Does your business feel like a black box?
This is the feeling many ‘human centric’ business owners feel when it comes to key decision making.
While we might spend a lot of time developing fancy dashboards for our clients to measure the success of a campaign or ROI of an initiative, rarely do we look internally.
Not having a good view of the key metrics that define the success of an agency is the equivalent of flying blind. You are making decisions completely out of the seat of your pants.
Instead it boils down to the old saying – revenue is vanity, profit is sanity and cash flow is reality. Without any knowledge as to what is driving either one of those.
Without the key metrics you cannot see what is actually revenue, driving profit or impacting cash flow.
Of course if you can’t measure, you can’t improve it.
So not only does having these metrics clearly visible give you the intel to make smarter decisions, but can lead to the right, informed changes in your business to make you successful.
Let’s have a look at Andrew, a 45-year old agency owner who’s spent 7 years in the grind to build an awesome digital marketing team of 20 people.
Andrew experienced immense growth in both his profits and his company in the first 3 years as his hustle and connections drove a growing book of work.
His small team were a bunch of superstars working for a classy startup and the mentality that came with it. Pure hustle.
Now he’s launching an office interstate, the team has tripled in the past 4 years and he’s working with some of the largest brands in the country.
But in the last year, despite winning the work and increasing revenue, profit hasn’t kept up pace. Not just by a little bit, like say, the cost of an interstate office, but by a lot.
It’s not to say he isn’t making some money – it’s just that there seems to be something going on that’s impacting margin.
That means less money to invest in growth. The new office fit out is going to have to take a hit. No green wall hanging garden. And he’ll defer the hiring of the new team lead by a few months and take on a bit of work himself just to see it through.
With a successful upcoming agency, at 45 years of age, he’s also looking at a potential buy out in a few years and knows that ‘back a of a napkin’ valuation is 3 times profit. So this is going to sting later.
Getting the Director of Operations, Kylie, in a room, they take a look at what is a happening.
Because with the last 12 months of timesheets and job profitability projections on seperate spreadsheets this is going to take some time. Potential problems could include one or any of the following:
The Operations Manager is already pretty flogged, but hopefully they’ll get an answer in the next 3 months.
It’s generally about this time that Kylie loses the plot and tells the Andrew (again) that she needs a proper system in place to track this stuff.
Andrew feels regret at not engaging that techno-dude 3 years ago who said he could have built a bunch of internal dashboards (cause, like, I know everything that’s going on in my team of 10 I don’t need it).
So… let’s take a look at the top 5 metrics Andrew wishes he had at this finger tips.
These are the top 5 – there are more. But if you are keeping your finger on the pulse of these bad boys you are 99% of the way there.
When I say ‘Job’, that’s whatever it means to you – a project, a contract or retainer.
When I say ‘margin’, I mean the % difference between total billed value and cost to deliver.
So Job Margin is the profit you are making on any given piece of client work your team does.
This first key metric is arguably the baseline for what you need to know if your client work is successful. It answers the question “Are we making any money”?
Ideally you want to be able to see your average job margin across your portfolio of work, across a particular client or vertical within your business and then down at a per ‘job’ level.
A great example goes here with an off link.
While getting the pure $ value of your profit is important, it’s more critical to get the %. Ultimately the % margin across your portfolio essentially matches ‘gross profit’ of your business (if you consider your team a cost of producing revenue… a little tip for your accountant).
The ideal state is you have a nice dashboard with average margin as a % and a little indicator up or down on previous months.
A fancy title for ‘are my people spending too much time on the bench’.
I.e. are they spending enough time on billable work or too much time in meetings, coffee breaks or just waiting to be scheduled work (by far the more common of the three).
If job margin is telling you whether or not your client work is profitable, Utilisation is telling you whether your team as a whole is profitable.
It’s this second dimension that often gets Agency owners unstuck. In fact it tends to answer the external question ‘Why am I making money on our jobs but business profit is down’.
Here’s how it works:
A full time team member, minus annual leave a few sick days have roughly 1840 hours a month to work (on average).
Utilisation is the % of that time spent on genuine billable work, e.g. 80%.
As your team grows beyond 15 people and you amass a larger book of work, scheduling your team in to works starts to get pretty complex. Not everyone is a startup hustling superstar begging you for work. And keeping across who has what skills to contribute to a project, who has capacity and when the are needed gets very complicated as you grow beyond that size.
It’s up to your operations manager to optimise your people, skills and capacity with demand.
Doing that without some kind of technology platform is a time consuming and flawed venture to begin with, but not having the metrics to measure utilisation to begin with means you may not even know you have a problem to begin with
Link to mavenlink article on utilisation.
Recent studies have found most agencies utilisation is as low as 60%, which is a signficant cause to the profitability woes of many a business.
Although you can never get this to 100% (unless your team are in fact robots), you do want to aim for 80%. Consider this even in your revenue forecasts – your job margin might be 60%, but if you’re only ever going to get 60% out of your team, your net margin will be punished.
There’s some interesting work being done on Utilisation’s big brother, Absorption as well.
Needless to say, monitoring Utilisation is pretty key.
Err don’t you mean lead gen Scott?
Sales conversion rate is your most important sales metric.
Why? Great question.
Because it’s a measure of how healthy your sales process is. Its directly related to the performance of your sales team.
Lead gen – yeah that will determine the performance of a particular marketing strategy. But if your team can’t convert, then it’s a waste of money.
Your conversion rate is typically spelled out as a % and is the ratio of won sales to total opportunities in any given timeframe.
That timeframe may depend on the nature of sales duration in your business – quarterly is a good for relationship heavy, larger contracts whereas monthly or weekly for more transactional businesses.
Conversion is what is driving the revenue in your business. A higher conversion is maximising the leads you have to increase potential revenue.
Sales conversion also drives cost of sale.
If you sales conversion is high, cost of sales comes down as you are selling more work for the same level of effort (cost).
If your CRM (customer relationship management) system isn’t reporting on conversion, it’s time for a new CRM (here’s some options – link to prosperworks v hubpost etc).
Now we are getting to the core of what makes an agency successful – happy customers.
You don’t need numerous studies to tell you what you already know – the best source of business is return business, followed closely by referrals.
Both of these revenue sources are driven by your ability to deliver amazing work that achieves your customers goals.
While you may have plenty of fancy schmancy customer dashboards indicating lead generation or website traffic stats, ultimately what counts (and what will drive return business and referrals) is whether your customer is happy.
That’s more than technical output. It’s your entire customer experience from the sales to delivery and the human relationships that make that journey a pleasure or complete hell.
There are a great many ways to measurable customer happiness, but the most effective we’ve come across is ‘net promoter score’.
A technical term for ‘how likely are your customers to refer you’.
Here’s how it works:
When you start delivering work with a client, you use a simple survey mechanism to collect one key point of data, literally ‘How likely are you to refer [your business] to a friend of college’?
A scale of 1 to 10 ensues. Anything below a 7 is considered a fail, with 7 and 8 being a ‘warm’ reaction and a 9-10 being a genuine plus.
Sometimes the scale is 1 to 100, but at the end of the day you get an average that you can take to the bank.
Happy customers return and refer. This work has a lower cost of sale as the prospect is warm, familiar and potentially already ingrained in your process. Oh and you didn’t need to spend a cent on advertising.
A win for your conversion rate… and a win for revenue which brings us to the final key metric to monitor.
The final metric that ties the whole thing together – revenue.
Importantly, revenue growth not just the dollars itself.
Your growth indicator, being a % on previous years, quarters or months, is critical to assessing your overall success in the market.
If revenue is going up, your strategy is right. If revenue is going down, then there are either market conditions not going your way or a strategy that has failed to deliver.
Now lets tie this together.
If your job margins are high and predictable, you foundation is profitable.
If utilisation is high and predicable, you can be sure you are maximising your margin by limiting non-billable labour cost.
If conversion is high, you are reducing cost of sales, further increasing real margin.
If you customer satisfaction score is high, then you are generating the lowest cost business, further increasing margin.
If revenue growth is increasing, you are set.
Average AR days – the secret killer of agencies – how long it takes on average to get an invoice paid. If this is out of alignment with your payroll and supplier contract payment terms, you’ll find yourself in a cash hole very quickly.
Growing a business is hard enough without trying to do it blind as a bat.
Your business feels like a black box because you aren’t actively trying to pry it open, or the tools you are using are too blunt for the job (e.g. spreadsheets).
Once you’ve had a dashboard established, it’s really just a matter of creating habits in the team to make it part of a high performing culture.
It’s important to know also that the big agency’s hauling ass in the world today already have this stuff covered.
They’ve done that for a reason and it’s not because they are soulless machines trying to churn revenue into profit – they actually understand that the numbers are key to creating a successful business.
A profitable business can reinvest in growth. A profitable business can invest in industry changes, social changes, personal changes.
Know your numbers!