Rob [00:00:00]:

None of us wants to be busy fools working really hard but not making a lot of profit. And that goes for both ourselves, the agency owner, and also our team, if we have one. So in today's podcast, we're digging into staff utilization. We're talking about what it is, what your target margin should be, how to measure those margins, and how to implement the metrics correctly so that everyone buys into it. And I'm really excited that Ryan Watson from Upsourced is joining me to dig into this fascinating topic. So let's jump into today's show. I'm Rob de Costa, and this is the agency Accelerator Podcast. As someone who has stood in your shoes, having started, grown, and sold my own agency, I know just how it feels in the ups and downs of agency life. So this podcast aims to ease your journey just a little by sharing mine and my guests’ experiences and advice as you navigate your way to growing a profitable, sustainable, and enjoyable business. Hey, everybody, and welcome to this week's episode of the Agency Accelerator Podcast. I am really excited to have you with me today Ryan Watson, and we are going to be talking about everything to do with measuring efficiency and utilization in your agency. And Ryan is an experienced operations and finance leader for creative agencies and venture-funded startups. As a partner at Upsourced, he helps growing agencies build better plans and drive profits. And prior to Upsourced, Ryan led operations and finance for marketing and ad agency a hology, if I'm saying that correctly. Yeah. Okay, good. Where they built a team of 50 people before selling to Quotient. So I hope I did a reasonable introduction there, Ryan, and welcome to the podcast.

Ryan [00:01:41]:

You nailed it, Rob. Thanks for having me. Excited to be here.

Rob [00:01:43]:

Excellent. So let me start with a big, broad question, which is, why is it important for agencies to measure utilization?

Ryan [00:01:53]:

Yeah, well, I guess there's probably two reasons, right? The first reason is, look, every agency, the number one reason we start an agency is because we want to do cool work with friends, right? But ultimately we have to do that in service of a profit, right? We can't do it forever if we don't generate some reasonable degree of profit. One of the most important measures of what I would describe broadly as profit in an agency is gross profit or gross margin, right? Revenue minus the cost of goods sold, which is basically wages, right? Ultimately utilize it at the end of the day, if I'm not earning a very good gross profit on my agency, right, if it's not where I want it to be. And by the way, we look at the gross margin, ideally north of 50%, if I'm not there, I have one of two problems, right? One possible problem is I'm not charging enough, right? I have service people and they're doing a bunch of work, but I'm not getting enough of a good rate for it, right? My rate per hour is not sufficient if that's not the issue. The other issue is this is where utilization comes in. The other issue is I have service people and they're not all doing service work, right? I have too many service people, they're not fully utilized, right? I'm paying them a full wage but only a small portion of their work is actually going to generate me revenue and that's dragging on my profit. And so utilization is one of the two key diagnostic metrics that we look at if we are trying to maximize or improve our profit. Right? That's the number one reason. The second thing is capacity planning, making sure I have enough people at the right times. That's the thing that's really hard about agencies. Like every business has a thing that's hard about it and having not too many people but enough people is the trick in managing a service business. Matching supply and demand and utilization is the tool that helps us do that. So we can unpack all that. But it's very important. It's like maybe one of the most important metrics in terms of running your agency.

Rob [00:03:53]:

Yeah, I completely agree. And I guess the other third dimension to being busy fools and not hitting those GP margins is the fact that we're massively over-servicing our clients because we want to do a great job and I guess utilization is going to help us. One of the things I see, I don't know if you would concur with this, is sometimes you see team members in agencies saying they are super busy and super stretched and we need more staff. And yet when you look at the numbers you think, well hang on a second, that doesn't make sense. You should still have the capacity to take it.

Ryan [00:04:25]:

On more work everywhere, all the time. And by the way, I'd say we get a lot of agencies who come to us, right? They work with our firm. When they hit one of a couple of inflexion points and one of the early inflexion points, about a million, 2 million in revenue, we'll have agencies who will express that exact same sentiment like, oh my gosh, everybody's really busy and we got to hire. And when we get under the hood and we actually start to measure utilization, we have a disconnect. There's a discrepancy in that narrative because we determine, hey, it seems as if we have plenty of capacity. So now what's really going on here? Right? And it could be any number of things. It could be a poor time tracking which is actually we don't have the capacity we think we have because we're not capturing the hours we're working. It could just be like cognitive dissonance. It's not the hours that we're working, it's the kinds of hours that we're working. These are really rough clients or the scope is being blown or whatever. There's like a pressure cooker in an environment. But it's only 39 hours of those. There could be any number of reasons, but ultimately you can't work your way through the solution until you have the data to do it.

Rob [00:05:41]:

Anyways, that brings me to the next question, which is at what stage of an agency's evolution should they start thinking about measuring this? Because I imagine a lot of agencies start as freelancers. They hire some freelancers, then they bring those roles in-house. They might work with a remote team. They're probably not thinking about this stuff at the beginning because they're thinking about doing a great job for their clients and they're thinking about winning business and retaining clients, of course, which translates into over-servicing and all the rest of it. So what point in that evolution, up to one or 2 million should they implement these utilization metrics?

Ryan [00:06:16]:

By the way? I think it's a phenomenal question. I'm interested you might disagree with me. I have a point of view on this. Not everybody may agree with it, but here's my so when we look at agencies, at our, at our firm, we segment them into what I would call their growth stages or their life cycle stages, right? In the very first life cycle stage, we call Create mode, right? That's basically zero to 1 million, give or take in revenue, right? And your path of Create mode is like the focus is all service and sales, right? What is my unique reason to exist and how do I acquire customers who need that thing and how do I deliver it to them? And in that Create mode, I would tell you service and sales, that's the priority. Get yourself to a point where you have a reason to live. This is a going concern. This business should exist. It's the hardest stage there is. I wouldn't over-index on things like utilization. Quite frankly, it's probably bad if you provide a multidisciplinary service like you're building websites, you need a copy, you need design, you need web development, and some number of those people are in-house on your path to a million, utilization is going to be bad. That's the deal, right? Utilization isn't a thing you can worry about until you have enough business and you often don't at that stage. So we categorize the next stage in build mode. It's like, okay, I've hit and again. These are really rough fence posts and as inflation takes hold, they grow. But the rough vens posts are like, let's say a million in revenue, give or take. Okay, now this thing should exist. I've somehow figured out the service and sales, but it's probably not very profitable. It probably has concentration risk. There's probably all kinds of challenges that's okay, we can solve those. And so that inflexion point is generally when we start to call this the hierarchy of financial needs. We work our way through and project profit, which is where we hit utilization. That's the second rung right after solvency like, can we pay our bills? Yes. Okay, great. Now we're going to worry about gross profit and we're going to look at utilization. So long-winded answer of saying it's in, that is what we call build mode. It's north of a million. Prior to that, just get the work done however you can. Shoestring and bubble gum?

Rob [00:08:21]:

Yeah, sure. We're trying to prove that our idea is going to work and that we can grow it and scale it beyond ourselves. I guess the metric people should really keep an eye on from the beginning is the GP number. Because none of us wants to be busy fools working really hard and making no money because that's not why we run our own business. So I think that's the number to look at. I agree with what you said. I think my only question about that is that let's say I've now hit a million pounds and I've come to you and I said, look, our GP is only at 20%, or even I don't know what to do. Doesn't that make it really difficult to untangle that web to then reverse engineer and say, actually you need to do things slightly differently?

Ryan [00:09:03]:

Not necessarily. In my experience, again, I would say it depends. 20% is worse than 40% is worse than 50% or whatever. If you're at a 20% margin, you probably have a few things going on. You probably don't just have a utilization problem. You definitely have like a pricing and servicing problem. You probably have both, right? Which is like you're coming out of the gate with the wrong target price and you're probably over-servicing. Like both of those two things are happening. So in the worst case, you might have built your business to a million servicing the wrong kinds of customers in the wrong kinds of ways and you might need to level up your rung of customers and define better the scope in which you provide them. But I would argue that a problem is easier to solve when you have a business. Like you have a thing. It's way harder to solve when you have nothing. You have no revenue, you're working nights and weekends when you're there and you don't have anything. That's not a problem that you necessarily may it's not a discrete problem you know you can solve, right? It may just be that this thing never exists. But when you're at a million dollars in revenue, even if you're serving the wrong kinds of customers, making the wrong kinds of money, like you're here, you're in the game, you've quit your full-time job, you've got 40 hours a week to devote to this, you can solve this problem. So for me, I actually don't think any situation is irreconcilable once you get to that level. Again, in best case scenario, you've sold all the right customers and you've got a great margin. You're just rocking. But even if not, that's okay. We can fix it. That's my point of view anyways.

Rob [00:10:48]:

Yeah, absolutely. So a couple of questions really. I guess the first question I should have asked you is to give us a definition of utilization and then also a good question. Just give this whole thing a bit of context and then let's dig into some of the ways we can actually measure and track it.

Ryan [00:11:04]:

Yeah, so, great question. So the definition of utilization is just simply like what are my billable hours or the hours that are devoted to servicing client work divided by my available hours, right? And oftentimes if I'm looking at an Am or a designer's week, for instance, generally the denominator is going to be 40. So that's the available hours, it may be different depending on who you're looking at and how, but the denominator is often 40 and the numerator is how many billable hours or client service hours there are. Right? And so again, we're measuring the percentage of the hours I'm paying for as an agency owner that are actually generating revenue for me. That's the equation. The second part of your question was just like how do we measure it? Right? I'd say the number one, the denominator part is quite easy and the doing the math part is quite easy. Like Excel or whatever can help you do that. The trick is the numerator, how many hours are devoted to client service work, right? Billable hours. And for that, you need some time tracking methodology. So look, a best-case scenario is your team is using one of the dozens and dozens of time tracking solutions at our firm. And we often recommend we use Harvest. That's a pretty common time-tracking tool. They've got some forecasting tools as well. There's a much bigger product called Parallax that we like for larger agencies that has time tracking and also capacity planning, like automation in it. But anyways, you just need some way to do it. And by the way, this is the hardest part, right? It's not the theory or the concept behind it that makes sense on how I would go get time tracked. The hard part is like creating a process that people follow and managing the compliance of getting people to actually produce accurate timesheets or getting your head around the idea that you're willing to do this at all because that's probably the number one obstacle we face with new agency owners.

Rob [00:13:14]: 

It's like time tracking. Yeah, I mean, if you don't get the cultural implementation of this right, then your staff are going to think you're being the big brother and checking up on them. So you need to communicate that whole efficiency profitability utilization thing to everybody and to help them understand that actually if we can monitor your efficiency, then we can work out, do you need more support, do you need training?

Ryan [00:13:38]:

That's exactly right. I mean that's the thing is there's definitely the profit component which is like when we win, we all win and people can somehow relate to that. But it's even better for the employees than that because I would argue the number one reason is like, look, if you're working 45 hours, that's a problem. I got to get you help. If you're working 25 hours, I'm sure you're bored. I got to get you work. How on earth am I going to know that if I don't have good visibility? But as you mentioned, where we see these initiatives fail is when it's like, hey, everybody here's harvest. Log in every day and record your time. And that's it, right? No context, no why behind it. That's kind of number one, like making sure people realize what we're really doing here and it's for our collective benefit. And number two, a thing that we see is selective implementation. So hey, you people do it. But me, agency owner, I'm not going to do it. And this person over here that I really value, they're not going to do it either, right? This is a do as I do, not as I say kind of a situation. And if you want your employees to do this, you're going to have to model the behaviour you want.

Rob [00:14:42]:

Yeah, I mean, goodness, I couldn't agree with everything you said more. And it's interesting that there's this conundrum or this contradiction between agencies thinking they're creative, being creative, and then this very what could feel like non-creative, like tracking your time, this function that needs to be done. And I just want to say, look, I ran my agency back in the we did many mistakes. One of the things we did really well was this. We used an Excel spreadsheet because there was no stream time, there was no harvest, there was no toggle, and there was none of those systems, those days that make life so much easier now for people. So I think I will put a list in the show notes of some of the chime-tracking tools that Ryan and I have got experience with. Not that we have your agenda about which ones to use, but there are great tools out there. So when someone's working out what good utilization is, what would be a good percentage? So if I could get as many clients as I wanted, and I've got a designer who's doing 40 hours a week, how many of those hours should be billable and how many of those hours should be allocated to admin or anything else?

Ryan [00:15:47]:

This is a good question. I mean, this is like the million dollar question people ask and I'll give you a point of view, but before I do that, I'll dodge it a second, which is to say there's like all sorts of caveats and whatever. So look, I'd say on a service, so when we're talking about just a person who's providing service, right, one individual a service utilization, often that's going to look close to 80%. I've seen it go up to 90%, I'll come back to why. But much greater than 90% is often problematic and much, much less than, let's say 75%, 70% maybe is going to be difficult to turn an adequate gross profit margin. Which again, this also differs depending on agency type. But ideally, north of 50 we like to target, 55 is what we're working towards. And so that's kind of the sweet spot. Now, again, these targets will depend on a few things. One being like the biggest is just kind of the nature of the work, right? Like if you have highly predictable retainer level work with really discrete scope and you're somewhat of a larger agency and it's somewhat easy for you to recruit this kind of talent like it's not highly differentiated talent, then you can take your utilization up to 90%, right? But if it's the opposite of that, where it's highly project, it's hard for me to predict. The kind of work is very specialized and it's very difficult for me to recruit these individuals, then I'm not going to let my utilization get all the way to 90%. And the reason is because, well, when I sell new work, I'm not going to be able to service it, right? It's going to take me three or four months to go and find another person to join this individual and in that time I'm going to have to actively turn away work, right? So if the work is not very fungible, then I'm going to set my utilization target lower and I'm going to hire earlier. So anyways, but like 80% is kind of what we target and then on a firm basis, like 65, 70%, and that includes the non-billable people and the billable people, you can turn a good margin at about that level. So those are rules of thumb.

Rob [00:18:07]:

Yeah. And that concurs with what I would tell my clients. 80% is a great target. Just tell us why you can answer this question, but tell us why it should be 80% and not 100%.

Ryan [00:18:20]:

Well, there's a bunch of reasons for 100%, right? One is just like if you're scheduling to 100%, you run the risk of working to 110%, 120%. So one is just burnout, right? You're just going to lose employees if you're scheduling to 100%. The other, of course, is just flexibility, right? Again, as I mentioned, every industry has its thing that's hard, right? Like if you're in logistics, it's like managing point-to-point. If you're in retail, it's like managing your inventory and you’re warehousing. In agencies, your inventory are people, right? And again, if you have too many people at any given time, you're not going to earn a profit. And if you have too few people at any given time, you are not flexible to win new work. You'll never be able to grow. So if you're forecasting to 100% utilization, you can profitably service the work that you have, but you cannot take on any new work, you have zero flexibility. And so that's why we target something in that 80% range. That's kind of the sweet spot where as long as we're charging the right price, we can still earn our 55% margin. But we have room for a scope to change, for new clients to come in, for any number of things to happen without asking our people to work 50-plus hours a week, which you might be able to do once or twice, but you cannot do consistently.

Rob [00:19:36]:

Yeah, absolutely. And I guess it copes for all the things we don't know. That's what I always say to people. Like, when you're totalling your day, you have to be able to plan for the things that you don't know are going to happen. And that extra 20% gives you that wiggle room, which if you schedule to 100% or even 95%, you are really going to know wiggle room with that because scopes change, and clients change their needs. And on that note, when you're looking at utilization, what would you say is reasonable I don't know if this is a fair question to ask you, Ryan, but what would you say a reasonable over-servicing level is with a client before we start thinking, okay, this is eating into our 50% GP?

Ryan [00:20:15]:

Well, boy, isn't that a great question? I don't know if I would give a firm answer because, man, it totally depends, right? I'd say the biggest function is like, what's the ROI on my over servicing? In other words, like, okay, if this is a large, you know if I have concentration risk, it's a large important client of mine. I've got a line of sight to incremental work. Then I view the over servicing as almost a sales activity. Right. That's an investment I'm making. To be perfectly honest with you, the 80 for 20 rule often applies. The 20% of my worst clients are responsible for 80% of my over-servicing. Whatever in this world where I'm over-servicing and it's because I have this overly needy client, those are often some of the least profitable and will continue to be in perpetuity. And so for those kinds of clients, I would say close to none. Right. That's probably an opportunity for you to compute addition by subtraction, where this is probably not an engagement I want to be in. So just it really depends on the value of that customer to you and the nature of the over scope.

Rob [00:21:31]:

That's a really great way of looking at that. And I think that's a question that I get asked quite a lot. And I'm saying to people, well, if you're ever servicing a client 10%, then you're probably going to win that back at some other point where you can under-service it by 10%. But if you're consistently over-servicing clients by 20, 30%, then you need to train your team to push back, and you need to get better boundaries of your clients, and you maybe need to terminate that client. But I think it's also a really good way to look at it, say, well, actually, will this act as an activity to get us more business in the future?

Ryan [00:22:02]:

Yeah, totally.

Rob [00:22:03]:

And let's just talk about whose responsibility it is to look at the whole utilization. Because I just want to say before you answer that question, another thing that I see that makes time recording fail is the fact that people diligently fill in their timesheets and then they appear to go into a black hole and they have no idea what happens to them next. They never get any feedback. So whose response is it to look at those timesheets and look at the utilization? And then what should we do with that information?

Ryan [00:22:31]:

Well, let me answer your last question first and then your first question last, which is so you're totally right. Time tracking for its own sake is a complete waste of time. And that happens plenty of times. So look, what we're trying to do here is produce a feedback loop, right? Often that feedback loop looks monthly. It can be more frequent, but I can't imagine how to do that. And it could be less frequent. But again, we'll create a feedback loop. And what we're trying to do is determine basically our gross profit. But ideally on a project basis, what we're really looking at here is project profit, right? So I can see, look, I'm tracking my time, I'm calculating my utilization, but I'm also looking at where that time is going and how is that resulting in a profit at the project or the client level? And I want to look at that on a monthly basis, and I want us all to talk about that, right? I want us to all talk about how did that go? Hey, this particular client, we're hitting our utilization target on that client, and we're earning a 60% client profit margin. That's great. What's happening there? Like, what's working? Why is that going well? Hey, this client over here, we're way over our utilization target for that particular client. Our margin on that client's, is negative. What's happening here, right? None of this feedback loop is meant to be punitive. None of this is meant to do anything other than, hey, let's observe, let's learn, let's throw out suggestions for how we might reduce or control scope over here, how we might apply the winning, the learnings over here, and elsewhere. We're going to do that every single we're going to do that every single month. It's going to help us get better. When you're small, the partner, the owner, the head of service, perhaps might be the individual who's doing that and running that. And they're doing it at a firm level. In our experience, I mentioned the first two phases of growth. The third phase of growth we call grow mode, and that's when you're north of 3 million in revenue, call it three to 4 million in revenue. And growing. You're now too big to manage on its totality and you need the next level of deputy leaders to come and do this exact exercise, right? So now that might look like project managers or account managers or service line owners and they're going to cut the business into like a couple of chunks and they're going to do that same feedback loop exercise but on their subset of the business. And they're going to manage each subset kind of independently, but either way. But at the end of the day, somebody is accountable to this. Somebody is accountable to project margin and that person is the one who's taking the time data, doing the reporting and bringing everybody and I mean everybody into the fold to look at it on a monthly basis.

Rob [00:25:19]:

How amazing would that be if all agencies did that? Like spend money, dive into what's working, what's not working, do more of what's working, do less of what's not working, and looked at the time recording like that, I think that would be great and I hope anyone who's listening to this takes that on as a message that they can start implementing. It's not difficult to do this. Now, one question before we start to wrap this up. So some agencies, I don't know if you find this, Ryan, when you're talking, but some agencies, when I talk to them about the importance of utilization measurements and therefore putting time tracking in place, are really resistant to the idea of time tracking. They think it goes against their culture and they don't want to do it. So do you see this and are there any alternative ways of measuring this if you really don't want to put time tracking in place?

Ryan [00:26:06]:

Yes, we absolutely see this. It's not the rule than the exception, but man, it's close. There's just a lot of just cultural resistance to you mentioned Big Brother and I think that I think we've all worked at bad places who weaponized time tracking and it's scarred us. So no judgment. I understand. The short answer is, look, we got to know what people are doing and roughly when and for how long. We have to know that there are no alternatives to that. However, for instance, we just had this conversation with a particular client of ours and we were brainstorming. They're resistant and hey, look, we're not going to be dogmatic about I don't care about specific processes. I just want to help you solve your problem. In their case, they have large projects with multiple people on the projects, right? So like these designers, for instance, they're not spending 2 hours on this client, 4 hours on this client, and 3 hours on another client. They're spending a week or a half a week or whatever. Fine. That's fine. We don't have to use a toggle to track every single hour. If we use in their case, they forecast staff. You have to do some version of like. Who's going to do this work and when right? They're forecasting it, they're putting it on spreadsheets. We can do like a quick reconciliation. Hey, this week we thought this person would be fully devoted for their full week, call it 40 hours to this client. Was that true or was it less? And if it was less, where did you go? Right, so again, it's kind of time tracking, right? But it's not toggle doing every hour. We're going to look at the spreadsheet, we're going to have the conversation, and we're going to do it less frequently because the individual chunks are just bigger. And if you can do that, more power to you, that's totally fine. But there is no alternative for knowing who roughly did what roughly went. There's just no alternative for that.

Rob [00:28:09]:

And I completely agree. It's just interesting how many people are resistant to this because they see this kind of contradiction to them being a creative agency and this is taking creativity away. I've worked in the agency world for 30-plus years and I've never seen an alternative. Back in the day when I ran my agency, we use Excel spreadsheets and if we could make that work, you guys can definitely make it work with the great tools that are out there, that are working on your phone and working on your computer and time in real time if you like. So great. So that's really fascinating and a topic that we could go on in a lot more detail. I hope the listeners have got a sense of a, why utilization is important, b, that sanity is whatever, vanity is revenue and sanity is profit. And we need to make sure we're hitting those GP numbers. And the only way really can do that is by time tracking. And the implementation culturally in the right way is what will get everybody to come along with you, plus the fact that you're actually doing something with the data that you receive. So that's great. Let me ask you the question that I ask all my guests, which is if you could go back in time and give your younger self, just starting out in business, a piece of advice, what would it be?

Ryan [00:29:21]:

Yes. Well, look, I would say when I look back at my younger self, I think I had this idea, right? You're starting out in the business, you look at all these people who have businesses and who are successful and you think, oh my gosh, these people are so much more talented than me, so much smarter than me, they have everything figured out. Not only does that make me feel like, oh, am I going to be successful, I'm not as smart, I don't have everything figured out. And also like, oh, I need to get everything in their brain. I think you realize when you've done this for a while and I'm sure Rob, you agree, nobody knows what they're doing. It's in general, nobody knows what they're doing. Everybody's figuring it out. There is no playbook for anything, right? Like, there are rules of thumb and whatever, but I think that if I could really impress that upon my earlier self, I definitely, A, sort of struggled with some confidence early on because, again, I just thought, oh, I don't have what these people have. And B, I think I got a lot of advice from mentors and whoever else, and I just assumed that that was gospel and I had to follow every word, even when it contradicted what I felt in my own gut. And now that I look back, it's like, no, everybody has an opinion, everybody has advice. What work for one person isn't necessarily going to work for another person? It's good to get information. There's no reason to completely recreate the wheel, but do so carefully and gather multiple data points and at the end of the day, it's your business. Create your business the way you want your business to look. Nobody can tell you how to do that for you. So anyway, that was my epiphany.

Rob [00:30:43]:

Yeah, that's great. And wouldn't that be a great piece of advice to give all of us, to give our younger selves? Because at the end of the day, one thing I've learned over the years is that everybody has impostor syndrome. It's more about the relationship they have with that voice. Do they believe it or do they just disengage from it? That's what separates confidence from a lacking of confidence 100%. So, Ryan, if people wanted to find out more about you and outsource and so on, where would they go?

Ryan [00:31:11]:

Yeah, so our website is upsourcedaccounting.com. Upsourcedaccounting.com. You can see us there. We've got a YouTube channel at Upsourced where we put out a bunch of content about topics like this and others. So it's the two best places to find us.

Rob [00:31:28]:

Great. Well, I will include links in the show notes that plus links to some of the time recording tools that we talked about today. So I just want to say a huge thank you for joining us on the podcast today. I found that really insightful, so I know the listeners will as well.

Ryan [00:31:41]:

Awesome. Thanks, Rob. It's a lot of fun.