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Profit & Growth Tips for Digital Agencies

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What is the Most Important KPI to Track, to Improve Agency Profitability?

Posted by Nicolas Jacobeus on Nov 9, 2016

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To monitor the health and profitability of your agency, it’s essential to track a whole host of crucial Key Performance Indicators (KPIs). While no one metric in isolation can reveal the whole picture, and you should always look at your agency’s key metrics in combination to understand the context of the data, there’s one KPI that is particularly useful.

Staff utilisation rate is a great way to get an at-a-glance insight to your agency’s profitability, by enabling you to calculate how much of your employees’ time is spent on billable vs non-billable work. This will also help you understand whether you’ve got enough client work, and whether your agency has a staff shortage.

How to Calculate Utilisation Rate?

Calculating staff utilisation rate is fairly simple, as long as your employees log their time consistently and accurately, and you can clearly differentiate between billable and non-billable work:

Billable hours worked ÷ fixed number of hours worked
(not allowing for overtime)

For example, with 30 billable hours worked during a 36-hour work week, we’d have a utilisation rate of 83%:

30 ÷ 36 83%

This one calculation can provide you with different insights about the performance of your team and individual team members: you can calculate this for each of your employees individually, for groups assigned to a specific project, or for your agency team as a whole.

How to Use Utilisation Rate to Improve Agency Profitability

Staff utilisation rate measures time, rather than assessing how the pricing of various projects impact their profitability. Most of your employees will have no control over your agency pricing, but they all have control over their workloads and how they spend their time at work each day. This means that all of your agency’s employees can directly influence your agency profitability.

If you weigh up your agency costs against your revenue, you can easily identify a point at which your work becomes profitable. This can be done for individual employees: for example, if you’ve got an employee working on a project where you’re charging your client at a rate of €100/hour, and the cost of that employee is €300/day, that tipping point will be at 3 hours:

€300 (cost of employee) ÷ €100 (hourly rate) = 3 hours

You can then calculate the utilisation rate that your employee needs to work at, to ensure they are doing enough billable work to balance out their daily rate:

3 ÷ 8 = 0.375 = 37.5% utilisation rate (based on an 8-hour work day)

If they spent an extra hour working on that project that day, their utilisation rate would increase:

4 ÷ 8 = 0.5 = 50% utilisation rate

€100 (hourly rate) x 4 (hours worked) = €400 billable work

€400 (billable work) - €300 (cost of employee) = €100 profit

However, to get an overview of your whole agency profitability, you can expand these calculations to cover your whole agency team. Your agency’s costs are fixed: your employees cost the same every day and every week, but if your employees increase their utilisation rate by spending more of their time on billable work, it can have a very immediate impact on your profitability.

By educating your employees about the link between their utilisation rate and your agency profitability, it gives your employees an incentive to track their time accurately. It also helps to align your employee’s priorities with your agency’s, by giving them a way to directly affect the financial health of your agency.

So while it’s important to monitor all of your agency’s KPIs, your staff utilisation rate gives you a quick, at-a-glance indicator as to your team’s performance and overall profitability that is easy to calculate and track over time.

how to make your digital agency profitable

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