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It’s one thing to believe you need to improve profitability at your agency, but where do you go for the metrics and benchmarks that help you grow your profits smartly?
One resource is Marcel Petitpas and The Agency Profit Podcast. He’s also the CEO and Co-Founder of Parakeeto, a software company that helps agencies improve their service — and their margins.
On this episode of Chats with Chip, Marcel explains some of the numbers that every agency owner should be watching, including why each is important. He also has some suggested guidelines for how to benchmark yourself against your peers.
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Transcript
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
CHIP: Hello, and welcome to another episode of Chats with Chip. I am your host Chip Griffin, and I am here today with Marcel Petitpas, CEO and co founder of Parakeeto, and the host of the Agency Profit Podcast. Welcome to the show, Marcel.
MARCEL: Thanks for having me, Chip. It’s an honor and a pleasure to be here.
CHIP: It’s great to have you here. We had a an opportunity to record a podcast episode on your show not too long ago. And that was a lot of fun. So I said, What the heck, why not do what on my show as well. And we can talk about one of my favorite topics. So I know one of yours as well, profitability.
MARCEL: profitability. I love talking about it. So let’s let’s jump in.
CHIP: And it does seem sort of like it would be malpractice for me to have on the host of the agency profit podcast and not talk about profits. But before we do that, Marcel, why don’t you tell us a little bit about para Quito and yourself to give our listeners a base of knowledge before we get in?
MARCEL: Absolutely. So yeah, as you mentioned, I’m the CEO of a software company called Parakeeto and our whole mantra what we’re out to do is make it easier for agency owners to manage the profitability of their business as you know, Chip Running a service business is more challenging than other business when it comes to profitability because of the nature of having to earn revenue after we sell it. And so a lot of things that go into getting better at that are tracking the right numbers and having those numbers in front of you at the right time. And being able to interpret and understand those numbers so that you can make strategic decisions about how to get better at being efficient in your business and where to invest your energy as a business owner. So we’re trying to save people from the pain of drowning in spreadsheets when they’re trying to figure this stuff out, make it easier, make it more accessible, and really give small agencies the kinds of tools that huge agencies have had for a long time, but I’ve never really been available to the small guy. So that’s what we’re trying to do. And our show our podcast is just aimed at helping educate people on all things profitability when it comes to running their agency.
CHIP: And I think you’ve zeroed in on one of the big challenges there. And that is first of all, agency owners need to appreciate the importance of profitability and on some level they do, right they they understand that they need to have profit So they can put the money in their pockets and do what they want to do but, but understanding the day to day profitability is something that a lot of agency owners don’t focus on. And when they start to think about it, their mind gets scrambled by how complex it can be. And so the goal that you have with your software and that I have with my processes is really to make it simple so that people can manage their profitability correctly. Right.
MARCEL: That’s right. Yeah.
Because Because it is way more complex than I think a lot of people give it credit
for. And so I think, you know, there are, I’ve spoken to a lot of agency owners about this, because it’s what I do all day, every day, and I’m always sometimes surprised by how many of them at first I was surprised by how many agency owners didn’t actually fundamentally understand their business model like the the fact that they had to earn the revenue after the sale and the dynamics of that and the different metrics involved in that. But as you start to go into this and research and as I started to, you know, educate myself on it in the earlier parts of my career, you realize that it is Very complex. And so people really shouldn’t beat themselves up. If a lot of this feels over their head, it there’s a lot of moving pieces here. And there’s a lot of different things to kind of learn about. And then you have to start putting all of this together and understanding it at the high level in the strategic level and then is challenging, there’s a lot to unpack. So that’s why, you know, I’ve dedicated myself to creating as much content as I can around this so that it can become a little bit more accessible, a little bit more digestible. And, and I’m glad that there’s other people like yourself out there that are on fighting the good fight, as well as it comes to making that content accessible.
CHIP: Yeah, well, you know, it’s one of those things where most people when they’re thinking about growing their business, and particularly thinking about growing their agency business, they think about revenue, they think about bringing on more clients and charging more money and things like that. But really, one of the best ways to grow your business is to figure out how to get more incremental profitability out of what you’ve already got, for two reasons. One is because hey, you don’t have to go out and win that business. It’s already there. And and secondly, because Whatever things that you put in place to improve profitability now will then take effect with all of that new business that you bring in, because hopefully you’re applying those same lessons.
MARCEL: Yeah, yeah. And I think this is an important distinction to make. Because I’ve seen a lot of people try to sell their way out of a service offering that wasn’t profitable, and can’t do it. It’s such a slippery slope, because what it actually does is it makes the problem worse, because you’re feeding more client work into a system that’s broken into a broken machine, you’re giving your business indigestion, and sometimes it can feel like you’re alleviating the pain because you have temporary cash flow to kind of kick that problem down the road a little bit. But there’s so much to be said about taking a step back and understanding that the foundation of a profitable agency no matter how good you are at accounting and sales and how good your creative work is, the foundation is being able to spend less money earning your revenue than it than the revenue that’s coming in less time than you know it. Basically spending less time and less cost of goods sold less contracts. spending less money to earn your revenue. If you can do that, well, everything else on top of that becomes easier. And all the other metrics that people might be paying attention to seem to start to work themselves out.
CHIP: Yeah. And I think the part of the challenge is that people mistake revenue and profitability for the same thing. Yeah. And so oftentimes, when I go in, and I’m consulting with an agency, I’ll ask them, you know, okay, provide me your client list and how much they pay and that sort of thing. I’ll ask them, which are your most profitable clients, and nine times out of 10, they’ll tell me their highest revenue clients. And that’s very rarely the case. It’s it’s much more frequent that that they are, in fact different. So if revenue and profitability aren’t the same, you know, what, what metrics should you be looking at? What are the things that you should be looking at as an agency owner in order to make sure that you are tracking the right things and gearing yourself towards profitability and not just top line numbers? Absolutely. So
MARCEL: My whole framework around this comes down to three numbers. So I believe that every service business, whether they’re selling websites, or plumbing, or building houses, or building funnels are all at the mercy of essentially three forces. The first is their capacity. So how much how much work you can do, how much revenue can earn in any given period of time has to do with if you’re in the business of trading people’s time for money, which is essentially what a service business is, if we want to define it that way. You’re at the mercy of how much time do you have available to you, and that’s generally through your team. And it’s generally through how much of their time you’ve basically purchased in bulk by giving them a salary and agreed that you’re going to resell it at a profit. So that’s the first kind of key metric is understanding what your capacity is at any given moment in time. And that’s a fairly simple thing to figure out. It’s a question of looking at how many hours a day are these people coming into the office? What kind of time off Do they have, what kind of holidays are coming up? What kind of policies do you have in place for the business offsites parties and so on, looking at how much of that time you expect Back to them to be working on client work and not sitting in meetings or filling out timesheets or doing reports or something of that nature, and then multiplying that by the number of working days you have available in a given period. And then if you have some other metrics that I’m about to talk about, you can start to work that into how much revenue can we expect to capture in that time period, you can break that down by service line, or maybe by business unit, and really start getting a clear picture of what kind of capacity you have any given period of time. So that’s the first essential metric. And let’s actually
CHIP: pause there on that metric, because I think, I think you’ve made an important point there in talking about capacity, and you talk about it in terms of labor hours, essentially, or what I used in the old days called man hours. And so it’s important to think of it that way, because a lot of agency leaders will think about it in terms of how many projects or clients can an individual service, and that’s, that’s going at it in reverse. You really need to think about the number of ours that your team has, and then figure out how to split them up. Right.
MARCEL: Right. And I mean, the context obviously depends on if you sell an extremely productized service that is super consistent in scope, you know, it’s a different world that you’re living in, then maybe you can use clients or projects as a quantifiable way to do that. But at the end of the day, all of that is a function of time. Right? It’s a function of having a scope that’s consistent and knowing that a client is 10 hours, you know, and so on, and so forth. So it always comes back to that. And this is another I mean, I always seem to have to like pause because all of my ideas really revolve around this concept that whether you build time, or you build on value, or you Bill flat rates, or you bill on ad spend, or however you charge your client, at the end of the day, your business model is selling time. And so all of this I should preface by saying, I believe that agencies and all service businesses should be tracking time for themselves because it is the most valuable piece of data that you can have internally to improve your profitability and improve your processes and help you get better as a business at not only serving yourself as the owner but also helping your team and all of The other stakeholders around your business to have a better work life balance. So that’s like just an Anik little thing at sound bite that I’ll drop in here to set context. Yeah,
CHIP: and I think that’s important too, because when people are advising agency owners about growth, they often are talking about you need to change your pricing model and do value based pricing or performance pricing or all sorts of other things and don’t do billable hours, which is fine, except that you still need to understand what those underlying billable hours are, because that is what you’re selling. So if you don’t know the cost of it, you have no idea what your profit margin is.
MARCEL: I think the most important thing about that, and this is a bit of a tangent, I think it’s an important one right is that all of those techniques around sales and pricing, all of those have at their core. The purpose of that is to increase your average billable rate, which is the amount of revenue that you can make for every hour that you work. And so that’s the value of decoupling your pricing from the billable hour. It allows you the opportunity to have a sale that based on the value to the client, and then come up with ways to be extremely efficient at earning that revenue, so that if you have 10,000 hours of capacity in a given period of time, well, would you rather make $200? For every hour your team works during that 10,000 or 100?
CHIP: Well, that’s 100 hundred definitely Marcel, I’d like to make.
MARCEL: Sometimes it seems like people want that reality. But so that’s the next metric. Actually, this works out well as a segue is average billable rate, which is a metric that defines for every hour that your team is working, how much revenue is your business bringing? And what’s important to know about this metric is what we’re looking at all of the time that it takes to earn revenue from a client. So I think a lot of people there starts to be a lot of mud in the water and we talk about billable versus non billable because there’s a lot of narrative that’s coming from this world in the agency space where everybody was billing for time. And so they’re like, Oh, well, you know, this time isn’t billable or it is billable. It’s like if the client pays you money, any time that you spend doing anything for that client is billable. It’s time that you need to invest to earn more revenue from that client. So basically, the equation for address billboard is you take your adjusted revenue, which is revenue minus anything that passes through you and on to contractors or advertising or print or so on the money that belongs to, and then you divide that by the amount of time it took you to earn that revenue. And that should normalize for the business. But it should also normalize by service line or by project type or by client type. So it’s a very insightful metric if you start to actually segmented in those ways to help you understand what are most efficient and most profitable types of work, maybe our most efficient and most profitable types of processes and it can really help you as a business owner understand, where should I be selling more things? Where should we be doubling down on strategically? But also, where should we be investigating to improve our process so that we can get more profitable at other things? And I like that metric because it’s kind of like EBITDA in that it levels the playing field against all these other factors like we could look at gross profit, we could try to look at net profit which is challenging to do on a surface level on a project level, but average billable rates are super simple number that gets us that same level of insight into, you know, what isn’t isn’t working efficiently in our business.
CHIP: Yeah, and it’s a great way to identify which projects you’re under or over servicing, as well as, as you said, to be able to identify the kind of work that you want to get more of. Because if you’ve got something that you can get that $200 rate on, why not pursue that kind of client, that kind of project instead of the one that’s $100? Correct,
MARCEL: right. And then the and then the question then becomes, and this it rolls around this last metric, which is utilization. Right. So the last one is of the time that you have available in a given period of time, let’s call it a year, how much of your team’s time is actually being spent doing things that earn your business revenue, right. So billable hours, however you want to define those, but essentially hours working for clients that pay you money in some way. And of course, the challenge with utilization is That most likely it’s going to be at the mercy of your pipeline. If you don’t have billable work for your team to do, then your utilization rate is going to drop unless you’re one of these agencies that likes to hold the team accountable to an arbitrary utilization rate. So they’ll just over service your clients, if you don’t have work for them to do. And then your utilization will stay high. But then you’ll see your average billable rate drop, which is my next point, which is that it’s very important to look at these numbers and the relationship between these numbers so that you can understand a full story of what’s happening in the business so that you can see our utilization rate went up, but our average billable rate dropped an equivalent amount. Well, I probably just means that we spent more time on existing clients and not more time on things that are bringing us more revenue. But utilization is another important metric, you want to essentially make sure that you can keep your utilization high enough so that you’re getting a return on the investment that you’re making in your team and low enough that you’re not burning them out and causing a bunch of turnover and causing your team to not be you know, performing long term at the level that you need them to do great work for your clients and Be happy and healthy human beings, which of course is important to
CHIP: write it. And utilization i think is indeed one of the trickiest things for agencies to nail it’s, it’s probably the the metric that’s most susceptible to the Goldilocks principle, when it comes to an agency business. Because if your utilization rate is too low, then you’re you’re wasting money, you’ve got you, you’ve pre bought in your terms, pre bought hours, that you’re just not using. But if it’s too high, then you’re either burning your team out or you’re preventing yourself from growing, because if you don’t have any excess capacity, unused utilization, if you will, to give to a new client that you can’t onboard someone without causing it to impact either an existing client or having to go out and pay subcontractors at a premium rate or or other things. So you need to get this one just right for your business in order to service that pipeline that you talked about.
MARCEL: Yeah, yeah. And to get into some benchmarks, you know, the the benchmarks that I see working with clients and that I’ve seen in the industry, you utilization generally, for an agency on an annual basis, business wide, for the billable team, you’re generally shooting for somewhere around 65%. So that’s after all of your holidays, all your weekends, all your paid time off, everything, everything, everything, you’re probably shooting for around 65%, you might end up a little bit higher than that maybe 7075 on the high end, and you might end up a little bit lower than that. But anything below 60 starts become problematic. And then if you look at this on a roll by row basis, then that really just comes back to your culture and your processes. I’ve seen, you know, software developers that work on a single client for six months at a time be 90% 95% utilized from week to week, and net out at, you know, 75 80% annually. And then I’ve seen project managers that are only expected to be billable for 50% of their time every week, because of the other responsibilities that they have. So there’s a lot of context around this. I would say that the average target for a billable employee on a week to week basis is somewhere between 75 and 90%. Depending on what the role is, if they’re a pure producer, and then on an annual basis, again, you’re you’re probably subtracting 10 or 15% off of that for all the other time off and holidays and so on.
CHIP: Yeah. And I think that this is one of those ones to words, it’s important to look at trends within your own agency, you know, is your utilization rate increasing or decreasing? And what does that tell you, because there are a lot of differences in the models that the different agencies used, the services that you’re providing your team structure, there’s all sorts of different things that go into it. And so in your particular agency, you might be at 70. And if you drop to 65, that’s a big deal. And you need to find a way to address it, whereas other agencies may be already at 65. And it’s just fine. So, you know, you really need to understand your own business and trends, I think can be a way to do that.
MARCEL: Absolutely. And, you know, the other important thing here is like that agency that’s at 65%. They might be foreign because their average billable rate is really strong, so they don’t need to work a bunch of extra hours to hit The revenue goal because every hour they work, they’re getting compensated very handsomely for that, you know, or they have the pipeline of like make sure that that utilization rate is going to be very smooth throughout the rest of the year. So, I think this is where it becomes important to set context that these numbers should always be being looked at, in two ways, number one, to make sure that they’re being looked at in context alongside each other and to your point, looking at trends over time, and then be able to look at different areas of the business and then as a, from like a high level strategic perspective, we should always be looking at these numbers in the interest of learning how to improve our processes, right? Not in the interest of trying to pinpoint if somebody is working hard enough or so you know, and so on, or trying to place blame on somebody, a client or a particular employee or particular part of the business for not being, you know, at the level that we want them to be at. The data should be used to inform questions about why or why not, you know, why are we hitting budgets on Why did we do so well on this project? Or why did we not do as well as we expected? What part of the process? Did we mess up on? What? How did why do we scope this and properly what assumptions that we make that weren’t correct? If we can have those kinds of conversations around this data with our team on a regular basis, that’s how we start to develop processes and procedures that will consistently get us consistent profits from our clients and get consistent results to our clients and allow our team to do you know, great work, and make sure that they’re feeling comfortable surfacing the things that are risks and our business that they otherwise might not be comfortable servicing.
CHIP: And you made another great point here, which is that as a leader, you need to be asking questions. And so when you’re looking at these metrics, and you’re comparing them to industry benchmarks, you need to look at the numbers and not just accept them, but you need to look at them and say, Why, what why is this number as you said, good or bad, and keep drilling. And so after each Why ask it again until you kind of keep getting into it and you will start to learn so much more. about your business. Because if you’re particularly if you’re a growing agency, as a leader, you often don’t know everything that’s going on in every nook and cranny. And so you need to be asking those questions so that you can absorb that information and make key decisions based not just on some percentage or dollar number that sitting at the top of a spreadsheet, but really understanding what the underlying data is telling you.
MARCEL: Yep, that’s the biggest key to all of this. I think so many people latch on to one or a few of these metrics, and just have this focus on it. And it’s without the context of really understanding at the beginning, what kind of questions are we trying to answer with this information? Right. And then, I think a lot of the confusion around what should we consider a billable hour or, you know, how should we be calculating our gross profit? What should we be including in our cost of goods sold? All these kinds of questions that are very nuanced that if we just took a step back and said, Okay, well, what’s the question we’re trying to answer with this data would all become incredibly clear. So I would encourage everyone that’s sitting at listening to this, maybe you’re feeling a little bit overwhelmed to kind of take a step back and think about, okay, what are the important questions for me to ask of my data? And then how can I structure my data so that it, it supports answering those questions in a way that’s quick and easy and clear. And for most of us, those questions are going to be what clients projects or services are most or least profitable for us. Why is that happening? Where should I be looking for improvements to our process or to our team, in order to improve the result and get more of the things that are working and perhaps either less of the things that aren’t working or make improvements to the things that aren’t working? that’s fundamentally what all of us are trying to figure out. And so we should think about how we track our time, and how we report on that in these kinds of metrics in order to facilitate discovering those answers.
CHIP: Yeah, and I, the you know, the keys here are to keep it simple. Gather only the data that you’re actually going to use Don’t, don’t ask your team to record their time down to the two minute increments if you’re not actually going to use it down to that level. You need to create a culture of honesty where people are comfortable sharing data, whether it’s they’re accurate time tracking or other bits and pieces of the puzzle. And then you need to have a way to aggregate it, whether it’s software like what you guys have, or a simple spreadsheet or hack a back of a napkin I, at some level, I don’t care where you’re keeping it as long as you’re collecting it and using it in a useful fashion.
MARCEL: Yeah, and I’m of that same mentality, which is why, you know, we’re giving away all the templates that we use with our consulting clients on our website. And you know, I hope this is appropriate. But if anyone’s listening, and they want some spreadsheet templates to calculate this stuff, like head on over to our website, if you go to pair kido.com, forward slash toolkit, we’ve got pretty much all of our templates and a folder in Google Drive that you can download. And yeah, I don’t care if you use our software or not, I just want to see more agencies do this stuff, because when you do it, and you do it well, then you know, your team doesn’t have to work long hours to subsidize projects that are going over budget. Everybody is happier, everybody’s healthier and your agency which is Probably supporting a lot of other small businesses in your community gets to thrive and survive. And I think ultimately, that’s a really positive thing. And it’s the, it’s the reason underneath of all the business success that I believe in solving this problem and helping more people solve this problem for themselves.
CHIP: And the bottom line for agency owners is you don’t need to reinvent the wheel there are. There are a lot of folks out there, whether it’s fellow agency owners, or folks like Marcel, who will share the information with you so that you’re, you know, you can use one of those templates and just, you know, get firing on all cylinders. You don’t need to sit there and stare at a blank sheet of paper and say, What do I do now? There are people out there who will help you and you just need to be asking the questions seeking the resources. And obviously, if you’re listening to us prattle on at this point, you probably are already interested in that. And you already know that so we appreciate you listening. But so obviously, you’ve given that link for the for that resource. Are there any other links that you want to share are places that people should go to learn about you or parakeet? Oh,
MARCEL: yeah, I mean, check out Parakeeto dot com, where we have a blog on that blog, we’re posting new content all the time, including our podcast episodes, which, of course, is a really great one coming out with chip, where we talk about a lot of the stuff that we just talked about now, except this more of shift perspective. So super interesting. Make sure you check that out at the agency profit podcast, if you’re more of an audio listener, you can subscribe to that on all your major podcast networks. And those are probably the two most important places if you want to learn more about profitability and stay in touch with the stuff that we’re creating. And of course, if you’re interested in checking out what we’re doing, there’s information on the website on how to how to look into that as well.
CHIP: Great, we’ll include links to all of that in the show notes. So if you happen to be on the treadmill or in the car, you don’t need to stop and try to write it down right now. Just go on over to the agency biz dot com and you will find all of the relevant links. So, Marcel, I really appreciate you taking the time to have this conversation. You’ve shared a lot of good insights for listeners that I think they’ll be able to apply to hopefully make their own agencies more profitable.
MARCEL: Thanks for having me too. It was a pleasure.
CHIP: Thanks, Marcel.
