One Simple Benchmark...That No One Seems To Use

I've worked hard to establish performance benchmarks for firms in this space. Some examples of that effort:

• Financial Management of a Marketing Firm. Don't buy this quite yet, because a revised version is coming out in a few weeks, but it is a huge manual that covers all of them. It was first published more than a decade ago. Everyone who has purchased a copy, no matter how long ago, will be eligible for a free updated version.
• Free article on Eight Important Gauges on Your Financial Dashboard.
• Free article on Options for that Single Performance Benchmark to Watch, which contrasts all of them with the pros/cons and a few simple recommendations.

Today I want to extract one element of that model to help you see your firm differently. I'm shocked that very few firms have looked at their performance this way.

It doesn’t rely on timekeeping–which I don’t believe in except in a few special instances–and it doesn’t assume that your staff will suddenly become compliant with timekeeping anyway. They won’t. Timekeeping records are as honest as Congressional expense reports, I think. If someone takes longer than they think you want them to spend on something, they’ll under report so they don’t look stupidly slow; if they don’t have enough work to do, they’ll manufacture their usefulness to keep the spotlight off their value in the event of a downturn-driven layoff.

Instead, it looks at your potential, your actual, and then measures the gap between the two. Here we go.

Multiply these five numbers together:

• The FTE (full-time equivalent) number of people you have, including the billable and non-billable people. If you have 24 full-timers and 2 half-timers, that number is 25.
• The hourly rate you use when a client steps outside of scope. I don’t care if the client knows what that rate is, and I don’t care how much you’re in love with value billing (see below), you do have some figure in your head. If you’re in the US, that number will be somewhere in the $160–240/hour range.
• The number of weeks you work in a year. So you start with 52 and subtract 2 weeks for paid public holidays and maybe 4 more weeks for PTO (paid-time off). In the US that number ends up being 46.5 weeks–less elsewhere.
• The number of hours that people typically work, whether billable or not, whether at work or at home. Don’t get pissy and say they are slow and not really working. Just use an honest number. The average these days is 42.5 hours/week.
• The expected utilization of the group, which in this industry is 60%. Some people will bill as much as 85% of their time and some people will bill none, but the average of the entire group should be 60% (higher with a client concentration problem).

So using these numbers, our equation looks like this: 25 x $180 X 46.5 x 42.5 x 60% = $5,336,000.

Let’s say this firm describes you and your actual fee base (after subtracting cost of goods sold) is $3,700,000. If you work that out on paper, it means that you are capturing 42% of your time instead of 60% of your time.

By the way, I’ve constructed this example intentionally, because the typical firm converts 42% instead of 60%. It’s not good. That research is based on a study of 4,730 firms.

So you sit back, take a deep breath, and now try to interpret the results. You’d work through it like this:

1. Are you busy? Do you have enough paying work to go around? Otherwise, you are over-staffed and these results would be expected. The team is ready and waiting to be more economically productive, but you need a better positioning and/or lead generation plan. If it’s been going on a long time, maybe it’s time for a staff reduction.
2. If everybody is generally busy, then you have a different problem, and that’s under-pricing and/or over-servicing. You fix that in the same way as above by finding better clients and swapping them out for your less than ideal current ones until your client base looks a lot better.

By the way, if you’d like to plug your numbers into a free calculator, download the Microsoft Excel file. Leave everything as is except for the six fields reversed out of black and you'll see your own results. I've left the sample populated with the numbers described above so that you can make sense of it. (The "months to cure" number helps my client see how long it'll typically take to fix their performance challenge.)

One final word, and this is about value pricing. Marketing and digital and creative firms the world over are whining about not getting paid honorably for the value of the work they are creating for their clients. They want to flip a switch and price things based on value rather than time.

I understand the sentiment, but you’ve got to walk before you can run. If your utilization–as measured above–is less than 60%, you’re crawling. Focus on getting paid for the time you’re already spending and then you’ll be walking, next. And from that perspective you can then explore how to get paid based on the true value of your thinking, and then you'll be running. An emphasis on value-pricing before you’re getting paid for your time is motivated more by resentment than sound business principles, and firms who try it usually fail.

Seriously, don't ever be afraid of the truth. That usually precedes some strong decisions about changing things up.