Understanding your agency’s profit levers: recovery

In part one of this blog series, I talked about how utilisation rates can help grow profits. Here, I’m going to look at the next step in the profit chain: recovery.

Or to put it another way, billed versus billable.

Your utilisation rates can tell you how much time someone realistically spends on work you can bill versus work you can’t (like internal projects or new pitches). Taking this a step further, your recovery rate is how much of this utilisation time you ultimately charge the client for.

And if you look at your historic data, you’re probably not 100% recoverable.

Which probably sounds a bit alarming. But there’s no need to panic.

As long as you know what your recovery rates are, you can calculate how much revenue you could achieve in a year.

Calculating your average recovery rate

Look back over your last year’s invoices and timesheets per job and individual. Here, you can see how much time was spent on a job, how much was billed, what the utilisation rates for that person were, and what your actual costs were.

# of hours hourly rate utilisation recovery rate = realistic turnover for year.

Once you’ve got this figure, you can use it as your target for your agency, teams and individuals.

If you’re not happy with this as a target, then you can introduce some new levers to increase utilisation rates or recovery rates. But you can’t feasibly just say ‘I’m increasing your utilisation rate’ – there’s a reason it was there in the first place. To raise this figure, you’ll need to look at how to achieve this, such as reallocating admin or internal projects.

Essentially, knowing your recovery rate is often enough, if you’re performing to the level you need/want to. But if you want to grow revenue without increasing cost, then you need to look at getting your recovery rates up to increase your bottom line.

How? First you need to get to the bottom of what is driving your rate down.

Here are six common reasons for reduced recovery rates:

  1. Loss leaders. You’ve decided to do this work as a lead in to future, more profitable work.
  2. Extra time. An individual doesn’t have anything else to work on, so they spend longer on a project than they otherwise might — or than they really need to.
  3. Perfectionism. Some people simply get so into a project they spend longer on it to get it perfectly right.
  4. Inaccurate timesheets. It’s fairly common for people to log more time than they spent on a job, to make sure they hit utilisation target.
  5. Underquoting. Once you’ve quoted, a client won’t usually accept a higher bill.
  6. Training. A new starter or someone less experienced might take longer on a project than an established employee.

Understanding your recovery rates

Even if you don’t want to change your recovery rate, you still need to understand it. Ultimately, the higher the rate, the more profitable your business will be. You can use it to build both company and department-level targets, understanding how much revenue each can turn over.

You can use the recovery rate in tandem with utilisation rates to set business targets and establish if you have the right mix in your workforce to achieve your ambitions.

Tracking recovery as a key KPI

At end of each month, finance teams can look at recovery in total e.g. if you’ve targeted £80k gross profit with 90% recovery, have you achieved this? If recovery was below 90%, you’re not going to hit your target for year. This is where you can then look to pinpoint why this job wasn’t on track, such as underquoting, overservicing or inaccurate time logging.

You can then take actions to stop these in the future, by looking at more realistic quoting or establishing why overservicing is happening. If your teams don’t have enough to do and are spending longer on projects than they need to, it could mean you need to start getting more new business in.

Recovery can sometimes be a tricky topic as essentially it means admitting that you’re not making as much in the way of profits as you could be. Which is why I can’t emphasise enough how important it is to get a handle on your recovery rates. Once you understand them, you can see if you’re still performing at the level you want to, or if you need to take action to drive them up.