Agency metrics and KPIs: The path to predictable profit

A graph, dollar signs and cogs on a green background.

In 2022, agencies in the US reported a 9.9% revenue growth according to Ad Age’s annual Revenue Report. Worldwide, agencies reported a 7.5% uptake in revenue growth. At the same time, October 2022 saw an all-time high in employment.

But since then, times have changed.

2023 saw layoffs, restructures, and mergers taunt the industry following more pressure from clients and shrinking budgets. 

This year, growth has been “modest” so far.

That’s why now, more than ever, staying on top of agency metrics (and KPIs) is crucial. Because when times are tough—optimize. 

From your resource foundations, through your project management process, to the all-important core financials, let’s take a look at the numbers that drive profit.

Definitions

A metric is anything you can quantifiably measure.

However, that doesn’t mean all metrics are useful indicators of business success. For example, one metric could be project headcount, but that doesn’t tell us much about productivity or driving project success. After all, it’s about outcomes, not outputs. 

A KPI is a specific metric you’ve decided to track and prioritize because it’s a crucial indicator of success. KPIs are directly tied to your strategy and agency goals.

For example, an agency with a goal of reducing its freelance and servicing costs will want to monitor how much of the project budget is spent in this area.

While KPIs will be unique from agency to agency based on their needs to drive agency growth, below we’ll share our take on the agency metrics that help pave the way toward profitability.

Note: This article focuses on metrics agencies need to track for their own profitability, not the KPIs and metrics they may be tracking on behalf of clients.

Crucial agency performance metrics: The core financials

Your core financials are a group of metrics that give you the overall picture of your agency’s health. While they’re most relevant to agency owners and leadership teams, it’s important for project teams to understand how they can have an impact on them.

That’s why both agency project management and resource management teams should understand which core financial KPIs are a priority, and how team goals feed into them.

Some examples of agency performance metrics include:

  • Revenue earning efficiency
  • Year-on-year (YoY) and month-on-month (MoM) revenue growth
  • Annual recurring revenue (ARR)
  • Monthly recurring revenue (MRR)
  • Operating profits
  • Delivery margin
  • Agency gross income
  • Overhead spending
  • Gross profit
  • Gross margins
  • Net profit
  • Net margin
  • Break-even point

Now that’s a pretty long list, and obsessing over every single metric isn’t going to increase profitability. Instead, pick an area where your agency can increase efficiency, and subsequently drive more revenue, and focus your efforts there.

While this might look different depending on your agency and its maturity, there are three core agency metrics that will help you keep a finger on the pulse of profit.

3 core financial agency KPIs that drive profit

A circular diagram with a large circle for agency gross income, and a smaller purple circle inside with agency profit. A lighter pink circle with a dotted line between the two shows your agency delivery margin.

KPI 1: Agency gross income

Agency gross income is what you earn from clients and projects before taking away salaries, overheads, sales costs, marketing costs, and tax. 

Why it’s an important agency KPI: It’s an important agency KPI because you need to understand how much you are earning separately from how much you’re spending. Then you can diagnose whether you need to increase earnings or decrease spending to improve profitability.

How to calculate it:

A placard image showing the calculation for agency gross income (AGI) as total revenue minus pass-through costs.

Pass-through costs are simply things you pay for that your client directly reimburses you for. For example, Google Ad spend or printing costs for an out-of-home campaign. 

You want to remove these so you can get a clear idea of exactly what you’re earning from your clients, rather than having an over-inflated idea of what your agency is earning or other delivery costs.

KPI 2: Net profit 

Your net profit is the core financial metric that represents the overall profitability and financial performance of your agency.

Why it’s an important agency KPI: It tells you how much you’ve earned from your core business versus how much it costs you to run your business.

How to calculate it: To work out your net profit you’ll need to take your agency’s gross income from a certain time period, like a month or a quarter.

A placard demonstrating the formula for net profit as total revenue minus pass-through costs, operating expenses, and any other expenses. But adding in other income.

Think about all your expenses like: 

  • Salaries
  • Overheads
  • Capital investments
  • Taxes and interest

KPI 3: Delivery margin

Your delivery margin helps you understand whether you are driving your net profit efficiently, and can even help you break down which clients, services, and projects have a desirable margin.

Why it’s an important agency KPI: For example, a large website commission may feel like it drives profit. But if it comes with extra costs like freelance support, increased client contact time, and multiple redrafts it might have a low delivery margin.

How to calculate it: Rather than trying to reduce the cost of necessary overheads or simply increase revenue without considering the knock-on costs, improving the company delivery margin is one of the best ways to drive predictable profit. 

A placard showing the formula for working out your delivery margin by dividing delivery profit by revenue and multiplying by 100%

A good agency KPI example is a delivery margin to be around 60-70% of your agency’s gross income per project.

If you zoom out and look across multiple projects this margin will go down to around 50%. This is, unfortunately, unavoidable. There will always be small inefficiencies like gaps in utilization, project downtime, and necessary administrative non-billable tasks. 

But 50% or above is a good benchmark to aim for.

Pro tip: Improve Lifetime Value (LTV)

An often overlooked part of improving your delivery margins is improving your clients’ lifetime value, and therefore client retention. It will vary depending on your exact agency sales process, but the cost per acquisition is often a huge drag on net profit and your overall profit margin. 

Improving the value of a client by even one project can make a huge difference.

So how do you improve the lifetime value of a client? Relationship building. Want to read more about improving your client-agency relationships? Look no further.

How else can you improve your delivery margin? 

Your delivery margin is the most important KPI in your core financial arsenal when it comes to driving predictable profit. 

But what are the KPIs in project and resource management that ladder up to improve delivery margin? 

Blocks that show how KPIs in resource management and strategic management can feed into improved delivery margins and increased net profit.

Project management agency metrics

When it comes to project management metrics you have a lot of options. Project managers will likely be tracking a variety of different metrics to ensure the holistic health of their projects.

Popular project management agency metrics include:

  • Milestone completion rate
  • Project pipeline velocity
  • Project health index
  • Scoping accuracy
  • Client satisfaction score 
  • Project risk exposure
  • Time to resolution
  • Project profitability rate or ROI
  • Project completion rate
  • Schedule variance
  • Client retention rate
  • On-time delivery rate
  • Customer satisfaction score

But if you’re looking to improve your delivery margin and drive profitability, we recommend the following KPIs.

Project management agency KPIs to improve delivery margins

KPI 1: Project scoping accuracy

Project scoping accuracy means tracking how closely the work you deliver and tasks you complete reflect the initial project scope you agreed on with the client.

It’s impossible to improve delivery margins if the dreaded scope creep keeps increasing the deliverables without additional financial compensation. Accurate scoping not only drives high profit margins, but also customer satisfaction and retention, accurate budgets, and billing. 

A great way of tracking project scoping accuracy is working out the time variance percentage of how long you forecast a project task taking versus how long it actually took. That’s why project management time tracking and project management timesheets are so important. 

From there you can understand the financial implications of your team spending more or less time on a project than you expected when you negotiated the price of the work. 

 placard demonstrating the formula for time variance percentage as actual time minus estimated time, divided by estimated time and multiplied by 100%.

Benchmark: A common target might be to keep the variance within a range of 5% to 10%. When a project exceeds this variance, it’s time to get forensic in understanding the factors and assumptions that led to the project eclipsing its scope.

KPI 2: Project profitability rate

Project profitability rate measures how financially successful specific projects are relative to their cost. 

It helps project managers and agency leadership teams understand what drives profit at a more granular level. They can then build their agency with these projects in mind by answering questions like:

  • Which projects have the best delivery margins for us? 
  • What kind of projects should an agency be prioritizing and looking for? 
  • What kind of staff would you need for these projects?

A placard demonstrating the formula for project profitability rate as net profit divided by total costs or investments multiplied by 100%.

Benchmark:

In an ideal world, a great project profitability rate would be in the 20-30% category. So for every dollar of revenue, you generate 20-30 cents of profit.

You will need to decide your own unique benchmark percentage based on your own business goals.

KPI 3: Budget variance

Budget variance is all about understanding the difference between your planned budget and what you actually spent. This ladders directly up to your profit margins, and helps you understand why there might be low profits even if revenue is sky-high.

How granular you want to go with budget variance is up to you. You could look at budget variance:

  • By project, so understanding which projects came in over or under budget
  • By area, such as budget on research, budget on freelance support, etc
  • Line by line from your forecast versus the actual budget 

Tracking your budget variance helps you understand where you’re overspending, and how to bring that spend down.

A placard that demonstrates the formula for budget variance as actual amount minus budgeted amount

Benchmark:

A common target for budget variance is 5% to 10%, but it depends on the industry and area you’re working in. Ad agencies may give themselves larger variations because projects often involve so many stakeholders and a lot of unpredictable variables.

A rectangle shaped banner in purple featuring a 3D book cover with a prompt to download an eBook about resource planning for agencies.

Resource management agency metrics: The foundation

Think of resource management as the foundation of your projects and core financials. It’s very hard to improve delivery margins if you’re scrambling to find talent or your current team isn’t working efficiently. 

Seasoned Project Manager Shantal Gonzalez points out that, “Ensure your company or team is set up for success with the right talent. Your staffing plan has to align with projections based on both active and upcoming projects.”

After all, project profitability is dependent on the right talent and team.

Core resource management metrics include:

  • Billable vs. non-billable hours
  • Billable utilization rate
  • Average billable rate
  • Capacity
  • Cost of resource
  • Skills inventory
  • Forecast vs actuals
  • Employee productivity
  • Employee satisfaction
  • Employee Net Promoter Score
  • Employee turnover
  • Employee retention

All of the above metrics are useful, but the following KPIs drive profit.

Resource management agency KPIs that drive revenue

KPI 1: Resource forecast versus actuals

Comparing how you predicted your resources would spend their time, versus how your resources actually spent their time is crucial to predictable profit.

Why? Because if you cannot accurately forecast resource time you cannot accurately quote clients or price projects. Improving your ability to forecast accurately ladders up to accurately scoping, which ladders up to improved delivery margins. This is why time tracking in resource management to improve your forecasting is so crucial to success. 

Having this as a KPI also supports efficient resource management meaning you’re not overspending on resources or underspending and risking resource churn.

A placard showing the formula for resource forecast versus actuals by subtracting actual resource usage from forecast resource usage and dividing it by forecasted resource usage and multiplying it by 100%

Benchmark: As a rule of thumb it’s good to aim for a variance of between 5% and 10%, the lower the better. 

Bear in mind this is a KPI that will take time and the right tools to improve. We all know how difficult it is to predict and understand the exact amount of time a piece of work will take for ourselves, let alone a whole team! 

What makes it easier is having the right tools.

KPI 2: Average billable rate

Your average billable rate measures the average amount your agency is earning per hour of client work.

Your agency-wide average billable is crucial for revenue as it’s a deciding factor in your delivery margin and directly impacts profitability. If your resources are overworked and close to burnout but you’re still not making decent delivery margins, your average billable rate might be the lever you need to pull.

You could also work out your average billable rate by project, by client, or by a specific employee.

Breaking this figure down from agency-wide to per client or resource can help you understand what kind of work improves the margins in your business, and what types of projects are dragging your delivery margin down. 

A placard showing the formula for the average billable rate as your total billable amount divided by your total billable hours.

Benchmark: There is no standard billable rate an agency should be aiming for. An advertising agency that specializes in working with law firms may have a very high billable rate, but that comes with high staffing costs. 

A good way to measure your average billable rate is to look at year-on-year growth or quarter-on-quarter, depending on the length of your project lifecycles and client contracts.

KPI 3: Billable utilization rate

Your billable utilization rate measures the percentage of time your team spends on billable hours, compared to the total available hours within a specific time period. 

Billable utilization rate helps you understand how efficiently your resources can generate income, and whether other non-billable work is occupying too much of their time. 

A placard showing the formula for billable utilization rate as total billable hours divided by total available working hours multiplied by 100%

Benchmarks: In an agency setting you typically want to aim for a billable utilization rate of 60% to 80%. If your billable utilization rate is low, this is another lever you can pull by understanding why and changing the circumstances to increase your agency utilization rate. 

Ask yourself (and your team):

  1. What else are my resources spending time on?
  2. Do we need to improve our agency operations to give resources more project time?
  3. Do we need to improve sales to give resources more billable work?

Do we have a high employee turnover that means employees spend a lot of time onboarding?A rectangle shaped banner in purple featuring a 3D book cover with a prompt to download an eBook about resource planning for agencies.

Agency metrics FAQs

Why do KPIs matter for agency profit?

KPIs drive agency profit by aligning a large group of people behind a clear strategic goal. 

In the 1980s the chairman of British Airways used a single KPI to save the airline which was simply airplanes starting and arriving on time. In the 2000s Domino’s did the same,  using delivery time as the KPI at the core of their digital transformation. 

In an agency setting KPIs can give you actionable insights into what levers you need to pull to improve profits. With consistent KPI tracking, you’ll be able to identify your business’s areas of strength, weakness, and key areas for improvement.  

Using KPIs across the business also creates a unique set of checks and balances that means you can see problems before they arise, and proactively make decisions that help you achieve agency goals.

For example, one month your overall revenue and income might be fine, but if your employee satisfaction score is low you can predict employee churn will be a problem that affects profit in the next 6 months. 

How to keep track of agency KPIs

How you keep track of agency KPIs will depend on which KPIs you’re tracking. Most of the crucial profit-driving KPIs we’ve listed above will rely on having some sort of way to forecast and track your team’s time. 

You can use spreadsheets and templates for this to some degree of success. However, compared to specialist agency software, spreadsheets can be inefficient and lack functions like dashboards and reports. 

👉 Our project time tracking guide can help you understand all the benefits of time tracking for projects, as well as find dedicated time tracking solutions for your specific agencies’ needs.

How many KPIs should your agency have?

Based on a global survey of over 3,200 senior executives by the Sloan Review deciding how many KPIs you should have was reported as a. hard and b. unique to your business. 

In our fast-changing world executives are torn between adding more detailed KPIs or lasering in on a smaller, simplified set 

All of which is to say, there isn’t any right answer. So before you do anything, reflect on your agency’s:

To give you a rough idea a small agency with under 50 employees should be considering under 10 KPIs. In comparison, a large agency of 200 or more employees will want to consider above 15.

With regular reflection and iteration over time you’ll find and develop a network of KPIs that work together to drive predictable profit. 

How to pick agency KPIs

To successfully pick the right KPIs you first need to understand your agency’s current strategic objectives.

Some common areas of strategic focus for agencies include:

  1. Predictable profitability
  2. Revenue growth
  3. Client retention
  4. Market expansion
  5. Brand awareness and differentiation
  6. Operational efficiency
  7. Talent development
  8. Innovation and creativity
  9. Client satisfaction and loyalty
  10. Social responsibility 

Once you have an agreed area of strategic focus you can start researching which KPIs feed into that area and which specific ones you’re looking to improve. 

You’ll want to make sure you have KPIs from different business areas so you get the whole picture. If you just focus on the core financials, you might never understand the daily decision-making that’s driving those numbers. 

We recommend making sure you’re tracking KPIs in:

  • Core finances
  • Project management
  • Resource management
  • Client acquisition
  • Client retention
  • Employee satisfaction

Once you have a set of KPIs you’re confident in, go around to key stakeholders and people on the ground, and get their take. Don’t decide upon an employee satisfaction metric without knowing if employees are satisfied with that metric.

What are some agency KPIs examples?

KPIs for agencies can be categorized based on your agency’s strategic focus. Broadly, you can group them into the following categories: 

  1. Customer KPIs
  2. Financial KPIs
  3. Project KPIs

Within project KPIs, for example, you’ll find estimated vs actual project cost and project margins—KPIs that represent project profitability. 

In a recent webinar with BugHerd, agency advisor Rob Sayles stressed that “You want to make sure that you’ve set your KPIs for the business. Is it, for example, delivery margin per project? Is it overall margin and profitability?”

He continues with “If you know what you’re looking for and you’ve got your financial information centrally, you can actually start looking through that and working out things like is it when we do these kinds of projects that we regularly hemorrhage our margin? Is it when we use this resource on these kinds of projects that we regularly overrun? Is it certain types of clients where we’re over servicing them or where we’re not using project management to clearly reinforce the boundaries of the scope?”

Lastly, he reminds us all that “Getting a balance between what’s going on now, what’s happened historically, and where you need to put yourself in the next six months will give you opportunities to start potentially reducing cost.”

Resource Guru can help you track crucial KPIs that drive profit

You should always be tracking your core financials, but you also need to be tracking metrics that will give you insight in advance. Having and tracking KPIs in resource management is the foundation of predictable profit.

Resource Guru offers various ways to track data from timesheets to dashboards. 

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