Creative Agency KPIs to Improve Profitability

Operations professionals face countless decisions, especially around personnel: When is it time to hire? What position should we prioritize? How many contracts do we have to sign to justify the hire? 

When answering these questions, we often lead with our gut – which can lead to mistakes: That’s where performance metrics come in. 

This article will cover three metrics you should be tracking to make data-driven decisions in your agency.

One Team, Clear Data

Let’s start with a caveat: These metrics will only give you useful information if everyone in the agency measures them correctly – and above all, consistently. As you work to define the metrics for your agency, make sure everyone understands them, and that every department understands them the same way.

For example: Imagine that you’re facing a lower net income than expected, despite the fact that operations and delivery are hitting their targets, with projects on budget and sales quotas met. 

Why the discrepancy? Check how the metrics are being measured. If each team doesn’t understand utilization, capacity and billable hours the same way, it’s easy for 2+2 to end up equaling 3. 

Let’s zoom in on specific metrics.

The Metrics You Should Be Tracking as a Team

Revenue and gross income: Your income statement should let you know how much money is coming into your bank account from all sources (= total revenue) as well as revenue less pass-through expenses (gross income). The gross income metric is the foundation of your profitability, because it represents your actual earnings.

Delivery expenses – direct costs or cost of goods sold – come next and need to be subtracted from your gross income to determine true gross profit. 

Separate software expenses from payroll to isolate “tool” versus labor costs. Now you can calculate your profit above the delivery expense along with your delivery margin or gross profit. A healthy agency should have a delivery margin of 50% or higher. 

Improve Delivery Margin with Three ‘Levers’

When agencies look to improve their profit margin, they often try to cut overhead. Running a lean agency is ideal, but you need to hit a sweet spot: there’s only so far you can cut before your agency starts to suffer in terms of delivery. We prefer to find ways for our clients to improve their margin by pulling “levers” – tracking and strategically improving parts of their delivery within their control.

Here are three to get started:

• Average cost per hour: How much does it cost to deliver your service? To find out, divide your fully loaded payroll (salary + benefits) by capacity. Once you have a baseline, you can see how to improve it – ideally by focusing on one specific type of work. Rather than creating bespoke projects for each client, look at where you can systematize your workflow by creating and documenting processes. What kind of technology can you incorporate to speed it up? As you track, you can see if the time savings the technology provides is greater than the monthly cost.

• Average bill rate: How much do you earn per hour of team effort? You can answer this question regardless of what billing method you use, assuming the team tracks time consistently. Find your average bill rate by dividing gross income by delivery hours.

  By tracking this metric you can help your team understand the impact of their efficiency on profitability. If you provide different kinds of services, you can contrast the various average bill rates to identify areas of strength as well as potential growth. If you have a high-performing team, look into their processes and skills to see if you can improve other teams along the same lines.

• Utilization: How busy is your team? Calculate utilization rates by dividing delivery hours by capacity. Using delivery hours instead of billable hours gives a more accurate assessment of time spent on work allowing you to see the true costs incurred by your team.

  Not every hour is billable, nor should it be: things like continuing education, team bonding, and – of course – PTO, are part of a healthy agency culture. Some months, utilization will dip because of a high number of holidays or a team retreat.

  Then there are the hours that are being wasted, and that’s where you want to do a little digging. Often, low utilization is due to a slow pipeline – a sign that you need to look into marketing or sales. If you see one department with a higher utilization rate than another, that might be a sign that clients are more interested in one service than another and you might need to look into the composition of your teams. 

There’s no shortage of KPIs – and advice on which ones are most important. We find that these areas offer powerful insights, without getting too far into the weeds. After all, the best KPIs are the ones you track diligently and consistently. Taken collectively, these agency KPIs will give you the necessary data points to improve your financial health and predict future profitability. 

If you have any questions about optimizing your plan to achieve agency goals, sign up for a free consultation with one of our Virtual CFOs. A Virtual CFO can help determine how to improve the financial health of your ideal pipeline size, explore how to expand your customer base, improve the financial health of your agency, and much more. Schedule a consultation below.