CredoCast Marketing Consultants and Agencies | Credo podcast

April 21, 2020 How to optimize your agency for profitability – Marcel Petitpas from Parakeeto

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Is your service business optimized for profitability? Do you know where you are making money and where you are bleeding money?

Making the agency model work comes down to three things:

Hiring good people who get clients results and help you retain those clients;

Charging the right prices for your services;

Getting proper data on work to know which teams and projects are profitable and which are not.

Marcel Petitpas is the cofounder and CEO of Parakeeto, which is a soon-to-launch agency software company that, as they say on their homepage, “automates your reports so you can simulate decisions & make more money.”

As he says:

The goal is to help make it easier for service businesses to track the critical metrics that determine their profitability which is a notoriously hard thing for them to do unless they’re a big enterprise company and have hundreds of thousands of dollars for enterprise licenses for software. So if you find yourself building a spreadsheet to try and figure out simple stuff like, did we make money on this project? That’s the problem we’re trying to solve.

Resources mentioned

The resources mentioned are:

Parakeeto

Parakeeto Agency Toolkit

Dan Martell’s SaaS Academy

Credo

Databox

Transcript

John Doherty:

Hello everybody. Welcome back to the Credo podcast. It’s been a little bit since I’ve done one of these episodes but trying to get back to it. I’ve been producing a lot of content other places, on the blog, on YouTube, writing a lot of emails. All of that, but kick starting this back again because I’m recognizing that I’m not an expert in everything. There are a lot of people out there that are super, super smart. I’ve been doing a lot of solo episodes on this in the past but I’m trying to get back to a bit of a balance, of solo episodes teaching you things but also bringing on experts, people that I listen to, that I respect, often friends of mine, and letting them share their genius with you as well.

John Doherty:

So today, I have Mr. Marcel Petitpas from Canada on the call with me. Marcel and I are both a part of SaaS Academy, which is Dan Martell’s group coaching program. Marcel and I have become friends over about the last year or so. He’s a marketing wizard.

He’s phenomenal at what he does, especially with Facebook ads and that sort of thing. He’s helped me out a ton, taught me a lot, helped out Credo a lot as well. Basically what he says, is he helps high growth creative agencies, consultancies and service businesses track the right metrics and maximize their profitability. So now only is he a phenomenal marketer but he’s also a phenomenal business mind. I’m really excited about this because agency operations, agency profitability, to be completely honest, is not something I know a ton about. Or it’s not something that I would consider myself a world class expert in versus Marcel is. He is the co-founder and I believe CEO of Parakeeto. Marcel, welcome to the show. If you would, introduce us. Tell us about Parakeeto, tell us about yourself.

Marcel Petitpas:

Thank you for the very generous and kind introduction John. It’s an honor to be here and I’m excited that anyone is tuning in to listen to this. I hope that I’ll be able to share something that is going to be valuable. Yeah, to kind of summarize what I do. I’m an agency profitability consultant. I’m also a business coach and I am the head strategic coach at SaaS Academy so I’ve spent a very big part of my career helping business owners become more successful and particularly have a focus on software and marketing or consulting businesses.

Marcel Petitpas:

What we do at Parakeeto is we’re building a set of tools. The goal is to help make it easier for service businesses to track the critical metrics that determine their profitability which is a notoriously hard thing for them to do unless they’re a big enterprise company and have hundreds of thousands of dollars for enterprise licenses for software. So if you find yourself building a spreadsheet to try and figure out simple stuff like, did we make money on this project? That’s the problem we’re trying to solve.

John Doherty:

Awesome, awesome. I love it. And I agree, it’s a deep deep world. It’s something that not a lot of people are doing well. Often what I find, is a lot of agencies, especially smaller ones, are doing a lot of bank account accounting, where it’s do we have more money in our bank account this month than we had last month? But they’re not looking at, was this project profitable, was it not? What should we be selling more of? What should we be selling less of? All of those sorts of things.

John Doherty:

I’m curious about the why behind the what. So you told us what you’re doing, but why? Why is agency profitability a focus for you? What’s the background story there? I don’t even know this, so all you listeners are getting this for the first time, getting abreast just like I am.

Marcel Petitpas:

Yeah, it’s really interesting. I think like most people that work or had their own agency, I left that world to go into software because it was much sexier. I didn’t really know at the time that it was so much harder. That’s a lesson that I learned later on. But I actually started… My first business ever was an agency and we were doing virtual reality services for real estate agents. So we would go in, this was back before you had Mad Report. This was right around the time that things like Mad Report were coming online. At that time, you still had to buy a DSLR and you had to get this special rig and you had to take a bazillion pictures and you had to stitch them altogether and you had to take those stitched together 360 images and put them into a virtual software and create a 3D model of the house and create a virtual experience.

Marcel Petitpas:

So that’s what I was doing. I hated it. I realized that real estate agents were so cheap that they were never really going to be willing to pay me what I needed to scale the business and reach the unit economics. I’ve always been that kind of person, that is validating the unit economics before I even start validating the idea to figure out if they can scale. I was very early on in my agency when I figured out, I’m just not able to drive up this price. Real estate agents in my market at the time were just not willing to pay more. I saw the unit economics were not going to work and I realized at that moment that it was really challenging.

Marcel Petitpas:

Then I left and said I want to build a software company. Fast forward like three years, this is after I met Dan. We became friends. I tried to start a couple of other businesses. I ended up becoming a consultant and a speaker and did that for a year professionally, then got into Dan’s world. Then we got a phone call one day from Jarrod Ferguson, who you might know from SaaS Academy.

He runs an agency out in Boise. He just said, “Dude I’ve got this problem. I am sick and tired of building spreadsheets to answer questions I’m asking myself everyday. I’ve looked out there and the only options that exist is moving my whole team off of the tools that they know and love now into an all in one platform. It feels like a compromise and is super expensive and we’re going to grow out of it in three years. Or option number two is I try to build my own tool.” That’s basically the options that they had in front of them. Or take a BI tool, like Tableau or Databox and do a bunch of custom dev on top of it and then you have this half baked thing that you’ve got to maintain.

John Doherty:

And it’s really expensive.

Marcel Petitpas:

At the end of the day… and it’s super expensive. So at the end of the day there just wasn’t a good solution for doing this stuff and that set us down the path to building Parakeeto which started as a consulting company. It still is largely a consulting company today. Of course our minimal viable product was let’s actually go out and just help agencies solve this problem and build a bunch of small tools to help make that process more efficient. We started building models. We started building spreadsheets, really started becoming experts in this field over a couple of years. Then started back channeling, building software off of that and now we’re getting to a point where we’re getting ready to launch the first real version of Parakeeto. We’ve had many different versions in beta. We’ve spent a lot of time making sure the product is right. We’ve learned a lot from that. We’re looking forward to a launch hopefully by the end of this summer is the timeline that we’re looking at.

Marcel Petitpas:

That’s the back story on Parakeeto. That’s how we got here.

John Doherty:

I love that. I love that. I learned a lot of new things in there. I’m a big fan of building the things for when people tell you they have this problem. What would you pay for that? That kind of thing, and building the thing. Also dog fooding it yourself. I built Credo out of my own consulting agency side in house, hiring agencies and intel consulting. The sales process that I teach and the sales process that I’ve used to sell a lot of work, so that’s really the best way to build a business like that.

John Doherty:

This isn’t a topic that we’ve covered at all before on the Credo podcast. We’re often talking about marketing and that sort of thing. But I love this because it’s just an intrinsic part about building a service business. One question I have for you is, what are these… Profitability metrics is something you talked about, and spreadsheets and data and all that. What are the main profitability metrics that you coach agencies to know or that you give them insight into that does that light bulb and that holy shit moment that gets them to that, this is amazing. And how have you seen that knowledge affect their businesses?

Marcel Petitpas:

Yeah, I think the biggest thing that I spend so much of my time talking about and helping agencies understand is how the service business model is unique. How different it is from a product business or even a software business. There’s a lot more similarities there but it’s very different in that you have to earn your revenue. When you make a sale or even when you get bookings, when a client pays you money, that is often a liability unless you’ve actually completed the work. Completing the work costs money. You either have to spend your own time which has a cost, or you have to hire somebody to come in and spend their time to deliver the results. So any kind of business that requires human capital to deliver results to a client is a different beast. This is why doing bank account accounting is so dangerous because your bank account is almost never going to reflective of how much money you actually have available. This requires accrual based accounting. It requires a different set of considerations.

Marcel Petitpas:

So the first thing is understanding the fundamental business model of an agency. The first thing to talk about is how does an agency earn revenue. That’s a function of, what is your capacity? Essentially what you’re selling is time. It’s a controversial thing to say but at the end of the day, when you really quantify your inventory, your inventory is, what kind of people do I have access to, what is their skillset, how much time does it generally require for us to do this thing that we’re selling to the client? Based on that math, how many of those things could we sell? How many clients could we serve in a given period of time. So that’s your capacity, it’s quantifying how much time do we effectively have access to?

Marcel Petitpas:

Then you have your utilization, so how much of that time you’re able to utilize is going to really… How much time you’re able to utilize for things that get you paid is going to determine essentially how much time you’re actually spending working.

Marcel Petitpas:

The last one is your average billable rate, so how much of your time do you need to invest in order to earn a certain amount of revenue? Or the simplest way to say this is, for every hour that my team works, how much revenue do we earn? A lot of people get this confused with their hourly rate or their rate card or their pricing. But what average billable rate really reflects is independent of how you price something, whether you charge somebody by the hour, you charge them a flat rate, they’re paying you a monthly retainer, with all the scope creep and all the additional things and all the little things the client asked for that you’re not charging them extra for and the thing that you messed up and you had to go and redo two times that you’re not getting paid extra for. After all the time that it actually took to get the thing done for the client, how much revenue did you earn for each hour that was invested?

Marcel Petitpas:

When you understand those three numbers you can model out how much revenue your agency can earn in a given period of time. That’s kind of the foundation. If you run specifically a traditional agency, those are going to be the three most important numbers for you to look at as it relates to modeling the potential of your business over a period of time. I spend a lot of time just on that, that fundamental economic reality about a service business. This is how you make money. It’s about getting your people, spending more time going stuff that gets you paid, and then making sure that it takes them less time to earn the same amount of revenue. We do those things well, that’s the foundation for running a successful service business.

John Doherty:

Gotcha. So once they understand those things, and those are the beyond the bank account accounting, do we have more in there than last month. There’s liabilities, there’s recognized revenue, there’s realized revenue. There is all that stuff going on. I guess my question is, there are definitely going to be levers that you can pull.

Marcel Petitpas:

Yes.

John Doherty:

This is why you talk about operations. You understand these three main things that you just went back over. What are some of the levers that you see agencies pull or what are some of the common ones that you tell people to look at or counsel people, consult with people to look at to figure out where is the fat? Where are you losing money? Where are you making money and how does that affect their strategic direction?

Marcel Petitpas:

The framework that we use in all of our consulting and the framework that’s now informing all the product development that we’re doing for how an agency gets more profitable is the following. It starts with the estimate. No matter what kind of work you’re doing, at some point you have to sit down and make assumptions about what you think it’s going to take to do the thing you promised the client. It starts with the estimation process and estimations processes run the gamut. Some are very sophisticated, some are very rudimentary. But at the end of the day, everyone has some kind of process for this, where they pull a number out of wherever it is they’re pulling it out of and they present it to the client. The client either says yes or the client says no.

Marcel Petitpas:

The process is we have to make sure that once we have an estimate, we have the ability to track the costs and the time that are structured in similar way to the estimate so that we can reconcile what actually happened versus what we thought was going to happen. Based on that information, that should then be driving a series of reports and a series of meeting cadences that we have with the team where we can extract qualitative and quantitative data about where we actually have the opportunity to make improvements.

Marcel Petitpas:

So this is where we surface things like, we’ve noticed a pattern that we typically go over budget on website projects by 20%. That should inform a conversation with the team about why do we think that’s happening? Are we not scoping it properly on the front end? Oh, we seem to be really janky on handing off design over to development, how can we streamline that process? That’s where you should start to extract the insight that helps you understand where do we need to make investments in our process, in our tools, in our systems as a business, so that we can become better at doing that thing, spending less time getting that thing done, and then that should then drive back to estimates.

Marcel Petitpas:

So if you get better at doing these things and if your process gets tighter, your estimates will get more accurate and that loop goes on and on and on until you reach the pinnacle which is you have a very profitable agency but also very importantly, you have a very predictable agency. Because you know not only how much money you’re likely going to make on a project, but you know this because you know how much time it’s going to take over what timeline that’s going to happen. You know the relative risk associated with different projects. That helps you do a really good job of resource planning which is something I love talking about because so many agencies overwork their team. It’s just because they’re really bad at scoping projects. The timeline is rarely the elastic thing about a project. It’s still got to get done on Friday but the fact that it’s going to take twice as much time as you thought it was going to, that just ends up getting absorbed into evenings and weekends because there’s nowhere else for that time to go.

Marcel Petitpas:

That’s the framework. So understanding that’s the framework, the things that we want to be really good at paying attention is time tracking data relative to our estimates and expenses relative to our estimates. That’s the foundational tooling that you need to have inside of your agency in order to get some insight. Then what you want to be paying attention to is utilization rates first of all. So that’s going to be trying to set a target annually of 65% for you billable team, and on a weekly basis, trying to keep your team somewhere between, depending on what their role is, 32 and 36 hours a month. That’s generally the kind of bench marking that we set for that. The things that are going to impact your utilization are number one, pipeline. Of course you have to be good at predictably getting work in the door. This is why I only work with high growth agencies because whether I like it or not, a lot of what I do is only actually going to be effective if you are good at consistently earning new business and attracting new clients. There is a point in optimizing for profitability otherwise, but you’re not going to get the upside unless you actually have something to put through that system. So number one is pipeline.

Marcel Petitpas:

Then beyond that, if you have enough pipeline, then you have to consider what are all the things that are taking away my team’s time off of billable stuff? This is things like what is the weekly expectation that you set for them for billable utilization? What kind of culture time do you have in your business, things like internal parties, internal meetings, all that kind of stuff. How do you do your resource planning? That’s really important. Are you officially moving people from one thing to another. Another one that I like to talk about is client delusion, so are you asking a single person to work on too many different projects at a time? That’s one of the biggest utilization killers that we see. If you are in a situation where the nature of your business is very horizontal across people, than are your structuring roles so that people are able to batch tasks very well? So yeah maybe we have to do this one thing for 16 different clients, but if I could do that one thing back to back to back to back to back for all 16 clients in one sitting, it’s going to be significantly more efficient. I’m going to be able to get locked in. There’s way more context switching.

Marcel Petitpas:

So it’s really thinking about how do we remove all of the inefficiencies that is asking our team to do things that is not working on client work and the better we can get at that, the more streamlined we can be about internal communications and meetings and processes and tools, the higher utilization is likely going to be. So that’s utilization.

Marcel Petitpas:

I’m going to stop there before I move onto the next one because I know that was a big one.

John Doherty:

Yeah that was a big one. I guess a followup question that I have there is, first of I think you said 32 to 36 hours a month. I think you meant 32 to 36 hours a week?

Marcel Petitpas:

Yeah, sorry a week. Yeah.

John Doherty:

Yep so getting them into 65, so basically across the year approximately 65-70% utilization. So basically what I assume is that this basically you have all your people. You assume 40 hours a week. This is how many hours they have and as you’re getting down to speccing it out and scoping it out, you’re saying these are the people we need on it. These are the utilizations that they have. Then can we actually pitch this project to make it work and to actually deliver on it as well. Is that fair to say?

Marcel Petitpas:

When we think about utilization the equation for that is basically, you look at any given time period and it’s exactly what you said. You take how many hours per week they’re working, you multiply that by the number of weeks. So in a year, it’s 52. That equals 2,080 hours a year. I know that number in my sleep because I talk about this way too much obviously. Then utilization is just a function of how many billable hours do we actually work in that time period and you divide those two numbers and that gives you your utilization percentage. So on an annual basis, you should be shooting for 65% or slightly higher than that as a benchmark. And yeah, week to week, this is excluding things like time off and so on, on a normal week when no one is taking time off, no one is sick, they should probably be expected to be between 70-90% utilization if they’re kind of a pure production role. There is some nuance around this. You have project managers. You have team leads that have more administrative responsibilities. Their utilization will generally be a little bit lower. When you look through your whole team, you want them to land somewhere around that 65% mark on an annualized basis.

Marcel Petitpas:

Then of course we talk about capacity. Generally what we can do now is if we know what our team’s capacity is let’s say over the next three months and we know what their billable expectation is, than we can do the math and figure out well this is realistically how many billable hours we’re going to have access to in this time period. So it does really help with understanding can we take on this project? Do we need to hire additional people? If so, when? What kind of skills do they need to have? This is where having these numbers and having them figured out becomes powerful because we can actually use them to model and get some forward visibility which is a thing that is notoriously hard for agencies to do when they don’t have access to this kind of information.

John Doherty:

Absolutely. So it also assumes that you have time tracking in place, that people are accurately doing it.

Marcel Petitpas:

Yeah and I’m going to stop and just do a small anecdote on time tracking because this is something that I harp on a lot.

John Doherty:

Please.

Marcel Petitpas:

If you are running an agency and you don’t track time I believe you are being irresponsible as a business owner. Tracking time is just as vital as tracking your financials if you run an agency. Point blank, it just is. Time and the expense of time, whether it’s contractors or direct labor, it’s going to be the biggest time on your P&L, guaranteed. It’s the most expensive and also the most profitable resource that you have in your business so you need to be managing it well. I think the reason that a lot of agencies resist time tracking is because traditionally time tracking was seen as the way that you build a client. Of course most people don’t build a client on time anymore. But time is also the largest variable cost when you earn revenue. When you sell something you have to invest that time to earn it. So it should behoove you to track your time because it allows you to get a lot more insight and make your business more profitable.

Marcel Petitpas:

It is the most valuable piece of data that you can have for making your agency more profitable. It has nothing to do with the client, it has everything to do with you. It also has everything to do with your team. This is the other thing I get pushback on a lot, is the team doesn’t want to track time, they think it’s a pain in the ass. But if you’re using the data properly and you’re doing what we talked about, using that information to inform process to make things more predictable, than guess what? They’re probably not going to have to work evenings and weekends that much anymore. If you get good at it, because your scope is going to be accurate. Your resources plan is going to be more accurate. If they’re incentivized to get bonuses based on the profitability of the company it’s also going to be good.

Marcel Petitpas:

So it’s just a question of having an understanding of what the data is used for and being able to explain that and get the team on board with that. There is no logical reason why anyone working at an agency or running an agency should not want to track time. If they do it’s probably because they just don’t have an understanding of why it’s important and how they can benefit from it.

John Doherty:

I know and I think that’s a good word. I’ve been very guilty of not wanting to track time in the past when I was at an agency years ago. I just didn’t. In retrospect I see that I was basically A, not helping the owners, my bosses, do a good job of running their company. But also, didn’t know why I was overworking. I’d hit May every year and be basically burnt out because I hadn’t had a vacation in five months. I was working 80 hours a week. That’s because I didn’t have a good idea of where my time was going and what I was using.

John Doherty:

So that does lead into the question that I was going to ask you about because I firmly believe and Dan says this all the time, you build the team, the team builds the business. How do you see people really getting their team bought into reviewing these things. We’re so used to, at least in the west, because we were raised in education systems that basically taught us, you did well, you did bad. Here’s your grade. We’re adults, we’re not getting grades. But how do you bring up that conversation? How do you have those conversations or build it into your culture to be reviewing these things and bring them in as kind of almost partners in it. You’re 20% underwater on these web dev projects, but they feel like they’re doing the best work they can. So, how do you manage those things?

Marcel Petitpas:

That’s a really good question. What I want to do is I want to touch on the last metric that I didn’t get to when I was going through the framework. That’s important for the answer I’m going to give to this question.

John Doherty:

Sounds great, let’s do it.

Marcel Petitpas:

So we talked about, just to circle back, we talked about estimation, how that leads to cost and time tracking, how that leads to reporting and conversations with your team. That’s what we’re going to talk about in a moment. Then how that informs process improvement and it goes in an infinite loop and you make more money and you become more profitable and everyone is happy. So of course, around cost and time tracking, we talked about utilization as being a main metric that you want to track. This is one of the biggest mistakes I see agencies make, is they say, utilization great. They stop there and then they tell their team, you need to hit this utilization target. That’s the only metric they hold them accountable to. Of course, if John over here is working for me and I tell John, you need to hit a 65% utilization. If you don’t I’m going to grill you in front of the rest of the team on the next meeting where we talk about these metrics.

Marcel Petitpas:

What’s John going to do if there’s not enough work to do but he’s got this logo that he’s working on. John is just going to make the logo bigger for three hours so he can hit his utilization target. That’s the worst possible thing that John could do because A, it abstains and muddies up our time tracking data and gives us an inaccurate idea of how long it actually takes to get a deliverable done. And number 2, it enforces a really bad habit of over servicing on clients which is very, very hard to backpedal from.

Marcel Petitpas:

So the last and important thing that we all have to pay attention to is some form of profitability metric. I like average billable rate because it’s the simplest one to get into. Average billable rate is basically what is your adjusted gross income, so it’s your revenue minus all the stuff that gets passed on to somebody else, contractors, print budgets, ad spends and so on. So what’s left over for you and the agency, divided by the amount of time it took you to earn that revenue. So how many billable hours did you have to work to get the thing done?

Marcel Petitpas:

You do that math, that gives you the average billable rate, that’s one really easy way to figure out the relative profitability of a project and compare clients and projects against each other and benchmark against a target that you have for yourself. So you can quickly see, is a project above or below that we want it to be at in terms of profitability.

Marcel Petitpas:

The other alternative to that is gross profit, which is really a similar equation. You take your revenue, you take out all the costs of goods sold, and then you take your team’s time and multiply it by their cost per hour, which is easy to figure out. It’s just their salary and benefits divided by their totally capacity in a year, that gives you their cost per hour. You minus all that out and that should get you to a gross profitability level. Again, same thing, you should have a benchmark for where you want to be on a project. Generally that’s going to be somewhere between 50-70% if you’re budgeting things properly. And you should have the estimate to reference. We thought we were going to do a 60% profit margin on this and right now it’s looking like we’re going to do 40. The reason we want to make sure we have that number on the table is because it helps counterbalance the utilization thing. Because now people are not incentivized to add extra hours to hit their utilization target because that’s going to screw up the profitability of the project.

Marcel Petitpas:

What we want to do is get away from using time tracking as a way to A, try to make sure that people are working hard enough. That’s not a good way to measure how hard people are working. And how hard people are working should have nothing to do with the amount of time it takes them to get things done. It should be more about the outcomes that they’re driving and how well they’re interacting with the team and how much they’re helping us get better as a business. Number two, we should not be using time tracking data or profitability data to berate the team about not hitting expectations. Instead as a leadership team, the way that we want to bring these numbers to the table is say, here’s what we expected. Here’s what happening. Why is it happening? We want to seek feedback. Most of the time, it is our failure as business owners to give our team the resources, give our team the accurate scope to implement that right processes or tools, to give them the opportunity to do the thing that we expected them to do. We need to be open to getting the people that are on the ground surfacing ways to actually make these things better. When they come up with the idea, guess what? They’re going to be way more bought into actually getting the thing done and then following that process on an ongoing basis to make things better.

Marcel Petitpas:

This is essentially the cycle that I take all of our consulting clients through. We get their estimation process squared away. Then we start reconciling their time tracking and cost tracking so that it matches up and we can easily pull reports on a regular basis to say, here’s what we expected, here’s what happening and here’s our forecast for where it’s going to go. Then on a weekly basis or a bi-weekly basis, we do a project performance meeting and we look at the at risk projects. We look at the projects that have closed and we ask the question, why did things go really well? What can we learn or replicate from that? Why did things not go the way that we planned? We learn all kinds of things from getting the team involved in that conversation that we never would have found out otherwise. It makes it so much easier to prioritize where we’re actually going to invest in making new processes, how to make our estimates better, how to factor things in that we weren’t thinking about before, how to manage better relationships with the clients, all that stuff. That’s really the long and short of it.

John Doherty:

Yeah, I think that really makes sense. Probably there’s also a part of, when it comes to your team, what is it that motivates them? Is it more time? Is it more freedom? Is it fewer hours so they can do other hobbies? Is it getting bonuses? You can directly tie it back to that. If we hit our profitability metrics, we hit our sales metrics, here’s how we’re doing. We hit our profitability metrics, here’s how we’re doing. Then you get X bonus, that motivates some people. There’s a bunch of different ways to grease that and get everybody on board where it’s not like, oh I’m working to make this agency owner rich. A lot of people don’t understand that agency owners don’t make a ton of money usually. But that’s how it feels because they’re not seeing any extra for doing a better job.

Marcel Petitpas:

Yeah, I love that. That’s exactly what it is. We need to be able to articulate to them, and it’s possible that you have an incentive structure at your agency where people get bonuses if the agency does well. It’s possible that you don’t. But even if you don’t the really big reward from doing this kind of thing is that they’re less likely to have to stay late, they’re less likely to have to come in on weekends, they’re less likely to have these… Because again the deadline rarely moves.

Marcel Petitpas:

I think the fundamental thing is the things that we want to get mad at people for or discipline people for, is not being compliant on process and tracking their time as honestly and as transparently as possible. But what we can’t really justify and be rating people for, is the profitability of a project not being there or their utilization not necessarily being there unless it’s really clear that we had enough work for them to do and that we resource planned properly and they just didn’t do the thing that they were supposed to do. Most of the time, if we’re not hitting profitability on our projects or if our team is not hitting the utilization, that’s our fault or it’s our management team’s fault or it’s a failure in the process that we have set them up with. It’s very rarely falls on the team. I think it’s a question of rethinking how we use this information because it can be used to your detriment and I see a lot of people unfortunately picking pieces of this and using them in the wrong way and it ends up being counterproductive.

John Doherty:

Yeah, totally, totally. I like that, that it comes back on the management team, on the sales team, on that kind of thing, on those levels. Because if you hire a designer and you’ve seen all their work and they do great work, and then they start producing shoddy work and you talk to them. Stuff is coming back for revisions and all that. Maybe it’s the client that just has unrealistic expectations, but that should have been solved in the sales process. They’re a great logo designer, let’s keep that same example going on. But all the sudden they have 50 logos to do in a week. No one is going to be able to do great work under that. So then the question is, are you selling it for too little? Are you expecting too much? There’s a bunch of different ways to solve that as well. So it’s that holistic view into it, but it starts with that time tracking just so you know where is all their time going? If they billed 60 hours in a week, that’s a problem so you have to figure that out.

Marcel Petitpas:

Yeah we don’t want that kind of thing happening consistently. It’s just not sustainable. This is one of the things that I see a lot and unfortunately there are some smart agency owners out there that understand all of this stuff and just continue to exploit people or that are not aware of this stuff and are not aware that their team is actually subsidizing their lack of proficiency at running their agency.

John Doherty:

Right.

Marcel Petitpas:

So the fact that they can’t scope properly, the fact that they’re not very good at resource planning, the fact that they’re not really good at managing relationships with clients and protecting scope, the team ends up paying for it by working twice as much time as they’re supposed to. That’s a legitimate way to subsidize these kinds of overruns. It’s not fair to the team, really.

John Doherty:

No it’s really not. It’s really not.

John Doherty:

Shifting a little bit to the last topic as we wrap all this up. We’re recording this on April 7, 2020. We’re right in the middle of… I’ve been working from home now for four weeks. We’re right in the middle of statewide lockdowns. A lot of other countries are locked down because of the COVID virus right now. We’re in the middle of a crisis in the agency world. I know very, very few agencies that are growing through this. Right now, a lot of agencies are just hoping to stay flat. I’ve seen some that have lost 50 to 60% of their revenue in a week’s time and had to lay off teammates and that kind of thing. So there’s a lot of clients pausing budgets. There’s a lot of clients shrinking budgets. There’s a lot less lead volume to go around. People are taking longer to make decisions. So I’m curious, as you’re talking to agency owners right now, how are you counseling them to handle this and to think through it?

Marcel Petitpas:

There’s basically three priorities to look at when we look at these metrics. The level of priority is, number one, we’ve got to be right-sizing our overhead. Overhead doesn’t make us money. It should be relative to our adjusted gross income. So that’s the first thing that I recommend you do if you’re in a position where you’re forecast for how much revenue you’re going to make this year has just changed a lot. Then you should be basically trying to figure out, over the next six months or year, how much adjusted gross income can you realistically expect to make and then go and review your spending on overhead and make sure that you right-size it.

Marcel Petitpas:

So to give you a sense of what that should look like, facilities, so anything that’s related to your rent, actually putting a roof over your head, utilities, internet, bills, all that kind of stuff, that should be between 4-6% of your adjusted gross income. Then you’re going to want to look at your administrative costs, so that’s going to be maybe part of your salary, if you’ve got an admin assistant, your QuickBooks subscription, your lawyers, your accountants, your bookkeepers, all that administrative stuff. That should be somewhere between 8-10, maybe 12% of your adjusted gross income. Then your sales and marketing, so anything related to acquiring new business, working on your own website, internal projects and the time it takes for that. That should fall somewhere between 10-14% of your adjusted gross income.

Marcel Petitpas:

Your total overhead really should not go over 30%. Ideally you’re keeping it close to 25%. So that’s the first thing I would recommend you do is figure out how much adjusted gross income you’re going to have over the next 12 months and then go review your spending to make sure that you’re not overspending on overhead and cutting that back to where it needs to be. Step one.

Marcel Petitpas:

Step two, you’ve got to increase your utilization. There’s only two levers for utilization. Either get more work or you get less capacity. If you’re in a position where you can go and farm more work from your clients or maybe offer them additional work at a discount or maybe offer them to lock in for a longer retainer by pre-paying and give them a discount for that, that’s an option. If you can take on work that’s not a best fit right now. I generally don’t recommend doing that but this would be a time that you could justify doing it because you really just need to get your utilization up.

Marcel Petitpas:

But if none of that stuff is possible, then you’ve got to right-size the team. The one piece of advice that I have around that, is don’t cut your teams legs off two inches at a time. If you’re going to make cuts, you want to make you don’t have to do another round of cuts for at least a month. There’s a grieving process and you need to give your team time to have it happen, deal with it and get back to normal. But if you’re just lopping off the odd person every week, you’re just dragging it out and it’s honestly a disservice to the people that you lay off because it limits the resources that you have access to, to actually give them potentially some severance or ease that transition or help them find a new spot.

Marcel Petitpas:

If you’re in that unfortunate position, that’s my advice. Do the financial forecast, figure out how much your adjusted gross income is. Again, your direct labor costs or your teams that you have should not exceed 60% of your planned adjusted gross income. Ideally you’re closer to 40 or 50%. That should help you figure out how much do we need to trim around this. Of course look into whatever programs are available in your state or in the United States around easing some of the burden of your employees or maybe helping transition to a part-time work or getting some kind of salary relief. I know there’s a lot of things going on. We have some in Canada. These are some of the things I would encourage you to look at.

Marcel Petitpas:

The last one is, take advantage of this opportunity to move your team to remote and installing new processes. They’re prime for change right now. It’s a perfect time to start setting new expectations for things like time tracking, for things like project reporting and meetings. Because they’re probably in a state where you’ve changed a lot of things and they’re ready for change and they’re installing new tools and processes. Take advantage of that to try and solidify your business so that if you can survive this, you come out the other end ready to scale and ready to be much more profitable and have a lot more insight. Those are my hot tips for where you want to be at this point in time and where you want to focus on if you’re in that position as an agency.

John Doherty:

I like those. Basically your three steps, just to recap are, take a look at your overhead. Make sure that you’re properly… well first of all forecast out what revenue can you ideally expect. Then look at your overhead, 3-4% for facilities, utilities, all that sort of stuff. 8-12% for owner salary and there were a couple other things in there as well.

Marcel Petitpas:

Admin.

John Doherty:

Admin stuff, QuickBooks subscription I think you mentioned. Then another 12-15% for marketing and sales and that sort of stuff. Basically keep that under 30, ideally 25. Then looking at your team, you need to increase utilization or do you need to decrease it based off of what you have or the amount of time that you have available. If you have to make layoffs don’t cut them off two inches at a time. You have to make a deeper cut. Then the third part was… Remind me what the third part was there.

Marcel Petitpas:

Take advantage of the opportunity to get better processes in place, better tooling, better reporting because it’s an opportunity to make those kinds of changes right now. The last thing that I’ll say is that remember in your agency, profit has to do with the volume of time that it takes you to get work done. So you’re always incentivized to get the same amount of work done in less time. But cash flow has to do with length of time to get work done. Because most people, your payment terms are going to have some kind of up front, maybe some kind of payment partway through and then you’re going to get the majority of it at the end. Now might be the time to start thinking about fast tracking work or trying to shorten the amount of time that you’re getting work done in so that you can get more bookings in the door. Cash flow is still a consideration. You still have things going out and you still need money coming in. So think about optimizing your cash flow which has to do with shortening the timelines for your work if you have the ability to do it. That’s another important thing to consider.

John Doherty:

Yeah, and I would say that’s a big one. I see a lot of agencies that… and this is part of the reason why we built escrow into the Credo platform is, there are a lot of agencies that they’ll do work and then they don’t bill anything up front. They’ll do work, they’ll send the invoice at the end, maybe they remember. But that’s actually the number two problem that a lot of agencies have told me they have, is remembering to send invoices. Number one is getting enough leads, number two is remembering to send invoices. Which surprised the heck out of me. Then they send it with Net 30, sometimes they agree to Net 60. Then we know no one ever pays within the net terms so Net 30 becomes 45, 60 becomes 75. You’re now 105 days past the time that you started work before you actually see any money. So this is a big time to shore up those payment terms. If you can, get some money up front. Or at least have it guaranteed that as soon as it’s done it’s getting paid.

Marcel Petitpas:

100%.

John Doherty:

You don’t want to chase for four months after you finish the work. That’s happened, it’s happened to me.

Marcel Petitpas:

Think about right now, you might have some clients that are actually thriving in this environment. I know John and I both know some people that are absolutely crushing it right now because their business is just well positioned. You might have some clients in that position too. They’re looking for a good deal on things because they have cash flow. So now might be a good time to go to them and say hey, do you want to lock in the next 12 months and I’ll give you a 20% discount. Or go to new clients that are coming in and say, hey we’ll incentivize you if you pay this within 15 days. We’ll give you a small discount. You’re incentivized right now to get cash in the door for your business, that’s important. If you’re in a position where you’ve got a client where you really don’t think you’re ever going to see that money because they might go bankrupt or something like that, I don’t generally recommend it, but you may want to look into factoring for some kind of receivables based financing. It’s generally not a great deal but it’s better than getting zero dollars for your outstanding invoices.

Marcel Petitpas:

This is definitely an area where it’s a good time to start revising your payment terms and how you incentivize clients to pay you because cash flow is going to be very, very important.

John Doherty:

I know a lot of agency owners are reticent to give any discounts. You talked 50-60% profitability, man I see most at like 10-15. They’re reticent to give those discounts, so it does start with figuring out why are you only at 10-15? Why are you not at 40 or 50? So right-sizing that, figuring that part out. But then also recognizing that CFOs, they’re job is to get the best deal. Their job is to minimize the outflow for what you’re getting. So if you sign a 12 month deal, we’ll give you a 15% discount. You were at 50% profitability and now you’re at 30-35. There it gets to be much easier for them to say yes, for the CFO to sign off on it right now as opposed to, no we don’t give discounts, blah blah blah. Give them the choice to say no but also increasing the amount of time that they have to give you. Don’t just give them 15% for a month to month. If you want 15%, we’re willing to give you 15% off but we need six months committed or 12 months committed, that kind of thing. You’re actually playing to the CFOs because ultimately it’s not the marketing manager making the choice. They don’t control the budget, the CFO has to sign off on it. They are incentivized to… They have to be cash flow positive as well.

Marcel Petitpas:

Yeah, 100%. Ideally if you’re doing this right, maybe you’re cutting your profitability down right now, but you should be getting more profitable over time. You should be getting more efficient over time. So maybe that goes back up to 40 or 45%. I also want to be clear on some of the benchmarks here because I don’t want people to get confused. When I talk about 50-70%, I’m talking about gross profit on a project. Your net profit as an agency, the industry averages around 10%. I try to get my clients to aim for 25. It is possible to get up closer to 35 or 40 if you’re really squeezing everything out of it. But 25% is a really healthy, highly profitable agency that can scale and cash flow it’s own growth. That’s not an unrealistic place to get to. But there’s always going to be this gap between your gross profitability and your overhead and then your bottom line because you’re not going to utilize your team at 100%. So there’s going to be a pretty significant portion of your direct labor costs, in this case for most people, between 50 and 45%, that you’re just kind of eating, and you’re investing not in having internal meetings, or maybe you’re investing in internal projects or maybe you’re paying for people to go on vacation. That’s part of the agreement that you make when you hire them so just keep that in mind. Those are the benchmarks.

Marcel Petitpas:

If you are confused about this. If you’ve been taking notes or you want to have all of these benchmarks and metrics on one piece of paper, you can go and download that on our website at Parakeeto.com/toolkit. There’s a bunch of stuff in the toolkit but that’s one of the things, is a summary of all these metrics that I talked about today.

John Doherty:

Awesome, I love it. I love it. I was going to ask if you had something like that. So Parakeeto, like parakeet the bird o.com? Slash toolkit. Is where you can find that.

John Doherty:

So Marcel, dude, thank you for being on. This is amazing. I’ve learned a bunch. I’m sure people that are listening to this are going to learn a ton as well. Other than Parakeeto.com/toolkit, where’s the best place for people to connect with you personally?

Marcel Petitpas:

Yes absolutely. I’m also the host the podcast, called The Agency Profit podcast. You have just become a guest on that show as well. So we bring on lots of experts. I’ve started doing some solo casts as well so you can check that out as well. It’s on iTunes. It’s on everywhere. It’s on YouTube. Agency Profitability podcast. Parakeeto.com. That’s where we have our blog. We have all kinds of free resources there. We’re always publishing content. If you want to reach out to me personally, you can find me on LinkedIn. You can find me on Facebook. Or you can just send me an email and if you download the toolkit, you will have my direct email address. Feel free to reach out. I’m always happy to hear from agency owners and if you’re trying to get a handle on these things and you’re confused, just let me know, I’m always happy to be a helping hand. I respond to every email so don’t hesitate to reach out. I just love seeing people action this stuff. It makes me really happy.

John Doherty:

Awesome. Love it Marcel. Well dude, thank you so much. I appreciate it. Everyone go check him out. Parakeeto.com. Download Parakeeto.com/toolkit. He’s a great dude based up in Canada. I’m sure you’ll learn a lot from him as you’re trying to manage your agency or service business in this very interesting time. So Marcel, thanks man. Very much appreciate it.

Marcel Petitpas:

Thanks for having me John. It was a pleasure.

John Doherty:

Hey there, John Doherty here once again. Just wanted to thank you for making it all the way through this episode. If you’ve gotten value from the Credo podcast we’d love it if you would leave us a five star review on iTunes or wherever you listen to podcasts. This really helps us get the message out there and also, if you really really liked it, take a screenshot of your phone, share it on your Instagram stories. Tag me at dohertyjfn. I’ll reshare it for you. Thank you so much for learning, for listening, and for sharing it with others.

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