Let’s tackle project profitability now! Everyone wants to have better visibility into their business metrics and alas, many people are afraid to admit how foggy the glass is they’re looking through. Why? It’s a control and approval thing. When we show just how vulnerable we are, it might expose us as being less than awesome. I would assert that the opposite of that story is true. The more honest we can be about gaps in visibility, the more focus we can put on a resolution. Nowhere have I seen that more pronounced than how marketing agencies measure their project-level economics.
First a little background. When we talk about project profitability, we are talking about something called (cue the accounting term)… contribution margin.
The contribution margin equals revenue less than the direct costs associated with earning that revenue. In the case of most marketing agencies, it is going to be direct labor and materials costs. This doesn’t sound that tough, right? Well, let’s peel back the top challenges in isolating contribution margin.
1. Managing Multiple Data Systems: Marketing agencies deal with multiple systems that don’t integrate or talk to each other. You may have a CRM, Project Management, and General Ledger Systems capturing various aspects of a project but lack a unified view.
2. Tracking Time is Essential but Difficult: If 85% of your costs are associated with labor and you’re not tracking that labor to a project, that’s a problem. Without knowing how and who are working certain jobs or projects, contribution margin is hard.
3. Real-Time vs. Lagging Indicator: The contribution margin is reasonably easy if you’re looking at how a project is doing and preparing an analysis of what happened. But what about answering the question, “What is happening right now?” while you’re in the middle of a project? If you can’t get data fairly real-time, you won’t be able to course correct in managing yourself internally or your client.
Imagine some questions you can answer if you reasonably tackle the above three obstacles. You can answer questions like:
- How are we performing vs. budget (real-time)?
- What will be the impact of adding this job to particular employees’ capacity on our team?
- How have we done historically servicing clients like this for these types of projects?
- And yes….Is this job profitable?
And then imagine that if you can answer these types of questions, what you can do in your business. Consider what you can have:
- Data-driven conversations with a client to ensure a win-4-all structure in your agreement
- Data insight into which segments and project types are most profitable
- Ability to assess your labor efficiency and use data to make team decisions
- Knowledge to structure agreements more profitably from the outset
- Transparency with your team so they can be empowered with data to self-manage
There are systems today targeted to marketing agencies that sell an “All in One” solution which sounds elegant but for most agencies (under ~$5 million in revenue), that is both expensive and requires dramatic change management for the organization. If you’re interested in how we are working with agencies to bring data into a single repository for reporting and insight, please reach out to me at firstname.lastname@example.org.