Capacity modelling 101

I recently saw a business advisor saying that to work out your agency’s billing capacity you should use the equation head count x billing rate. Simple!

If you are able to run a successful agency using ‘back of fag packet’ metrics, may I be the first to congratulate you, and suggest that this post is not for you.

For anyone left reading, and I suspect there may be a few, if you’re using that equation, you’re probably consistently failing to deliver the billings you expect, and wondering how to get more ‘efficient’.

When I’m asked to look at efficiency, or maximising billings, the first thing I do is work out what billings the agency has the potential to deliver with the existing head count.

We do start with how many of each type of skill set there is, and what the associated charge out rate is. Then, because people are human, I add in a proportion of ‘downtime’ – time spent lingering over the kettle, taking personal phone calls, visiting the bathroom, looking at twitter, and forwarding cat gifs. You don’t want this to be a large number, but you do need to factor some in.

If you are confident that you don’t have any downtime, then again may I congratulate you, this time for stamping out any semblance of personality in your work force. It doesn’t sound much fun working at your agency. Or perhaps your downtime is masked by overtime. There will be some – if for no other reason than that people eat, drink, and visit the bathroom.

Once we’ve factored in downtime, we need to look at agency-specific factors – the agency processes and administration needs, internal meetings, training and development, R&D, average sick days over the year, holiday allowance and anything else that takes people away from their desks.

Once you’ve got to that point, you’ve got a realistic view on how much time you have to sell.

Then you need to consider billing rate. Are all your clients paying the same amount? If so, that makes it easy. This situation is rare though – in most agencies there are clients paying different amounts, whether because you’ve offered a volume discount, have a ‘charity’ rate, have some legacy clients who predate a rate increase, etc etc.

Once you’ve taken a good look at that, you should be able to look at the volume of work you are likely to deliver at each rate and either create an ‘average’ rate or be more granular to give yourself a realistic figure for your billing capacity each month.

This process does take a fair bit of spreadsheet wrangling, but gives you a powerful tool to start to understand ‘efficiency’ and how you might maximise your billings.

For example, it can highlight inefficient administrative / internal processes, or the impact of different rate structures. Sometimes it is the catalyst for ending the relationship with a ‘legacy’ client, or targeting a different profile of work. It may allow you to consider the impact of sick time, and do something about it (e.g. the cost of investing in the health of your employees may be less than the opportunity cost of not doing so).

I went through this process with one agency and it showed that the ‘excellent deal’ they had with a client actually meant that even though the client was spending a large amount of money, the work was not that profitable compared to other engagements.

I mentioned previously that understanding capacity is a starting point to understanding efficiency – of course to do that you’ve got to marry this data up with the time sheet data that you collect. If you’ve set your model up in the right way, you can work out the value of the time spent on each project vs. the potential billing for each employee.

One agency I worked with felt they were ‘inefficient’ but once we’d got the model right it showed that they were billing 90% of the billable time which isn’t a bad metric – their issue was that they weren’t charging enough for the time in the first place.

Understanding your true capacity is also a valuable tool to use in conjunction with your sales pipeline – do you have enough work coming in to maximise your billings, and is it the right kind of work?

Lots to think about!