The true cost of employing somebody

To get an accurate picture on levels of service, you need to base your calculations on cost rates – not charge out rates.

Creative agencies are no strangers to over-servicing. Indeed, in today’s climate, a certain amount is inevitable. But some are over-servicing far more than they realise. Why? Because they base their analysis on employees’ charge out rates. The following information is true for both retained and invoiced work.

It’s common to price jobs by charge out rates: a designer at £X an hour, an account manager at £Y and so on. It’s common for these to vary too, from client to client and project to project. There may even be specific jobs in which you need to offer a discount in order to procure the work.

The trouble with charge out rates is that by themselves they don’t reflect the actual cost of doing the work. The true cost is often a lot higher. So while jobs in isolation may appear to be making a profit as long as the hours worked don’t exceed the total stated on the original estimate, the agency (by the time it’s factored in all its costs) may not be.

What are true costs?

By true costs, We are talking about the cost of employing somebody. Exactly how much depends on each individual’s package of course, but as an example, the cost of employing somebody on a basic salary of £20,000 – once you’ve taken into account national insurance, holiday pay, benefits, software licences, Computer hardware, stationary and all your other overheads – is somewhere in the high thirties. More if the agency has a expensive postcode.

If you were to base that person’s hourly rate on their salary alone, you’d be charging them out at about £10.50 per hour – and you’d be making a substantial loss. To cover costs and generate even a small profit, the actual cost is closer to £25 per hour.

That is the baseline figure against which you need to assess levels of service. Our advice will always be to compare outgoing costs (as they are always paid) against incoming revenue, whilst taking into account overheads. Costs are always going to be paid, but it may come to be that you do not recuperate the agreed hourly rate for the work conducted.

How to reduce over-servicing

We are not suggesting that agencies aren’t aware there are costs involved in employing staff. But as long as they continue to use charge-out rates instead of cost-rates when pricing, comparing or monitoring progress on jobs, they’re never going to know exactly how much they’re over-servicing clients. And when being competitive means having to accepting tighter and tighter margins, that’s a real danger.

As we see it there are two essential steps to take if you want to reduce over-servicing:

1) Be absolutely sure of the cost of employing somebody at your agency. It is not always the case that the hourly / daily salary is the exact cost. In our experience elevating that figure by 40-100% will give a true figure.

2) Be regimented about recording time on every job. It doesn’t have to be correct to the minute but the more granular the time the greater precision you will have.

Creative work is notoriously difficult to standardise – partly because no two jobs are the same but, more significantly, because individuals work at different paces. One copywriter, for instance, may be able to produce 1000 words in an afternoon. Another might take the best part of a day to complete the same task. And that can have a big impact on your bottom line.

You can also look at staff, team or departmental utilisation. It may be that re-assigning priorities will help even out the workflow and where free-up higher costing staff members to work on higher billable work.

Alternatively you can look at budgeting resources, by knowing how many hours or chargeable time the business can commit to, automated reports can inform whether action or a re-negotiation needs to be conducted.

Keeping accurate timesheets, then, is not just about being able to record the number of hours worked on a project while it’s in progress. It’s about building intelligence based on past experience. In time, that helps you predict future jobs with more accuracy and – critically – shows you how much of a margin you need to build into your quotes to return a healthy profit.

Find out more

To see how an easy-to-manage online timesheet system like Tempora could help your business, why not give us a call today?