Why Knowing Your Agency Employees’ Internal Cost Per Billable Hour Will Set You Up For Success

Internal Costs per billable hour

Agency world is often a turbulent place. Founders, C-Levels and SMTs spin many plates. Delivering great work, retaining great staff, and keeping clients delighted, all while being profitable, are just some of the critical areas that agency leaders are focusing on every day. And let’s not forget the constant flow of new business that agencies need to bring in to keep the lights on, or better still to hit those growth targets.

And whilst winning new business (whether new client/new biz or existing client/new biz) is, of course, critical, it is equally critical that this new business has been priced correctly and has been through a multi-stage approval process prior to submission to the (prospective or existing) Client. So, financial strategies and controls should be a top priority to ensure these new projects and retainers will be profitable.

A best-in-class workflow for pricing a project or retainer correctly will involve numerous processes and various departments, but I want to focus on a step which happens first, happens in the background, and will significantly increase the chances of a project or retainer hitting target profit margins (caveat: this is on the basis that time and resources quoted are sufficient to deliver the outputs). This step is to calculate an agency’s internal cost per billable hour for each billable member of staff. We will refer to this as ICperBH.

As one of the most important parts of the process for pricing projects and retainers correctly, agencies need to have a good understanding of their billable employees' ICperBH. Let's explore why this knowledge is so beneficial:

Setting Rate Cards

Rate cards are the foundation of pricing strategies for many agencies. They establish the client-facing prices for the various agency roles and resources required to deliver a project or provide retained support. Understanding ICperBH for each billable agency resource enables agencies to set appropriate rates to recover the true cost of each billable employee (in simple terms, their salary plus overheads and non-billable salaries) plus the desired profit margins.

Strategic Insight, Planning and Growth Opportunities

By having a clear understanding of the ICperBH of each billable member of the team, agencies can ensure that the rates they set are both competitive in the market and align with their financial performance targets.

If, after establishing ICperBH, the subsequently set agency rates are not competitive, this provides a great opportunity to explore why this is. Various factors could cause these uncompetitive rates, and it could be just one factor, several, or all. These factors include:

  • Agency overheads are too high
  • Staff costs are competitively higher than market rates
  • Billable utilisation targets/expectations are not high enough
  • Target profit margins are unrealistic

On the flip side, if agency rates look too competitive, this also provides an opportunity to check that budgeted costs are realistic and not underestimated - and to possibly increase target profit margins if all other factors have been checked and validated.

In Summary

As shown above, knowing your billable employees’ ICperBH is a powerful insight, because it paves the way for informed strategic decision-making across numerous areas of an agency.

In addition, by establishing ICperBH and setting agency rates accordingly, the financials are taken care of when agency teams are pricing jobs; which leaves them to focus on the scope, the required resources and the time needed by each resource to deliver.

Calculating ICperBH can be a complex thing to do. There are specific steps to go through and factors to build into the ICperBH model, including employee billable utilisation targets, staff absence, methods of cost apportionment, and scenario modelling.

I specialise in building these models for agencies, so if you are interested in learning more about ICperBH and how it can benefit your agency, get in touch by phone or arrange a call by clicking here.

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