The Agency Profit Podcast The Metrics that Matter During COVID-19 with Marcel Petitpas - Episode 30
About Marcel:
Marcel Petitpas is co-founder and CEO of Parakeeto. Indeed you do recognize him from The Agency Profit Podcast!
In addition to being an agency profitability consultant – specializing in helping agencies get a handle on their gains – Marcel is also a renowned keynote/virtual speaker and podcaster.
Time Stamps: points of interest
• Intro 0:00
• Behind The Agency Profit Podcast 3:35
• Focusing on the numbers 6:37
• Where should your focus be right now? 9:42
• Implementing and utilizing changes 10:55
• Identifying goals 13:27
• Importance of both internal and billable time 16:17
• Cost performance indexing 18:57
• Increasing efficiency and profitability 22:15
• Helpful tools! 25:00
• Outro 30:30
Blog:
Today’s episode of the Agency Profit Podcast is a bit different for you guys. Since we’re living in very uncertain times due to COVID-19, I decided to pause the usual podcast (on't worry; we've content in the can for the next few months!) and personally address how this outbreak impacts our lives – as well as all the agencies and businesses out there.
Whether you're an agency that had an office and had to send everybody home, or you were already a remote agency, this is probably impacting you and/or your clients.
I want to discuss some of the things I've addressed with our clients in the midst of this COVID-19 crisis. There are three really particular opportunities that exist around this situation, especially if you're in a position where you’re having to make a lot of changes to the way that your team operates.
First, I want to talk about how to increase your focus on numbers; the opportunity to implement new changes in your agency; and how to make your business more efficient.
Behind The Agency Profit Podcast
Before we dive into the things, I want to share a few things: I am an agency profitability consultant, specializing in helping agencies essentially get a handle on their basic numbers.
Most of our income as a company has been from consulting revenue, public speaking, appearing on other people's podcasts and speaking in virtual events.
If you’re an avid listener to our bi-monthly APP, you probably know I always have a guest on the show to discuss how they've honed their business into a profitable agency and tackled potential pitfalls along the way.
Focussing on the Numbers
If you've been a frequent listener of the Agency Profit Podcast, you know the topic of increasing number focus is a hot topic. The three key foundations of the economic model of an agency are capacity, utilization, and average billable rates.
• Capacity is defined as the amount of time your team could contribute towards doing billable work in any given time period. It’s determined by how many people you have access to on your team – from, freelancers or contractors – as well as how much of that time you expect them to work. This can quantify it in terms of dollars using an average billable rate.
Essentially, if I know I've got 10,000 hours of billable time this year which I can sell, then that's good. You must invest time to earn revenue. It’s important to know what your capacity is and how much revenue you could potentially earn in a given time period.
• Utilization is how much time your agency actually uses for things that result in payment from clients. This is the true and straightforward definition of the term. We'll discuss how there are a couple of different definitions of utilization that get used in the industry, and how to best use those with your team to avoid complications.
• Average bill rate is basically every hour that my team invests working on projects for the agency or their client/s.
When you have a really good handle on capacity, utilization, and average bill rate, it's easy to start modeling things such as:
- What are our best clients or services?
- How much revenue could we potentially earn in a given time period?
- What kind of revenue are we looking to earn in the future?
Always remember; as an agency, the moment you sell a project, you have to start earning the revenue as there's already a gap due to liability. Interestingly, a lot of agency owners forget about this principle.
Then, there's the cost of earning revenue; where you have to invest time and resources to earn said revenue. As much as possible, you must shorten that latency of when you close the revenue (when contract or bookings happened), and when you actually earn the revenue. You want to decrease that cost as much as possible.
This should be the objective of your operational model when it comes to delivery. Gross profit or gross margin, for most people, is going to be a bit more challenging to follow accurately. Depending on how your systems are set up, generally you're going to want to do that via accounting software, or by spreadsheets.
However, undertaking this exactly is usually more expensive than tracking the average bill rate, which is a super simple number to pinpoint.
Where Should Your Focus be Right Now?
Well, your focus really should be on utilization. This is probably the biggest and most important number, especially in this current economic downturn.
Whether you're losing clients or experiencing a massive influx of clients due to the pandemic, then your focus should be actually on your average bill rate and your capacity.
Another important note for agency owners; ensure you actually have enough people to service the work that's coming in. Make sure you're not causing your business indigestion: losing out on potential cash flow and profit by taking on projects you're not going to be able to earn efficiently from.
That's where you, as an agency owner, should be focused on your average below rate and your capacity, because your utilization is going to be high – or low – depending on your company’s working schedule, whether it's busy or not. However, it’s very important to keep your rate of utilization as high as possible.
This means taking on as much work possible and ensuring you adjust capacity to keep your utilization high. Unfortunately, this could mean potential layoffs. You may need to cut back on the hours for contractors you've been working with for a while.
Implementing and Utilizing Changes
Implementing and utilizing necessary changes, while obviously tough, can bring a sense of opportunity and excitement. In fact, a mentor of mine – Dan – has a great exercise he made us do in his coaching program; he basically sits us down and says, “I want you to write down everybody that's on your team. Now, imagine you have a blank slate and you're hiring everybody back.”
If you're not excited to hire somebody back on the list, then you need to think really long and hard about whether they should still be on the team. Who, in the back of your mind, do you know isn't the right fit...
This is an opportunity to potentially save the people you see yourself working with while providing those – who may not be such a good fit – the opportunity to find somewhere better suited for them. In essence, that's really the focus if you're in the situation of utilization.
Now, I want to address the pure definition of utilization and how much of my team’s time is being used working on clients. The reason for its hard definition is because of the context of how we're using it on the operational side.
Therefore, it's really useful to know:
- How much of our available time is being used to serve clients?
- What does that number look like on average?
- What has that number been previously?
We can use this data to assess whether your agency is ready to have a new and improved operational process set up! Through this assessment, you can also estimate your maximum utilization, which must be around 80% or 85%.
We require our team to take a certain amount of time off, to sit in certain internal meetings, work on certain internal projects, and so on. However, I observe a lot of agencies inflating utilization to make their team feel good.
Personally speaking, we need to take a step back to consider utilization and the context of how we're sharing it with our team.
Identifying Goals
Time tracking compliance is an excellent tool for assessing or adjusting utilizations. It's perfectly fine to be holding your team accountable. In fact, it's encouraged for time tracking. Compliance shows agency owners the time you're investing through the week and where it's going.
All of your employees must be honest about that. Hold people to a billable utilization goal; if we do that without also holding them to project profitability or average billable rate goal, it can become a bad habit. Your team may start logging extra billable hours against unnecessary projects just to hit a billable utilization goal.
It's also going to distort your time tracking data, making it seem like it takes a lot longer to earn revenue than it actually does. It's important to protect the quality and reliability of our data.
Whether you're transitioning your business model to a new one, or if you're starting to expose more numbers to your team, I wouldn't encourage you to hold people accountable for a billable utilization goal rate without having full transparency about project profitability – or, at the very least, average billable rate.
The reason being, at least those two things will counterbalance themselves. However, if you simply say, “Hey, I need you to hit 65% billable utilization at the end of the week.” 99% of the time, if they're not able to hit that goal, it's not their fault. It's yours. As an agency owner, you are responsible for giving your employees enough work to do and provide enough clarity.
A good example is when your team is supposed to work for 40 hours a week. You must instruct them to track those 40 hours a week, even if two of those are vacation days. It is also very helpful to build transparency amongst your team. Ask them to leave notes in the time tracking system so that you have a good, clean, reliable time tracking data.
That is one of the most valuable resources for your agency as it relates to your visibility as a management team. In order to make it more profitable. you're going to start holding your team accountable, which translates to increased visibility.
Importance of Both Internal and Billable Time
The importance of internal time and billable time stems from questions such as:
- Where did your time go? In order for you to make informed decisions about how to reprioritize.
- Why did this go well?
- What didn't go well, and why?
Agency owners can ensure people are aligned with what their priorities are as a business, and have the necessary data to back it up. If you're trying to get your team onto utilization, do not hold them exclusively to an arbitrary Billable Utilization Goal.
Once you have a clean time tracking data, first, you can use it to get an understanding of where your team's time is going. Based on that information, you can have conversations with your team leaders or your project managers. You can really glean an understanding of what internal projects are important to your agency at any given moment.
It's important to use your clean and reliable time tracking data to indicate the risk of a potential project. This helps you and your management team understand where best to invest time and energy.
In a remote environment, one of the biggest keys to success is being very intentional about conversations because you can't just wheel your chair down to somebody's office and have a quick chat, or just call an impromptu meeting.
You're now dealing with other people's calendars and they're moving around. You need to have an agenda, and you need to schedule it. Intent becomes very important around where you focus on energy as a manager or owner.
Cost Performance Indexing
You take a piece of work, and the amount of time you're expecting it will take. Then, when you compare that to the amount of time that's been invested thus far, you then give that project 8% of the complete number.
As an agency owner, you might ask whoever's leading the project to report on progress or roadblocks.
Let's say you had 400 hours tracked, and you were expecting 800 hours to get the project done; that gets you to 50% of the project. Then, it's like, okay: do we feel we're ahead or behind at this 50% benchmark? They might report that said project may be a little bit behind, currently at 45%.
In this instance, what we would essentially do is divide the total amount of time we're expecting the project to take by the delta between the amount of time you used and the percentage completed. That gives us a projection of how many hours we think it's actually gonna take to get a certain project done.
In such a case, it's going to be about a 5% increase. Then we can look at what that does to our average billable rate. We can do this for all of our projects very quickly. This helps us get informed as a management team on where we should focus and who needs our help, plus where we might need to make some investments and catch fires before they start burning too hot.
Increasing Efficiency and Profitability
In a time like this, it's beneficial for us agency owners, and project leaders of organizations, to get our team involved in helping us become more efficient. This means having regularly scheduled cadences to review the profitability of projects and our project management process.
Since you’re already implementing new tools and procedures, this is an opportunity for you to ask your team:
- What's working?
- What's not working?
- Where can we improve?
Urge them to provide feedback. Their input provides an opportunity to implement more efficient practices.
If we don't do a good job of scoping initially, the protection of project profitability can become tricky. It can be difficult to make sure we are planning our resources well – that's how we own business situations where our team is working overtime.
For example, if I’m noticing that all of our current website projects are going over budget, or have the potential to go over budget, we can surface that on our next team meeting. When reviewing project profitability, we ask ourselves:
- Why do we think this might be happening?
- Is it that we didn't do a great job of scoping from the offset?
- Did something unexpected arise while doing this project?
- Are we having trouble handing things off from one department to another?
- Are we aware of potential challenges?
From that conversation, a lot of feedback can surface and will help you understand what your company needs to do to make a certain project more efficient, more profitable, more streamlined, and easier for our team to undertake.
As your team is already primed for things being in flux, they're going to be more receptive to changes because that's what they're expecting.
This is an opportunity to change employee habits, and I believe getting them involved in the conversation – and therefore bringing ideas to the table – you're really just facilitating and managing who is going to take the lead going forward.
It's important to build a foundation for your numbers and I highly encourage you to get a time tracking tool in place – if you don't already have one. If you do have one in place, the best way for us to have visibility into how well the business is running is for everyone to be proficient at tracking their time.
Then, use that information to decipher what's going well in terms of projects; where people’s time is going; and use that data to inform us how we can improve as a business, making our processes more efficient.
Helpful Tools We Use
We at Parakeeto have been a remote-first company since day zero. Our team is scattered right now between, Edmonton, Alberta, Monkton Canada, and Harlem, New York. We also have people in the Philippines, Ireland, as well as South Africa. In short, the team is all over the place!
We coordinate across multiple time zones, so there are few important tools enabling us to function productively in this way. The first is Zoom. I use Zoom every single day – for many, many hours – and I think they're doing a lot right now to make Zoom more accessible to teams that haven't used it before. Video conferencing is an important part and plays a major role in communicating with my team.
We also use Acuity Scheduling, which is how I do all of my external scheduling. You might find yourself scheduling a lot of meetings right now, and some people on the team are also using X.AI – a virtual assistant AI bot, which works incredibly well. So, if you're looking for better solutions for scheduling meetings, within your team or with clients, definitely check those out.
For documentation and knowledge-base tools, we're using Notion, which I'm a very big fan of. For collaboration and running meetings, especially our solution design meetings that we do for product management, and for our executive brainstorming and an offsite type of work we use Miro. We use it feverishly – Lee and I highly recommend it.
We use Google Drive, and use Harvest for time tracking. We use QuickBooks online extensively to see where our expenses are going, plus track the profitability of our clients and projects. And of course, we use Parakeeto!
Want to See More of Marcel? Follow him online via…
Agency Profitability Tool Kit
If you're looking for more resources to help you improve your agency's profitability, then check out the Agency Profitability Tool Kit - it's full of the same templates and checklists we've used with consulting clients to help them improve their profitability by over 100% in under 60 days.