The Issue That Impacts Profit Most

Warning: this post is going to have math.

What impacts profit the most in an agency is not getting the staffing combination right.

Specifically billable to non-billable people. 

And the understanding of how much a billable employee should produce.

I’m Nick Avaria, agency owner, and founder of Agency Acquisitions. Every week I share a client story, insights, and tips into scaling your agency faster, in 300 words or less. Every week I drop a new YouTube Video with real stories of scaling agencies to 7 and 8 figures. Watch the latest videos here.

2 methods: Hours or Direct Labor Efficiency Ratio

Hours method first:

Let's assume the following:

• 10 holidays/culture days

• 15 vacation + sick days

• 25 days off total

260 total work days  - 25 days off = 235 days

8 hours per working day x 235 days = 1,880 working hours.

Let assume we’re trying to hit 80% utilization: 1,880 x 80% = 1,504 hrs per year = 125 hrs per month.

If your hourly rate is:

• $125 x 125 hrs = $15,625 /mo  = $187,500/yr

• $150 x 125 hrs = $18,750 /mo  = $225,000/yr

• $175 x 125 hrs = $21,875 /mo  = $262,500/yr

• $200 x 125 hrs = $25,000 /mo  = $300,000/yr

• $225 x 125 hrs = $28,125 /mo  = $337,500/yr

It's rare to see agencies strictly billing hours anymore - it happens but usually hours are an estimating tool to create product based pricing. 

The allure is generally that by doing this the client gets clarity on price, and the agency gets the upside if they become more efficient.

Unfortunately, most of the time this does not happen for the agency. As new people come into the business, people slow down delivery as training standards fall over time.

Worse yet, a very high performer made the time estimates to the product based pricing and those estimates were too little compared to the average performer the agency has today.

Result = the agency eats the time overage.  

This is why time tracking is needed - to identify overage early; then train people to be more efficient.

I combine this measurement with DLER (Direct Labor Efficiency Ratio).

DLER is simple: Revenue under management / employee cost.

Example: 100k in revenue / 30k in pod cost = 3.33 DLER (note this also translates to 30% delivery cost of labor or 70% delivery margin of labor)

By the way, yes, my DLER target is 3.33

DLER is really fast at spotting macro-level problems in profitability quickly.

You can use this for a single individual, pod, or company as a whole.

The problem with DLER is that it doesn't spot micro problems - you need time tracking for that.

Each tool has its own place and when combined yields great results.

Here is the takeaway:

1. DLER helps you identify what person or pod is doing well quickly at a glance;

2. Analyzing the time helps you understand why they are doing well so we can reverse engineer the win and share it with the other teams.

Ready to stop wasting time and start scaling your agency to 7 or 8 figures? Book a time with me this week to find out how to get started.

Nick