Successful engineering firms have a thorough, clear, and detailed business strategy. Their c-suite know the direction they want the business to take. These organisations are often exceptionally good at tracking what matters. For example, they measure how their digital, AI (Artificial Intelligence) or analytic transformations are progressing to capture their full potential. They have a deep understanding of where margins are suboptimal and can choose to meaningfully concentrate their efforts on projects and clients that make the biggest impact.
How do they achieve this? They choose KPIs (key performance indicators) that will form an integral part of that strategy to success. Tracking KPIs is crucial for businesses in a time of digital, AI, analytics, and economic challenges such as rising interest rates. These indicators help to identify areas of lagging efficiencies versus those areas of the business with the best working capital conversions. Deltek's 4th Annual EMEA and APAC Clarity Industry Study examined the challenges and opportunities of the architecture, engineering, and consultancy sector, and one of the important focus points was the measuring and tracking of KPIs.
The adoption of KPIs in the engineering industry
The study indicated that most engineering firms surveyed monitor KPIs, particularly in relation to financial performance. A promising indication of well-defined business strategies and performance evaluation.
Nevertheless, the data showed that there is still room for improvement. The report brought to light an opportunity for monitoring of crucial business performance metrics, which firms can proactively address to enhance their operations.
Based on the report’s findings, margins (80 per cent), net revenue (80 per cent), and revenue factor (79 per cent) emerge as the KPIs most frequently monitored by engineering firms. Two of the KPIs less likely to be tracked are net labour margin (64 per cent) and backlog (71 per cent). Based on these findings, engineering companies are rightfully monitoring profits, however, to drive material impact and achieve a holistic view, it is crucial to reduce the data gap.
The net labour margin and backlog KPIs present significant opportunities to make operational efficiencies which will lead to increased profits, improved client satisfaction, and a reduced risk of employee burnout. That said, the report revealed that engineering firms do have ambitions for improving KPI monitoring. When asked which KPIs are not tracked well enough, the top answer was average collection period (29 per cent).
Engineering firms also reported revenue factor (27 per cent) and backlog (25 per cent) as ‘needing work’. Nearly three in five (59 per cent) engineering firms alluded to having ‘high confidence’ in their ability to accurately report on project profitability, signalling that even though the focus for most is on tracking profits, there’s still room for firms to track and analyse other financial performance metrics related to their projects. And this needn't take long and can produce tremendous value if those KPI’s are simple, measurable, and timely, to make data driven decisions. Without which, firms will be hard pressed to have laser focus on higher margin work and meet clients' objectives effectively.
Strategic KPI alignment
Setting KPIs does not follow a universal template, as the chosen metrics depend on the specific goals and objectives of each business. However, it is advisable for companies to focus on the metrics that align most effectively with their overarching business strategy and prioritise the key indicators that can genuinely and tangibly impact the business.
Initially, business leaders should consider their yearly objectives, which are likely to vary across parts of the business. For example, the objectives of project management and human resources will obviously be different. By establishing a clear success criterion, businesses can effectively employ KPIs to evaluate their progress in achieving these objectives or, at the very least, make substantial strides towards them.
It is crucial for engineering firms to maintain a balanced approach to their KPIs. Every company goal is likely to influence others, necessitating a thorough evaluation of potential trade-offs between KPIs. For instance, striving to achieve a high staff utilisation target provides an opportunity to strike a balance that promotes a better work-life balance and fosters ample room for professional development opportunities. In such scenarios, conversations will come into play, and businesses might need to consider some compromises. The magic lies in setting goals that harmoniously complement each other, paving the way to achieve the fundamental objectives of the firm.
KPI strategies: Behind the data
Monitoring KPIs goes far beyond the data. It is also about what businesses do with that data that helps them to learn, take corrective action where needed and use it as a guiding force to make smarter decisions. This means understanding the data, identifying the trends, and ensuring the organisation is acting from a single verified version of the truth. There can sometimes be a disconnect between setting goals and tracking progress. Some companies set ambitious goals, but then do not track their progress or make changes as needed. This can lead to missed opportunities and, failure to achieve those goals. The organisation must commit to its KPI improvements.
In terms of monitoring, the frequency of reviewing KPIs varies depending on the KPI and the company's goals. It is important to consider the nature of the KPI, the industry, and personal objectives when determining the right monitoring frequency. Outlining an evaluation period at the same time as setting the goal is prudent. Doing so, will enable businesses to identify trends and challenges and make necessary adjustments to their strategy.
Given the current climate, where organisations are embarking on new digital initiatives, the economy is volatile, and clients are demanding more, measuring whether you are delivering on results is paramount.
Establishing precise and meaningful KPIs remains a crucial method for businesses to ensure they are on the right path. These KPIs act as a roadmap, so that leaders have a cross company perspective and can adjust where necessary to ensure their next moves are profitable.
Neil Davidson, group vice president, Deltek
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