Step by step, this presentation breaks down a few simple and critical metrics that should be of focus for creating agency growth. Using this model, you will have the opportunity to begin auditing your own agency to see how you stack up and to identify immediate opportunities for improvement. To help illustrate the model, we share the results of our latest research into agency productivity and profitability.
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After the Win: Profitable Growth
1.
2. Background
★ Founded Internetrix in 2000 in Australia
★ Grew to a multi-million dollar agency;
clients included Prime Minister & Cabinet
★ Became increasingly frustrated with how hard
it was to run the business
★ Created AffinityLive to make it easier to run a
growing professional service business -
building on hard-won lessons in agency land
★ AffinityLive launched 3 years ago - venture
backed and HQ in San Francisco
3. What We'll Cover
1. Agency Economics 2. Time is Money
3. Blind Sweat & Tears 4. Cash Costs of Growth
5. Agency Economics
Wages, Salaries, Benefits
& Contractor Costs:
$60K - $65K
Sales, Marketing,
General & Administrative:
$20K - $25K
Profit: $15K
(EBITDA)
Sources: Spire Research & SPI Research
Where does the money go?
For every $100K of new business:
6. Agency Economics
Costs are mostly fixed based on time/hours
People are a fixed
"sticky-up" cost
Other overheads are
mostly fixed too
Revenue earned by
doing work for clients
But Revenue is variable
7.
8. Time is Money
★ Research study on time tracking across hundreds
of agencies in late 2014.
★ Even for firms billing on a fixed-price basis, not
knowing where time is spent is a critical issue.
★ The largest source of "time leakage" are:
○ Email
○ Meetings
○ Forgetting
★ Study featured in Harvard Business Review in
January 2015
9. Emails Leaking Hours
★ 350 hours of time per year 'leaked' to email (using McKinsey study of 2.6 hours per day on email)
★ At a charge-out rate of $150/hour, this costs over $50,000 per employee per year.
10. Meetings Leaking Hours
★ 213 hours of time per year 'leaked' to meetings (using Verizon study of 3.1 hrs/day in meetings)
★ At a charge-out rate of $150/hour, this costs $32,000 per employee per year.
11. Forgetting Leaking Hours
★ Moving from weekly to daily time entry cuts time leakage by 80% (from 23% to 5%)
★ On average, 172 hours of time per year 'leaked' to memory loss (Ebbinghaus Forgetting Curve)
★ At a charge-out rate of $150/hour, this costs over $25,000 per employee per year.
12. Costs & Consequences of Leakage
★ Amount of time leaked is staggering: 4.6 months a
year!
★ If all that time was recovered as billable, it means over
$100K in lost revenue (and profit!) based on a
$150/hour charge-out rate.
★ While it is unlikely all of this time can or should be
charged out, not knowing what happens with 38% of
your largest cost each year is clearly crazy.
13. Solution: Automatic Timesheets
Automatically populate timesheets based
on emails between staff and clients - no
more forgetting what they worked on!
Synchronize meetings & appointments from
calendars into the timesheet too.
15. Blind Sweat & Tears
★ Research study on time tracking across hundreds
of agencies in early 2015.
★ Professional service firms make the vast majority
of their revenue through 'projects'.
★ Study found the following:
○ 80% of projects are <6mths; 60% <3mths
○ The most common projects are the worst
managed (75% using nothing at all)
○ The most common projects use manual or
budget tracking at all (70%)
○ Communication is most significant
determinant of success, but dominated by
email, meetings and calls.
16. Big Enough to be Dangerous
★ 80% of projects are <6 months; 60% are <3 months - average length 2 months.
★ Profit margin for the year = 2 months; these projects are definitely big enough to be dangerous.
17. Mismanagement of the most common
★ Longer projects are better managed, but most common projects very poorly managed.
18. Tracking Budgets - Two Thirds Run Blind
★ Almost 70% use manual or no budget tracking at all (over 26%)
★ Project profitability isn't something managers can see without manual effort & calcs (if at all)
19. Schedules - Manual Cat Herding
★ Handling (frequent) changes in project scope, deadlines and even personnel is commonplace but most
professionals aren't able to respond quickly and easily - causing stress & conflict.
20. Communication - Critical but Manual
★ Effective Communication by far the most important part of running success client projects.
21. Communication - Critical but Manual
★ Email is by far the most important, followed by meetings & calls.
★ Only a quarter of respondents communicate/collaborate within project management software.
23. Solution: Automated Scheduling
See a list of all
projects, tasks
and retainers
Drag and drop work onto individual user
schedules (pushes to calendar)
Workloads auto
adjust as tasks are
completed or
deadlines change.
See where you
have unallocated
work to schedule
26. Cash Costs of Growth
★ Professional service businesses have a distinct
disadvantage - you can't use vendor credit terms
to fund growth (since costs are payroll).
★ At the same time, many clients expect you (as
their vendor) to extend credit on their terms.
★ The consequence - you have to rely on retained
profits to fund operations.
★ Growth makes this problem more acute (up-front
costs of recruiting, onboarding time) and the "big
win" can actually be a death knell.
★ Deposits are critical to successful growth & then
bill for work done, not milestones met.
Editor's Notes
In this first section, we'll have a quick look at the benchmarks of our industry and reflect on the fundamental economics of an agency.
Professional Services are *very* labor cost heavy - more than 50% of every dollar earned is spent directly on payroll. When you add on benefits and contractor costs, you see 60-65% in direct labor costs.
There's then an additional 20-25% on office space, sales and marketing investment, general and administrative overhead.
Finally, you've got 15% of profit (EBITDA) to work with - and unless you've been able to raise capital (investors or debt), this retained profit is your "dry powder" which you use to grow.
Unfortunately, your costs are pretty fixed.
Labor is a sticky-up cost (when was the last time you successfully cut salaries?) and while you can downsize, firing people costs money, hiring again costs money, and new people aren't as productive straight away - so you hold onto good people (making these costs fixed).
Your overheads are also fixed (try handing back a third of your office space if you downsize).
While your revenue
Fundamentally, your profitability is defined by the revenue per person hour in the business.