Episode 65

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Drew McLellan is the Top Dog at Agency Management Institute. For the past 21 years, he has also owned and operated his own agency. Drew’s unique vantage point as being both an active agency owner and working with 250+ small- to mid-size agencies throughout the year, give him a unique perspective on running an agency today.

AMI works with agency owners by:

  • Leading agency owner peer groups
  • Offering workshops for owners and their leadership teams
  • Offering AE bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with those 250+ agencies every year — he has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”



What you’ll learn about in this episode:

  • Why you have to measure inside your agency
  • The AGI/FTE ratio: why you should be aiming for this to be 150,000 (and why many agencies struggle to reach this goal)
  • Measuring over/under on projects: how often are you over, how often are you under, and by how much?
  • Why you need to look at profitability on a client by client basis (and how to know when to fire a client due to profitability)
  • Why you need a minimum standard AGI for all your clients
  • Why you absolutely need to use timesheets inside your agency (and why this doesn’t mean you should bill by the hour)


The Golden Nugget:

“When something matters enough to measure it, that’s when you move the needle.” – @DrewMcLellan Share on X


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Ways to contact Drew McLellan:

We’re proud to announce that Hubspot is now the presenting sponsor of the Build A Better Agency podcast! Many thanks to them for their support!

Speaker 1: If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Build a Better Agency, where we show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25 plus years of expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.


Drew McLellan: Hey everybody, Drew McLellan here with another episode of Build a Better Agency. This week’s episode is one of my solo casts. So if you’ve been around for a while, you’ve probably picked up the pattern that every fifth episode, I don’t have a guest on with me. It’s just me and you talking about something that I want to get on your radar screen. Typically it’s something that has come up in my conversations with agency owners over the last month over and over and over again to the point that I think it’s a broad enough topic or an important enough topic that all of you should be thinking about it.


  And then we’ll go back next week to the guest kind of podcast that you are used to where other folks bring their expertise to the show. So buckle in. I want to talk about some things today that I think are super important and I think probably are on your radar screen, but they are on your radar screen in sort of stealth mode, meaning this is not the exciting part of owning an agency. This isn’t the reason why you started your agency or bought your agency. And this for most of you is not the kind of stuff that you love, but it’s super important to actually getting out of the business why you got into the business, which is for you to make a good living for you to be able to take care of your family, for you to be able to take care of your employees.


  And of course, for you to be able to serve the right kinds of clients and helping them get to the goals that they want to get to. So what I want to talk about today is the whole idea of measuring what matters. And at AMI, we talk a lot about AGI and the AGI ratios, and I’m not going to go into that today. I’ve written about it before, you can find it on the blog and I’ve done podcasts on it. I want to focus on some things that maybe are a little less obvious in terms of things that I want you to be monitoring and measuring. I’m a firm believer in when something matters to you enough that you measure it and you make it a priority, that’s when you can move the needle on those things.


  And these are… I’m going to talk to you about five different things that I think really should be on your watch list on a monthly and quarterly basis. And if you start to monitor these things, I think you’re going to be surprised at the results that you can create inside your shop just by paying attention to these. So the first thing I want to talk about is I want to talk about the ratio between AGI and FTE. So AGI of course stands for adjusted gross income. So that’s you take your gross income, your gross billings, you subtract out all of your cost of goods, including all of your contractors, no employee cost should be in there, but all of your contractors or freelancers should be up in that cost of goods.


  So you take gross billings minus cost of goods, and what’s left is AGI. And that’s the money you actually have to spend on your agency. And typically that money gets spent in three big areas. It’s going to be spent on people. So salaries, benefits, that sort of thing. It’s going to be spent on overhead, rent, transportation, TNE, all of that sort of stuff. And then hopefully there’s some leftover in the profit bucket. So FTEs or full-time equivalent. So this is, if you have people working 40 hours, every one of those counts as a one full-time equivalent. And if you have some part-timers, you would cobble those together and figure out how many FTEs you have.


  This does not include freelancers. So again, freelance costs, whether you have an ongoing contract with them and you use them a set amount every week or you use them on a more ad hoc basis, those are always in the cost of goods category. That’s a variable expense, not a fixed expense like salaries. Salaries, you’re going to pay people whether they’re working on your business or not, whether they’re on vacation or they’re sick, or they’re in an all day agency retreat, they get paid the same. So that’s the salary part.


  So anyway, it used to be back when I started my agency that the goal was to have $100,000 of AGI per FTE. And unfortunately, that number has skyrocketed. And now the target market for you is for you to have $150,000 of AGI per FTE. And the reason why that’s gone up is quite honestly, a couple of things. One, salaries have gone up significantly as we employ more digital folks, more technical people, and those salaries go higher. And of course just cost of living increases over time. Unfortunately, the challenge with that is that for many agencies, you guys haven’t changed your billing rates or how you charge clients for the work that you do in many years.


  So many agencies are squeezed pretty tight on this AGI to FTE ratio. In fact, when I look at the AMI agencies, remember I see their full financials. They’re sitting at about $135,000 of AGI per FTE. So much better. Most agencies are riding right at 100,000 or 110. And I will tell you, if your ratios are down in that 100, 110 mark, you should be concerned. And what that probably tells me is that you do not have a very profitable agency. That you’re making salary and you’re covering your overhead, but there’s not a lot left over for uncle Sam or for you or for bonuses or for reinvesting in your agency.


  So the first thing I want you to start measuring is AGI per FTE. And remember the target is 150 of AGI per FTE, but you can feel pretty comfortable if you’re at the 130 mark or above, but anything below that should cause you some concern. The second thing I want you to start measuring is I want you to start looking at your projects. And most of you are using some sort of an accounting software that will give you this data. You just start really looking at it. And I want you to start tracking for every project how much you go over, meaning what do you write off that job and are not able to bill a client and what projects do you come in under?


  So if you tell a client a project’s going to cost $10,000 and you can bring it in for eight, I want you to start counting that $2,000 as basically pure profit. So I want you to start measuring your over under. So how often are you over budget and do you have to write off time or in some cases, horrifyingly, a hard cost. How often are you writing stuff off? And what is that number? What are you writing off? And also, what are you writing up? What are you able to add as pure profit to a job? Because you have either estimated super well, the job has gone according to plan, which hardly ever happens and, or your folks were super efficient and you were able to add some extra profit to that job.


  And I think what happens is, and when you start measuring this, I think you’re going to be a little horrified at how much you are giving away. And when agencies call me and they say, “Man, we are working like dogs. We’re super busy. We’ve got lots of client work but we can’t make a dime.” It’s often, this is one of the places that I look first, because oftentimes you are working hard and you are working on client work. Unfortunately, you are over-servicing those clients to a degree that you just can’t afford to continue. And so you are writing off thousands of dollars of time on jobs that could have been invested in other client work. It could have been invested in new business. It could have been invested in your own agency marketing, but instead it’s squandered on clients that you can’t recoup those costs.


  And oftentimes you are not very often coming in under budget, meaning there’s no opportunity for you to add pure profit to the jobs. And oftentimes what that is telling you is that you have a process problem or that your estimates are off. Remember, lots of you have heard me say that I believe that agencies should put together an estimate and then multiply it by about 1.5. And that’s actually an accurate estimate. We create estimates as though the job is going to go according to plan, and there’s going to be nothing, no twist or turn in the job, nothing that you haven’t anticipated.


  And the reality is when was the last time you had a job like that? No project goes through exactly as planned. No project goes through without a hiccup or two, but that’s how we build our estimates, which means our estimates are always going to really be short. And so by measuring the over-under, you’re able to track how you’re doing on that. And I think you’ll be surprised just paying attention to it, how you can reduce the overages and increase your estimating prowess so that more often than not, there’s additional profit in the job.


  And I could spend a whole podcast on talking about estimates and I’ll do that down the road. But for now, I just want you to start measuring the overage and the under when you’re adding extra profit.


  The third thing I want you to start tracking is I want you… And again, your accounting software should do this for you. I want you to look at profitability by client. Oftentimes agencies will look at their profitability overall, but they won’t drill it down to a per client number. And the truth of the matter is for most of you, you have some clients that are wildly profitable and you have other clients that literally you are paying for the privilege of doing work for them. It’s not that they have low profit, it’s that they have no profit. And I want you to start tracking that on a monthly and quarterly basis. And I want you to have a minimum acceptable profitability number. I don’t care what it is.


  I don’t care if it’s 5% or 3% or 10% or 20%. Every agency is going to have a different number. I have opinions about where you should target that. I don’t think a client that is less than 10% profitable is a client that deserves to be in your shop. But look at where you’re at now first, and then figure out how to incrementally increase that. And the way you do that is by monitoring it and by identifying which clients are unprofitable and then spending some time figuring out why they’re not profitable. And then coming up with a solution. In some cases, the solution may be fire the client or in a kinder way, get more expensive so that the client fires you.


  In other cases, it might be sitting down with a client and figuring out, you know what, we’ve got to handle jobs differently because we are doing so many revisions or there’s so many delays or whatever the problem is that’s causing them to be not profitable. You need to figure out what that is and address that so that they either are more profitable or they go away. Because again, you’re wasting resource just like when you over-service a client. If you’re working on client work that doesn’t yield a profit for your agency, why are you bothering? For many of you, it’s about cashflow and that’s a really dangerous trap to fall into.


  You need clients that both provide you cashflow and profitability. A client that provides only cashflow in the short run is lovely, but in the long run can kill your business. The fourth thing I want you to start measuring is I want you to have a minimum engagement with a client. First thing I want you to do is have a list of your clients and what they annually are worth to you in both gross billings and AGI. And then I want you to set a minimum for gross billings and more importantly for AGI. And again, for some of you, it might be $5,000. For others of you, it might be $250,000 a year.


  I don’t care what the number is, but what I care is that you are looking at, and especially when you combine it with profitability, when you have an Excel spreadsheet of your clients and you have their gross billings, their AGI and their profitability percentage, you’re going to see very quickly what size clients you can absolutely service and service in a way that they are delighted and that you are delighted because they’re profitable. And by the way, for some of you, you’re going to have clients that are too small to be profitable. And you’re also going to have clients that are too big to be profitable.


  Sometimes serving a client that is so large that they have you running like a banshee all of the time and you can’t really make them happy and that you’re having to redo an overdue and all of that, that can be as big a problem as a small client. So I want you to know what your sweet spot is in terms of client AGI and what size clients are the ones that are the right fit for you both in terms of being able to deliver great work and in terms of profitability for your agency. And then once you figure that out, I want you to constantly be monitoring your current clients against that number. And any client who falls below that number, you’ve got two choices. One, again, fire them, or two, figure out how to grow that business and get them into the acceptable range.


  And by the way, getting your foot in the door and having a small project with someone because you think there’s great opportunity, I am all about that strategy. But if you did that three years ago and you still haven’t gotten to your minimum, it’s not going to happen. So stop fooling yourself and get rid of that client and let your people spend more time serving the clients that actually do deliver profitability to your agency. So again, have a minimum. And for some of you, you also need to have a maximum, know exactly where your sweet spot is in terms of the size of clients that you can win, that you can delight, that you can deliver incredible results and you can do all of that at a reasonable profit for your agency.


  And you know what? The last thing I want you to measure is what ties all of these things together. And this is the one that you all are going to hate, time sheets. I know that there are consultants out there that tell you agency folks should not have to do time sheets. And quite honestly, I think they’re totally full of crap. I think you absolutely have to have time sheets, not because I want you billing by the hour, because you know I don’t. I do not think that’s an effective way for you to bill for your time, but your people are your biggest asset and your biggest resource, and your biggest expense. And you need to know how you are using that asset and how you are applying that resource to know whether or not you’re doing it well or if there’s room for improvement.


  And it all starts with time sheets. You cannot really track over and under hours if you don’t do time sheets. You cannot track AGI per FTE because you don’t really know how much people are working and what the equivalence of an FTE is. For you an FTE might be 30 hours, for you an FTE might be 50 hours. You don’t know unless your people are doing accurate time sheets. You cannot know the profitability per client until you know how much time has been applied against every one of those projects for every one of those clients. And you cannot know what your minimum should be or your maximum should be. Because again, if you don’t know how much time is being applied to projects, how in the world do you know?


  And by the way, this isn’t just time sheets for your creative team. This isn’t just time sheets for your account people, every human being who works in your office and yes, that means you. Every human being who works in your office needs to do time sheets. Why? Because of all the reasons I just told you. You’ve got to manage your business better than you are doing right now if you do not require time sheets or if you are sloppy and lazy about time sheet compliance. I know that time sheets suck. I’ve been in the agency business my entire life. I have never been excited about doing a time sheet, but that doesn’t mean that they’re not important.


  So here’s what I want you to do. I want you to make a commitment that time sheets are going to be one of the things that you measure. And what you’re going to measure is you’re going to measure daily time sheet compliance. Daily time sheet compliance. I know that it stinks. I know that it’s going to be a tough field to climb, but I’m telling you, you will be amazed at how much more profitable you are, how much smarter you are about running your business, and how much more in control you feel about your assets and your resources when you do this. And here’s how to make that happen. You pull everybody together and you tell them that it’s your fault that you have allowed them to be sloppy about their time sheets, but no more.


  And by the way, this was a hotter topic when the whole overtime law was pending. But even though that’s gone away and who knows if it’ll come back or not, it doesn’t matter, this is critical to your business. Everybody has to do time sheets. So you bring everybody together and you say to them, “You know what, we’re going to do time sheets. And we are going to have 100% compliance. And here’s how this is going to work. We are going to put together a kitty of money, so it could be 250 bucks, $500 a month. And here’s how that plays out. So first of all, we are going to have software, and maybe you already have it. We’re going to have software where people have no excuse not to do their time sheets.”


  They can do it from their phone. They can log in remotely, whatever it is, but there’s no excuse. Everyone’s time sheet is due the following day at 10:00 AM. So if today is a Tuesday, my time sheet is due tomorrow at 10:00 AM on Wednesday. Everybody’s, including yours. If for every person who gets their time sheet in Monday through Friday on time, so they get them all in on time, then they get one entry into a drawing. So over the course of a month, they could have four to five entries depending on how many weeks there are in the month in the drawing for the money. But if during that week, there is not 95% compliance, then nobody’s name goes in the drawing that week.


  So every morning at 9:00 AM your CFO or your bookkeeper, whoever has access to your time sheet software sends an email out and says, “Here’s a list of the people whose time sheets are still due by 10:00 AM.” You will be stunned at the peer pressure that is created inside your organization to get those time sheets done. And all of a sudden you’re going to have… I had an agency that went from 67% compliance to 98% compliance within three months of implementing this program. And by the way, their profitability went up by several percentage points as well, but not because of clients, not because of new projects, simply because they were monitoring the time better. And they were therefore billing more accurately, which allowed them to do estimates more accurately.


  So again, let me run through this program. So 250 to $500 in the kitty every month. Every time somebody gets all five time sheets in on time, they get an entry into the pot, but only if 95% of the entire agency, including you has the time sheets done. Every day someone is reporting out at about nine o’clock what time sheets are in jeopardy of not being done on time. And you allow peer pressure. And by the way, you also pick up the phone or walk over to somebody’s office, or however you communicate with them paying them. But you let them know that you expect them to get those time sheets done within the hour. So all month that happens.


  If three weeks out of the four you did not hit 95% compliance, there is no drawing that month. So before you start going, “Oh, I don’t want to spend $6,000 a year on having compliance on my time sheets,” I promise you are losing way more than $6,000 a year by not having time sheet compliance. I promise you, you’re making hiring decisions incorrectly. I promise you, you have some slackers on your team that are sliding under the radar because you don’t have the accurate data. I promise you that you are sending out bills inaccurately and you are leaving money on the table because you’re not doing time sheets. Doing the time sheets allows you to monitor and measure all five of these things that I’m talking about.


  So again, it’s AGI per FTE. Shoot for 150, be content at 130-ish or so. Anything below that, be worried. Number two, start measuring your over and under in terms of over-servicing clients or being able to add extra profit onto jobs. Number three, tracking profitability by clients and having a minimum standard for that. Number four, having a minimum standard for AGI for all of your clients and having a program in place to move people up to that minimum. And also being mindful of a cap. If you need to have a cap and say, there are certain clients that are just too big for us, we can’t knock it out of the park for them.


  And number five, you tie all that up with a bow by doing time sheets. If you monitor those five things, I think you’re going to be stunned at what comes out of that in the next quarter or six months. I promise you profitability is going to be up, your estimates are going to be better, you’re going to be giving away less money, and you’re going to be putting more money in your pocket. And by the way, you’re also going to be able to monitor and measure your resources better. So you’re going to know who to hire and when to hire them. All of that leads to a more profitable, better run agency, which is I know what your goal is, and it’s my goal for you.


  So please, put some of these things into place and let me know how it goes. That’s it. That’s my message for today. I hope it was helpful. I know it was not a fun message. I’m sorry. I’ll try and have a more fun one next time, but it’s super important. And I want you to make the most out of the risks that you’re taking. Remember that most people don’t have the courage to do what you’re doing, which is to run their own business. And most people aren’t willing to take the risks. So if you’re that person, if you’re willing to take those risks, I want to make sure that you also get the reward and monitoring and measu