Data Analysis is the Future, and the Future is Now!
Organizations that harness the power of data aren’t just a bit better off—they are in a league of their own: 23 times more likely to acquire customers, 6 times more likely to retain them, and 19 times more likely to be profitable (according to the McKinsey Global Institute).
From understanding the impact of agency metrics on business success to identifying key indicators for tracking performance, this guide will provide you with the tools you need to thrive. Through strategic decision-making and the use of innovative tools, discover how to leverage metrics to optimize project outcomes, improve client relationships, and ensure long-term success.
Why Agency Metrics Matter in Today’s Competitive Landscape (and Why Some Matter More)
Imagine this: you’re driving blindfolded, trying to reach a specific destination—you might accidentally stumble upon your destination, but it’s more likely you’ll get lost, have an accident, or lose your way, right? Agency metrics are the GPS of your agency; they illuminate the path forward, showing you where you excel and where you need to correct your course. They are the key to unlocking your agency’s full potential, guiding you towards greater efficiency, profitability, and ultimately mastering your sector.
But not all metrics lead to actionable insights! Some metrics hold the key to understanding your agency’s performance, while others just clutter the dashboard. It’s not about drowning in a sea of numbers; it’s about focusing on the metrics that provide the clearest picture of your progress.
Understanding the Impact of Agency Metrics on Business Success
By keeping an eye on these metrics and acting on what they reveal, you steer your agency towards growth and success. Plus, everyone loves a bit of healthy competition, right? When team members can see how their efforts contribute to the whole, it adds a fun element to the daily routine. And let’s not forget the bragging rights! When you can show clients how their investment is paying off, it’s like shouting “We did it!” from the rooftops, giving them tangible proof that they should work with you again.
How Do Agency Metrics Drive Profitability and Growth?
By tracking metrics such as customer acquisition cost, project efficiency, and client satisfaction, agencies gain insights to optimize strategies, reduce costs, and improve service quality. These metrics not only inform proactive decision-making but also enable agile adaptation to market trends, thus driving long-term success. With clear benchmarks and ambitious goals, agencies can navigate towards profitability and growth using data-driven approaches to stay ahead in the competitive landscape.
Identifying Key Metrics Every Agency Should Track
After collaborating with over 500 agencies and meticulously examining their performance, we have established a comprehensive list of financial and non-financial metrics that we consider essential for success.
What Are the Key Financial KPIs for Agencies?
Gross Margin
There has been a notable shift from the “retainer” model to more “project-based” approaches, a transformation accelerated by the COVID-19 pandemic. What does this shift entail? It has led to the fragmentation of work scopes into multiple projects, intensifying competition while paradoxically reducing budgets. Moreover, decision-making power has shifted from marketing teams to procurement departments, resulting in tougher negotiations and accreditation requirements to collaborate with major advertisers.
Inevitably, this scenario puts pressure on the gross margins of traditional agencies, which now face a landscape where advertisers aim to get “more for less,” seeking broader work scopes for equal or reduced budgets. In this context, gross margin is more crucial than ever. But what level of gross margin should we aim for? A gross margin target of 35% to 40% is considered a benchmark.
For example, when an advertiser gives you an all-inclusive budget of €200,000 for a competition, you should anticipate revenues of around €70,000 to €80,000, allocating the rest to production. It is important to note that this benchmark can vary depending on the type of activity and the usual share of purchases. For instance, a high-performing production company will achieve gross margin levels close to 80%.
So, how can you increase your gross margin? Internalizing all or part of the production presents itself as a viable solution, as well as strategically integrating freelancers to flexibly adapt to specific needs and projects. This approach not only optimizes costs but also provides customized work that precisely meets client requirements. You can also try to reduce the scope of work for the same budget, aiming for “less for more”!
Salary/Gross Margin Ratio
We are aware—and you are too—of the current ecosystem and existing tensions around budgets. Therefore, a prudent entrepreneur must keep control over expenses, with salaries being a critical area to monitor closely.
The goal is to find the right balance between flexibility and adaptability. In a project-based business model, you need to adjust salaries to the duration and obviously to the budgets of your projects. Many agencies opt for this hybrid system with a ratio of 3/4 employees to 1/4 freelancers. This balance allows for greater flexibility, limits salary expenses between projects, while maintaining a permanent employee base to ensure delivery and operational continuity.
So, what salary/gross margin ratio do we recommend to our clients? Between 55% and 65%: this means you should spend between 55% and 65% of your gross margin on salaries for your team (including yourself). If you meet this KPI and manage your structural costs properly, you should be able to achieve between 15% and 20% operating profit.
Office Costs/Gross Margin Ratio
When we talk about office costs, we mainly refer to your rent and rental fees. Some agencies overestimate their office needs, resulting in more space than employees. While there is often a desire to appear larger in advertising, some regret it; once the lease is signed, it becomes harder to leave quickly and therefore reduce your costs in this area.
So, what level of office costs should you adhere to? 7/8% of your gross margin should be allocated to paying for your offices. Okay, you can push it up to 10% if you feel really ambitious, but beyond that, you risk unnecessarily overloading your company’s structural costs.
What can you do if you have overestimated what you can handle? Several options are available:
- Sublease unused spaces to lighten the burden of office costs on your P&L.
- Have you considered coworking? More and more agencies are moving into shared offices, offering more flexibility.
- Finally, you also have the option of opting for shorter leases and avoiding getting stuck with a fixed six-year lease (or worse).
Flexibility is always key!
EBIT %
EBIT (Earnings Before Interest and Taxes) alias Operating Profit is a key indicator of your financial performance because, after taking into account almost all of your company’s expenses except corporate taxes, it’s the profit you make! This will be affected by the factors mentioned previously, namely your gross margin level, your salaries, and your office costs.
So, what revenue to gross margin ratio says “I manage my agency well”? 15% means you are doing well and 20% means you are doing exceptionally well. Don’t worry, you’re not a bad manager if you find yourself around 10%… especially in the current economy and with the shift to project-based approaches.
Client Staffing Ratio
Let’s look at a more technical KPI but just as important in managing your agency: the client staffing rate ratio. Simply put, it allows you to measure the volume of time your team spends on billable client hours. This helps you make decisions to increase or reduce your staff.
So, what minimum level of client staffing rate should you aim for? At least 75% of your team’s time should be spent on clients and billed through your fees and gross client margin. Below this level, you are likely overstaffed relative to your business volume. Going much higher also presents a risk because understaffing leads to dissatisfaction within your team and lower quality work.
But what should the remaining 25% of your team’s time be devoted to? In agencies, this time is often allocated to business development and tenders, as well as administrative tasks, reporting, internal meetings, and managing agency processes.
All the financial KPIs we have examined so far are closely related. For example, if you have a staffing rate around 75% with a gross margin around 35% and you maintain the salary/gross margin ratio (between 55% and 65%), you will be in the ideal gross margin range per employee (around €150K/year).
Gross Margin per Employee
This KPI is a financial indicator to determine if each employee in your agency is contributing enough to your gross margin. It also helps determine if your agency is properly staffed, if your client staffing rate is sufficient, and if your gross margin level is appropriate for the size of your organization.
So, what level of gross margin per employee should I aim for? The calculations are relatively simple: you need to divide your total gross margin by your full-time equivalent (FTE) headcount. If this figure reaches or exceeds €150,000 per employee, good news! Not only do you have a well-calibrated gross margin per employee relative to your headcount, but you are also closer to achieving a 15% EBIT!
However, be careful; if you approach €200,000 per employee, make sure you are not understaffed and that your team’s workload remains reasonable.
New Business Staffing
The last KPI we will explore is the level of staffing dedicated to New Business by your teams. As previously discussed, your teams’ client staffing rate should be around 75%. So, how should the remaining 25% be allocated? There are three main elements to consider:
- Business development
- Administrative tasks and meeting reports
- Internal meetings and agency process management
It is essential to note that the staffing level for business development evolves throughout the year but cannot be constantly at a high level; otherwise, it leads to team burnout and self-exhaustion.
So, what level should you aim for? Given the widely adopted project-based model, the minimum staffing level for business development should be > 10% and can reach up to 25% during peak tender periods. Make sure to adjust it according to tender seasons, which are traditionally stronger in early spring and late summer!
The Role of Non-Financial Metrics in Managing Agency Projects
Non-financial metrics complement financial indicators in managing agency projects by providing insights into various aspects of project performance, including client satisfaction, project timelines, deliverable quality, team productivity, creativity, employee satisfaction, client retention, and risk management. By monitoring and leveraging both financial and non-financial metrics, you can optimize project outcomes, improve client relationships, and ensure your agency is on the path to growth.
Continuous tracking of metrics throughout projects, rather than at billing time, is crucial for proactively identifying issues, ensuring transparency, mitigating risks, allocating resources effectively, and guaranteeing high-quality results.
The Importance of Tracking Project Progress: Project Profitability Metrics
Here are the different indicators you should consider:
Projected Net Profitability:
This indicator measures the actual profitability of the project, considering all associated costs. To calculate projected net profitability: Production Amount – (number of days spent * Daily Employee Cost) The production amount corresponds to: project gross margin * project progress percentage
Estimated Sold Profitability:
When negative: it indicates missed opportunities (what should have been sold versus what was earned) or vice versa When positive: it indicates the overperformance achieved compared to what was sold To calculate estimated sold profitability: production amount – number of days spent * Daily Rate (either based on daily rates or the average daily rate of the business unit or the default global daily rate) Example: If you have a project worth €10,000 and a -€2,000 on this indicator, it means there is a missed opportunity relative to the number of days spent of €2,000. In other words, if your progress is less advanced than your workload, it is very likely that you have a negative estimated sold profitability and need to make adjustments!
Billed Amount:
This indicator reflects the completed financial transactions for the project. It measures the total amount of money that has been invoiced and received from the client for the work done up to the current date. To calculate the billed amount: sum all the invoices issued to the client for the project, including partial payments or achieved milestones.
Progress Indicator:
This indicator quantifies the progress made on the project relative to its entire scope. It evaluates the proportion of tasks or deliverables completed compared to the entire project plan. To calculate the project progress percentage: divide the total number of completed tasks by the total number of planned tasks for the project, then multiply by 100 to express the result as a percentage.
These metrics provide insights into financial health and progress, helping make informed decisions. With a clear understanding of profitability, cash flow, and project progress, teams can navigate complexities and optimize outcomes effectively.
Using Metrics for Strategic Decision-Making
From data to decision: how to use metrics to guide agency strategy
To ensure success, use your metrics strategically to identify growth priorities, adapt tactics, and set ambitious but achievable goals. This involves using data to make decisions, executing tasks carefully, and communicating openly to achieve success with precision and flexibility.
Case Studies: Successful Strategies Influenced by Agency Metrics
Billed Amount:
Since adopting Furious in early 2020, just a month before the global lockdown began, David, CEO of Agence Rebellion, has seen remarkable transformations within his agency. From humble beginnings with just two employees to now a team of sixty, the agency has experienced unprecedented growth, particularly following the COVID-19 pandemic, with a 70% increase in gross margin.
However, with growth come challenges, and Agence Rebellion has not been spared. As margins began to shrink year after year, David recognized the pressing need for a tool capable of effectively managing and structuring their burgeoning operations. Faced with fierce competition for talent and clients tightening their budgets due to economic uncertainties, the agency encountered a pivotal moment in its trajectory.
To meet these challenges, David turned to Furious, leveraging its robust project management capabilities not only to track key performance indicators but also to gain actionable insights into the agency’s financial health and staffing balance. Every Monday morning, he dives into KPIs such as gross margin and revenue, receiving a concise summary of new project signings, setting the tone for the week ahead.
Additionally, David collaborates closely with his management team, using monthly indicators to assess margin profitability and conducting comprehensive monthly reviews to analyze performance and make informed decisions. With a keen eye on financial stability and talent retention, Furious has become more than just a software tool for Agence Rebellion—it’s a strategic ally in their journey towards sustainable growth and success.
David Ait-Ali, CEO of Agence Rebellion
The most useful aspect of a tool like Furious is that it is designed to accompany us every step of the way from start to finish—and that's something we struggled to find with competitors.
Furious Squad: Your Future Tool to Ensure and Visualize Your Agency’s Profitability
Why is Furious the Tool You Need?
Instant Access to Your Performance:
One of Furious’s main advantages is its ability to provide real-time updates and automatic alerts on the status of budgets and projects. This allows you to stay ahead of potential overruns, take corrective action quickly, and ensure projects stay on the path to profitability. We don’t just help you manage projects; we transform raw project data into actionable insights. Through comprehensive reports and profitability analyses, you’ll gain in-depth insights into your financial performance, enabling you to discern trends and implement strategic measures to improve future profitability at all organizational levels.
