The Art of Agency Profitability and the Science of Effective Leadership, with Marcel Petitpas

Embark on a transformative journey with us as Marcel Petitpas, the powerhouse behind Parakeeto, reveals the secrets to agency profitability and leadership. With the finesse of a former Apple account manager turned agency mentor, Marcel unveils the strategies that will shift your agency from surviving to thriving. We tackle the intricacies of project scopes and pricing, ensuring that what you promise clients is not only achievable but also profitable. Peel back the layers of agency resource management with us, and watch as your business blossoms into a hub of sustainable growth and operational excellence.

In the nurturing environment of transparent leadership, we discover together the profound impact honesty has on a team's spirit and success. As Marcel and I dissect the perils of inaccurate project estimations, you'll learn how a culture of clarity can combat the toxic work cultures born from dishonesty. Equip yourself with the metrics that matter - those that spell out the health of your business without ambiguity and empower your team to reach new heights of accountability and satisfaction. Say goodbye to skewed data and hello to metrics that truly reflect your agency's vitality.

Closing the loop on our insightful dialogue, Marcel graciously shares the financial metrics that are the lifeblood of agency profitability. Dive into discussions on average cost per hour, billable rates, and the utilization metric, all while gaining an appreciation for the art of precision without losing sight of practicality. Plus, we don't shy away from personal leadership, as we underscore the pivotal role of self-awareness and feedback in your journey as an agency leader. Prepare to have your perspective on business and personal growth fundamentally altered, as this episode serves as both a mirror and a map for your leadership expedition.

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Transcript

Speaker 1: 0:02

Welcome to Catalytic Leadership, the podcast designed to help leaders intentionally grow and thrive. Here is your host author and leadership and executive coach, dr William Attaway.

Speaker 2: 0:16

Hey, it's William and welcome to today's episode of the Catalytic Leadership podcast. Each week, we tackle a topic related to the field of leadership. My goal is to ensure that you have actionable steps you can take from each episode to grow in your own leadership. Growth doesn't just happen. My goal is to help you become intentional about it. Each week, we spotlight leaders from a variety of fields, organizations and locations. My goal is for you to see that leaders can be catalytic, no matter where they are or what they lead. I draw inspiration from the stories and journeys of these leaders and I hear from many of you that you do too.

Speaker 2: 0:57

Let's jump into today's interview. I'm so excited today to have Marcel Pettipa on the show. Marcel is the CEO and co-founder of Perikito, a company that is dedicated to helping agencies measure and improve their profitability by streamlining their operations and reporting systems. He's also the head strategic coach at SAS Academy by Dan Martel, the number one coaching program for B2B SAS businesses in the world. In his work as a speaker, podcast host and consultant specializing in agency profitability optimization, he has helped hundreds of agencies around the world measure the right metrics and improve their operations and profitability without relying on financial data and accounting professionals and take control of their business with simple numbers anyone can understand and measure. When he's not helping agencies make more money, he's probably watching the office or parks and rec on a never ending loop and eating breakfast foods for every meal of the day. Marcel, I'm so glad you are here. I've been looking forward to this conversation.

Speaker 3: 2:14

Likewise, william. I appreciate you having me.

Speaker 2: 2:16

I would love to start by you sharing a little bit of your story with our listeners, particularly around your journey and your development as a leader. How did you get started?

Speaker 3: 2:26

My career started as Apple as an account manager, and I had a great manager working in that job and I learned a lot from him. His name was Steve Capigrecco and I learned a lot about how to find that sweet spot of giving somebody autonomy and also letting them make their own mistakes and learn some things the hard way. I had to know when to step in. He was really quite good at that balancing act as a manager. From there I decided to move on and start my own agency, which was my first business, and that's where I became familiar with the challenges that we solve today for agency owners. I'm trying to answer simple questions every day about are we making money on clients and projects? When can we take on our next project, who do we need to hire and when? That balancing act of work coming in and needing more resources and people to get that work done and just finding it extremely difficult not only to figure out how to measure these things but to actually do it and practice and get all the data together to do it. Then I became interested in software as a service. That's where I met Dan Martell and started working more closely with him A few years later a good mutual friend of ours got put in contact with me and he just shared hey, he ran a much bigger agency than I'd ever run.

Speaker 3: 3:44

I spent two days a week in spreadsheets trying to answer these questions. There has to be a better way to do this. Every agency owner that I talked to that's a peer has the same problem. I resonate with that immediately and said, okay, well, let's work on solving this problem. That was almost six years ago today. We've been through lots of twists and turns but thankfully figured out a way to get this solved and have been able to build a company since then.

Speaker 2: 4:09

You bring so much credibility to this because you ran an agency. You saw firsthand the pitfalls, the tripwires that trips so many people up. I love one of the things you do there A lot of things you do One of the things that jumped out at me this idea of are we making money on this client or on this service? You would think that's a really simple question to answer, yet so many of the agency owners that I work with, when you pose that simple of a question, their answer is, I think so. Do you see that?

Speaker 3: 4:47

Absolutely. I think that this is one of the things that not enough people are acknowledging about professional services in general. The advantage to professional services is there's very little capital costs to get started. There's very little barrier to entry. If you have a skill, you can go out and you can start working for yourself. If you have a group of people around you, a network that has skill, you can start to scale that up into a business. That's great. You can start, but it's difficult to scale because we don't have fixed costs.

Speaker 3: 5:16

It's not like selling a widget or selling a piece of software, selling a product. The amount of time that it takes to get something done for a client determines what it costs you. One of the traps that I think a lot of people fall into when they first start is they're not valuing their own time as the founder. They're spending a lot of their time subsidizing projects. It's not until they're forced to build a team underneath them, become the leader of that team and incur the direct cost of spending more or less time than expected on things that they now have to essentially address this issue that they've been able to defer for a while by subsidizing those challenges with their evenings and weekends.

Speaker 2: 5:55

How do you suggest agencies measure their performance? You talk a lot about this on so many venues. What are the things that people should be looking at as agency owners? What are the key elements?

Speaker 3: 6:10

We'll start with intake, which is when you're pricing or scoping a project and how to set yourself up for success from that point. I say this all the time Most agencies are suffering from indigestion, not starvation. They just happen to feel the same. What I mean by that is I'll often talk to agency owners that are doing one, five, $10 million a year in revenue and they're not making money or they have razor-thin profit margins. Clearly, none of those businesses are suffering from starvation. They have millions of dollars of revenue coming in the door.

Speaker 3: 6:45

Something is going on between when that money is collected and when the deliverable is given to the client and all the invoices are paid for the business. That's causing there to be less money left over than there should be, based on how this business was designed to operate. That's what we really need to get focused on. What we find in auditing agencies is the majority of them have what we call a delivery margin problem. For those of you that are familiar with some basic financials, delivery margin is probably the same thing that you would call gross margin or contribution margin.

Speaker 3: 7:19

What we're really trying to figure out here is what does it cost you to earn a dollar? If a client gives you a dollar and you make a promise in return. How much money do you have to spend to fulfill that promise and how much of that dollar is left over? Ultimately, as a business, we want to try to have at least 50% of every dollar that clients pay us left over after the promise has been delivered. On that way, we have 20% or 30% of that dollar to spend on overhead and growth. We hopefully have 20% to 30% left on the bottom line to actually reward ourselves and the other founders and executives in the team, and perhaps even our team, if we want to do profit sharing for the risk that we took investing in this business.

Speaker 3: 8:01

In order to do that, we need to target anywhere from 60% to 70% delivery margin when we sell a project to a client. That's really the starting point. I find that agencies really they trip themselves up when they price and scope projects in a bunch of ways and we could dig more deeply into why and how that is but most of the time they're either not aware that they're underpricing or they are aware of what their margins are, but they're just not targeting a high enough margin to really set their business up for success from the start. Essentially, they're behind the eight ball from the moment they sell a project, because that indigestion is designed into how they've priced and scoped that work.

Speaker 2: 8:44

Is that underpricing something that you're seeing in a lot of different places, a lot of different agents?

Speaker 3: 8:52

When I say underpricing, there's two sides to that equation. You could underpric in the sense that you know it's going to take a lot of time and you just don't charge enough for that. You're just not giving yourself enough margin. That's a conscious decision. Sometimes it is the right thing to do because we have to utilize our team. If we have this option next month to either sell some work at a discounted price and have some work for our team to do, or have our team be sitting on their hands. Or option three is we have to lay some people off. Sometimes it may very well make sense to discount the work intentionally. The other side of this, which I see very often, is we just underestimate the time it's going to take to get the work done. It costs us a lot more than we thought. That's often called over-servicing, but in some cases it's the result of underpricing. Where I see this happen most often is when the way that work is priced has a coupling between time and budget. What I mean by this is we arrive at a price for a client by saying here's how many hours we have. Let's multiply that by some billable rate. Oftentimes there's not really much thought put into that billable rate, it's not clear what the margin on that billable rate is expected to be. Then we arrive at a price or, worse yet, we go to the client we say what's your budget? Then we divide that budget by the hourly rate we want to achieve and then we say well, this is how many hours we have to complete this work, which to me is like such a dangerous trap to fall into because there's no reconciliation of. Is that even realistic? What often happens in that situation is the client says, hey, that amount of money that you're asking me for is too much. My budget is lower. Can you do it for that?

Speaker 3: 10:34

Often what happens because there's this intrinsic coupling in this agency's pricing model between time and money is they'll go back and they'll lower the budget by lowering the amount of hours on the project, even if the scope hasn't actually changed. What they're doing in that case is nothing's changing. For the client, they're going to pay the price that the agency comes back and ask them to do, but for the agency, what they've just done is they've just lied to themselves about how much time they think it's going to take to get this thing done. Then, six months later, when they've built the website for the client and everyone's sitting down to do their project retrospective and they go wow, we really blew through the budget on this one. They're all pissed off because they forgot that.

Speaker 3: 11:17

Well, actually we set ourselves up for failure from the start. We knew it was going to take longer than this in the original estimate, but for some reason we decided to obfuscate that, because the way that we think about pricing has this unbreakable link between time and money. Of course, those two things are not intrinsically linked to one another. They're related, but they're not the same.

Speaker 2: 11:39

I think you're spot on there. And when they make that choice to obfuscate the actual cost, whether it's in minutes or dollars, they know at the beginning, but they choose to push that to the side. It reminds me something that a friend of mine will often say bad news is not like a fun one. It does not get better with age. We shove it to the side, we shove it under a rug, we think it'll take care of itself, it'll get better, it'll go away. That has not been my experience. You need to deal with that directly. As the business owner, it is your responsibility to lead from the front on this. But I see the same thing People who are like, yeah, we'll get it, we'll take care of it, I'll take care of it. They invest more of their own intention, more of their own time, their own effort than they ever wanted to. One day they wake up and say this business that I created, that I started from nothing to give me time. Financial and location freedom has given me none of those. It has become a cage.

Speaker 3: 12:50

Well, that's absolutely right. We see that all the time. If we want to tie this back to leadership, I think one of the tragic impacts that this can have is it creates this false negative, which is that somehow the team has failed on this project. Yes, because they went way over budget. If we're doing this chronically, then we have this impression that this is a chronic issue, and the reality is we didn't realistically estimate this from the start. We lied on the estimate to ourselves. Yes, we did that to ourselves.

Speaker 3: 13:20

But again, if the team is constantly feeling like, hey, we're constantly failing, we're constantly having these negative project retrospectives about how we went over budget, there's this issue in the business, but that issue isn't really solvable because we're not seeing truthful information about what was actually expected for this to take.

Speaker 3: 13:39

The team feels like they're being set up for failure. The team feels like the budgets are unrealistic. That's a really negative place to be, and think about how difficult it is to create accountability and autonomy in that kind of a framework where it just feels like they're being set up for failure. So this is where I think really developing mastery around numbers is important as you start to build that team, because you need to be able to use that data to create accountability and create a shared understanding of what's happening in the business so that you can actually allow your team to have more autonomy over achieving results. And until that is in place, it's very, very difficult to get to that level and to really start to install layers of management and build teams that can get things done without being micromanaged.

Speaker 2: 14:27

And if the team feels like that over time, they feel like they're losing, they feel like they're failing consistently, that's right, they're coming back to the top. I mean that's going to have a huge impact on retention of your team members. They're not going to stick around. Nobody wants to stick around in a losing environment.

Speaker 3: 14:44

That's right, and some of the byproducts of this are you're going to see one of two things Either there's just going to be frustration they're constantly going to feel like they're failing, they're going to quit, or they're going to start lying on their time sheets, or they're going to start under logging time and then they're going to start to get overworked because they're so sick of having this negative project that's so much respect for it. It's like, hey, you blew through this budget. But it's like, hey, this thing takes 200 hours to do, but you keep quoting it at 125. So I'm just going to use my evenings and weekends and not log that time.

Speaker 3: 15:14

And all of these things are toxic. All of these things are really problematic and lead to issues, and it's just basically this fundamental lack of clarity, this fundamental lack of honesty, and a lot of that is often institutionalized in the framework that a business uses to measure their performance. So that's why I'm so passionate about this problem, because it's not actually about getting an owner of an agency an extra summer home or a yacht or a big fat retirement fund. When this stuff is done well, all of the stakeholders in an agency are well served by it.

Speaker 2: 15:49

Yes, I think the highest job of a leader is to raise up, to level up the people that they lead. You get to pour into them, you get to invest in them. If you're not being honest as the leader, you're exactly right they're going to start not to be honest as the team members with themselves and, ultimately, with the company. Is that the culture you want to create as a leader? I don't know a great leader who would say oh yeah, that's what I'm after. I mean, nobody wants to do that. And yet, more and more. That's exactly what I'm seeing, and it sounds like you're seeing the same thing.

Speaker 3: 16:25

I am Now. I want to be clear that most of the time, this isn't intentional or nefarious.

Speaker 2: 16:31

Oh, no, right. Nobody goes into it thinking, oh, this is what I have to do.

Speaker 3: 16:36

That's right. Most of the time, the way that the framework for measuring an agency's performance is developed is by piecemeal, and it comes together either by different managers or different people within the organization bringing ideas from the previous firm that they were at into the business and then trying to cobble them together, or doing research and picking metrics from one expert or one blog and trying to bring them together. And that's a really dangerous and often problematic way to build a reporting framework for the business, because there isn't consistency between those metrics. And so another thing that we see all the time is when we go into a business, they're investing tons of time and money measuring all kinds of great KPIs often even the ones that we recommend they measure but because they're not in a consistent framework I've had this conversation with the CEO before where they go.

Speaker 3: 17:30

My ops manager is managing all of these metrics. They're hitting all their targets. My finance manager over here is managing these metrics. The sales team is managing these metrics.

Speaker 3: 17:39

Everybody's hitting their targets, and yet there's 15% of my bottom line that I don't know where it is, but it's not in my bank account and I can't figure out what's wrong. And we spend five minutes looking at that and we go oh well, the way you're defining a billable hour in this area is different than how you're doing it in this area. And the way that capacity is being modeled by your ops manager is different than the way your finance manager is thinking about capacity. And the way you measure gross margin on a project after the fact is different than how you're estimating it, and these little differences add up to this 15% bottom line. So it's really important to be intentional and bring all this stuff together in a way that's consistent, so that everybody across departments can be on the same page and you don't end up with these kind of gaps, these gaps where things slip through their cracks and again kind of lead back to some of these issues where it feels like the expectations aren't clear and aligned across those different stakeholders.

Speaker 2: 18:38

And that is so good. I'm just processing what you're saying. I'm hoping that everybody who is listening is capturing this, because there's gold here. Like, what you're sharing is something that every agency owner I've ever interacted with or worked with needs to understand. This is the path that will take you where you want to go. Cobbling together, pulling from this and that and oh, I like that, I'll pull that in Creating a Frankenstein approach, if you will Like, this is not gonna be helpful to you. It's not gonna take you where you wanna go. It's gotta be something consistent. I love the way you talk about this.

Speaker 3: 19:15

Yeah, and I think one of the issues is that oftentimes what I see in a firm is people are kind of voluntold to figure this stuff out and they're doing this from each of their departments. So the sales team it's like hey, figure out how to measure the sales metrics and give me this information. And then the finance person hey, give me the right metrics. Often they're just kind of trusting the finance person to do that in the right way and, frankly, most of the time they're not doing it, in my opinion, in the right way. And it's the same thing with the ops person, which is often the project manager that's been around the longest, that gets upgraded to an ops manager overnight and it's like hey, you gotta figure out how to make track the profitability of all our projects and do resource planning. And they're kind of left to their own devices to figure these things out, often in silos.

Speaker 3: 20:06

And when I ask a firm well, whose job is it to bring this stuff together? Either the answer is nobody or somebody's been volunt told to do this and frankly, it's not even within the scope of their job and they're being set up for failure and often they're they're Exasperated and frustrated and quite defensive when we start the conversation until I Sit on their side of the table and say you know what? It's really not fair that you're being asked to do this and it's not a good use of your time either. So I'd love to talk, if it's relevant, about how to kind of ladder up from. Okay, we figured out how to price projects and set ourselves up for delivery margin. How do we then kind of measure the performance of the business thereafter and take control of it and really bridge the gap between Finance and operations? That, I find, is one of the most difficult things for people to do.

Speaker 2: 20:52

I Agree, I think that is a. That is a. It feels like a grand Canyon sized gap for a lot of business owners.

Speaker 3: 21:00

Yes you bridge that so our framework and I want to Make it clear that when I explain our framework, this is our framework. So the way to measure each of these individual metrics is not necessarily the correct way, but it's the way that we do it, because the way we measure each of the metrics in this framework Makes it consistent with the rest of the framework and, at the end of the day, that's what's most important. So you could choose to do any of these things differently, but you just have to make sure you chase down the 15 different dependencies With the decision that you make about how to measure that one metric differently, because it has to be consistent with Everything else. So, with that in mind, the way that we would recommend doing this is on the financials, we really need to measure and understand delivery margin and most P&L's. When we look at them and we look at about a half a dozen P&L's a month of different firms Almost none of them can actually see their delivery margin. So the way that we calculate this is really important.

Speaker 3: 21:57

The first thing we need to do is we need to isolate what's called pass-through expenses and so, to give you an example of what pass-through expenses are, this would be things that flow through your business onto other vendors that you're not Responsible for the profitability of. So easy examples here are advertising spend, print budgets, materials, maybe external vendors that do things that you don't do internally, like if you are an ad agency but you don't do any video production and a client needs a video, you might bring you know another partner in to do that video. So all of that revenue is passing through you into external vendors. We need to strip that out of your revenue so we can get to what we call agency gross income, which is what is the amount of money that you're actually earning as an agency and that you need to now Earn with your time, after we strip out all that other stuff that really doesn't belong to you. And so we see this all the time.

Speaker 3: 22:48

When you know you have a firm that has eight employees, they tell you they're a ten million dollar agency and you're like, no, you're not. Actually you're a two million dollar agency that does eight million dollars of advertising spend per year. Right, there's a very big difference. You don't want to spend money like a ten million dollar agency. That would be a really bad idea, but for most firms it's not that extreme. So that's step one isolate pasture expenses. That gets you to agency gross income.

Speaker 3: 23:12

Now the next step is we need to figure out what is it costing us to earn that agency gross income? And that's where we want to isolate what we call delivery expenses. And the problem with delivery expenses is most of it's going to be made up of payroll and often there's some what we call shared delivery expenses in there. So if you run a design agency, you probably have a figma subscription for your whole team, right, it's not something that you allocate to each individual project. That's just like a tool in your team's tool belt that they bring to work every day. If you run an ad agency, you probably have some advertising management tools or some tracking tools. So you want to basically Measure how much of our payroll is going towards delivery. And you know, do we have any shared delivery expenses?

Speaker 3: 23:54

And the problem we see on most PNL's is all the payroll is going into one account on the PNL. Everybody in the company, regardless of what they do, it all goes into one big payroll account. So without going in and doing some kind of salary allocations, we can't actually see, okay, well, how much of this payroll is actually meant for doing client work. Therefore we can't measure the delivery margin of the business. So Often it's software and payroll are the two problematic accounts and at the very least what we want to do is separate that into two accounts one for delivery, payroll and For software. Similarly, one for software Specifics to delivery, and then the rest of it can go in another big account for overhead or it can be split out more granularly. But if we can do that, then we can start to get a sense of okay, like what is the delivery margin of this business on a financial basis? And most people when they go and do this math, even on the back of a napkin, they'll realize we're not hitting that 50% benchmark, we're quite a bit lower than that.

Speaker 3: 24:52

Then the question becomes okay, well, why is it that we're lower than we need to be and what do we do about it? And that's where the utility of financial Reporting is. You know, actually not going to be that high. Firstly because it's fairly retroactive. Most of the time you're looking at your P&L two, three weeks after the month is done, if you're lucky, and it's very, very expensive and cumbersome to try and get more detailed than that in the P&L. You want to do project-based accounting or department-based accounting. It adds a lot of cost and complexity and will often delay the reconciliation timeline. So instead, this is where we want to bridge the gap into operations and say, okay, well, what are the things that we can measure much more frequently and with much less expense, that will help us predict the outcome on our financials ahead of time and that allow us to make Much better decisions closer to the ground, because we know that those are the things that lead to healthy delivery margin. So I'll pause there and get hydrated before yeah, no, absolutely.

Speaker 2: 25:51

This is so Fascinating and and so practical. This is, this is really like, on the ground level Practicality. Marcel, thank you for this.

Speaker 3: 26:02

That's the goal. So if you're listening to this and you've kind of paused the episode and you've done the math and you're okay, yeah, my delivery margin is not where it needs to be, I need to get it up, how do you do that? And there's really kind of three operational levers that control delivery margin. So first let's talk about the formula for delivery margin. It's a very simple margin formula. It's agency gross income, which again is your revenue minus any past your expenses. So agency gross income minus your delivery costs, divided by agency gross income. So if my firm does a million dollars in a year and I spend four hundred thousand dollars on On delivery costs, then I would have a sixty percent delivery margin. So based on that formula, you can see there's there's two ways to improve this number. You can either decrease the cost and keep the revenue the same, or you can increase the amount of money that you're bringing in While keeping your costs the same. So if we think about operationally, how do we achieve that? We'll start with decreasing cost, which is my least favorite. So we'll start with that.

Speaker 3: 27:01

The first one, the proxy for that operationally, is what we call average cost per hour. An average cost per hour, is this really easy way to figure out for any segment of the business? So the three metrics I'm about to discuss. The beautiful thing about these is you can use them to look at any time period a day, a week, a month, a quarter and you can use them to look at any cross-section of the business a single client, a group of clients, a department, a type of product or service Any way that you can slice and dice the two inputs that are required for each of these metrics. You can compare anything to anything and you can do it over any time horizon. That's part of the reason that I love these metrics so much.

Speaker 3: 27:43

Average cost per hour allows you to ask for any time period or for any cross-section of the business. On average, what did an hour of labor cost us in that area? You can start to compare. When we do website projects, our average cost per hour is X. When we do SEO projects, our average cost per hour is Y.

Speaker 3: 27:59

You can start to identify where is our average cost per hour high, and that is generally an indication that more expensive people need to do a larger share of the work on those kinds of deliverables. That's not inherently a bad thing, but often, what that poses is an opportunity to improve the process, create better documentation, use technology to leverage that process and displace a lot of work from very senior people that could be done by more junior people In aggregate. What that should do is either change the composition of your team to be less top-heavy, and if you use freelancers and contractors, it will very immediately lower your costs on every single project. That operational proxy is a really useful one to say okay, how do we get the same work done but do it with less cost?

Speaker 2: 28:53

Reducing cost, cutting cost, is something that is a lever that every business owner is aware of. I don't know that I've heard anybody talk about it like you just did.

Speaker 3: 29:03

I think part of that is maybe it's a little bit unsavory to suggest that lowering the amount of judgment required to do something means that generally you can use less experienced labor, and less experienced labor tends to be less expensive For some reason. That maybe sounds a little bit controversial, but it's generally. Again, it's a generalization, but it is generally true. Just being blunt about it, it is very objective. You can use these numbers and really start to identify very quickly where are we having to leverage very experienced and expensive talent to get things done? I'll give you an example.

Speaker 3: 29:42

In our own business there was a deliverable that I used to do. It took me about 40 hours to do To displace myself. Since then I've hired somebody to do that job that I was doing. We call it the consultant in our business. That job is about $150,000, $160,000 a year job, so it's fairly expensive. It was taking 40 hours of that person to do this deliverable. We worked very hard on process and documentation and technology et cetera. We were able to get about 75% of that work now done by an account manager. It's things like collecting information from the client, setting up the template for the presentation deck, tooling up all of the spreadsheets, doing some of the initial data analysis. By doing that the account manager costs about half of what a consultant does. We were able to lower that cost per hour by about 40%, which really helped improve our margins without having to change the price of that work. That's just a very practical example of how that applies to a given type of work.

Speaker 2: 30:42

I love the intentional evaluation you're using here. This is not something that you're winging. I don't hear winging anywhere in what you're describing. I talk to the leaders and I tell them all the time experience does not make you any better. You can have 20 years of experience and it does not make you any better than day one. Good experience makes you better. You are so intentional with your evaluation of how you are doing this and so intentional. I wanted to comment on that because I think a lot of business owners are not. They're not evaluating that honestly and that ruthlessly.

Speaker 3: 31:20

This is the leadership, the catalytic leadership podcast.

Speaker 3: 31:23

To tie this back to leadership, I've learned that that's really important, because having subjective discussions with the team is a really dangerous game that often does not create a lot of winners.

Speaker 3: 31:38

What I've figured out is that, at least for myself and I've observed this with a lot of our clients when you can just create objectivity with data that gives everybody a chance to get on the same side of the table and say how do we work together to get this from where it is to where it needs to be? We can all agree on what the target is. We can all agree that if we get there and the business is striving, everybody will benefit from that. And here's how let's all get on the same side of the table and figure out how to solve this problem. When we don't have this data, what we find is you get into a project retrospective and the conversation quickly devolves into arguing about what we think happened, as opposed to focusing on solving the problem itself. That's why I'm so really passionate about trying to empower teams with this kind of data, because it completely changes the dynamic.

Speaker 2: 32:27

It can also devolve in an unhealthy team dynamic to where you're blaming Well Bob and his team. They had done their job right, we wouldn't be in this mess. I've seen that Too often that kind of dysfunctionality on a team will manifest in a hot wash or retrospective, like you're describing.

Speaker 3: 32:48

The risk of that is certainly higher. Of course, having objective data about what happened doesn't completely mitigate that risk, but it certainly can reduce the chance of it happening. There are some people listening that, like me. I've told them that there's three numbers. We've only given them one. If I don't close that loop, they're not going to be able to sleep tonight.

Speaker 2: 33:05

That was my next question. You got to finish it. I'm making a list here.

Speaker 3: 33:09

Absolutely All right. Don't worry guys, let's look back into it. We talked about the first lever for affecting delivery margin, which is average cost per hour. That's related to decreasing costs. The next two I'm going to discuss are related to increasing the amount of revenue that your team can generate without changing the cost structure at all. The first one is what we call average billable rate.

Speaker 3: 33:31

The second that I say the word billable rate, there are some people listening that think well, I don't bill by the hour, so this isn't relevant to me. You could not be more wrong about that. The thing that's beautiful about average billable rate is, again, it normalizes any project, well, any client work, whether it's a project or it's retained work and recurring work, and it normalizes all billing models. Whether you bill by the hour, you bill a flat rate, you do value-based pricing, you do sprint-based pricing, you get paid and trident layers doesn't matter, and you can do it over any time period and over any cross-section of work. This is such a beautiful thing. You can compare anything to anything in exactly the same way. The math on this number is very simple. You take your agency gross income, which again is the money you collected minus pass through, and you divide it by what we call delivery hours, how many hours were required to earn that revenue? Notice, I didn't call it a billable hour. For a lot of people those are going to be the same, but a billable hour is potentially problematic because it has the connotation that it matters if the client was billed for that time or not. When we're looking at average billable rate, it doesn't matter if the client was billed, it only matters if it was required to get it done. That's how it normalizes all these billing models. Thank you.

Speaker 3: 34:44

If you think about this, let's imagine here's a really good example of a report. We say, hey, let's look at our projects for the last three months and let's measure the average billable rate on all of them and immediately we might see hey, we got paid $50,000 for this project, but it took us a ton of time and we earned $100 for every hour that we invested, whereas this other project that was only $10,000, we invested 50 hours to get it done and it was really efficient. We earned $200 per hour. What kind of interesting conversation could you have around that? Hey, what can we learn from that 50 hour project that we earned $200 an hour on? Is there something that we're doing on those types of things that we can learn from and apply to others.

Speaker 3: 35:24

What about this website? Is there something that we're missing in the scoping? Was there something about our process that felt clunky, that felt like it was getting in our way? And we can really get curious and invite the team to start contributing to that conversation. And this sounds too simple to be true, but if you think about it, if you sold every hour that your team had available for twice as much money, you would earn twice as much revenue without changing anything else. That's just math. That's not my opinion. That's just math. That's it. So that's the power of average billable rate. Is it really gives you this simple, cost effective lens that allows you to really start to spot the opportunities in the business to improve the level of efficiency with which your team creates value?

Speaker 2: 36:10

This is something any leader, any business owner that his listing can do. Yes, very simple. I just want to make sure. I want to say that, because I know there's people listening here like this is so complicated, I can't do this. Listen to it again, back it up, let's do it again. You can absolutely do this.

Speaker 3: 36:29

Yeah, how much did you have paid? How much time went into it? And this is where I want to take a quick side tangent Precision and accuracy are not the same thing. This is a trap I see a lot of people fall into. They go well, we can't measure that precisely, therefore we're not going to do it at all. And it's like well, if you had 80% of the time captured on a project and you knew that roughly 80% was in there, so you applied a heuristic to that time to say, okay, well, if we assume that this is 80% roughly, this is how much time we spent. Now you have a directionally accurate sense and you can start to compare things. Is that not better than nothing? And is that not going to be an accurate insight, despite not being that precise? So decouple those two concepts. Precision and accuracy are not the same thing and often in these kinds of things, precision comes at the cost of accuracy. They should not be confused as being the same.

Speaker 2: 37:18

Jim Collins taught us this right Don't let the perfect be the enemy of the great.

Speaker 3: 37:22

That's right. That's a great quote. I got to use that one more myself, all right. So metric one was average cost per hour, that's about decreasing cost. Metric two was average, a global rate. That's about increasing the amount of revenue and value that our team can earn. The third one, which, for the Star Wars nerds in the room, is the dark saber of agency metrics. It has great power but it can do great harm in the wrong hands, is a metric we've all probably heard of. It's called utilization, and so utilization is really answering the question of all the time that I'm purchasing from my team in bulk. How much of it am I able to resell to clients in order to earn that average global rate that I talked about earlier?

Speaker 3: 38:07

The measurement for this. There's a project manager that's going to have an aneurysm when I tell them how we measure this because it's not precise, but it is more accurate and it's also very simple. You take delivery hours worked and again, across any area of the business, any time period, any cross section of the team, whether it's a single person, a group of people, the whole business doesn't matter. What was the amount of delivery time worked and what was the total capacity for the group of people selected in that time period. We're not subtracting out of capacity things like time off, sick time, holidays, vacations, internal non-billable time. We leave all of that in there.

Speaker 3: 38:46

Now, why is that? Well, think about it for a second. If we start to remove all of that from capacity, then the more time off and non-billable time that the team has, the higher our utilization rate goes. That would indicate to us that we get more profitable the less we work, and again, that might feel more convenient and it might make the team feel better and it might make it feel like this measurement is more fair, because, well, we don't actually have all of that capacity available. But it's a false positive, it's the opposite of the truth, and so we can't really measure it that way.

Speaker 3: 39:19

We need to see the cost of those things reflected, and the way that we do that is by including all of that stuff in the total capacity, so we can get a real look at what percentage of our time really is earning that average billable rate. And so it also happens to be much simpler to measure because I don't have to chase down how much time off somebody has accrued. We know what holidays are coming up this month every time that I want to measure this metric. So the benchmark for this is, as an entire agency, for the entire year, 50 to 60%, and I know that that sounds low. And it is because, again, you have to consider that everyone's not working all the time. Everyone gets vacation, everybody gets holidays, sick time, etc. And if people are telling you that they're getting 85, 90% utilization rates, it's because they're not measuring it the same way. That's the only reason why Nobody is getting those kinds of utilization rates under this calculation. If they are, they're violating labor laws and that's not necessarily something we want to be modeling.

Speaker 2: 40:17

Now. Let's discourage that clearly and vocally right now.

Speaker 3: 40:21

Yes, and so I want to tie these things together, because we talk about these metrics and it's a little bit obscure still. I want to draw out an example. So let's imagine we have a team of five people. They have roughly 10,000 hours of capacity in a year. That's $2,000 per person multiplied by five people. If they were utilized at 50%, that would mean 5,000 of those hours are going to be used to earn value and on average they earn $100 for each hour. So they earn $500,000 in agency gross income in that time period. In example two we increase that utilization rate to 60%. So it's 6,000 hours multiplied by $100. They've now made $600,000 with that same team. Imagine the costs haven't changed. We just added $100,000 at the bottom line. Pretty cool.

Speaker 3: 41:08

In the third example, we keep that 60% utilization rate and then we increase the average billable rate through some process improvements, through a couple pricing tweaks, to 125. That same team has now earned $750,000. So we've just added $250,000, or increased their revenue production by 50%, without changing any of the costs. All that flows to the bottom line. If we choose to let it, or we can choose to reinvest into the business, it doesn't matter. That's the power of these seemingly small tweaks to operations on the actual financial performance of the business. And again, these are three simple numbers that anyone can measure, that you can use to look at any cross-section of the business and that don't require any financial data. You can just do this with the data that your team creates every day in a project management tool and with estimates and quotes from clients.

Speaker 2: 41:57

Marcel, that is so helpful Really, just as a business owner myself that is so helpful, and I know our listeners feel the same. I want to dive in for just a minute into you. You are not the same leader you worked five years ago.

Speaker 3: 42:15

Definitely not.

Speaker 2: 42:16

You can't be, because your business requires more of you now. Five years from now, your business is going to require even more. It's going to require you to lead at a higher level. How do you stay on top of your game? How do you level up with the skills that you need to be developing and be the leader your team and your business need you to be.

Speaker 3: 42:39

It's a great question and of course it's a very big question and you're absolutely right in that. You know, a good mentor of mine, Dan, actually says this all the time. He says, if your business is stalled, then it's not growing. Look in the mirror, because that's the bottleneck and that has been so true. You know, when I look back on the moments where we had these breakthroughs or where we got stuck, it always kind of came back to my capacity to lead the business into the next stage, that it needed to be, or to grow to become the person that could, you know, handle being the leader of a business where the stakes were higher, the team was bigger, etc.

Speaker 3: 43:15

And if I think about the three things that have really helped me become a better leader, the first one is personal development. And you know I think this is true about most people I haven't had a perfect life. I have baggage and trauma that I bring into the office every day and I'm not aware of how it shows up a lot of the time, and so there is a constant amount of work that has to go into reflecting on that and identifying those things and identifying how they show up and learning how to control those things, how to redirect those things, how to heal those things. So my baggage isn't coming at the cost of my ability to lead. So that's the first one, and that's. You know, it's journaling, it's therapy, it's all of those things. The second is education and coaching. Right, so you know, I've been listening to like all the Pat Lentioni books recently. I love those, the fables especially. They're so easy to listen to.

Speaker 3: 44:07

I was a fan of one too, and those kinds of books are. What I found is you listen to them at different stages of your life and you learn different things every time. Yeah, because you can wrap your context into those stories. And so, even if you just have a couple of great books that you come back to, you know, throughout different points in your career, that constant.

Speaker 3: 44:32

You know, looking at a problem through that different set of eyes is really helpful, and coaching combined with that is also so critical, because sometimes you just got to get it out of your head in front of somebody like yourself that can look at it objectively. Because you know being a leader is an emotional thing. You have relationships with your people, you're in the trenches with them every day, and it's very, very hard to, even if you have very high emotional intelligence, completely parse those things apart and to look at the issues that you're having from another set of eyes. And so having somebody that can challenge you, that can call you on your shit, that can help you see a different perspective, that can ask you sometimes the insanely simple questions that you're not asking yourself, can be a massive lever in helping you know address how you show up in the business and get to that next level. And so that's number two. And number three, I've got to say, is really just like practice and leaning in, you know, like we are going to make mistakes.

Speaker 3: 45:40

And the biggest point there that has been helpful for me is actually getting feedback from the team, and that has to be intentional, because the team's not going to give you feedback when you're their boss, no matter how much you try to and I try very hard to be incredibly receptive to feedback, to thank my team, to celebrate them in front of the rest of the team for daring to give me critical feedback when they do it, and even when I do all of those things, they're still very apprehensive.

Speaker 3: 46:07

Something has to be very, very wrong for them to unprompted pull me aside and say can I give you some feedback on something? So as an organization, we have to facilitate specific exercises on a quarterly basis to really try to draw that stuff out of our teams, and it's always always, always insightful. So it's, you know, not being afraid to lean in and continue to push yourself as a leader, but installing those feedback loops very, very intentionally, because if you're waiting for your team to tell you that something's wrong. It's going to be too late by the time they come around and tell you that.

Speaker 2: 46:37

In my experience, that's been my hallucination 100%, man, I agree with everything you just said there. You know, if you could go back and talk to yourself before you started your business with what you know now, what would you love to go back and tell yourself?

Speaker 3: 46:58

Oh, smart nut man. No, in all seriousness, the biggest mistakes that I've made have been this sounds really nuanced and it is, but I spent way too much time trying to prove myself right instead of proving myself wrong. And that subtle change of execution is so critical because, you know, I got into business probably for all the wrong reasons. You know, I had a chip on my shoulder, I had something to prove, I thought I was better than everyone else, but really I was deeply insecure and that's how all those things were manifesting themselves, and so I needed to be right. I needed to have an idea that was good, I needed to get out there and sell it. I needed to grow the business, I needed to accomplish things to validate this story that I want to be able to tell about myself, and that underlying fear of not being good enough, of not being successful, et cetera, actually held me back from challenging myself and asking myself the hard questions.

Speaker 3: 47:58

That would have saved me a lot of time and a lot of headaches, because I would have gotten to product market fit quicker, I would have addressed issues and the products that I was selling quicker, I would have really identified the things that were holding me back from growth quicker. And because I was afraid of asking myself those questions, I didn't do it, and so again, I was trying to prove myself right Instead of stepping back and saying how can I prove myself wrong as quickly as possible, and by doing that, really getting to the things that needed to be addressed in order to unlock more growth. And that has been the shift. You know, as I think I've worked on those aspects and I've had enough success to appease some of that sentiment, I'm much more willing now to come in and say like nothing is safe in this business. We need to constantly be challenging our assumptions about what we think is correct and really coming from a place of saying how do we deliver more value and solve more problems for our customers?

Speaker 2: 48:54

So much insight there. Marcel, you know a mentor month says what would you rather? Would you rather be right? Would you rather make a difference? You get to pick one and I just hear so much of that same insight and wisdom in what you just shared. Thank you for that. That's a great quote. Is there a book that has made a tremendous difference in your journey that you would recommend that the listeners pick up and add to their to read list?

Speaker 3: 49:20

There have been a lot. I'm a big fan of fables. I'm writing a book right now. Actually, I'm trying to write it as a fable. It's significantly harder, but I'm hoping that it will be worth it. I'm just on all of these things. By the way, I want to write the fable of the agency that struggles with all of these numbers and eventually figures it out, and so my I'm going to recommend two. Actually, my top two are number one, the go giver, which I think is one of the great, simple, easy to read, you know business fables, but really talks about some fundamentals that the older I get, the more timeless I realize that they are. The second is the five dysfunctions of a team, you know, which I think. If it's like to me, it's like if there was just one business book that you could read, that would probably be the one that I recommend.

Speaker 2: 50:06

You know, often people will leave an episode like this with one big idea. You know we've covered a lot of ground today, but they'll be with one big idea. If you could define that one big idea, what would you want that to be?

Speaker 3: 50:20

Know what it costs you to earn your money, that's it. Just know that, because if you don't, everything's gonna be a lot harder.

Speaker 2: 50:27

I love that Simple, wise and profound. Marcel, this has been a masterclass today in this topic. I'm so grateful for your generosity, your open handedness with what you've learned so far. I know people are going to want to stay connected with you and continue to learn from you. What is the best way for them to do that?

Speaker 3: 50:47

You can check us out at paraketocom. And if you want to grab a free toolkit that's full of training videos and templates and cheat sheets to help you actually measure all the numbers that I talked about today, you can grab that absolutely free at paraketocom forward slash toolkit. And if you want to connect with me, the best place to find me is on LinkedIn. And if you like podcasts, check out the agency profit podcast, where we talk about these kinds of things all the time.

Speaker 2: 51:11

And I'll recommend that one as well One of my new favorites. Thanks for joining me for this episode today. As we wrap up, I'd love for you to do two things. First, subscribe to this podcast so you don't miss an episode, and if you find value here, I'd love it if you would rate it and review it. That really does make a difference in helping other people to discover this podcast. Second, if you don't have a copy of my newest book, catalytic Leadership, I'd love to put a copy in your hands. If you go to catalyticleadershipbookcom, you can get a copy for free. Just pay the shipping so I can get it to you and we'll get one right out.

Speaker 2: 51:50

My goal is to put this into the hands of as many leaders as possible. This book captures principles that I've learned in 20 plus years of coaching leaders in the entrepreneurial space, in business, government, nonprofits, education and the local church. You can also connect with me on LinkedIn to keep up with what I'm currently learning and thinking about. And if you're ready to take a next step with a coach to help you intentionally grow and thrive as a leader, I'd be honored to help you. Just go to catalyticleadershipnet to book a call with me. Stay tuned for our next episode next week. Until then, as always, leaders choose to be catalytic.

Speaker 1: 52:35

Thanks for listening to Catalytic Leadership with Dr William Attaway. Be sure to subscribe wherever you listen to podcasts so you don't miss the next episode. Want more? Go to catalyticleadershipnet.