Agency Slippage is the amount in dollars of billable work each year that you are not billing your customers - this is also known as your Realization Gap, or the amount of billable hours you are not realizing. Imagine if you could just bill every billable hour your company logged and increase your net profit 10 fold? Great idea, huh? Definitely easier said than done, however tackling your Realization Gap is absolutely worth the effort.
In essence, you've already covered all the internal costs (direct labor and overhead) to do the work for your clients, which means all the extra money you get back can go to the bottom line - directly increasing your net profit. Or, it can be put towards that office treadmill to work off those extra pounds, invested in a company party to reward your employees for their hard work, or just to fill the beer fridge!
Simply put, your Agency Realization Gap is the total of all billable hours that are not being billed, multiplied by your average or blended hourly rate. Some technologies can actually give you your slippage by person, rate and reason so you can see in detail where the leak is coming from. Agency Slippage does NOT take into account the amount of money you could earn if your people put in more hours; rather, it is the hours that they have already worked that you are not getting paid for.
I have calculated this number for many agency owners and most of them were blown away by the amount of money they were leaving on the table with the brilliant and creative resources that they already had. We've seen Realization Gaps ranging from 15% all the way up to 50% of Agency Gross Income! How de-motivating is it for employees to work long hours and put in lots of billable time only to have a principal say, "Well, you have to work harder because we just don't have the profit we should."
After analyzing many agencies' Realization Gaps, we find that most of these unbilled hours/dollars are made up of:
At Creative Performance Inc, we believe if you tackle Agency Slippage you can effectively do more with the exceptional talent you already have without working them harder.
Measuring your Realization Gap should be calculated with a detailed formula, however you can use a pretty simple formula to ballpark it to see if this is an area you should be digging deeper into. In order to measure your slippage, you must already be measuring your employee's utilizations of billable vs. non-billable work - which, of course, requires accurate time keeping.
Start by taking your yearly average billable employee utilization (let's use 75%) and multiply it by 157 hours per month (we use 157 hours per month, which excludes 10 Holidays and 3 weeks Vacation time per year); then, multiply that by your total number of billable employees. Next, multiply that by your average or blended hourly rate and finally, multiply by 12 for a yearly total.
*Note: Fee Income is equal to your Agency Gross Income - Cost of Goods Sold Mark Up
This means our example firm 'ABC', with 15 billable employees plus 3 more who are non-billable, who is currently running at $1,865,000 in Fee Income, has an Agency Realization Gap equal to $1,321,000!
Can you believe it? 'ABC' is currently leaving $1.3M on the table for billable work they are actually doing. If your clients asked for a 41% discount on your current rate card, what would you say? Because, really, that is what you are effectively doing with this much slippage!
As GI Joe would say, "Knowing is half the battle." I truly believe being aware of how severe your Agency Slippage is helps principals, executives and employees make different decisions. It is also important that you and your team are willing to put in the time and effort as a team to tackle all the things that this type of Agency Slippage implies.
Now is the time to analyze your over budget projects for the year and identify how much of that overage was related to the above mentioned slippage reasons. Start to work on process improvements to fix these problems; some things you might need to consider:
Vanessa Edwards is a serial entrepreneur, professional jet pilot, former agency owner and founder of Creative Performance Inc, a consultancy that empowers agency owners to achieve their cultural, operational and profitability goals. As a FunctionFox, Workamajig and Oracle PLM partner, she has helped over a 100 marketing services organizations (agency + brand) through large-scale organizational change, complex technology deployments and strategic planning.