of both, because I think when you look at the markets, one of the key indicators that we see, especially for architecture and engineering is when you have strong private and public markets, it makes it easier for these companies to be successful. So when we come out of economic downturns, we usually see one area of the industry coming back stronger. Both of those sides of the industry really have been strong for several years. When we have conversations with companies around the country, they all seem to say the same thing. They’re really busy. They have a lot of work. As we even saw in the Clarity report, they have strong backlogs. They’re looking at backlogs in excess of seven plus months at any given time. So they’re feeling confident that they have work to rely on for the months to come.

Miller:

And they are just seeing that there’s more work out there. There’s not a lack of projects. There’s not projects that are getting defunded. Some of that though, to your point, is also efficiency internally. People are leveraging more technology. They’re looking at their processes internally and making them more efficient so that they can increase that profitability. They’re able to reach some of their targets. They can attract the right talent so that they can fill some of those vacant seats. I really do think that for many companies, it’s a combination of both. They’ree successful in the projects that they’re winning but they’re also becoming more sophisticated in how they run their businesses.

ACEC:

I don’t know if this is a function of that, but one of the things that jumped out at me was that 60% of the contracts of the respondents are fixed price. Is that something that contributes to an improved bottom line? Is that a growing trend that you’ve seen?

Miller:

I looked back at a couple of the past years there, and I think it’s pretty close to that 60% for the past few years. So if I look at 2018, or 2017, it was 57% and in 2018, it was 59%. So there’s some incremental increases in more of that fixed price, but I do think that that gives companies more flexibility in how they leverage those contracts, if they have more of those fixed price fee structures in place.

ACEC:

I was looking at your data on client relationships and three things jumped out at me, and I’m not sure if they’re contradictory or if they’re complimentary. First, the firms said that their top business development challenge is nurturing client relationships, but then they also said that the only 44% of the firms actually measure client satisfaction, but then conversely 76% of the firms said they are good at client relationships. Are those complimentary in some way that I don’t see?

Miller:

So I think in some ways it’s the perspective of the different areas of the business. So when I look at nurturing client relationships, I look at that from the business development perspective and really having time to invest in those relationships, staying out in front of the next big project, and making sure that you’re top of mind when another project comes out. When it comes to client satisfaction and measuring that specifically, oftentimes that’s done when a project is completed. It’s not done early on in the process, right? So it’s not always done throughout the lifecycle of the project. It’s often only done at the end. Some companies feel like they get that feedback without doing formal client satisfaction reports, so I think that’s where you get that 76% thinks they’re great at these client relationships, yet only 44% are measuring. Some I think are measuring in a different way. They’re just not doing those formal evaluations. And I think this industry is always striving to do better. They’re always pressed for time. I think their challenge will continue to be making time for business development and making that client nurturing a key priority for their businesses.

ACEC:

On that 44%, it seems to me like a no brainer to measure your client satisfaction. If you measure your client’s satisfaction from the previous job, you are basically setting yourself up for the next one. Is that 44%–I didn’t look back to previous studies–is that ncreasing? Is it decreasing? Staying the same?

Miller:

For this year in particular, it did go down quite a bit, surprisingly, and what’s even more interesting is the frequency of measuring that client satisfaction. So I mentioned that project complete, there are a lot of companies that only do this once a year, and they’re not really getting that feedback on each project in some cases. Again, I think that’s a time thing and it’s not seen as top priority. We’re finished with the project and we’re moving onto the next one. But I think there’s a huge opportunity there for companies to really get that feedback. I will say that it’s important to get that feedback from the right person, or have the right person go and seek that feedback. Because if, for example, a project manager was a challenge on a project, that client may not tell the project manager that that was part of the issue that they may have had, and it could create issues like you said, of going after the next project.

Miller:

So that’s one area that I really think that companies should be taking advantage of and finding a way to be able to do more with client satisfaction, even if it’s not a super formal process, but being able to do that. So that really you can make sure that what’s happening on the business development side and those nurturing of those relationships is also carrying through. And there’s a connection there between the project delivery and the business development. So that we’re all instinct with what’s happening with this client, how we’re focusing on this client and we, whether we’re positioned well to go after the next project.

ACEC:

You’ve mentioned a couple of times that attracting good candidates is a prime concern and challenge for a lot of firms. Employee turnover in this study was about 13% annually. Is this high for our industry? And relative to other industries is it high?

Miller:

Across the board for the past several years, it’s about the same for what we’ve seen for turnover. From the Clarity Report specifically, we know that professional services firms on average have about 11%. So I would say that from an overall professional services perspective, the A&E industry does tend to be higher than that number. Historically I think we’ve come down a little bit. There have been some peaks and valleys in this particular metric, but we tend to hover right around that 13%, 14% for turnover in this industry

ACEC:

And in an economic slowdown, does that number go up? Does it go down as people try to hold onto their jobs? Or what did you find?

Miller:

I think some of that’s really going to depend on the different markets and the different companies, and where they typically are working. So if they work more in the public sector, they may see an increase in employees and they may see that they need more positions filled and they may lose fewer employees. The flip side is that there could be some challenges with people having too much to do if they do see an influx in one market or the other. The flip side of that obviously is that we have seen some companies that there have been some furloughs and there have been some challenges in keeping staff. I think really what companies need to be looking at in their turnover is, is it voluntary? Is it involuntary? What’s happening in that? So maybe there’s something that’s more appealing in a different company that companies need to be considering. And just making sure that again, they’re watching what’s happening with the workload so that they can adjust accordingly. We anticipate that there’ll be some increase in this, but a lot of that is just going to depend on the duration of the pandemic and the impact to see how far is this going to go and how deep will this continue to impact companies.

ACEC:

In their going out in the market and looking for candidates, I was struck that 33% of firms track passive candidates, which jumped 8% from the previous year. What exactly is tracking passive candidates? And why did that jump so much?

Miller:

If you think of tracking passive candidates, it’s really keeping a portfolio, so to speak of possible candidates. So if I know that there is a project manager at a company who is a strong project manager, andthey have a great relationship with certain clients that we work with. And maybe because of some relationships that they have with others within my company, I know maybe they’re not a hundred percent happy where they are. They may not be ready to make a move, but I want to keep in touch with them and I want to keep them on my radar. So if you think about it, it’s similar to business development. You’re building those relationships. You’re building that pipeline of candidates in the same way that you would a pipeline of potential prospects or clients. I think we’re seeing much more of a move to this because again, looking at the challenges in all the different areas, financial has finding and retaining talent, project manager has staff shortages and competing priorities, so this piece of the business really has become much more of a focus for many firms. They’re becoming more strategic about it. It’s a more integrated process across the entire business. And many companies are moving to a more modern recruiting strategy. And one of those strategies is to really keep that pipeline of potential candidates for when the right position becomes available. You’re not starting from scratch and then trying to find anybody that might be interested. You’ve already identified some potential candidates to start those conversations. And it’s more of a warm lead for recruiting in the same way that you would want a warm lead from a business development perspective.

ACEC:

From all you’ve said during our discussion, it seems to me that engineering firms are getting more operationally effective as the years go by. Would you agree?

Miller:

I think in some companies, absolutely. I think there are many companies that are becoming much more strategic. They’re becoming much more savvy in the way that they’re running their businesses. But I do think in some cases, there are some companies where there’s still some work to be done. It may be in their processes. It may be how they’re leveraging technology, but many companies are looking at,the way we’ve been doing things for that past 20 years and saying that may not be the best way to do it anymore. And they’re leveraging the expertise of their staff to find ways to make things better. For the companies that are doing that. I think they’re seeing some of the progress like we’ve talked about here. In other companies, there are still opportunities for them to take advantage–whether it’s the technology, whether it’s the process improvement–to be able to put themselves in that same type of position.

ACEC:

If an engineering firm wants to get a hold of this study, how would they do that?

Miller:

If you want to, go to deltek.com/clarity-AE, then you can download the report. It is a complimentary report that we provide to the industry. In there you can find dozens of benchmarks. You can see some of these ten-year trends in all of these different sections of the report. So we encourage you to check that out. We also have deep-dive webinars on each of these that are also available, so you can dig into the results a little bit more, understand a little bit more about those trends, to be able to better understand what you can do with this information. Because again, the number is just a piece of the story. It’s what your numbers are telling you, and really what you can do with that information to drive change, and to be a catalyst for conversations within your company.

ACEC:

And I would concur it’s an exceptional report. So thanks so much, Megan, for taking the time to speak with us today.

Miller:

Thank you. I appreciate the opportunity.