Whether it's a single agency office, a local or global client, a region or the whole shooting match -- there are ten key metrics that should be used to diagnose and track ad agency operational health. These metrics go well beyond income, staff-cost ratios, hourly rates, overhead rates, multiples and margins, not that these are unimportant.
New metrics are required to track and measure workloads, prices and resource productivity. That's the only way agencies can evaluate and negotiate changes in the fees they are paid in today's marketplace -- and halt the erosion in agency operational health. Without the metrics, it's hard for an agency to know or fix its state of health.
Here are the 10 key metrics:
- The number of creative deliverables in the Scopes of Work. Are the deliverables growing, holding flat or shrinking? Big ideas aside, agencies are in the business of developing and making ads. Not campaigns -- ads. For every $1 million of agency income, creative and production departments crank out between 10 and 30 creative executions of various types, from web sites and original TV ads to ad banners. The number of deliverables is increasing every year. However, deliverables are not currently documented, tracked or reviewed across clients by agency offices. This needs to be a key priority.
- The "workload" that these deliverables represent. Not all deliverables are equal. Some types of deliverables require more resources because they're creatively complex, requiring multiple creative teams and lots of expected rework. Other types are simple and can be executed with minimal resources. Deliverables can be classified by type, and "standard creative time" can be used to create a useful "workload unit" for each type of deliverable. (At Farmer & Company, we've developed the ScopeMetric Unit (SMU) to measure the workloads of 2,475 different types of deliverables in our SOW database). Our research shows that SOW workloads (as measured by SMUs) have been growing dramatically for the past decade. The workloads of agency SOWs need to be documented, tracked and reviewed, using a suitable workload unit for calculation purposes.
- The "complexity" of the mix of deliverables for each client. Not all clients have the same mix of deliverables in their Scopes of Work. Some SOWs are becoming more complex (an increasing mix of complex media originations); others are becoming more simple (mix is increasingly made up of simple adaptations). Complex SOWs require lots of high-powered creativity and other resources (this is good if properly paid-for); simple SOWs are commodity-like, requiring low-cost execution (a different set of skills). What's important is to know and measure the changes, using a Complexity Index to evaluate client SOWs over time. The number of deliverables per workload unit in a SOW gives a measure of SOW complexity. Every agency should have a Complexity Index to diagnose the changes in each client's SOWs.
- Client income. This is an existing metric. It needs to be used in a more meaningful way. Is income growing, holding flat or shrinking? Are income and workload moving in the same direction? Unfortunately, for most agencies, income is headed south and workloads are headed north. Simple graphs of workloads and income over time tell the story.
- Client price. Price is income divided by workload. Is price growing, holding flat or shrinking? What is its absolute level from one client to another? Generally, because workloads are growing faster than income, price is declining. This needs to be known. The price of each SOW needs to be calculated, tracked and reviewed -- and eventually discussed and negotiated with clients.
- SOW headcounts. SOW headcount is the headcount assigned to the client divided by workload -- or the headcount per unit of work. How does each client's allocation compare to desired allocations? To the office allocations as a whole? Which clients appear under-allocated? Over-allocated? With declining prices for SOW work, headcounts are declining as well, and this is means that headcounts per unit of work are declining. This stretches resources. The problem varies from one client to another and needs to be measured.
- Output per creative. This is the output of each creative person per year as measured in workload units (per SMU in the Farmer scheme). How much output is each creative person generating for each client? Which client teams appear stretched (too much output per creative)? Which client teams appear inefficient (too little output per creative, perhaps due to excessive rework)?
- Output per production person. This is similar to the output per creative, above. How much output is each production person generating for each client? Which client production teams appear stretched? Inefficient?
- Client Service & Planning ratio. This is the number of client service & planning people (CS&P people) for each creative person on a client. Client service & planning people perform such a variety of tasks that their allocation cannot be evaluated on a workload basis. However, the ratio of CS&P people to creative people is a good measure for evaluating CS&P staffing. How 'heavy' or 'light' is the CS&P allocation for each client? Why is the ratio 'high' or 'low?' Which clients appear to be too heavy? Too light?
- Profit margin. This is an existing metric, but it is better understood when the other nine metrics are used. Profit margin is largely explained by workload size, pricing, headcount and productivity measures. There is more to profit margin than the difference between income and costs. The use of these metrics casts light on the drivers of profitability and on the current state of ad agency operational health.