There are many different measures of success that an agency can use to determine performance. An agency might be successful if they win multiple awards, or if they are able to take on new business, or hit gross revenue targets, however the fundamental measure of their success as a business is margin.

One of the biggest challenges that most marketing agencies face is that what they sell boils down to a multiple of time and knowledge. The hourly rate at which they set their prices, as some multiple of the skills and experience of the person who is being sold.

In theory, this should mean that the agency delivers a healthy profit. After all, the charge out rate for most professional services including marketing hovers around the £100 per hour mark, and very few staff in a typical marketing agency will see their take home pay at that sort of level.

Aside from the wage costs of the resource who is being charged for, most agencies have some support functions who are non-chargeable – admin, account management, or IT staff for example – and the agency also has additional costs in the form of premises, technology, and more.

So far, so “lesson in sucking eggs”.

A few years ago, when talking about the sale of marketing agencies, the ratio that hit a sweet spot was 50:5:1:

• 50 Staff
• £5 Million Turnover
• £1 Million Profit

This was a comfortable number that could attract a decent multiple. A nice sized business to integrate into a larger entity, a decent revenue number, and good overall profitability that could no doubt be improved through efficiency savings as part of a larger group.

The average revenue per staff member was £100,000 annually, with £20,000 in profit.

If we assume that when holidays are taken into account, an average staff member has about 1,750 available each year, having front line staff pick up £100,000 revenue at £100 per hour seems easily achievable.  After all, even if they’re only 75% productive, they should still bring in over £130,000. In most cases, that should be enough to cover the wages of that person, and at least one other.

Which of course leads us to the problem of productivity and its measurement.

Understanding how efficient staff are, and how much billable work they engage in is essential in managing margin.

When all costs are taken into account, billable hours need to exceed non-billable hours. That means that there must be a balance of staff in favour of those who are chargeable, and the availability of billable staff needs to be maximised.

There are tonnes of timesheet tools to record productivity, and the number of available hours per client needs to be prescribed each month, not just for the staff involved in billable work, but also the staff who are not.

Those productivity records need to be analysed regularly to identify:

If clients are being over serviced – which negatively affects their “real” hourly charge out rate

If staff are being under productive – which increases their effective cost and lowers their billable availability

In some cases, a client may be strategically important to an agency – keeping them happy might be worth investing additional time and resource, but this erosion of value can quickly spread and other clients become similarly important because they might leave. Suddenly, the £10,000 for 100 hours becomes £10,000 for 125 hours, and the hourly rate falls to £80. This means that the staff member who is 75% efficient is now only worth £105,000 annually – at which point, the calculations about how the wages of supporting staff are funded become more difficult.

The inevitable response, is to force higher productivity from staff, which can negatively affect morale, leading to the quality of work being questioned by clients, and undermining confidence in the business.

Maintaining good measurement practices, and acting properly on them helps an agency to avoid a spiral. Management need to be confident in making change, and in delivering results for the agency. If this means tough decisions, then it means tough decisions.

Can we help?

If you are struggling to improve profitability in your agency, we can help. Book an initial call to talk through your concerns and we will put together a consultancy package that targets the areas you need to improve, and puts in place a workable roadmap that will get you back to solid margins from all clients and staff.