A KPI, also known as a Key Performance Indicator is a critical metric that evaluates the success and performance of an organization, particularly in professional services businesses, like an advertising agency.
KPIs are metrics that help companies track progress towards their objectives and identify areas for improvement. While many Chief Financial Officers (CFOs) in professional services prioritize employee “chargeability” as a key KPI, there’s a growing realization that this alone may not encompass the full picture of a company’s health.
What Is Chargeability?
Chargeability, typically calculated as the percentage of billable hours out of the total working hours, has long been a standard measure of productivity in professional services.
For example, at the start of a year, an advertising agency might set billing rates and chargeability targets for its staff. Suppose the agency achieves or even exceeds these chargebility targets midway through the year, yet it’s not meeting its financial goals.
This discrepancy raises a crucial question: why isn’t high staff productivity translated into expected revenue?
Historically, professional services, including advertising agencies, have billed clients on a time and materials (T&M) basis. Under this model, chargebility was a crucial KPI, as every chargeable hour directly contributed to revenue.
However, the shift towards fixed-price projects has altered this dynamic. In a fixed-price scenario, not every chargeable hour is necessarily billable, and the profit risk lies with the service provider, not the client.
Enter Billability, the KPI you may be overlooking
This shift brings us to the concept of “billability” or “efficiency” a KPI that reflects the percentage of chargeable hours that are actually billed to clients.
Efficiency becomes a crucial measure in a fixed-price project setting.
For instance, even if an agency’s staff is 80% chargeable, it doesn’t guarantee that all these hours are reflected in the revenue. The agency might discover that their actual revenue falls short of expectations, indicating a gap in efficiency.
For Example:
Consider an agency with 10 employees, each with a daily billing rate of $1.000 and a target utilization (chargeability) of 75%.
Working 20 days a month, the expected monthly revenue would be $150.000.
However, if actual revenue is only $140.000 despite a higher actual utilization of 80%, it suggests that not al chargeable work is being efficiently converted into billable hours.
This discrepancy, often due to overwork, flawed estimates, inadequate briefing, or scope creep, can significantly impact the company’s financial health.
Therefore, alongside chargeability, agencies need to monitor their efficiency, i.e., the ratio of billed to chargeable hours, both in percentage and absolute dollar terms.
For instance, in the above example, the efficiency would be 87,5% ($140.000/ $160.000). Reports that showcase both chargeability and efficiency in percentages and dollar values can provide deeper insights for decision-making
In Conclusion:
While chargeability remains a vital KPI for professional services, including advertising agencies, it’s no longer sufficient in isolation. The inclusion of “billability” or “efficiency” as a KPI provides a more comprehensive understanding of an agency’s operational effectiveness and financial health.
There are tools available in the market that can track and report these KPIs, offering valuable insights for managing and improving business performance.
