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Business benchmarking
We all know it’s been a tough 12 months – but where does that leave the profession? The RIBA annual Business Benchmarking survey lays bare the figures and trends. 

This year, 20% more practices took part in the RIBA’s annual Business Benchmarking survey. Although there is still some way to go before it is truly representative of the architectural profession, this is a great step in the right direction: just under 7% of chartered practices across the UK submitted data.  Together, these practices employ more than 4,250 people and work on projects for almost 8,000 clients; they have a combined income of just under £0.29bn and have achieved, between them, £52m profit. 

Shrinking market
So what are the headline stories? As expected, we are living in a shrinking market.  Despite a 20% rise in the number of practices taking part in the survey, neither the number of clients nor the total income have increased proportionately.  Perhaps more worrying is that the profession’s response to this reduced income has been slow: the total profit achieved by practices in this year’s survey is pretty much the same as that achieved by the fewer practices last year. 

The good news is that 57% of participating practices have met the Colander benchmark of achieving a 15% profit to turnover ratio.  The bad news is that this is 10% down on last year’s figure and is likely to drop significantly next year, as roll over fees on projects secured in the good times tail off.  Interestingly, the smaller practices (those with a headcount of up to 10 people) average a significantly higher profit to turnover ratio: 25% as compared to 16% for the larger practices.  Of course, in real money, the profits achieved by the larger practices are considerably higher than those of their smaller counterparts: on average five times higher.

Turnover per fee earner remains low again this year, at less than £70,000, although it is higher for the larger practices and also for London based practices.  Over the years of benchmarking architects, we have found profit per fee earner to be a significant measure for the profession. As expected from previous years, this is a measure that the larger practices find difficult to sustain, which suggests that growth and efficiency do not necessarily go hand in hand. Remarkably, there is a significant difference between London and regional practices on this measure, with London practices averaging almost twice the level of profit per fee earner as their regional counterparts.  This is a worrying discrepancy, suggesting unacceptable levels of inefficiency in some regional practices.

Cutting costs?
So what are practices doing to cut their costs?  While some have clearly made swingeing cuts to reflect their reduced income, the falling percentage of practices meeting the benchmark for profit to turnover suggests that, for many, the simple answer is: ‘not enough’.  Responding to feedback from respondents, the 2009 questionnaire was slimmed down by approximately one third, to around 20 questions, so we do not have the level of detail that would be required to comprehensively answer this question.  However, we do ask practices to give us a breakdown of their expenses against salaries, premises, IT and marketing and it is worth analysing how the allocation of money to each of these aspects of running a business have changed, year on year.

Salaries
In the pre-recession years, we saw basic salaries rising well above the rate of inflation and, as a result, the percentage of expenses allocated to salaries also rose steadily.  We would expect salaries to account for around 70% of expenses, which of course puts staff in the front line for cost cutting, whether through redundancies to reduce numbers or through salary cuts to reduce costs without undermining the skills in the practice.

This survey suggests that many practices are still struggling with an over inflated salary bill with almost 60% of the participating practices allocating more than 70% of their expenses to salaries.  Rather alarmingly, compared to last year’s figures, average salaries rose this year across all levels – except equity partners in small practices who faced, on average, a 10% cut.  This suggests that, when these figures were compiled, practices were using the recession to weed out less effective staff rather than addressing the more fundamental issue of unsustainably high salaries. 

Certainly, newspaper headlines in the past months have charted the terrible human cost of redundancies across the profession. However, it is probable that next year’s survey figures will paint a far bleaker picture regarding actual salary levels. Anecdotally many practices have reached a point where they are reluctant to lose more staff and are now trying to address falling income with salary rather than staff cuts. All of this is incredibly disheartening for a profession that is notoriously underpaid: recent years’ gains in salary levels look likely to be eroded.

Premises
Premises costs also represent a sizeable burden for many practices – around 10% of the total expenses bill.  However, as it is difficult to make rapid changes to leases, there is often little room for short-term savings on premises costs.  It is not surprising therefore, that as other costs are cut, premises account for a rising percentage of the expenses pot.  For London practices the burden of premises is particularly onerous, averaging in this survey, a whopping 38% of expenses (excluding salaries).

IT budgets
One area where you might have expected practices to tighten their belts is in their expenditure on IT.  But while the overall IT budget has no doubt fallen, it is interesting to see that it is down only slightly against other expenses items: excluding salaries, IT accounts for 16% of expenses, compared to 17% last year.  That said, the larger practices have made more significant cuts in IT – down to 14%.

Marketing costs
In recessionary times, there is a strong case for increasing marketing expenditure, to help maintain market position, investigate new markets and promote new services.  With some notable exceptions, the architectural profession has always under spent on marketing.  So, while it is a great relief to see that marketing budgets have not been cut in relation to other expenses, it is also disappointing that they remain so low, averaging a mere 1.6% of turnover. It seems that the larger practices are particularly reluctant to invest in marketing: in this survey their expenditure in this area averages 1.4% of turnover, below the benchmark.

Winning work
They say that a bird in the hand is worth two in the bush and, in this shrinking market, existing clients have become critically important, accounting for over half of all new business coming into practices in this survey. 

Last year three-quarters of the practices met the Colander benchmark of winning 50% of the projects they chased.  This year, this figure dropped to two-thirds – a clear indication that practices are facing tougher times.  However, it is critical that practices continue to be selective in the project opportunities they pursue, especially with the tight marketing and new business budgets already highlighted.

Client types
As expected, the percentage of private corporate clients has dropped significantly from 43% last year to 34% in this year’s survey, with the large practices being hit particularly hard by the fall in private sector work. However, despite all the talk about the growing importance of the public sector to the architectural profession, public clients only accounted for 17% of the work undertaken by practices in this survey – a small increase on last year’s 16%.  This picture is likely to change significantly in next year’s survey. 

Interestingly, the proportion of domestic clients has risen for larger practices suggesting that, as their more natural private corporate markets are drying up, they are moving into the territory usually covered by smaller practices.  That said, the shortfall in private sector work has been replaced primarily by ‘other’ client types – presumably contractor clients who are now running many public sector projects. It would be useful to add detail to this section of the questionnaire in future years.

Conclusions
It must be remembered that this survey is a snap shot in time in a year when the economic climate worsened rapidly.  It clearly shows a profession working in a shrinking market, and one that is still living on work and profits secured in better times.  We would expect next year’s survey to paint a bleaker picture.

Author Caroline Cole is founder and director of Colander, a business consultancy for professionals in construction

To take part in the survey
Although the deadline for inclusion in the main benchmarking report has passed, practices can still send in data and receive their own comparative confidential report, which includes a measure of financial efficiency and shows performance against six Colander benchmarks. In addition, a more global report has been created which comments on the wider performance of the profession as represented by the participating practices, and this is also available to participating practices. Taking part is free to all chartered practices. Email (JavaScript must be enabled to view this email address)