The One Magic Agency Business Metric

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Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin

Gini Dietrich: and I’m Gini Dietrich.

Chip Griffin: And I have the magic eight ball answer for everybody right after this.

Wouldn’t it be nice if we just could get that magic answer to our questions? It’s simple. It’s the, it’s the silver bullet. It’s the, the one thing we need to know. And after that, it all comes easily.

Gini Dietrich: I mean, listen, I would love it if I could live my life by the magic eight ball. Is today going to be a good day?

Yes. Am I going to make a lot of money? Yes. How much money am I going to make? More than a million dollars? Decidedly so. Great. Awesome.

Chip Griffin: You’ve spent a lot of time with the magic eight ball in the past couple minutes.

Gini Dietrich: I have a nine year old.

Chip Griffin: Ah, yeah. See, I haven’t seen a magic eight ball in a really long. So, so no, we’re, we’re not actually gonna bring out the magic eight ball, but, but I was struck by the fact that, that in my inbox, over the last 48 hours, I’ve gotten at least three emails with the general theme that here’s the one number that you need in order to track your business. A couple of them were agency related and, and one was not, but it just struck me. People are just hungry for that, that single KPI, that one number that I need to keep an eye on. And I will know if I’ve got a good business or not.

Gini Dietrich: Yeah. I mean, that comes as no surprise, right?

We’re generally as human beings, pretty lazy. We like instant gratification and we want the easy way. It’s the, it’s the reason that bad diets exist. It’s the reason that get rich schemes exist. And it’s the same thing in our businesses. We want the one thing that’s going to help us be successful as fast as possible.

Chip Griffin: And it reminds me of a Seinfeld episode, as many things do. And this, this was an episode where Kramer was pretending to be the Movie Phone. And so I forget which, which friend is, is calling and he’s pretending to be Movie Phone. He’s like, if you wanna see movie X hit one, if you wanna see movie Y hit two and no button’s being pushed, he finally says, why don’t you just tell me what movie you want to see. And, and we all want that, that simple… just someone tell us. What do we need to know? What do we need to do?

Gini Dietrich: Yeah, absolutely.

I mean, I am not immune to that at all. Same thing. If, if you could give me one thing that said, okay, this is going to determine the success of your business. I’d be like, all right, let’s do it.

Chip Griffin: And, and there are a lot of folks out there who will try to convince you, of course, that there is one simple formula, one simple plan, one simple metric that you can use in order to run a good agency. I fundamentally disagree with that. I think that, that there are, there are things that you can look at. There are some commonalities that can be helpful to inform your decision making, you know, inform your, your structure and processes and all that. But I don’t believe that there is, there is one number to rule them all that you all can just use and, you know, kind of wash your hands when you’re done and say, yep. It works.

Gini Dietrich: So one of the things that always makes me laugh is when people say to you, well, how much revenue per employee should I count on? Or what kind of utilizations should I look at? Or, you know, they’re always asking you these kinds of questions. And as you say, at the very end of this podcast, every episode, the answer is always, it depends.

Right? So I, I love it. When people come at you with these questions, I can sit back with my popcorn and I’m like, oh, this is gonna be awesome. Let’s watch this because it’s… You don’t believe – and I don’t either – in the idea that there is a one size fits all in how we run our agencies. There are way too many other factors that come into it.

Chip Griffin: And, and look, it would be nice if there was this sort of thing. But there isn’t. And you know, you’ve mentioned a couple of the, the really popular metrics that folks will tell you, you need to pay attention to in your agency. The first one being revenue per originally, it was per employee. And then as contractors started to become utilized more by agencies, people have done it by FTE or a full-time equivalent.

So you start trying to figure out how you, you count those contractors who work for you. But here’s the problem with that. It masks all sorts of other things by looking just at that number. Because revenue per employee or full-time equivalent employee is very different when looked at for an agency in Concord, New Hampshire versus Chicago, Illinois.

Sure. Particularly if you still have, you know, a brick and mortar kind of setup and you’ve got office space and those kinds of things. The salaries tend to be higher in big cities. The office space is much more expensive. So the same agency set up with the same number of employees in the same revenue, the profit’s gonna be wildly different even though your revenue employee may be exactly the same.

And so if you ask me, do I want to have revenue or do I want to have profit? I’m always gonna tell you profit. And if you’re an agency owner and you’re not telling me that you’re focused on profit, I’m gonna ask why. Why are you so worried about revenue? Worry about profit.

Gini Dietrich: Yeah. I mean, I, I have… everything that we talk about, I have made the mistake. And in the early years I made that mistake. I was solely focused on revenue and I kept thinking if we get higher and higher and higher, you know, we’re up with the four and a half, $5 million range. Which was great from a revenue standpoint, we weren’t making any money. right. And I didn’t fully understand.

I kept thinking that revenue was the number that we had to achieve and we were achieving it. But at the same time, we were spending more than we were making. And it was a really hard lesson for me to learn because I went into debt and I’ve talked about this before. I used the line of credit to, to pay people’s payroll and didn’t have the income coming in to, to cover it all.

It was, it was a big disaster. So it also was a great lesson in the kinds of things that I should be paying attention to in my agency.

Chip Griffin: Yeah. And, and it’s, I mean, it, it’s one of those things where revenue is exciting because first of all, it’s always fun to win new business, right? Absolutely. Yep. Nobody that I know who’s ever run a business has said, oh yeah, I won a new client yesterday.

It’s just exciting. And particularly because a lot of us are creative in one form or another, we like the, the ability to be creative for a new client. So it’s, it’s not just the money it’s that we’ve won new business and all that. So, so we all are driven towards that revenue metric. But it’s not a particularly good one.

And, and if you, if you’re doubting me here, I would encourage you, particularly if you’re a PR agency go to O’Dwyers take a look at their list of largest independent PR agencies that they publish every year. And on that they will show you the total revenue and the number of employees. If you do that, and if you actually run the numbers on it, you will see that the, the range in revenue per full-time employee varies tremendously. Everything from under a hundred thousand dollars all the way up to nearly half a million.

Yep. If that doesn’t tell you that that’s a bad metric to look at I don’t know what does. Because nobody’s gonna argue that their top 100 list of PR agencies is a list of unsuccessful agencies. Right?

Gini Dietrich: Right, right.

Chip Griffin: I mean, look, rankings aren’t the be all and end all certainly. And I’m not encouraging people to really fixate on this kind of stuff.

I mean, I’m not a huge fan of ranking list of any kind, whether it’s the Inc list or the O’Dwyer’s list or PR Week or whatever, but they are out there and you can look at them. And if you look at them, you’ll realize that this is just bunk to focus on revenue per employee, because it’s all over the map. So how can that be a legitimate metric for you to use, to check the health of your agency?

Gini Dietrich: And not only that, but as you’re growing your agency, there are things that your team is going to have to focus on that’s not billable, it’s not. You’re not gonna generate revenue from it. Some of it might be mentoring younger colleagues. Some of it might be training. Some of it might be speaking for business development or for brand awareness.

There’s a whole bunch of things that your entire team will focus on that is not client related and not billable. When you’re in a big agency, you have a, there’s a team that focuses on that and that’s all they do. They only do new business. They only do marketing for the agency. They only do sales. Like there is a piece to that.

And so when you’re in a big agency, you, your team focuses solely on client work, but in your agency everybody’s gonna be doing everything. And so you can’t be, you can’t compare yourself to the big agencies because it’s totally different.

Chip Griffin: Well, and that’s a perfect segue to one of the other metrics that you mentioned earlier, that is another popular, the one metric to rule them all, which is looking at employee utilization.

So what percentage of your employee’s time is billable? And so this is the kind of thing where I get asked this question all the time. I see it posted on Reddit and elsewhere. What percentage of time should my account manager bill? What percentage of time should my directors or vice presidents bill?

You know what? Don’t focus on that. Because now you’re, if you start measuring something, you’re gonna start managing towards it. And we’ve talked about some of these, you know, billable kind of issues in the past. And if you are taking an account manager and saying, you need to be 85 to 90% billable, they’re gonna do one of two things.

They’re either gonna lie to you and tell you that, that that’s what they’ve done, because that’s what you want to hear. Mm-hmm right. And it’s the path of least resistance. Nobody wants to get yelled at and told no you’re doing too much of this. So they’ll just hide some of the time that they’re doing on non-billable stuff and probably overwork.

Which in some cases may even be a legal issue because maybe, maybe they’re entitled to overtime. And if they’re not telling you – guess what, even if they don’t report it, if they’re actually working it, you’re still on the hook, which believe me, years ago, when I found that out, I was just completely befuddled and it seems totally wrong to me.

If the employee tells me I’m working less than 40 hours a week and I, I have no reason to disbelieve them, I don’t think it’s right to hold me responsible as employer. Right. But guess what? A lot of jurisdictions, it doesn’t matter. You’re, you’re expected to know. Right. Which is even harder today with, with remote employees and all that kind of stuff.

But, so you’ve got this problem where they’re either gonna lie to you in order to get those numbers, or you’re not gonna be able to do all of the things that you need to do in order to develop your team: the team meetings, the one on ones, the staff training, all of these things that help you to build a better team over the long term you’re going to shy away from, and your team is gonna shy away from because you’re so focused on getting these utilization rates to where you want them to be.

And again, utilization rates don’t tell you how much money you’re making as an agency owner. It doesn’t tell you profitability. At the end of the day, if you’re a small agency – and almost everybody who’s listening to this is – that should be where you’re focusing most of your energy and effort.

Gini Dietrich: Yeah. And I will tell you, made this mistake too, coming from a big agency, we were, we were measured against utilization and it was, they took our utilization and they said, okay, 95% of your 40 hours has to billable. But we still had to do administrative work and, you know, new business meetings and staff meetings and professional development and travel and all that stuff that wasn’t billable. And suddenly you’re working a hundred hours a week. So fast forward to me starting my own agency. I thought that that’s the way you were supposed to do it.

And that’s what I was measuring my team against. And the turnover was so high and I couldn’t figure out why we kept losing people within six to eight months. And finally, somebody said, these numbers, this way you’re working us is doesn’t work. It’s not working for us. And I finally took a step back and realized it’s because even though I had worked a hundred hours a week, because that’s what it was expected, it was not a viable business model at all.

Right. So I had to take the step back and say, okay, this is not what we should be looking at. And then turn over did not happen.

Chip Griffin: And I can tell you when I was a junior account executive almost 30 years ago at the very first agency I worked at, we had our own targets that we were given and we could not, it was a combination of billable and new business was where we had to get like 90% of our time.

And so what did we do for anything that was not specifically client related? Because that agency did bill by the hour. What we did was we just put it under new business. So it looked like we were spend tons of time generating new business. Interesting. So you’re always gonna find a way to bury these things as an employee, if you need to, in order to make sure that, you know, you’re hitting your numbers.

Yeah. And so it’s, it’s either that you’re gonna fudge or you’re gonna overwork in which case you’re gonna become unhappy and you’re gonna have high turnover and all that. Yep. So, so focusing on that doesn’t matter. So, so those are two of, probably the most common core metrics that agencies are told to look at.

But, then we start to get into some of the more exotic ones or the more complicated ones. And, and there are good things that you can learn from them. One of the ones that, that I saw promoted recently was, was basically a fee efficiency percentage. So in other words, if you look at, at the total capacity of your team to bill. And so you figure out, okay, you know, I’ve got a thousand hours from my team and I can bill it out at a hundred dollars an hour that comes out to be whatever that number a hundred thousand. And that was easy. Keep, keep it simple for everybody out there too, and myself too, because you know, I’m, I’m doing this live folks, even though you’re not listening to it live.

Gini Dietrich: Yeah. Right. Yeah. Got it.

Chip Griffin: So, you look and say, okay, so I could bill a hundred thousand and then you look at what you actually billed. Say let’s, let’s say I billed 80,000. So now, you know, my, my fee efficiency is 80%. Okay, great. I mean, that’s, it’s a nice little number and, and you can start to say, okay, well, you know, a good number is 80%.

A bad number is 60%, you know, anywhere in between is okay. So what? I mean, first of all, that’s complicated and I don’t know very many agency owners in the small agency space who have a CFO and they don’t have, you know, any kind of fancy accounting support that are gonna sit there and try to figure out what these numbers are.

Also small shifts in how you look at those things can make a big difference. So you have to come up with a blended hourly rate to use typically for these to make it somewhat uncomplicated, but if I make it 110 versus 120, that can make a huge difference to my percentage. Once I multiply it out by all my staff.

So, right. You know, there there’s, there, there are some nuances in there when you start calculating it. Is, is it good to look at, you know, the capacity of your team and how you’re billing them out, and are you getting the most return on that investment? Sure, of course. We’ve talked many times about how your talent is what you are selling.

The time of your team is what you are selling. You can dress it up however you want, you can call it value price, you can call it whatever you want. You can call it, you know, I dunno. Doesn’t matter. That is what you’re selling. So you should look at it. Yes, but it’s not the one number that you can use because there’s just too many other variables that are going into your business to rely on just one thing. And, and so I guess that’s, I know I’m harping on that, but it’s just the fact that I saw three of these emails in such a short period of time. Just, it really struck me that, that people are so hungry for this. They’re so hungry for the easy answer that they’re gonna latch onto whatever they see and say, yes.

And so next thing, you know, you pick that number out and you show up in your next staff meeting, you say, Hey, guess what? We’re gonna focus going forward on utilization or revenue per employee or whatever. And now all of a sudden you’ve got the whole team fixated on this single number. Is that good?

Probably not.

Gini Dietrich: Yeah. And it doesn’t, to your point, doesn’t speak to profitability. So are you, is the business profitable? Are you making a profit margin on the client work that you’re doing? Are your clients profitable? Which ones are, and which ones are not. And if you figure that out, that will determine whether or not the business is successful.

It’s not all this other stuff.

Chip Griffin: Absolutely. And, and, and a lot of it comes down to trying to figure out what problem you’re trying to address. And so typically you will, you will set metrics to say, okay, my profitability isn’t where it should be. What numbers can I look at to help me improve that? Maybe you’re looking at the fact that you’ve got a team that seems to be sitting around and twiddling their thumbs all the time.

What numbers should I be looking at to address that? Maybe you’ve got a team that just, you know, is pulling their hair out and you’re seeing that they’re always working 80 hours a week and, and just kind of, you know, what are the metrics you need to look at in order to address that? So you should be looking at what you’re trying to drive towards and then figure out what metrics can help you to get there.

Not, not tell you that you need to get there, not tell you how to do it, but be part of the solution. Then that matters. But here’s the thing. And I know I’ve said this before in the show, but I’m gonna say it again. If you own a small agency and again, that’s like 99.9999% of you. Own a small agency, there are three things that you need to be looking at.

How much are you making, how much are you working and do you enjoy the work that you’re doing?

Gini Dietrich: And do you enjoy the work that you’re doing?

Chip Griffin: Correct.

Gini Dietrich: Done.

Chip Griffin: If you look at those three things, those are the KPIs that I care about as a business owner. Yep. All the other stuff is just how I get there. It’s not the, it’s not the, the final step.

It’s how I get to those three core metrics because that’s why we own a business or it’s why we should own a business. Right. We don’t own a business for someone else. Right. Or again, you shouldn’t. Right. I mean, you started a business for a reason. Remember those reasons.

Gini Dietrich: And remember if you are not happy, nobody else is, and you’re not running the most successful business that you can.

And I recently had a client come to me and say, okay, we’d really like to have you come to the office one week a month. And we’d like to come to Chicago one week a month. And there was all this stuff that they wanted to do. And it, those are part of my non-negotiables like, I’m not getting on a plane anymore.

I’m not doing it. Non-negotiable. And so we had to walk away from the client because that was a non-negotiable for them as well. And we couldn’t come to terms, but I knew that if I had taken this client and I agreed to spend two weeks in person with them every month, I would not be happy. It might be profitable and it might be fun.

And it might be interesting, but personally I would not be happy. And so we walked away from it. So we’ve talked about this before on the podcast. Figure out what it is, what kind of business you want and what it allows you to be able to do and make that the way that you make your decisions.

Chip Griffin: Right? And, and again, I’m not saying you shouldn’t use any of these numbers, all the numbers we’ve talked about are useful tools, right? Utilization rate is a useful tool if you use it correctly. Revenue per employee can be a useful tool if you look at correctly. And all of these numbers are good if you’re looking at them over time, because what’s more important than anything else is the trends within your own agency.

Right. Don’t focus so much on – and we’ve talked about this recently – don’t keep up with the Joneses, don’t worry about what your number is compared to your friends or your competitors or that kind of stuff. Look at it in terms of, are you improving? Are you getting better at what you’re doing? And more importantly, is that improvement tied to your ultimate objectives as the owner.

If so, then you’ve got a great setup. If not, then you’re just muddying the mix with all of these different numbers that you’ve read about in some magazine or a blog post. And look, I mean, we’re guilty of it. We talk about some of these things that you should be paying attention to. Maybe you don’t even agree that you should enjoy what you’re doing.

I think you’re nuts if you don’t think that that’s one of the three core metrics you should look at, but maybe you decide it’s not. That’s fine. Right? Right. Know what your objectives are and build out from there. Don’t – just do not buy into any of these things that tell you, this is the one number that will tell you if you’re healthy.

This is the one number that will tell you if you’re headed in the right direction. This is the simple magic formula for success in your agency. These things don’t exist.

Gini Dietrich: They do not exist. And just like fad diets and get rich schemes, nothing happens overnight. You have to do the hard work. It takes a long time.

You have to have a plan and you have to follow the plan.

Chip Griffin: And you have to listen to great podcasts like this. Agency Leadership Podcast is the place you should go every single week to hear episodes where we tell you the cold, hard facts, even when you don’t want to hear them.

Gini Dietrich: Yes, we do.

Chip Griffin: We appreciate you taking the time to listen to this episode.

I’m Chip Griffin,

Gini Dietrich: I’m Gini Dietrich,

Chip Griffin: and it depends.