July 3, 2012
You only need to control four things in order to run a profitable agency: how much you pay your employees, their billing rates, what percentage of their time is billable and how well you manage over-servicing.
If you set the first three according to industry standards and control over-servicing — when an agency spends more time working for a client than the client is actually paying them for — then you should be able to make a reasonable profit.
Without over-servicing, industry standards should allow an agency to make more than a 40 percent profit margin. Although most agencies pay close attention to industry standards regarding rates, billable targets and salaries, many struggle with profits far below this level — even below the 15-20 percent range that most management considers acceptable.
The problem is that even when all employees achieve the targets that we set, we do not bill a large portion of the time associated with client activity.
In essence, we are frequently working hard enough to make a reasonable return, but failing to get paid adequately for our efforts.
This is not a situation that we can easily fix with new business. If your staff is already hitting sensible billable targets, then when you add new clients, you will either have to hire additional staff or add an additional burden to your existing staff, including longer work hours.
You must get a better return on the work you’re already doing. You need to either get paid more for the work you’re doing or do less work for the amount you’re getting paid.
Evaluate the numbers
The first step is to make certain that every employee logs every hour exactly as he or she spent it. By taking this simple step, you can understand the actions that you need to take in order to fix the problem of low profitability.
For each client, you should try to estimate how much time you will need each month to deliver the work and to ensure that the total time expended is close to the amount that the client is paying you for total engagement.
You should base this estimation on the account activities each month as well as the number of billable days in the month.
The number of billable days is important because even if you do the same amount of work every day, you will spend 21 percent more time working during a 23-day month than in a 19-day month.
For example, presume that you have a $240K program for 12 months, and you expect to spend $50K per month for two months because of a spike in activity. In that situation, you only have $140K to spend during the remaining 10 months. You should only average $14K during those months. And even that will vary due to the number of billable days in each month.
With this information, it’s now possible to estimate the number of hours that each person on the account will spend on the client during the next month. You should compare those hours to the time estimate for the client and to the billable target for the employee.
If those two items don’t sync, then you must change how the employee is spending his or her time.
Just lowering or raising an employee’s time estimate to make the numbers jibe will not change the reality of the work that you need to accomplish.
At the end of the month, you should compare the hours worked to the monthly scope of the work estimate, by person.
In addition, you should compare the time that you expended for the client to the total value of the client engagement. When there is over-servicing during that month, you must evaluate and decide whether that will reduce the time you owe the client in subsequent months. If it will, then you should reduce anticipated spending levels going forward.
Solve the problem
If you find that you are habitually over-servicing a particular client, then there are several things that you can do to rectify the situation.
You may be experiencing “scope creep,” which means you are doing certain activities that were never supposed to be part of the original extent of work. The best way to avoid this situation is to make certain that the original budget clearly states what’s included in the price.
Another problem occurs when employees perform work that can be effectively handled by more junior staff.
For example, an account supervisor may be doing work that an account executive can do. This will lead to over-servicing and can stunt the growth of both the account supervisor and the account executive, because neither is being challenged to learn new skills.
Often, there are activities that may not provide real value to the client. For example, strive to eliminate any reports that are no longer necessary, or meetings that are too frequent or include too many people.
Finally, it’s possible that you might have created an inadequate budget and that the over-servicing is actually your issue instead of the client’s issue. Here, you need to accept the over-servicing and only bill the amount that you and the client agreed on.
However, you should still have employees log all of their time so that you can learn from this experience and budget more accurately in the future.
Your staff is probably already doing enough client work for your agency to be profitable. You can’t eliminate over-servicing entirely, but if you can learn how to manage the process, then you can dramatically improve your profit and reduce the workload of your staff.