This week Chip Griffin and Gini Dietrich discuss how you can figure out how much revenue your agency should have in order to support hiring a new employee — whether it is your 1st or your 101st.

This is a question that was asked recently in the Spin Sucks community, and it is something that many agency owners struggle with solving.

Chip also expresses his disdain for rules of thumb, while Gini explains why they do have value.

The duo also explore the risks of hiring (and firing) at the wrong time, as well as the differences between staffing models based on “W2” payroll employees and those relying on “1099” subcontractors.

And be sure to listen in to the end and let us know what you think of the new sign-off.

Automated Transcript

The following transcript was automatically generated. Unfortunately, this week the AI seemed more “A” than “I” and decided that Chip and Gini sound the same. We’re not certain who should be more offended.

Hello and welcome to another episode of the agency leadership podcast. I’m Chip Griffin and Gini Dietrich and we’d have your radio voice on today. I am trying, at least, it’s not my, you know, for packer lay smoker voice that I get when I have a cold. The emphysema voice. Yes, yes. No, I’m, but I am. I am trying to sound a little radio like I guess why not, I mean, this is podcasts are like, you know, today’s radio. Well, it sounds very radio like I liked. Thank you very much. Thank you. I appreciate that. Uh, we are now on the fir podcast, network radio and networks and all that kind of stuff. So the thank you to Shel Holtz for, uh, agreeing to allow us to become part of his storied network for communicators. Very nice about us too. I was like, thanks buddy. He did. Um, although I was, I was quite disappointed that he decided to listen to the dodgers in his car instead of listening to our first episode.

So, I mean, really shallots. Let’s have a conversation about this. Yeah, I mean I think we need priorities are really on the other hand, he can still listen to his team. So funny boy. Well I mean you can listen to them now until the red sox to feed them in the world series and of course by the time folks are, are listening to this, a few days after we’ve recorded it will have a better picture for how those world series are going. But again, sadly we do not have the ability to predict the future so we’re not going to. We could try,

we could and then we’d probably get even better reviews on itunes, but I have to say a little shout out to uh, Matthias, he gave us a nice five star review on Itunes, said, this podcast really fills a void. It’s great to see a show that focuses on the business side of running an agency is awesome. I couldn’t have written it better myself. Did you write it yourself? I did not write it myself. Matthias is not my alter ego. I am not spamming itunes with fake reviews. That that’s not how I do things. Now. I’m not sure how much it would help anyway. I mean, you know, I’d have to spam a lot of all. I did see there was some story about some spammers who were taking over, um, the itunes top listen, blissed or something. I didn’t read the whole story. Yeah, I know some.

Someone, uh, because they wondered why there was some, I think it was a real estate podcast that was suddenly number one on the most listened to podcasts or on apple podcast, which seemed a little unusual and it wasn’t like cereal or something like that. Yeah. Interesting. Anyway, in any case I’ll be gained. Absolutely. But one thing that you can’t game is the expenses and profits of your agency. So that’ll be something that we’re talking about in today’s episode. Segue. Uh, you know, I, I, I try know, I’m trying for the radio voice in the radio segue. That was amazing. Thank you very much. Um, I’m here all week. And so the, uh, this is a question that came to us, uh, in an online forum, uh, and basically the question paraphrased is that on the first episode of the agency leadership podcast, Jenny mentioned that every $250,000 in revenue affords a fulltime employee, and this was from an agency owner who says that she’s working on transitioning from an all 10 99 subcontractors model to a hybrid employee subcontractor model.

And really trying to understand how much of that 250,000 in revenue should be allocated towards salary. She cited a golden partners benchmark study that says that no more than 40 percent of your revenue should be spent on staff costs. So she wondered if $100,000 is the amount that you would need to be pet, where the, the, the maximum amount you would want to pay for $250,000 in revenue. So, uh, ultimately I think the real question is, you know, how do you know how much revenue is, is enough revenue to hire your next employee? What kind of benchmarks should you use? And so I’ll let you take the first crack at this one, Jenny,

I’m going to walk carefully into this because I know what your answer is going to be. Um, so I think that the golden partners study that she referenced has always said, and I think this is based on the big agency global model that between 130 and $150,000 in revenue for an employee, a new employee, a full time employee is profitable. But we also know that that at the large global agency level is between 15 and 20 percent profit margin. So if you’re aiming for 15 to 20 percent, you can go as low as 150 130 I guess. Um, if you want to be more profitable, but of course have higher billable hours from your employees, then Jordan 50 is a good rule of thumb. That being said, I know chip and it will not rain on your parade that you do not like rules of thumb.

I hate rules of thumb and to be honest, I think they’re rubbish. They are there. They’re something that are useful as far as starting to get your thought process moving, but I’m a firm believer that every agency owner, every business owner for that matter, needs to take these rules of thumb with a grain of salt and needs to actually run numbers for themselves to see what works. I mean to say that $250,000 in revenue is just what you should tag for an employee. Well, I mean, that’s, as you mentioned it, it’s different if you’re a large agency or a small agency. It’s different if you’re based in the boondocks of, of New Hampshire where there’s lower cost of living and so therefore lower salaries versus living in Manhattan. Um, you know, there’s differences in what the model is that you have for your business. And we all know there are different kinds of agencies. You know, if you’ve got a lot of paid advertising in the mix or other things where you’re taking a percentage, you know, sort of passively, okay, those numbers are no longer going to work. So I think it’s a fine starting point. But I really, really think it’s important that nobody take it as gospel and instead crunch the numbers themselves and figure out what’s actually going to work for their individual situation.

I agree with that, but I also think that there’s value in looking at it and saying, okay, you know, I mean to be quite honest, as I was growing my agency, if I had waited for her $250,000 in revenue or I guess an additional. So if I had waited for 500 because I would, I, me and myself would have covered the first 2:50. So if I was at $500,000 before I hired my first employee, I would’ve died. I would’ve died. I wouldn’t have been able to do it. So, you know, while it’s a good rule of thumb, I think you’re absolutely right. You do have to, you have to have to have to figure out the business side of things and what works for your business. You know, $130,000 in revenue is probably, you know, 10 to 15 percent margins. And when you ask an agency owner, not all of them, but when you ask a good majority of them what their profit margin percentages, they look at you blankly like what, what?

And I always make, I always say in just like you have to know that number, you have to know that number, so you have to figure out what your goal is. You know, for us ours is between 35 and 40 percent. Um, and because of that I know that I have to reach a certain level of revenue in before I can hire somebody. But then again, you’re right, yeah, we’re virtual so it could, you know, if I hire somebody in New Hampshire versus Chicago, the salaries are going to be different. And it also helps me dictate, you know, is it a $60,000 a person or as a $150,000 per person. So I think you also have to take into account not only the salary but the benefits, payroll, taxes, all the stuff that you’re going to put into somebody. So you’re going to. I would take the salary times 40 percent and that’s the number thing. You’re going to want to at least double it so that you’re. So if you’re paying somebody to make it easy, $100,000 in salary plus $40,000 in benefits and paid time off and all that kind of stuff. So you’re at 1:40, you probably want to be looking close to $300,000 in revenue in order to be profitable.

Yeah, absolutely. I mean, I, I think that using those sort of a benchmark things are, are helpful. Um, know I think that one of the things that I’m always asked for folks is, you know, how do you figure out, you know, what the hourly rate should be for people on your team if you happen to have that model. And I think I’ve mentioned on a previous podcast, I am not a fan of the billable hour model, uh, but I, but I know what it is used and there are certainly cases where I’ve used it in my own agencies as well for various projects but don’t like it. But setting that aside, you know, an easy way to sort of come up with a rough number is just to drop the thousands part of someone’s salary. So if you’re paying someone $150,000, you should charge them at least 100 or charge them out and at least $150 an hour, ideally more. But, you know, you certainly wouldn’t want to less than that. Um, that’s a, you know, for, for a math phobic agency owners, which frankly are a lot of agency owners, um, you know, that’s, that’s not a bad place to start. Again, run the numbers and part of that comes down to what the utilization of that employee is. And um, and you also want to look at actually charging clients for value, not necessarily just to, to recoup costs, but again, just as a, as a starting point, it’s not a bad place to start.

It’s not a bad place to start. And I do. I really liked the driving, dropping the thousands to get to your billable hour. I’m, I’m with you on, on billable hours. I don’t like them. I also think you do have to track time so that you know, how long it takes to do certain things and can charge appropriately. Um, but yeah, billing out by the hour and all that.

Yeah. Well, I mean there’s an end, there’s a difference between tracking things internally so that you know, how to, how to price and um, and understand your profit centers and cost centers and all that. But um, you know, when you start getting into it with a, you know, a building out that way, it just, it creates weird incentives and I think probably it’s worthwhile for us at some point to have a whole episode of the pros and cons of, of different billing systems. But for here, as we, as we think about, um, employees, you know, I think you’ve made a great point about having to calculate the total cost of that employee. Um, you know, which also will vary if you’re a virtual model versus a, a, an in person model because obviously if you’re virtual you generally don’t have to factor in, you know, the actual physical office space required.

Um, and, but it, it really comes down to each owner understanding what the drivers for their own model are. And you also need to think about what is this person doing right? So if you’ve got, if you’ve got a large project a and you’ve got people who are doing a strategic piece of work, you’ve got people who are doing sort of more mechanical operational day to day posting on social stuff, you know, whatever, um, you know, they’re going to cost different things and you need to break up the, um, the value of those client contracts appropriately, split them amongst your different employees. So you can say, okay, you know, $50,000 of the revenue is attributable to this employee. We need to make sure that their time costs us less than 25,000 to service that employee, things like that. So you really need to get it. Not just look at the big picture for your total revenue numbers, but look at a granual level for that individual project to make sure that you’re pricing it appropriately in servicing it appropriately. Because once you start getting upside down on a client and you, it’s very difficult to, to, to right that ship.

You never make that up. Never, ever, ever, ever.

Nope. I mean if I, if I, if I charge someone a dollar a widget and I realized that actually costs me a dollar widget to make it’s gonna be really hard for me to go to them, you know, next year and say I’m going to charge you $2 for that exact same which no difference. So that’s where you then have to get creative as far as how you can reprice on renewals up and down the road to try to right size a project. But again, another topic for another day, you know, the great. But that’s another topic for the great thing is there is no shortage of topics about the business side of agency life. So I suspect we’ll get to episode number 1,362 and still not having repeated the same ground that much.

Quite a specific number. One thousand 362.

Yeah. That would be a long ways in the future. So it’s a very long ways. Yeah. Yeah. So, okay. Well, how about just how the episode 136 then that seems more attainable. Um, but the, you know, the, the other thing is um, you know, when you look at the cost of a employee on a particular project, uh, you know, I think there are some good rules of thumb there. Again, as starting points, you know, a gold says, you know, overall 40 percent of agency revenue, you know, I always want to try to make sure that if it’s a, a human centric, a project that the human costs are less than 50 percent. Ideally, well less than that because you want your total project cost ideally to be 50 percent of what you bill out. Again, doesn’t work in every case. And certainly folks who were, who were doing any kind of media buying or anything like that, those numbers get thrown out the window. You’ve got to start fresh. But in general, for most PR or marketing communications agencies that are largely providing human services, that 50 percent is a, is a good starting point and then adjust for your own particular model from there.

Yep.

Also look for things that are going to make you more efficient. Um, you know, you certainly could have an account coordinator or an account executive be doing some quote unquote billable work for clients that could be replaced by robots. So look for things that, you know, media list development, things like that that can be,

um,

for lack of a better term, outsourced to technology and go ahead and, and bill your clients for that, put that into your contract. We use x, Y, and z pieces of software. It will cost you this much extra on top of the retainer and then have your people doing the creative work, the creative kinds of things that the robots can’t replace.

Absolutely. Now, one of the things that was in that original question that we got was a, you know, the, the, the agency owner was looking to move from a 10 99 model to a hybrid model. And we’ve talked mostly hear about, you know, revenue per actual w, two employee, but you know, when you think about, you know, the 10, 99 subcontractors, you know, how do you think of, of that piece from our revenue to cost perspective. Do you think about that any differently than you do the employee or would you treat it pretty much the same?

No, I tend to look at it a little bit differently because usually, you know, your, your 10, 90 nines or freelancers, I’m bill by the. They’ll have a barrel billable hour rate. So let’s say it’s $100 an hour,

um,

you have to be billing the client at least that much. So I always tend to look at case by case. You know, if I have a client that is paying us $10,000 a month and I know that half of it needs to go to the person that’s I’m going to do most of the work, I’m probably going to either have to negotiate a lower billing our billable hour with them or have them do it on a flat flat retainer project fee so that they know they’re getting the, the consistent cashflow, uh, but it may not be, you know, that they’re going to be able to bill it out at $100 an hour. So it’s definitely case by case, especially if the client is already a client, you know, if we’re going in and pitching business together, that’s a different story. But if I’m bringing on somebody specific to media relations or to design or to video production or something like that, then I have to make sure it’s within the client retainer and I’m still making money, um, that I’m not just, Oh, okay, well you’re going to do all this work. I’ll just hand over the retainer to you. That’s not how we.

All right. And I think that’s, I think that’s a very important consideration is to, again, it goes back to sort of knowing the cost for your particular projects and that I think, you know, one of the interesting things for me from a looking at a subcontractor standpoint and you know, like you, I, I, you know, I always look at it from the project level and my preferences to pay subcontractors, fixed fees per project whenever possible so that you know, they share in the risk reward, right? So you know, if the client asks for less work than we thought they make out, well as do we, and if it’s too much, then we’re both feeling the pain to some degree. Obviously that doesn’t always work particularly for, for things where you’ve got a larger project and you may need to use people for just a piece and on an occasional basis.

It’s not fixed. So you may need to go hourly. But the other thing to think about when you’re looking at subcontractors is that they don’t have much value to you beyond the actual projects they’re working on. Whereas a w two employee, they have excess capacity, you can use them to help grow the agency to try different ideas or things like that. Things you would not typically do with a subcontractor costs you have to pay extra for it. But if I’ve got a junior employee sitting over here who is only 80 percent utilized, there’s some additional potential, you know, business development or marketing value or something that I can get out of them, uh, in addition to it. So you need to think that through as you’re, as you’re looking at making some of these investments.

Yeah. And yes, I would, I like the hybrid model because you can, for lack of better term test people out, um, you know, have a dating period to make sure it works for both sides. But maybe you have a model where you say, okay, after six months we just, if we are still in love with one another and we’re doing great work together, let’s make this a permanent full time position. So I think there’s an opportunity there to where it doesn’t necessarily have to be, these are my wgs and these are my 10, $99 and that’s all there is. I think there’s an opportunity for you to, you know, woo somebody away from doing their own thing in the right situation.

Right. And when using the hybrid model,

you’re able to balance the risk a little bit better because it’s always easier to shed subcontractors than it is to share please both psychologically as well as you know, in practice and uh, you know, the. But the thing to keep in mind is that subcontractors, you’re typically going to end up paying more to over time than you would to aw , two employee. You can, you can typically because of the way that you structure agreements and that sort of thing in general, subcontractors will charge you more than you would pay to an equivalent in house employee. So that’s right. Yeah. You’re not going to be paying an in house employee $150 an hour for 40 hours a week.

Correct. Well, maybe you are, it depends on their role. Right? But, but, but it would have to be a pretty substantial role to be paying the actual.

They really like generating serious new business.

Correct? Yes. And if they’re not, then yeah, you want to go in a different direction. I think the other thing, this sort of highlights is, you know, thinking about capacity issues, right? Because when you’re, when you’re thinking about staffing from a, a w two perspective, instead of a 10, 99 subcontractor, you know, if you’re, if you’re anticipating growth, you have to have a certain level of underutilization of your team, right? Because if you’re 100 percent utilized then you sign a new contract, you know who’s going to do that work, right? So we will hire someone up typically and get them trained up, particularly on your own system and all that, you know, quick enough. So you either have to use subcontractors on a temporary basis or you have to have some degree of excess capacity within your staff. It doesn’t mean you can’t. Everybody can’t work a little bit harder for a period of time, but you can’t work at 110 percent on a, on a consistent basis and expect to get good results from your employee though.

Right? I think that’s always one of the mistakes I see. One when pure finance people look at agencies, you know, they, they’re looking for 100 percent utilization and they love to highlight while, you know, we looked at time sheets and this person is only 85 percent utilized. That’s the problem. Well, okay, theoretically if you want to do this on a textbook maybe, but think about the reality and so, you know, what I’ve often said to those finance people is, okay, so let’s say we sign up a new client next week. What happens? Well, we just hire somebody. Oh sure. Oh, you know how to hire people that quickly. Fantastic. You should be an HR finance.

Get them onboard and get them trained and get them clients knowledge and all that. Sure, absolutely.

Absolutely. But I,

not to mention, you’re right, there are other agency things that employees do, like and not even just business growth things but, or you know, promotion and marketing and all that. But also they have administrative things. They have email, they have social, they have, you know, time sheets, they have all this stuff that they have to do and if they’re traveling expense reports and stuff like that. So just say that they should be 100 percent utilized as, I mean, I use that in an ideal world, that’d be amazing. But that’s impossible.

Right? And that’s why, you know, if you look at, uh, you know, anyone who’s doing billable hours, you know, you typically use 2000 or so billable hours, is that the maximum that you can do that, you know, people will typically work more than 2000 actual hours in the year, but that’s, that’s what you target for your utilization levels and run a lot of numbers off of that. Um, you know, but I think the, you know, it all comes back to, you know, looking at your own particular case. If you’re an agency that works off of a lot of processes and is constantly creating new ones to be more efficient, you know, use that underutilized time for that verse I should say, are underutilized in air quotes, you know, try to think about, you know, how it is that you maximize the value that you’re getting from them. But, you know, frankly, the other thing is sometimes it’s not a bad idea for a.

apparently somebody wants to talk to me. We’ll have to see if we can edit that out. If not, I apologize to you. Somebody managed to get all of these things off, but I have a little, a few too many electronic phones that ring in different places because you have like 65 computers. I know I have, I have many computers and you know, computers are great because, you know, they, they work 24 slash seven and don’t charge any more for it. So yeah, they can be, it can be 100 percent utilized. Um, now they, they will tend to melt down. And when that happens, when I used to have a software company, servers that we ran literally at 100 percent cpu utilization all the time and they used to die, uh, periodically because you know, they, they do like to take a breather actually as it turns out, even though they are mechanical.

But in any case, yeah, I think the bottom line is there’s, there’s no replacement for agency owners and other agency leaders to really have that in depth understanding of their cost structure of the, of what they need to be profitable for their individual employees. So if you, if you want to use rules of thumb as a starting point, fantastic. I think it’s, it’s good to start somewhere rather than just with a completely blank sheet of paper without any further ideas. But you really need to tailor it to your individual circumstance. And I guess that that to me is the bottom line answer to the original question.

I would agree with that. And I also would be really, really careful that as you’re adding, especially as you’re adding w two employees, that you have the revenue to support them. That you’re not hiring them with the expectation that you know, revenue will come with them or that you can add it later because that’s very, very, very big.

You also need to be psychologically prepared for the possibility. You may have to let them go with that. Agency owners have two big hangups when it comes to employees. The first is hiring the first one and the second is letting any of them go. And so the agency owners tend to be slow on both ends and being slow on either end is costly.

Yes, it’s scary. Very scary. But yeah, I think not being, not doing it well and doing it at the right time,

I can make a huge

difference. You know, back to your point earlier, you know, if you had waited to a half million dollars in revenue before hiring anybody, you know, you, you either wouldn’t have grown or you’d have been dead. Um, and, and that’s the difference is it is at different stages in the lifecycle that you can look at some of these rules of thumb differently. Right? So the rules of thumb are generally designed around established agencies growing at a modest pace. If you’re in the early stages, you know, you kind of have to throw those out the window and figure out, okay, what can you stomach, uh, from a risk perspective, what can you stomach from a cost perspective and balance those out to match the goals that you’re trying to achieve. So, you know, I think, as I’ve said before, basically this podcast really could just be two words every week and it could be just, it depends.

I think if we did that, nobody would listen to. Well, we could, we could start it. We could end everyone with it depends. That’s a good sign off, right? I mean, what was Walter cronkite sign off? Um, that’s a part of our. I don’t know, I can’t remember it. It was. No, that’s not what it was. That was Dan Rather. I think. Oh God, I hate that because I’m a news junkie. I used remember these things, but you know, so that maybe that’ll start beating my sign off after another podcast. It depends. It depends. Like the diapers, just so we’re clear. All right. I think we’re kind of wandering off the rails here. Do you have any further words of wisdom before we lose? The good news is we have. We have at least one listener, but I’m afraid now we may be losing even even Matea. So review point. Can you take back reviews on apple podcasts? I don’t know. Hopefully not. Any case, any final words of wisdom on topic?

No, it depends. For shuttle. Well then that will bring to a close and another episode of the agency leadership podcast. We appreciate you listening all the way through to any, despite any technical hiccups and of course inane banter that you may have been forced to endure over the past 25 minutes or so. And would that. I’m chip Griffin.