What am I working with?
Traditional advertising agencies used to largely ignore head hours for many
employees as their business model survived on media commissions, service fees on media spend and the mark-ups on supplier costs. During the 1990s the move to track and bill head hours for a range of services occurred as the traditional media spend declined, competition increased and agencies added more services to their portfolio as a way of critical features of this model (which is one that all creative businesses have) are the number of head hours and the rate that you charge them at.
Billable head hours are your “stock in trade” – its what you are using to generate the head hours is the most critical aspect to capacity of your business, i.e. the amount of billings you are capable of generating. The better you manage head hours, the greater the billing capacity of your business.
Setting a minimum benchmark for the number of chargeable hours that each employee has number, the greater the capacity of your business.
There are 45 working weeks available every year after allowing for annual leave, public holidays and sick leave. This means there are 1800 potential billable hours for each employee. Not all hours are going to be billable, nor even spent in generating income, but the greater the number of valuable hours you can get out of your employees, the more potential billings you will generate.
If you can’t get 70% percent valuable time out of most of your employees (and 80% or more out of many of your employees) then your business is not as productive as it should be. Your employees are not generating as much value as they need to, in order to reach your profit plan.
If you don’t generate sufficient value out of your employees, there is a huge crack in your business, and your profit is leaking through this crack.
What rate can I charge?
There is no magic number here, but there is a mathematical formula, one that factors all the costs of running your business into your each chargeable hour. Some people rely on the rule of thumb for working out a charge rate, taking an employee’s salary and calculating their hourly cost, then multiplying that by a factor (generally between 2 and 3) to arrive at the charge rate. This method fails to recognise the variability in the number of chargeable hours from one person to another. Example: Assume that there are 1800 available hours in a year, and Joe’s salary is $90,000. Joe costs you (in salary terms) $50 per hour. On a rule of thumb basis of 2.5, you would charge Joe out at $125 per hour. Joe generates 60% chargeable time and therefore generates billings of $135,000.
Given that Joe costs you $90,000, it would appear that Joe is generating a handsome business equate to $60 per hour then the Operating (overhead) costs outside of the direct salaries of employees who bill their hours are one of the critical factors of a successful creative business. Every employee who generates revenue also has to bear of the cost of the infrastructure that supports them doing their job.
If you don’t recognise the overhead costs of your business when calculating charge rates, then you are in You also need to take into consideration the prevailing market rates, but that has to be tempered with your own marketing strategy, particularly where you are making a pitch to clients or positioning yourself in the market.
The higher you position your business, the higher rates you should be charging.
How should I manage client’s changes?
This is often the most contentious part of a job. You’ve taken the brief, your client has approved your fee estimate and your product then you receive the call – “We’d just like to make a few changes…”.
Some creative businesses allow for one or two rounds of changes in their estimates, which minutes, and also changes that change the whole structure of the document/product being produced, and there are some clients who are contrary enough to believe that any change that they ask for should be included in the original price quoted.
The critical thing here is you need to set the clarity the terms and conditions of doing business with you, the parameters of the project and what actions or changes have been included in the fee for service. You also need to tell your clients that changes to the scope of the project or excessive amendments to documents and projects will incur additional fees. And you need to go through your terms of business with the client before you start any work so they know exactly how you work, when they are going to be charged, and for what services they will be charged. Clients hate surprises so don’t give them any.
When you get a request from a client for a doing, and what the outcome of the request will be – changes in timing, cost and approval dates need to be communicated to the client. When you put it in writing, the information is clearer and it is documented for later review. You also look more professional and most importantly, you are making a record on the job that the client has requested and agreed to the changes as you have understood them.
This information also needs to be communicated to any of the people on your team who are working on the job, where it impacts them.
Creative staff, studio staff and your finance team all potentially need to know what has been agreed between you and the client.
Should we capture every single thing we’re doing?
Every creative business generates value. By value, I mean the chargeable value of the work that has been performed. Often that value is not recognised because it is not all the activity of your business, then you will never know the full value that you have generated on any job, and you will never bill the client for all that you should. This is the primary profit leak in a creative business.
I don’t know anyone who likes timesheets; my guess is because it makes us accountable billable hours, they are critical to the success of your business. Your time needs to be captured every day, measured against your targets (both in terms of hours and the value of the work performed), and then managed where the results don’t match your plan.
Feedback about timesheets needs to be given every day. Getting timesheets done every day may be a major cultural shift for your business. The only way to successfully make the shift is for your CEO to embrace it and lead the charge. If you do it, and commit your business to it, then you will see a shift. If you don’t lead, then no-one else will follow.
Making timesheets easy to do is one thing that will make a big difference. We put JobBag into a well known mid-sized ad agency in Melbourne, and I was told “there’s no way you are going to get the Creatives and Studio people doing timesheets…”. So we took the approach of showing them why timesheets were important, and the impact that they had on the business. Then we showed them how they could do their timesheets using the Active Timesheet window in JobBag. The immediate response was “Why didn’t we get this system years ago? This is so much easier…”.
The other outcome of this implementation was the managing partner of the agency (who had a high charge rate) went from having around 30% valuable time to over 60%. It made them see through new eyes where they were spending their time, and which clients were paying their way. It will revolutionise your understanding of your clients.
It will become instantly evident the real value you are generating, who you good clients are, and which clients need stronger management.
What does ACTIVE JOB MANAGEMENT mean?
Your goal is to get the job done – on time, on brief and on budget. The only way to achieve that is to know the progress of the job at all times. To do that, you must have a good measures and manages all of your business.
All of your staff need to use the system every day for all that they do. The system is a tool way of working, by making the process faster and by bringing all the information together so it can be accessed by anyone who needs it the employee who is managing the job once a month.
Managing a job successfully requires financial oversight of the job on a regular basis through the lifecycle of the job. Your system should allow your job managers to review all their jobs quickly on a daily basis if necessary. Good job managers will develop an insight into their jobs through seeing a investigate why things don’t look right. Often it can be that time or outside costs have been entered onto the wrong job, so the earlier this is detected, the better.
At a minimum they should be reviewing the system will allow them to do this in less than 10 minutes. There is more to active job management than just reviewing job reports – job managers also need easy access to the timeline, to see budget versus actual hours, to review deadlines, to see the communication between your company and the client, to see what notes have been written by those who have been working on the job, access to changes in the brief and any other documents that relate to the job. Give your staff easy access to all that, then getting the job done on time, on brief and on budget gets a whole lot easier – plus your staff will be more productive.
Active job management doesn’t finish with the final invoice. Jobs should be reviewed on completion to see how you performed, and if there is unbilled value on the job, you should investigate why this happened.
Unbilled value is unrecovered profit – every extra dollar you bill increases your net profit.
Lose that client!
One thing is certain – you will lose a client or two along the way. The reasons why aren’t pertinent to this discussion, what to do about it is. I used to say to our new business director “I don’t know which clients we are going to lose, I just know we will lose them, so I need new clients to replace them”. You must have an active new business program which works at multiple levels i.e. working at winning a whole account, getting some projects and creating new relationships. This pipeline of new business prospects will see prospects evolve into clients of some size.
Even if some clients start small, if you do your job right they will grow into larger, profitable clients.