Top Agency Metrics to Follow

Introduction

In order to successfully grow an agency, you need to keep track of various metrics to know what's going on. For leaders like CEOs and COOs, and people running the agency operations, there are some key metrics that should be monitored. They're quite universal no matter if you're in management consulting, advertising, or running a digital agency. Let's jump right in.

Understanding Key Metrics

Key metrics like utilization rate, billable hours, internal-vs-bllable ratio, revenue growth, and client satisfaction are pivotal in understanding an agency's performance. Leaders can gain insights into operational efficiency, financial health, and the strength of client and employee relationships by focusing on these metrics.

Billable Utilization and Billable Hours

Understanding billable utilization and billable hours is crucial for agency efficiency. Utilization reflects the percentage of time spent on billable tasks, indicating effective resource use. Billable hours, the time charged to clients, directly impact revenue. Balancing these metrics ensures optimal workload management and profitability.

Billable Utilization = time spent on billable work / (All time spent - absences)

This formula for utilization gives the effective utilization, i.e. how effectively a consultant spends their time while at work, disregarding absences. There usually exists an effective utilization threshold over which the agency makes profit. If you know your cost base, billable headcount, and your average hourly rate, you can calculate how high of a utilization you need to brea even, reach profits of 10%, and so on.

Planned vs. actual Hours

Planned vs. Actual Hours (or Planned vs. Actual Utilization) is a metric that can reveal many things. First of all, it indicates how efficiently your employees are using their time in relation to their plans. Someone might be underutilized in relation to what was planned, while someone else might have too much work and can't deliver everything! Additionally, the metric reveals how well your resource allocation process works in the first place. It also reveals if you end up selling a project with too few hours. The good thing about this metric is that is will spark conversation. As we highlighted, there are many reasons why planned and actual hours might look odd on an individual, team, or company level, so one should always try to understand the reasons behind the numbers before jumping into conclusions. We also have a specific article on planned and actual utilization in projects.

Internal vs. Billable FTE Ratio

As headcount increases, agencies begin to expand their middle management teams. Balancing the proportion of billable and internal full-time equivalent (FTE) positions within the overall headcount is crucial for operational efficiency. This ratio reflects the effectiveness of your organization and plays a pivotal role in ensuring your agency stays profitable. The leaner you can run your organization, while keeping employees and clients happy, the better.

Billable FTEs / All FTEs = Billable personnel ratio
Internal FTEs / All FTEs = Internal personnel ratio

Some companies have experimented with new kinds of organizational structures that help grow an agency with less middle management. E.g. our customer Columbia Road is running their business with a community-led organizational model with no managers. While this enables the company to grow with less overhead, it also gives employees more autonomy boosting eNPS.

Average Hourly Rate

For agencies working on a time & materials basis, it's important to monitor their average hourly rate. Similarly, for companies working in retainer-based or fixed-price project arrangements, it's essential to calculate the hourly rate for each project to evaluate their profitability.

Average Hourly Rate = Total Earnings / Total Hours Worked

To comprehend the trend in your average hourly rate, we recommend calculating it on a rolling basis, say, for a three-month rolling period. This approach minimizes the potential impact of individual projects.

Average Project Value

Average Project Value (APV) and Average Invoicing Per Month are crucial metrics for agencies to track financial performance. APV indicates the average amount spent by clients per project, helping to understand client spending behavior and efficiency of sales efforts. It guides decisions on pricing and client management.

You should keep track of the value of new projects sold and existing projects e.g. on a monthly basis. Naturally, you should be trying to nudge APV up as time passes.

Revenue Growth and Profitability

I don't think these metrics need much explaining. Understanding them is crucial for financial health and informed decision-making regarding expansion and resource allocation.

Revenue growth can be measured on a month-on-month (MoM) or year-on-year (YoY) basis. Using YoY comparisons for monthly revenues and profits is a great way to assess if progress has been made. The agency business is cyclical, so comparing January and March with one another makes little sense.

High-performing agencies operate their businesses with profit margins exceeding 10%, while the top-tier ones achieve margins exceeding 20%.

Gross Margin

Gross margin, the difference between revenue and cost of services sold, is a key financial health indicator. It reflects the efficiency in resource utilization for income generation, guiding service pricing and project profitability.

Gross Margin (%) = [(Revenue - Cost of Services Sold) / Revenue] x 100

Costs of services sold in an agency business is simple. It's all your employees salaries + the fees paid for subcontractors. This might also include production costs and other expenses directly related to producing the service.

Employee Retention

Employee retention is one the most important metrics to monitor, as agencies are people businesses. If you try to run a highly profitable business while neglecting your employees well-being, your best people will leave. High retention rates suggest a strong company culture, essential for consistent service delivery and maintaining client relationships. Clients like establishing long relationships with consultants.

We recommend keeping track of the monthly employee headcount and both the absolute and relative change in the number of employees. For larger companies, it makes sense to break this down per competence, skill set, department etc.

eNPS

eNPS (Employee Net Promoter Score) is a metric that measures employee satisfaction and engagement. It asks employees how likely they are to recommend their agency as a great place to work. Scores range from -100 to +100, with positive scores indicating a healthy, engaged workforce. Agencies use eNPS to assess employee morale, identify areas for improvement, and enhance workplace conditions. It's a great leading indicator for employee retention!

Client Satisfaction and Account Growth

Client satisfaction drives account growth and is fundamental for long-term success. Monitoring client feedback and engagement aids in service improvement. Account growth, through repeat business and increasing monthly invoicing is an important measure. High potential accounts should be paid close attention to. Read more on the topic on our article on account management.

Conclusion

Agencies, especially those looking to grow, need to keep an eye on important metrics like utilization, planned vs. actual hours, and whether their clients and employees are happy. With multiple years of experience in the agency business, we're happy to discuss more on this topic!