Prioritizing the Profitability Trinity in Digital Agencies

There is a myth in digital agencies that any work is good work at the start, even work that isn't really priced to turn a profit. While there may be some truth to this early on, it’s important to shift your focus to profitability once you have a positive reputation.

After all, the Bureau of Labor Statistics reports that at least 20% of businesses fail in their first year, and that number is far higher in many industries.

These early failures are often directly related to doing unprofitable work. The work you do, hour-over-hour, must be bringing in actual revenue, or you’ll eventually run out of steam and be forced to close.

In our eBook, we delve deeply into many aspects of profitability, but a good place to start is with the profitability trinity, where we see the component parts of a profitable business.

The Profitability Trinity

The three elements that form profitable digital agencies are:

• Budgets: How many hours or how much total money you have to "spend" on a piece of client work.
• Timelines: When each project is expected to be completed for the client (i.e. available hours for that project).
• Utilization: The number hours you are paying your employees that are also directly billable to the client.

Every element of the triangle must be aligned to the project, but you'd never pay your employee $50/hour and then bill the budget at the same rate. You provide everything from benefits to office space to vacation time, so your billed rate will inevitably be higher than your rate of employee compensation. 

However, it can be made much higher as a result of bad utilization. A 40-hour a week employee who only bills a few hours a week has extremely low utilization, with the rest being overhead that you have to pay from somewhere. 

Great utilization requires great management. You create the timelines and budgets of the projects based on what you know about your agency employees, but you also can push for greater understanding of what stands in the way of high utilization. What is taking up more time than you projected, and how can it be remedied?

Often, low utilization happens when the tetris-blocks of different projects don't line up: you have one graphic designer on staff but have a month where you only need 5 hours a week of graphic design. 

This means that each project needs to be constructed with budgets and timelines that help you make sure you have the work to keep all employees as busy as possible. Keep in mind that it's not just about their work efficiency, but rather about the variety and timeline of the projects you have available to complete.

High utilization results from good management of individuals to keep efficiency up, and from having the right kinds of work on timelines that allow for each employee to have a full day every day. 

When you achieve high utilization and keep your billable hourly rate at a sustainable level, profitability mentality and profit results. 

Maintaining Long-Term Profitability

Once you’ve optimized your utilization, you'll still have other elements of the triangle to monitor. For one thing, it's key to stay on budget and to refine your approach over time. All stakeholders need to work efficiently to deliver the best possible product while staying within budget.

As timelines are refined and new elements or obstacles are discovered over the course of the project, it’s critical that you keep your client informed. 

There will inevitably be times when budgets must be revised due to unforeseen project expansion, even if the end goal remains the same. Clear information visibility for your client keeps the relationship solid without forcing you to eat expensive overage costs.

Attaining utilization numbers isn't a one-time thing, either. It's easy to let these numbers slide if they aren't monitored, but every meeting and every task has a cost. 

Focus on what is being logged as billable client work to understand the story of time spent on each piece of client work. It's good for management and essential for your bottom line.

Lastly, don't let awkwardness prevent clear communication about payment terms. If necessary, get paid up front, or get a significant deposit to ensure that the intention and ability to pay is there. Agencies that don't require any kind of upfront payment can be burned easily by people looking to get something for nothing.

Ready to run your business with the profitability trinity in mind? Sign up today for a free Accelo trial and download our complete eBook — it’s full of actionable steps to take your digital agency to the next level.