It’s in the nature of any good agency in the creative sector to be working on multiple projects all at once. Usually, they’ll be trying to satisfy a variety of clients and their briefs, while trying to stay on top of looming deadlines and acquiring even more clients. Despite this, there are still many design agencies who struggle to turnover a healthy profit. This is despite the fact that they’ve got plenty of work coming in! So, where are they going wrong? One of the main markers of an agency who is able to turn a good profit is their recovery rate. This means the percentage of their workforce’s time that is actually spent on paid client work. The lower the recovery rate, the less likely it is that the agency will be turning a profit, and therefore they are ultimately less likely to remain in business. The recovery rates across the creative sector are actually quite surprising. I think that you’d be shocked to know the average rate! So, in this blog post, we’ll be taking a closer look at recovery rates and what can be done to improve them to help develop a more profitable agency. This should help you answer the question, is your design agency working for free on Fridays? And, what can you do about it?
What are the current recovery rates for design agencies?
To take a better look at recovery rates for design agencies and what they mean, I’ll be using the 2020 Design Business Association Annual Survey Report. This represents the most up to date data there is on this subject, looking at how creative businesses were performing last year. According to the DBA report, there was an average of a 76.6% recovery rate. This means that just over three quarters of staff time is being spent on paid client work across the board. So, essentially design agencies are working for free on Fridays! Of course, some businesses will have a recovery rate that is higher than this (although it’s nearly impossible to get to 100%!). In fact, almost half of surveyed businesses (49.3%) reported a recovery rate of over 76%. The most startling thing, however, is how low the rates are for some surveyed businesses. For 5%, their recovery rate was 25% or less. This means that less than a quarter of their time is being spent on paid work. Spending so little time on the stuff that drives a profit must mean that they really struggle to stay afloat. But what can be done to improve recovery rates for all design agencies? Let’s take a look...
How has the pandemic affected recovery rates for design agencies?
The DBA report doesn’t cover how the pandemic may have affected recovery rates and profits, but here are some ideas of how it may have done so in both positive and negative ways:
- Less client work is out there. Especially towards the start of the pandemic, many businesses scaled back their spending in anticipation of what was to come. This meant that, for many design agencies, there wasn’t as much work available as usual. So, a natural consequence of this was that they couldn’t up the percentage of time spent on paid client work if they weren’t getting any more in.
- More businesses started looking inwards. As the pandemic began to hit hard, many businesses took the opportunity to look inwards and see how they could develop internally to weather this storm. This is also a side effect of having less work coming in, freeing up more time to work on the business itself. So, perhaps this led to less time being spent on paid work, and more time on business development.
- Working from home impacted the day-to-day running of businesses. While this may not have had too much of an effect on recovery rates themselves, if design agencies were in the fortunate position of still having the same amount of work coming in, their profit margins may have risen as they were spending less on costs such as utilities and general office outgoings. And, with less of the admin that goes along with working in an office environment, a few more hours may have been freed up to work on paid projects, therefore also aiding the recovery rate to some extent.
- The current economic climate puts pressure on agencies to deliver projects that are good value. This means that many are put off from increasing their prices as they worry about losing clients as a result. In turn, this can squeeze profit margins and recovery rates as agencies fight to win clients and be competitively priced.
It is important to note, however, that the average recovery rate reported by the DBA in 2018 was around the same level. So, it could be that the pandemic has not really had much of an overall impact. But, it’s worth mentioning these things as they may have affected individual agencies who are looking to improve their rates.
Is your design agency working for free on Fridays, and what can you do about it?
If you’re part of a design agency or other creative business and you haven’t put much thought into your recovery rate, now is a good time to do it. You may be surprised about the results, in either a positive or negative way. Once you know the answer to the question, is your design agency working for free on Fridays?, you can start to do something about it if the answer is yes! Of course, not every minute of every team member’s day will be spent on billable work. There are all the general administration tasks that go along with almost any job role, and they may be spending time on projects for the agency itself, too. Having said that, there are a few things that you can do in an attempt to improve your recovery rates. Here are a few ideas:
Identify what work gives you a good recovery rate
I am a big advocate for creative businesses figuring out what works well for them, and sticking to it for the most part. This is a good way to increase your profitability and efficiency across the board. And, by taking on the type of projects that give you a good recovery rate, your rate should also rise.
Are you charging properly for your services?
If your agency has a good recovery rate but is still struggling to make a healthy profit, it may be time to look at your pricing strategy. Where do your prices sit compared to those of your competitors? Could you start charging more for your services in order to create a better profit for your agency? I’ve already mentioned how the current economic climate means that many agencies feel pressured to keep prices low, so this is, of course, easier said than done. But, if you are confident in the value that you bring to your clients, and that they will pay, considering raising what you charge can take the pressure off your recovery rates somewhat.
Utilisation rates
Utilisation rates and recovery rates go hand in hand. But what are utilisation rates? Well, they are the percentage of staff time that is made available as chargeable to clients. The utilisation rate of each team member will be different. For example, more junior staff tend to have higher utilisation rates, whereas senior staff in director roles tend to have rates that are much lower. This is because more of their time needs to be spent on tasks such as business development and general management for the agency itself. And, larger agencies tend to have lower utilisation rates, as more work is needed to keep them afloat in the way of management, marketing, acquiring new business, and so on.
Utilisation rates have an impact on recovery rates. The lower a staff member’s utilisation rate is, the lower their recovery rate will be as they have less time available to carry out billable work in the first place. So, if you want to improve recovery rates, it’s a good idea to look at utilisation rates and see if they can be made higher, either across the board or for individual team members. Then, you need to look at the proportion of billable hours that are actually billed. What does this ratio look like, and can it be improved? Here, communication is also vital in order to make sure that everyone is on the same page when it comes to the utilisation and recovery rates that are expected of them.
Conclusion
So, is your design agency working for free on Fridays? It’s a very common problem faced by many businesses in the creative sector. While your recovery rates will never be 100%, there are some things that you can do to improve them and thus help you to turn a healthier profit and get the most out of your team and their talents.
I work with creative agencies to help them scale and deliver profitable work. So, if you're looking to master business challenges, including improving your recovery rates, I can help! Please visit my website or get in touch with me today to find out more.
