The state of project profitability in the agency landscape

Software platform Forecast and consultancy Cactus have released a new report on the state of project profitability in the agency landscape – in the process identifying what steps leaders can take to ramp up their project margins and profitability. Rob Massa, Chief Revenue Officer at Forecast, walks us through some of the report’s key findings.

We are living in an era characterised by the “un” prefix. Unprecedented. Uncertain. Unforeseen. The pandemic gave the world a stark reminder that meticulously planned business strategies can become irrelevant very quickly, and those businesses that could pivot quickly found greater success.

Agencies have always been praised for their agility and flexibility – their ability to scale resources up when needed, pivot direction at the drop of a hat and to deliver to tight deadlines. But how to marry effective, profitable project management with the way agencies ‘typically’ work is the challenge in this new era.

The findings of our research with consultancy Cactus are concerning, to say the least. Only 9% of agency leaders surveyed (we surveyed 160+ agency leaders) think they are ‘nailing’ project profitability; this figure drops to just 5% for agencies with fewer than 50 employees.

If 90 to 95% of agencies don’t think their projects are profitable, we have a serious problem on our hands.

Naturally, many of the agency leaders in the study acknowledged there was room for improvement. 35% admitted they could make ‘significant’ improvements, which is alarming. Our report suggests that agency leaders are fully aware there is a serious problem with project profitability, but they’re stuck on how to get back on top of things.

The fresh demand for new business could hardly be considered an obstacle on paper. But when paired with the current talent crisis, we have an industry frozen in fear of where and when to start when there are so many challenges that are demanding attention first.

Ultimately, project profitability is the real determinant of success for agencies, so it should be the number one priority to address – and it needs to be happening now.

Tackling admin overload

Reporting and managing how employee time is being utilised is a significant challenge for companies. Our research showed that larger agencies dedicate more time to updating and managing clients, which seems obvious but is not a straightforward challenge to address.

67% of agencies surveyed with 100-199 employees cited status and update meetings, resource management and timesheeting as the areas of client management which absorbed most of their time.

For small to mid sized agencies – those with 50-99 employees – less time spent reporting meant more time invested in overarching strategy. Nearly 70% of agencies in this bracket cited project planning as the aspect which absorbed most time.

The solution isn’t simply cutting out these time-intensive tasks. Clients need updates, resources need to be managed, and reporting needs to occur. All these tasks are necessary to deliver a good client experience. But they are a huge drain on time and resources for agencies when they are inefficiently operated, which then negatively impacts overall agency profitability. Everything is always connected.

Automation is becoming more and more effective and accessible with every year. Routine, repetitive, non-billable admin tasks eat up so much time when performed manually, but they are ideal candidate tasks for automation. Artificial intelligence and machine learning can process historic data to assemble a project plan at speed, so tasks are allocated to the right people and timelines mapped out.

Fixing forecasting

In our work with clients, the challenge of accurately forecasting revenue and project profitability is always number one. What it usually comes down to is a lack of visibility. If agencies don’t have sight of how much time their people are spending on tasks and track historic metrics, how can they possibly forecast future projects?

The accuracy of project profitability assessments is closely linked with an agency’s capacity to forecast future revenue from client and project work.

With forecasting having a bearing on so many decisions, including investment in talent and tools, it needs to be as accurate as possible. But 57% of agencies felt they were only ‘somewhat accurate’ with their revenue forecasting.

If the lack of confidence in accuracy amongst more than half of agencies wasn’t concerning enough, the 10% who admitted they were ‘very inaccurate’ in their capacity for forecasting project revenue, surely should be. It’s not enough to identify a problem and accept it. You cannot function properly as a business with this many inefficiencies that are directly impacting your bottom line.

Interestingly, the smallest agencies (with 10-29 employees) felt the most confident that they could ‘very accurately’ forecast revenue at 48%.

So what is preventing the majority of agencies from being able to accurately forecast? Across all agencies, the two most dominant forces holding back forecasting were lack of visibility and lack of time (40%). Inaccurate or disparate data was the third most common cause identified (18%).

As we’ve already seen, update meetings, resource management and timesheeting are the aspects of project management cited as absorbing the most time and resources from agencies.

Agency staff feel like client processes slow them down and take up time. And then these processes mean agencies don’t have the time - or the right information - to accurately forecast future revenue. The circle needs to be squared.

Key takeaways

Ultimately, you can’t fix what you can’t measure. Operational efficiency is a vague concept until it’s translated into numbers. Data, tools and processes need to be centralised. It’s also better to avoid spreadsheets wherever possible. Dodgy data across project management, operations, and finance will only snowball if you continue using colour-coded spreadsheets as a single source of truth. Spreadsheets are an antiquated tool that, more often than not, slow teams down.

Effectiveness and profitability stem from understanding how your people transform time into revenue. Reliable data informs your capacity for accurate fiscal foresight.

Ask yourself what steps your business takes to deliver the finished product. Think both big and small. Seeing the big picture and also the smallest detail will help you come up with the final checklist of ‘process offenders’ that need to be automated or entirely cut out.