You know you have enough work. Your team is busy. You keep getting new clients. Billings are robust. But are you doing the right work? And are you doing it right? Are you really measuring what matters? In agency management, you must look beyond obvious signs and metrics because they may be misleading.
Are employees leaving because they're overworked? Are you achieving your profitability goals? Are those new customers replacing ones you just got? Your agency management system may not be giving you the data you need to make good decisions. Here are the KPIs your agency should be tracking—but isn't.
Recruiting and retaining good employees is essential for pleasing clients and working profitably. Learning to write or design in accordance with a client’s preferred styles can take time. So, the longer you keep an employee, the better they can deliver work that satisfies clients.
On average, companies turn over 19 percent of their employees annually, according to the Society for Human Resource Management’s (SHRM) 2016 Human Capital Benchmarking Report.
What is your employee turnover rate? Do you know? If you don’t, follow these steps from SHRM to determine your employee turnover rate:
1. Calculate the number of employees for a month
Count each employee on your payroll, regardless of their work schedule. Don’t use full-time equivalents (FTE). Include temps as well as any employees on temporary leave. Exclude independent contractors or outsourced workers. Run your payroll report regularly each month to account for any variations.
2. Calculate the average number of employees for a month
SHRM suggests that you next add the total headcount from each payroll report run during the period you are reviewing (i.e., your month or year). Then divide by the number of reports used in order to obtain the average number of employees on the payroll that month.
3. Calculate the number of separations during the month
Compile a list of employees who were terminated during the month, either voluntarily or involuntarily. Temporary layoffs or leaves of absence do not count.
4. Divide the number of separations by average number of employees for the month
Divide your total from Step 3 (separations) by your total from Step 2 (average number of employees on the payroll).
5. Calculate the turnover rate for the month
Multiply the result of Step 4 by 100 to get the month’s turnover rate as a percentage.
6. Calculate your annual turnover rate
Add up your turnover rate from each month to get the rate for the year.
You can also use SHRM’s Turnover Calculation Spreadsheet to automatically calculate turnover rates for your agency.
Once you know your rate, look for reasons behind it to minimize turnover. If it is above SHRM’s national average of 19 percent, you may be doing something wrong. For example, you could be hiring the right employees but not treating them right, thus prompting them to leave. Or you might be hiring the wrong employees and having to force them to leave. You also could be doing a little of both.
Employee engagement surveys can help you identify issues that could be eroding morale or impairing productivity, such as your team feeling unappreciated or that you don’t provide enough direction. You can alleviate such problems by ensuring you have a bulletproof agency management system that enables you to manage resources properly; you want to avoid overloading employees with work. This will do that for you, and will help you provide ample guidance through shared access to documents, such as creative briefs. You can also facilitate communication through tools like online chat, which cultivates collaboration among employees, thereby increasing their engagement.
Cost of Employee Turnover
Employers spend an average of $4,129 and 42 days to fill a position, according to SHRM’s 2016 Human Capital benchmarking report. And that is just the average cost-per-hire. Moreover, SHRM estimates that replacing a salaried employee costs an average of six to nine months of salary, while some research groups place the cost as high as twice the amount of the annual salary, according to a Zane Benefits blog post on employee retention.
You can calculate the cost of employee turnover at your agency by adding up hard and soft costs. Hard costs may include expenses related to processing the separation paperwork for the departing employee, advertising the open position, or paying overtime to other employees who temporarily fill the vacancy. If you are calculating a cost that involves paying an employee, such as the administrative staff who process the separation paperwork or the creative who may work overtime, multiply the time they accrued by their wage to get the hard cost.
Compute soft costs similarly. For example, multiply the hours the departing employee would have worked by their wage to determine lost productivity. Other examples of soft costs include lost productivity for coworkers, recruiting time for supervisors, and decreased productivity during training for the new employee.
Total the hard and soft costs to get the cost of turning over one employee. Then multiply the number of employees that left during the year by the cost of turnover to determine your annual cost of employee turnover.
Agency management software that integrates accounting and project management can help you manage employee turnover costs by providing visibility into revenue and resources by client and project. You can see how a vacant position requires other team members to fill in and what that does to their productivity and to your agency’s expenses.
You can also fill positions more quickly by republishing previously posted ads for a vacant position and perhaps avoid turnover by aligning your staff experience with client needs, thereby keeping your employees engaged, your clients happy, and your profits strong.
As with employees, clients are also often replaced. You work hard to sign and please them, but they leave anyways. Knowing how often clients leave and why helps you retain them, thereby increasing their long-term value for your agency.
Inc. magazine contributor Jeff Haden suggests following these steps to calculate your customer retention rate:
1. Subtract the number of new customers (CN) acquired during the period you are reviewing (i.e., a month or year) from the number of customers at the end of the period (CE).
2. Divide the result in Step 1 by the number of customers at the start of the period (CS).
3. Multiply the result in Step 2 by 100.
Haden’s formula looks like this: ((CE-CN)/CS)) x 100. As an example, if you started the month with 10 clients, added two and lost one, your retention rate would be 90 percent based on the following calculation: ((11 customers at end of period - 2 new customers))/10 customers at start) x 100 = 90 percent.
Now that you know your client churn, determine why so you can keep it to a minimum. Are they churning because they should not have been acquired? Or perhaps because of bad project management? Identify reasons clients leave by seeking their input and reviewing your processes.
Solicit client feedback by including surveys and feedback forms in your post-delivery process. If a client complains about your work, probe for specific ways in which they have been disappointed. Was work late? Subpar?
Then determine what caused the disappointments. Were expectations misaligned? Or did you assign the work to the wrong team members?
Rectify any problems to satisfy a disgruntled client before they leave. If it is too late and they still leave, implement changes anyway to improve your client retention rate going forward.
You can also improve retention by documenting your client onboarding process. Set client expectations, establish communication protocols, and educate clients on how you work to position them and your agency for mutual success.
“Of course I know whether projects or clients are profitable,” you say. “I track monthly recurring revenue (MRR) and annual recurring revenue (ARR)."
Congratulations. You’re not flying blind when it comes to measuring project profitability. But your vision may be blurry.
Your client with the highest MRR may not be the most profitable for your agency based on how you operate. For example, you may want to calculate your return on investment in a project. If so, follow these steps to demonstrate ROI for creative work:
1. Calculate the time invested
a. Identify each team member involved in the project.
b. Compile the time they each spent on the project.
c. Multiply the time accrued by the wage for each team member to determine your agency’s cost.
d. Add up the labor costs for all of your team members to find the total expense.
2. Calculate your return
a. Identify each team member involved in the project.
b. Compile the time each member spent on the project.
c. Multiply the time accrued by the billable rate for each team member to determine the fees you will charge your client.
d. Add the billable hours for all of your team members to find the total revenue.
You can also gauge profitability through such means as your hourly realization rate, which shows the actual hourly rate earned. You can calculate this rate from labor billed, total billed (invoiced amount, including expenses divided by hours), or labor income (general ledger accounts divided by hours).
A client profit-and-loss report is yet another helpful measure:
1. Determine your revenue by totaling your client invoices and journal entries.
2. Calculate cost of goods by breaking down labor cost by time entered against specific services.
3. Compute AGI by subtracting COGS from revenue.
4. Compile inside costs by adding up vendor invoices, miscellaneous costs, and labor costs.
5. Determine other income and expenses based on vendor invoices and journal entries.
Once you identify your least profitable and most profitable clients, you can seek less of the former and more of the latter. Look for commonalities including industry served, company size, and account budget as a way to better screen potential clients. Build your team around the expertise more profitable clients require; that way, you can provide them with more services.
In managing your agency, you’re pulled in so many different directions that it can be dizzying. But you should know what is going on with every aspect if you are to maximize productivity and profitability. Whether it’s your team, clients, or financials, you need sound data to make good decisions.
Is your agency management system giving you the information you need? We’ve identified some KPIs your agency should be tracking but may not be. Now, it’s up to you to measure and improve.
Did we miss any KPIs? If so, let us know.