Agency Financial Metrics: How To Track And Improve Them (feat. Ryan Watson, Partner at Upsourced)

Hello, hello, hello, everyone, and welcome to today's Zenpilot webinar, featuring Ryan Watson, partner at upsourced, and with our own very own Gray Mackenzie, co founder at zenpilot. Hello, everyone. Hope everybody's having a lovely time today. We're about to certainly. And also to help you learn more about your agency financial metrics, just to let you know a little bit about the people on the call who you'll be listening to today. Not me, primarily. I'm just here to facilitate. But I'm Kuba, content marketing manager at zenpilot. With us on the call, like I mentioned, is Graham McKenzie, our co founder. I mean, this is a Zen pilot webinar. A lot of you probably know Gray, big project management and agency operations of Brain. And he's the man behind zenpilot alongside our co founder, Andrew. But also with us on the call today, and what makes this a very special occasion is, is Ryan Watson from opsourced. And Ryan, I thought I might give you, you know, a sentence or two to introduce yourself, if you don't mind.

I don't mind at all. And I'm excited to be here. Thanks for having me. Yeah. So Ryan Watson, my partner at upsourced, we are an outsourced accounting and CFO advisory firm for agencies. We've been doing this for the better part of a decade, I think over 11 years. And we can talk more about, like, the things that we do. But my background is before this role, I actually was coo, CFO of an agency. So I sat in the operator chair, sold that business. So I've got plenty of empathy for running an agency on both sides and excited to talk to your, to your audience here. It's a cool topic.

Okay, awesome. A little bit of webinar housekeeping before we begin. You are bound to have questions as we present the content. Please drop them in the Q and A, not in the chat. And regarding the chat, don't worry if you're not seeing a lot of messages there. It's set up so that we will be getting your messages. So don't hesitate to drop your messages there. Let's start with what you're hoping to learn today. Kind of steer us in the direction of what you would like to learn the most about. If you've got some questions already on your mind, questions, drop them in the Q and A. Want to learn about something? You can drop that in the chat. Just let us know you're there. You can see us and hear us, and everything is coming to you. Okay, so that's the one thing that I wanted to mention. We'll be doing the Q A. Unless there's a question that's, like, really relevant to what's being discussed right now on screen. We'll be doing the Q A at the end of the presentation this time around, so pay attention to that. And, yeah, I mean, the story so far behind this webinar is that last year in October. Okay. What happened was Ray was a guest of Ryan's on the upsourced YouTube channel. You should go check that out. And we talked all about project management metrics for agencies, and today we're doing this with a roo. So Gray will be grilling Ryan today on everything related to.

Nobody told me about grilling.

We got you here now. Yeah. So if anybody. Anybody here is a listener to the Agency Journey podcast, you know, Gray always comes with great questions, so that's what you can anticipate hearing about today. And I don't want to make the intro too, too long, so unless there's any other notes from y', all, then I guess I'll just pass it over to Gray, disappear into the chat, be answering your questions and dropping links and just enjoying the show. Yeah. Good to go.

Awesome, right?

Take it away, Gray.

Thanks, Kuba.

Let's do it.

I'm excited to dig into this, Ryan. We've got, like, some of the context here is we got a handful of shared clients, and the work that we're doing on the project management side is deeply tied into what the financial operations of a firm winds up looking like. And you all, obviously, the metrics that you're reporting on are going to be very indicative of how adept a firm is at managing projects. And, like, the core thing that we do is charging clients and delivering client work back to them, and we try to do that as profitably as we can. So I'd love to just dig into, like, kind of skimming lessons from the best of the best. Yeah, I think there's two different. The two different pieces are like, what should we be looking at? What are the actual metrics? And then what does good look like? So I know you've got a report put together, but let me. Let me toss it over to you, and let's just kind of start with.

Yeah, yeah, let's do it. And obviously, you know, we've gone back and forth, and so, you know a little bit what I'm going to do, but just for everybody's benefit, like, obviously, as, you know, as we thought about and prepared for this particular, you know, this discussion, around like, what are the metrics that we should be looking at and you know, ultimately in service of like, how do I grow my agency, how do I become more profitable, how do I generate more cash flow? There's a lot of ways for us to do that. One of which is for me just a lecture at like, here's do this and do this. And it's a little abstracted and in some cases kind of hard to like empathize with. So you know, what we decided to do instead is like, well actually, you know what, why don't we do like obviously we sit here in our role and we work with hundreds of a little over 100 marketing agencies and we have the benefit of looking at, at like all of them as a whole. And we can, you know, both from a macro standpoint, like what's going on in the environment, but also like a micro standpoint, like what ultimately sets what. You know, here's, here's all these KPIs you should follow. But like if I step back and just say, well, let me look at the winners, let me look at the top quartile of performance, what's true about those agencies? What is ultimately driving their outsized performance? And what can I as an agency who may not find myself in the top quartile, what can I take away from that? So, and honestly, I'll credit you a little bit gray for the, for, for like that as a prompt and a direction. I think that's really interest. So what I've done is, and I'll share my screen now and get into it. What I've done is I have pulled together the things, like the five things that are primarily metrics driven that are true about our top performing agencies. And so what I thought I would do is I would present those five things in the context of a monthly report that we provide. So, you know, we use this tool called Fathom. It allows us to take financial information and visualize it and contextualize it. It also allows us to benchmark our clients against others. And turns out we actually have one client who exemplifies all five of the things I'm about to mention. So what I thought I would do is like, let me actually take their, their November monthly financial report and use that report to show you this is what the best of the best looks like relative to the important KPIs and trends. So anyway, as you're following along, like this is actually like a real monthly report that we provide. And this is, you know, I obviously sanitize and Scrubbed all the identifying info. But anyway, okay, so I'll go through. So you know, I don't want this to be a monologue gray. So I'll go like lesson by lesson. You can stop me, ask questions, dig in, whatever. A couple of these things I think are going to be particularly relevant to what you all do as well. So anyway, with that, you know, let me scroll through. I'm not going to spend a lot of time on the executive summary. I just left it here because this is you. When we, when we report to a client, we'll, we'll sort of surface. These are the key takeaways, this is what matters. And are we on or off track? Right. So you can see out, out of the gate that this particular client is crushing all the key metrics that we're tracking for them. And these of course are, are custom per, per client. So anyway, with that, let's get into the first thing that is broadly true about all of our clients that are performing in like the top quartile performance. And that is these clients retain revenue to some degree versus rely only on new logos. So like as a foil. And again, we have a lot of these clients and I don't mean to suggest this is a bad thing at all. It just is hard, right? Like the hardest business to run in the agency world is that, you know, I'm a million to $2 million agency. I do branding work, right. I do new logos and, and websites and you know, sort of like brand identity projects, 50K. And I'm working with like, you know, $5 million small businesses, right? Well, the thing about that is like that $5 million small business can afford exactly one of those projects in, per decade, may maybe less, right? And so, you know, I sell that 50k and I feel really good and I might earn a really good margin on it, but there's no way I'm going to go back to that. Well, so I might have a knockout quarter, right? Like a total blow the doors off quarter. And guess what? I wake up the beginning of the next quarter and I got to, I got to put the boulder up the hill again. None of that stacks. I don't get to, I don't get any ability to sort of like stack revenue on itself when I'm in that kind business where I have no ability to retain revenue. So no question the winners are those who retain revenue. And, and I know that the natural belief is I have, you know, retaining means I have recurring revenue, right? A monthly recurring service or whatever it is. And obviously that's you know, that's, that, that's a great model. I don't even mean to say that's preferable. It is a good model if you can have it. It's very naturally retainable. But it's not the only way. Right. Like the other way of course is, you know, you have a larger client. I'm my client, Salesforce, right. And now I have the opportunity to string an annuity of projects together. Right. Like I might do branding for their event in the summer and then I might do, you know, some presentation work for you know, the salesforce marketing clouds, whatever. Right. Like I have different departments, different stakeholders, different ways to like land and expand and, and that looks like, that looks like retention. So you know that, that's like, that's number one. You can see for this particular client their ability to retain revenue is a key metric for us. Right. Because again that's, that's really important. And they, and they look to see, you know, of their revenue, they look for 70% of that to be what I'd call existing revenue, existing customers. These are logos that we entered the year with and they're looking to see, you know, 70% now. They, this business does benefit from a traditional retainer model, but you can see that's only 50 of their business. So 50 is like retainer, 50 is project. And within that project work they're looking for a meaningful chunk of that to come from existing, existing customers. And in this case that's, that's 70, 20, our, our largest client well into the eight figures of revenue. Last year they did 90% of their revenue from existing customers and 10% from new logos. And there's a mix there and there's no perfect answer, but when it's, when it's 0, 100, it's just the world's hardest business model. And you know, if you're that you, you, I'm not telling you anything new. You live that every day. But this is, this is kind of where you, this is where you want to get to.

I think it's worth calling out that the, there are firms who've been able to grow project based but it's not the norm. Like this is like any best practice. Can we find examples that, that don't fit that for sure. But the norm is recurring revenue is awesome. The big thing to call out is the less retained revenue you have, the more crucial your pipeline is. So if you see yourself as awesome as a sales operation for your own agency, you can get away with a lot more project based one off Revenue because you'll have that coming in repeatedly enough that it kind of covers the process. But if you see yourself as like, I love the work and I hate having to track down and you know, go through the whole sales process, you need to be finding your way into a revenue retention model as quickly as possible.

Yeah, totally agreed. And again, the one thing I'll underscore and you know this of course, but just to clarify, like I think you know, doesn't. You can still, like, I'm not suggesting you can't do project work. I'm just saying that, you know, project work for clients that can buy more than one project. I mean we started with an agency who was, I mean, quite frankly struggling at the start of the, of last year. And the number one tweak that we made to their sales process as a, an experiment was to say, like to take your laser beam and focus it on clients that you have worked with in the past, whether you're currently working with or they've gone stale. And, and they did that for the course of like nine months and we just wrapped up their, their 2023 reporting. It's the best year they've ever had and it's because they shifted their, you know, the source of revenue from exclusively relying on new. Which in that, which in a 2023, you know, environment is tough to folks who know them, trust them, you know, believe in what they do, etc. So anyway, not to belabor that that point but so, so you know, I'll scroll through the other. Like I left some of these charts in here just so as you're watching you can see like we're obviously there's, there's other elements of revenue not necessarily related to the, to the trend that we would show you on a monthly basis that different ways that we might sort of slice and dice success versus target. So anyway, okay, number two, I have a feeling Gray, you have a, you have a point of view on number two. This, this probably is, is, you know, I'm, I'm dipping into your realm here. But, but the, the, the number two trend and by the way, in no particular order, quite frankly, if I were to order them, I would probably put this at number one, which is the agencies that, that are, you know, in the top quartile, they obsess over project margins. Right. And, and so like, you know, the foil again is the agency who you might, you know, we have a lot of folks who come to us and, and we talk about project margins and they have you, they have some sort of like Semblance of an idea, right? Like this project went well. I, you know, it, it felt smooth. I think we did well on that one. This one, you know, didn't go well. It drug on and we had several rounds of revision and we even to the point where we've concluded we've lost money. But if you're like, all right, well so, but like what was your mark we, your project margin on that one and how did it relate to that one? The agencies who don't do this well give you a blank stare. The agencies who do this well are like, oh no, here, I'll tell you, I'll tell you exactly. So, and, and you know, feel free to interject at any point but just to like, what we would look at in what a, what a client who obsesses over project margins would do is something like this, right? So again, I sanitize this, but this is this particular client's project profitability spreadsheet. And so, you know, again, like the, the first thing we're going to do is we're going to ask ourselves, so first of all we're going to look at all of our inflight projects and, and calculate like, are we currently on track to make money? Yes or no, right. And you know, again, I'm going to, I'm going to look at a high level, like, what is my target? So this particular business, I should say as you're looking at these numbers, is a consultancy. The margin profile for this like engineering consultancy is different than like a branding agency. So a branding agency might target like 50 to 55% gross margins, 60 plus percent project margins, and like a lower amount of utilization. This business, they target a 40% gross margin with like a 45% project margin because their utilization is like 100%. Right. Because they're longer projects and they're more predictable. So anyway, that this, you might see these numbers and they go, shoot, these are worse than mine. This is actually a little bit of a different business. But anyway, this particular business is targeting, you know, 45 project margin in order to hit their goals. And so the first thing they're going to say is, okay, we're, you know, we've, we've done that in total. But then we're going to look at individual project margins like so gray. I mean you, you, I suspect you have a similar point of view. But for, for, for our clients who aren't this, right. Who are not hitting their project margin, they have a project, you know, they have a gross margin problem, which is a function of the Project like what they're doing on projects. And you know, generally speaking it's not obvious that there's like one clear answer. It's not, it's not usually the case that like, oh, that's uniformly distributed. All of my projects are doing poorly. It's, it can be true, but it's also not usually true that it' oh, my project margin is bad and they're all bad because like I just am. I just have chosen the wrong price, right? Like my average cost rate is $100 and I'm just going out there charging 120 and oh, shoot, that, that doesn't work mathematically. Like, that's not usually how this goes. Usually how this goes is that some of your projects are pretty good and some of your projects are pretty bad. And the reason that some of your projects are pretty bad can be varied, right? They can be, hey, I'm really aggressive when I go price. Like I have this optimistic view of how many hours and turns out that's not how it always works. Or we got a terrible handoff between sales and delivery. Like I had this scope in mind but I wasn't very clear to them. And so when the client asked for more stuff, they thought, oh, that was included and I didn't. Or it could be project work. And the whole point is to say like, at least in my experience, I think it's difficult to identify those trends in a top down manner. Like to say, oh, it's clear that we have a handoff problem. More often those trends are identified in a bottoms up manner. In other words, I'm going to look at my individual projects and see which ones are not performing. Okay. Then I'm going to diagnose why is that project not performing. Okay. And then I'm going to solve that particular project. But I'm also going to say, does that rhyme with a problem I have identified on another project recently? And I start to see two dots and three dots and three dots make a line. And now I have identified a theme that I can solve in a more holistic way. Like, oh, our handoff between sales and delivery is broken and therefore I need to solve it. But my point to say of all of that is in our experience, the way you get to that, aha, oh, I have a big solution is bottoms up project, brick by big, project by project. And it looks like a process a lot like this does that. Would you say that conforms to your view of the world Gray? Or how does that compare to what some, what you guys see?

Yeah, I Think for sure the. I think it's totally fine to have strategic reasons to make less money on a project. So I get that. You know, I say like ClickUp's largest global customer came to us for help and wanted a price that was unrealistic for the work. And like, it's fine to make a decision about, hey, no, they're the largest customer. They definitely have the money to pay, so we're going to charge them what we normally charge or to make a strategic decision and say, hey, there's some discount for the volume of work. And because we want to win this specific piece of business to be able to tout whatever it might be a, you know, strategic in terms of referrals they can do, it might be a nonprofit you're trying to help out. There's all kinds of different reasons to do that, but you're not measuring. It's really hard to know where that's happening accidentally and where that's happening intentionally. And you're, you know, you're looking for the bottom, the, the underperformers and figuring out like the easiest way to solve any of this is just charge more. And at some point the market has a cap on what you're able to charge. And so that's the point where you need to figure out, well, how do we be more efficient? Or is this just the wrong type of client for us to take on the right type of project and are there enough of the right types of projects? So, yeah, all of that, like, subject area is all tied into project margins, but it all stems out of having visibility into it. So our.

Yeah, yeah, go ahead.

Like, we've built the profitability and utilization reporting add on so that ClickUp users who are using a specific database can get this data in real time without having to do all the legwork to, to pull this together. Which is why you get the blank stare all the time. Because it's like, oh, there's a lot of like, I need to figure out how we recognize revenue and all the different pieces that are tied to this. Yeah, but I think this is 100% if you're not using ClickUp already. If you're not, you know, if you don't have this visibility somewhere, like throw it in a sheet and get it built out. This will uncover so much stuff that is causing your ultimate profit to take a hit.

Yeah, totally. A couple things I'll say. First of all, yeah, I love that. And any opportunity, like, you know, any opportunity, like we have some clients who will do a very manual process for things like utilization in this client included utilization, utilization forecasting and others, you know, will graduate to the point we can use a tool like Parallax or, you know, something like that. Right. So, you know, I'm always like, let's solve the process first. Right? Let's do this. Solve the process first and get the data, and then let's try to find a way to do that more efficiently and automate that. Right. So love that. I'd be interested to see your tool too, by the way. Number two is. Yeah, I mean, I think the biggest thing, like, you know, as I was, was listening to you describe some of those things. I think, you know, the thing that I just always like the. The PTSD I have from sitting in so many of these client meetings is, you know, we kind of all intuitively know that, like, I can think of one client in specific, and we have margin problems and we just kind of intuitively know it's probably a little of this. It may be a little of this. It could be a little of this. But these are very squirrely problems to solve in the abstract. And there are a lot. And there's. By the way. So the answer is to do it in the specific. Right. Like to say, okay, we've like, let's apply that to this specific. Is that exactly what's doing this? Can we solve it here and then can we use that solution to give us leverage elsewhere? But that's work, right? Like, that's a little bit of, you know, what I describe as, like, crawling through glass, which, hey, guess what? That's the jobs we do. That's at the end of the day, like, we are. We are selling service and delivering service. And how. How well we manage the quality and the efficiency is. Is a function of, you know, how much money we make or don't make.

Yeah. Have you ever done this exercise, Ryan? Have you ever asked prospects or clients coming in to just like, outline their clients and say what? Who do you like? Just rank them by most profitable to least profitable. Because I've done this a handful of times, and the vast majority of the time, by far the most profitable, by far the least profitable. Like, they nail that totally. And there's all kinds of discrepancies and total oversight. When you get down to anything other than the absolute outliers where they think like this happens almost more commonly than not that there are significant clients who are either under margin or way more profitable than they thought, but they're not close enough to those specific clients and just have no idea. Once you actually get in and break it down. What it looks like the number of times that they're surprised around that is kind of astounding to me.

Yeah. And you know, and a tangible example of that I can think of kind of recently is you know, clients where obviously a lot of agencies, you know, you'll have, you'll have owners that are still involved in client service to some degree. Obviously smaller ones more, more frequently than larger ones. But yeah, so the ones that they're doing the service on, they'll have an intimate experience with and they're probably going like relatively smoothly. And so they'll feel like those are pretty profitable. And some of these where you have some more junior folks that you, you, you may either just don't know or be so abstracted that you assume it's going a little bit worse. But you understate the, the impact of the cost rate which is like sometimes you like I see the, the total hours, but like the leverage model is just so much different on some of these other projects. Turns out those are more profitable for you and not just on a dollars basis, but on like a mind share basis. Right. It's just a more scalable model. If I can do more of that and less of this.

Yep, for sure.

Cool. All right, so I guess the, the, the, the, the only thing to say to kind of wrap a bow on project margins is just like, look, obviously as you're thinking about, like this is obviously the thing, this is what drives the business. And, and you know, your project margin is, is the revenue you make less the, the cost you spend directly on those projects. Right. The utilized time of your team. Right. Then your gross margin is, includes both the utilized time of your team and the unutilized time of your team. Right. So project margin is probably the most important driver of gross margin. And so if I do gross margin or if I do project margin well, in all likelihood I'm going to do gross profit well as well. So you know, for this business, we've shown their gross profit and they are also performing well against their 40% gross profit number. Okay, I bet you have a point of view on this one too, Grass. I suspect you fun one here. Pretty, pretty, pretty meaningfully so. Number three, the best in the best agencies hire with data, not optimism and sort of sub, sub note, they build flexibility into their staffing model. And so again I, I always like to start with the counter. Right. So the counter to this would be. And I see, you know, I have these conversations all the time which is like two, two Versions of it. One is like, all right, I get it. My utilization is, is poor. I've got, you know, I have too many people. But we got a lot of things cooking. Like, my pipeline is feeling good, right? Like, I, I, I couldn't possibly part with these individuals because, like, I'm feeling some mo, right? And I got some momentum or even worse, like, hey, I'm entering the year and we got big plans and I need X, Y and Z expertise so that I can go sell it. And so I, I gotta like, front load with the talent, right? That's, that's the, that's the more destructive version of it. But, but, but even on the prior, like the, I'm feeling really good. Well, here's the problem, like, the problem with that and is what if you're, if you're an entrepreneur, if you're an agency owner, you're listening to this like, you are an optimist by definition. Like, because, I mean, you know, if you weren't an optimist, if you were a pessimist, you would not do this job. You would optimize for net present value of cash and you'd probably go work for somebody else. But because you're an optimist, you see the opportunity of being in the top quartile and you believe you're there. And most of you are, right? But because you are an optimist, you see everything through the, the, the, the most rosy lens. And while that's a great, that is such a, that is such a great skill, don't let that strength be your undoing. And in making tactical, specifically staffing decisions with that same lens, incredibly destructive, right? So the ones that do this well are using real data, right? Which is to say, all right, I have this team that is, you know, I have this team and I have this amount of booked revenue, right? Whether it's projects that are booked and are coming or recurring revenue, whatever it is, I have this amount of booked revenue, right? And then I, which, which may use some all too much of my current team. And then I also have a pipeline, right? Like, I also have opportunities that are in my pipeline and I have applied, and this is hard, but I have applied some degree of objective weighting to those pipeline, right? Like I am, I'm saying, okay, these are these opportunities, but if I use history or I use some other form of objective weighting, if I, I have sort of an overall best guess expectation of what my next 30, 60 and 90 days are going to look like from a demand standpoint, and I'm going to use that data to make hiring decisions. And if that data, despite all this good vibes that I'm getting in the sales call, if those are all top of funnel and if I do my waiting, it don't amount to anything, then you know what, hanging on to that person just because I've got good feels, it's a poor choice. Right. Similarly, if, if the data suggests that, you know what this, this is, this revenue is going to stack and I'm understaffed, you know what takes 90 days to go hire a W2 employee. I need to get on it right now. And the best agencies understand that math and are, and are collecting that information and are making their decisions that way. Like this one right where you see and I'm only, I've only gone out 30 days for a couple of reasons. But you can see like this here is my capacity. I've hired some folks going into December and my booked and weighted are actually the same. So the yellow is below the red. I've got excess capacity. Right. So I just hired somebody. I probably wouldn't let them immediately go, but I certainly have the capacity to sell into and I'm expecting a little excess capacity, lower utilization going into that month. So anyway, that's the, that's the, that's the exercise that, that I assume that probably comports with a lot of what, what you're recommending for your, your teams. Greg?

Yeah, I think the, like the two things I'd tag onto that one is you say that today and that resonates at a totally different level with everybody who's here on the call versus if you said that 18 months ago, because 18 months ago we were going through, you know, the best bull run for agencies in the last ever, you know, two decades. Yeah, probably, probably pretty much ever coming like the tail end of 21 or.

A lot of free money.

21 was awesome. 22, the first half was awesome. And then things started to slow down a little bit. And so if we told everybody that, you know, Q2 of 20, 22, everyone's like, yeah, but that's not what my data says. Like, my data says we just keep growing forever. And now everyone's lived through this for the last year and said, oh shoot, we're fat, like, we've got to cut back. There's a lot of experience where this is going to resonate more.

Yeah.

And I think the, I mean like figuring out what you're. We'll probably talk more at some point here about utilization compared to what your profit margin or your, you know, the gap between your average billable rate and average labor rate or whatever language we want to use around that looks like. So I think that's certainly part of what your utilization target should be. But there's all the, like what you said is 100% true. You know, our greatest strength of being optimist is the reason we're in this business is the greatest weakness in the, the reason that we wind up falling down here over hiring and not wanting to, to cut back at all.

Yeah, well, and by the way, we can talk, we can touch on. So let me say, let me say a couple of things. Let me touch on the thread that you just, you pulled for a second, which is the, the sort of like target utilization rate. And you know, this is how we are viewing this. And great. Feel free to disagree, agree, edit, whatever. But you know, again, generally, you know, our, our target gross margin. So I had this like, this may not, this may resonate, may not resonate. I'll just show it because I'm going to talk about it, which is like again, the, the what, what I'll call like the margin waterfall, right? So like if I'm an agency and I'm targeting a 50% gross margin, that is a combination of how much money I'm making on my projects, right? Which is the, you, you know, the, the revenue less the cost of the time my people are spending on projects and, and my unutilized service wages, right. Which is the time my people are not spending on projects, right. So my 50% gross margin assumes a target project margin and a target utilization or a target under utilization, if you will. Right. And so you know, again, like the, the, this particular business, if I go back over here, their Math is a 45% project margin target with a 90 utilization rate. So you can see that they were at 94, a 90 because again, these are very large, long term, very predictable. That is very atypical for a more traditional agency that might be in like the 65, 70% blended target utilization. But anyways, they're 90 and, and in order if they hit 90 and 45, then their gross margin will be 40 or roughly 40. Right? That's the idea. And so generally what in this exercise, the should I hire? Should I not we have sort of like a, a collar, right? Like a utilization collar, in other words. Okay, I mean this caller is a little bit narrower because of the predictability of this business. But you know, let's just use round numbers like my caller might be. And by the way, this is often a little custom for specific roles, if you can get to that point. But anyway, let's just say my collar is like, my target is 65. Right. As a blended business, in order to hit my, my, my goals at, let's say 75, I'm, I'm redlining. Like my team is doing too much and I'm not flexible enough to take on new work or to do the oversight that is required. 75 would be the point where it's like, this is, this is redlining. Or, and, and 72 is like, this is the point we gotta hire. Right. We're approaching redlining to the point where it's time to fire up the sales engine. Because by the time I get somebody in here, I'll be at 75 or above. And on the flip side, you know, my, my, the bottom of my utilization might be 60 or, you know, the numbers don't matter. But the point is I have a, I have a low end which is, hey, I'm not hitting my target, but I'm not hitting my target by so much that I have excess slack that is going to meaningfully deteriorate profitability. I'm going to have to let some air out of the, the staffing model and we're going to have to let go or reduce or whatever that looks like. How does that compare to how you guys?

I think, I think it's exactly right. I think the, like, if we could dig into the psychology of this for a second too. Yeah, there is a lot of. I don't want to let this person go. They're a key member of the team. They've been great. They've done nothing wrong. We just lost clients because the economy's been tough. And so, you know, and also, I don't want to scare off other people on the team that we're letting someone that everyone likes go. And so we hold on to people for longer than we ought to. What happens is we just all, as humans adapt to the new normal. So we're underutilized. We're sitting at 50% or 45%, a number that's definitely not sustainable for the business. But we think we're doing everybody a favor by keeping them on and everyone gets used to that. And now you finally do turn things around and people are like, whoa, 70% utilized. Like, this is crazy compared to what I had before. The workload's just through the roof. You know, it's like we're barely touching where we need to be. And I've got all this catch up to do? Yeah, like I'm not happy. And now you're losing some of your best people anyways and so you're not doing anyone a favor by staying too fat staffed for too long.

Yeah, I mean I can't, I couldn't agree more. I mean there's so many, you know, like it's. Yeah, I, I couldn't agree more. And also like look, if you're staying too fat for too long, you are losing money. I mean it, you know, like this, this, the thing I say a lot internally is that like you, you always read these stats like a substantial amount of, of households, U.S. households live paycheck to paycheck. Well, a similar percentage of businesses live payroll to payroll. And, and part of the reason is because of this, right? It's, it's, it's hanging on to folks. Well, eventually a stiff breeze is going to knock you over and you just ask yourself like am I, do I want to save this one person at the risk of all of these people? I mean through that, through that lens, is this, is this really doing anybody any favors? Probably not. The only other thing I'll add to this is, and this is not a, this is not a, a solution to that problem, but it is a mitigant to that problem, which is a lot of the, a lot of the agencies who have figured this out mitigate this risk to some degree by building some flex into their staffing model. So some percentage of their way of their services are being done by freelancers. And it's just an escape valve. Right. So you obviously look, we're matching supply and demand. Most of these are project based, right. Even if they're annuities, annuities of project social projects. So like your revenue does not go like up and to the right. It's up and down. It's ebbs and flows and it's like. So you know, you, you are, you are going to have to try to match supply and demand as best you can. And freelancers allow you to let the escape valve out a little bit or flex up. Right. If you get a big project and you're at risk of saying no, so you know, the right amount of freelancers relative to, you know, W2S does not have a firm answer. It could be zero if it's, you know, in certain cases. But that is a, that is a, a tool. But of course, keep in mind that you know, what you, what you get in flexibility, you give up in your average cost rate. Right. Naturally, freelancers are more expensive on a per hourly basis. And so this is you choosing to, to inflate to some degree your average, you know, average hourly cost rate for the sake of having this flexibility and striking that balance is very like client, you know, very business, business model dependent.

Yep, there's some great questions around that specific topic, but we'll get to that in the Q and A. I want to let you, I'll get out of the way and let you keep going here to number four.

Okay, cool. Well, you know, the good news is the last couple are a little quicker and straightforward. So, so then, yeah, let's do that. Let's get, let's knock these out and let's get into the Q A. Okay, cool. Number four. You know, this is, this is actually a really good segue from what we were just talking about, which is the sort of natural peaks and valleys of, of demand in a project business. The best agencies are holding on to cash, right? These are agencies who have, who have stockpiled sufficient cash reserves so that, you know, if I have no cash reserves, then I'm riding that, I'm riding that wave up and down. I'm, I'm laying off immediately and I'm hiring immediately. And because I, you know, I have no ability to pay for people if I don't have money coming in, obviously that's no way to live. And so, you know, we recommend, you know, roughly three months of fixed operating expenses sitting in cash reserves. If you're a recurring revenue business, you can, you can sustain a number less than that, probably two, maybe even a little less than two. And if you are a, you know, a, a long sales cycle, highly unpredictable hits business, then you probably need to stack maybe four, four plus in, in cash. So you know, this is an example of obviously a client who has done a wonderful job at that. And even, I mean, look, there's no, there's no like too much. I mean some of this is like a personal decision. But I can tell you the way we, we typically advise clients is, you know, get to the point where you have your cash reserves and you know, this is probably a S corp or a flow through business. Just distribute the rest, right? Like put, take, take the money off the table and put it in your own investment vehicle or do whatever you want with it. That's one of the benefits. These don't have, these don't sell for high multiples. They're not software companies. They generate a lot of cash if you do them well. So take it off the table and enjoy that. So, you know, this, this, this would be an Opportunity for somebody to do that if they, if they so chose. But the, the, the, the, the two ways to do this better. One of which you'll see this client does quite well, which is they collect AR like it's their job because it is their job. And so like 20 day, 21 days of like average, like I submit it to, I get a cash check in the mail. That is top of the class. That is a plus, really good job. Especially if, if you're working with like, you know that that may not even be achievable depending on if you have enterprise level clients. You know, at my agency I think 120 days was what P and G was paying. So like you know that that's pretty tricky. The other thing that agencies do relatively well, that this, this client I don't actually think is taking advantage of this, but is using customer funds to fund your operation rather than debt or something else. And you do that through deferred revenue. You do that through like billing up front and collecting up front. Like as an extreme example, which again is there were reasons why we were able to do this, but at my agency, you know, we, we were an influencer marketing agency and generally we would, we would invoice the second the IO was signed for 100% of the project that would be due in 30 days. And in a lot of cases it would be due before we would even kick off the project. Like we would have all of the money to pay for the work before we did any of the work. And again there's, that's, that's doable to varying degrees. But that made it super easy. And we had like a little AR line of credit. We would, we were able to that into a cash in one day. And so we had far more cash in our bank than you know, the revenue we were recognizing because we were growing and we were pulling cash forward. If you can do that, then you can grow and invest a lot faster anyway, so that's the cash piece and the fifth and final is, and this is to some degree a bit unsatisfying for folks who are unable to take advantage of this because there's not a lot you can do about this. But the most successful clients of ours are big enough to enjoy what's called operating leverage, right? And so basically what that means is like look, if I'm a 500, there are things that I need as an agency that I have to have and pay for that are, that's true whether I'm a half million dollar agency or a $5 million agency. Right. These are just fixed monthly operating expenses. And, and by the way, when I buy them at a half million dollar agency, those costs do not 10x. By the time I become a $5 million agency, they might 2x, they might grow 50%. I mean, you know, generally like they're not going to grow. The idea is as your revenue grows like this, your up, your overhead grows like this. Right? And so just naturally you don't have to do anything else better. Your, your gross margins don't have to get better project margins not to get better. As long as revenue grows, your profit margin will improve because the overhead is going to decline as a percentage of revenue because it's just not going to grow as fast. And if it is growing as fast, spending too much, don't do that. That's not the way to run this business. Right. Get the, get the benefit of operating leverage. This particular client is in like the $3 million year range. And so they're honestly just on the front end of enjoying this. They keep doing a lot of this stuff, this 13% which by the way is incredibly efficient as a lot of these consultancies are. This thing's gonna go south of 10 and that, that, that 4 percentage just gets directly added to this 16%. Right. So that 16 and a half percent operating profit becomes a, let's round up for fun, a 21 operating profit margin just for free, right? You don't have to cut budget. You just keep doing what you're doing and you're growing revenue and you just become more profitable. And that, like I said, the, the, I guess the counter to that is if you're a million dollar agency and you're doing a bunch of project work, a 20% operating margin is hard to achieve because you don't have operating leverage. Right. And so some of your ability to be profitable and pay yourself more money and all those sorts of things, some of that is just a revenue problem. It's just a revenue opportunity. It's just a, you got to get bigger. And that's just a, that's just a reality of how these businesses work. Any business works.

Yeah, that's awesome. I want to pull Kuba back in here to walk to the next steps. The one thing I like, project margins back to your earlier point are such a big piece compared to operating leverage where I see teams pick up operating leverage but not improve operating margin. It's almost always because they are, you know, they're scaling their, everyone's getting raises internally, we're growing. That's Great. Everyone's earning more money and they're not adjusting pricing at the same time. So that that project margin piece get out or get. Get behind basically of. Of the extra skill that they're doing. So operating leverage is an awesome concept, and you just need to make sure that all this stuff works together. So, Ryan, I thought, yeah, like, we could spend another hour and a half just on those metrics, but super cool to see, like, hey, here's what an actual agency looks like. Here's the types of reports, and I think that bleeds super well into Kuba pulling you back up. Like, I give a shout out to what you guys are doing, and it's, you know, I'm sure this question will pop in at some point, and you probably answered a lot like, what tool is that? You mentioning that that's fathom right out of the gate. Where does that data pull from? Like, how can we get that is, I'm sure, a recurring question. So, yeah, I'll let you. I'll let you interject here, but maybe we can go back to some of that stuff during Q and A.

All right, well, thank you, first of all, for the awesome presentation. This is a little bit of an intermission between the main content and the Q and A, which we'll get into in just a second. But some of you might be thinking, how do I learn more from Ryan? How do I leverage upsourced expertise and a couple of words about Zenpilot before we move on? So, first of all, for upsourced, definitely check out their site and go to the Contact Us page on the site to start working with Ryan and his team. Caroline from upsourced is going to drop the links in the chat in just a second to make things convenient for you. There you go. Upsourcedaccounting.com contact us. And the second thing I want to tell you about is one of my favorite YouTube channels, and that's the upsourced YouTube channel they're dropping. Just a lot of good stuff there. Running a podcast, which I recently had a chance to be a guest on, so you can check that out as well. And if you want to see the first iteration of this webinar series, it's also on the upsourced channel. So go to YouTube upsourced and you'll find that channel there. For my part. Sorry, our part, I should say I have a very brief screen share for you. Let me just pull that up. Okay. Are you seeing the screen?

Yes.

Got it.

Okay, so two words about Zenpilot. We're ClickUp's largest and highest rated solutions partner. We can help you build a watertight project management work management system based on ClickUp and based on Timor.com actually. You can learn all about that on Zenpilot.com basically, we help you fix project management chaos and lead you through the last project management implementation you'll ever need because you'll be running the Zenpilot system. I wanted to pull this up just for a second here. These are zenpilot profitability reports. Something that's really relevant to the topic of this conversation. Where we can get you at Zenpilot is we can give you this full view of your profitability per project, per client, all based on your ClickUp data. So if you're interested in that, you should check out again zenpilot.com under our Solutions dropdown. There's a little bit of. Yeah, great, just dropped that in the chat. So go to the link that Gray just dropped and you can learn more about that as well. We've got a live stream recording about that as well on our YouTube channel, so go check that out. Next up, we've got something for you. Ah, right. You know what, in the interest of time, if you want to learn about the three keys, you'll have to check that out on our site as well, but free stuff. We've got the ClickUp bundle for you today, which includes our ClickUp for Agencies guide, a full client onboarding process template built in ClickUp, and our Client Journey template. So if you want to get a taste of what the Zenpilot system is like for project management and for fixing your agency operations, go to zenpilot.com ClickUp bundle. It's on the screen there and it'll be in the chat in a second. I think Gray is assisting me here, isn't he? Yes, thank you, Gray, so much for dropping that in the chat. And that's where you can have a taste of the system. Run some of this yourself. And of course, when you're ready, you can go to zenpiler.com call, meet the team, get your blueprint, which is what we call the kind of diagnosis of your project management, a full plan for how you should set up your project management, and recommendation of whether you should be building on ClickUp or teamwork.com in there. I'll let you look at our testimonials for 15 seconds here and we'll get right into the Q and A. Actually, I'll leave that pulled up for just a second. We've got seven questions in the Q and A that I can see. Ryan Gray, did you have any preference as to which one? Is there one that you're looking at, you're just itching to answer, or do we go chronologically? Anything else that you might want here?

I don't have any strong opinions.

Whatever you think, Ryan, let me throw stuff at you. Andrea asks, can we assume existing non recurring is from upsell? This is back to basically recurring revenue versus recurring revenue.

Not necessarily. I mean, again, in these cases it's not upsell. This is like, you know, the example would be Salesforce. I did a project for Salesforce last year. I did another project for Salesforce this year. Right. It's a different thing. Might be the same buyer. Might be a different buyer in the same company. The point is I didn't have to go get a new msa. I didn't have to go break into Salesforce. I landed and I expanded. And that's usually what this existing non recurring looks like.

Yep. I'd say that's more commonly where I see that as well. All right, Michael jumped in with a couple of good questions. Is that chart recommendation for FTEs versus Freelance 9 to 1. Is that overall by role? And you kind of hinted at this earlier, like, hey, there's not necessarily a magic.

Yeah, yeah, that's all. Yeah, that's all. I would say it's not necessarily reco. I mean that to answer your question, that is in this case it's like my, my total service wages or Service costs are 90% W2, 10% freelance. But that is not what I'm putting forth as a recommendation. Somebody here actually in the chat has a 8020 model which we can talk about that question. But. And I think in certain situations that's great too. By the way, I have clients who are 100 freelance. And you know, and that's. That can work. Right. It's. It's, you know. So there's no answer. But the. Yeah, anyway. Yeah. No, no. No specific answer.

Yep. This might be a translation of that question, but what percent would you recommend seeing freelancers at before you hire in house? Like we're talking about, like. Well, anyways, I'll let you take the first stab at that one.

Yeah.

So.

Well, again, I don't have a specific answer of like what percent I would look at. I, I think the, the, generally speaking as an agency is going from zero to one. Right. You're. You're often starting with heavy freelancers because you don't have a choice. Like you cannot afford the. Especially for a multidisciplinary offering. Right. Like, I need design and development and strategy and copy and whatever. Like, I can't hire four people when I don't enough revenue. And so I'm gonna, you know, I'm gonna. I'm gonna use freelance talent. And so, you know, this is an unsatisfying answer, but unfortunately, a lot of these are more nuanced than they are, like, formulaic. But it's the point where the. The like at zero, my. The like at zero, I need. I require flexibility. I cannot afford to pay for somebody full time. Right. So flexibility is my number one thing. At some point, reducing my cost per hour so that I can earn a profit is more important than my exclusive flexibility. Right. And so, again, that. That is the point where, okay, I have enough work and enough comfort that I can achieve a minimum utilization rate for that individual such that it's worth it for me to hire them. And I'm going to do that in lieu of a freelancer. So anyway, that's the way of thinking about it. But the percentages or the thresholds may differ based on.

Yeah, I think if you had to. If you pinned me down to say, like, because your answer is the right answer, but that doesn't get retweeted or reshared because that takes four paragraphs to explain. So I think it breaks into a couple different buckets. How bullish are you on more demand for the same thing happening? And if you're super bullish, then I'd pick a ratio here and maybe say, like, hey, when you're paying 50% of what you think an FTE would be to a free freelancer, and that could be because they'd be the exact same hourly rate and you're using half their time. You know, they're spending 20 hours a week on it, or it could be because they're double the rate, but they're spending 10 hours a week on it or whatever.

Yeah.

You know, if it's in that, hey, I know more of this work's coming. Like, go ahead and go make the hire if you've got the cash to do it. If it's more experimental, I don't know if we're going to do the service or not. Like, get that ratio an awful lot closer to 100 or even over 100. You know, I know I can save today if I plug in somebody full time. But if you're not sure how much demand you're going to have or you're not very optimistic about that, you know, you may still want to Be paying too much, you know, theoretically, to a freelancer.

Yeah, I think that's right. And look, it goes back to the same. I mean, you know, it's, it's the same question of, like, do I hire or do I not? Right. You have that utilization collar. So you describe in your example, you're talking about like a 50. Like, do I have 50 utilization on this individual? And does 50 work in my business? If so, let's do it. And if 50% doesn't work in my business, then I, you know, I can't do it. Right. So it's the same kind of framework.

Yep. I think, Andrea, if there's anything else you want answered. You asked again about how much the subcontract model plays into it, and that's the 80, 20 mix that you mentioned, Ryan. Yeah. Clarify if there's anything else that we didn't cover there. Michael had another good one. Are you considering utilized wages as part of your cogs in your AGI, or is it part of opex?

Yeah, no, it's definitely in cogs. Right. Like, let me just be, let me just be very clear on, on how this breaks down. So, like, my AGI in my little margin thing was, is. Is revenue, effectively. So you have gross revenue. You have gross revenue, and then you have freelance out of pocket costs. Right. Subtract those things out. Now I have AGI. So AGI is like real revenue. Right. Okay. So I have my real revenue. And then this is, this is how we view the world. My service wages utilized or unutilized are cost of goods sold. Right? These are cost of goods sold whether they're doing work or not. Right. Whether they're, if they're doing work, they fall into my project margin. If they're not doing work, then they don't. But they're all of my utilized or. All of my wages are in cogs. And my gross margin, of course, is a function of. Or my gross profit is my AGI less my, my service wages. Right. But. But service wages are in cogs and then SGNA wages, my salespeople, my marketing people, my HR people, they are in opex.

Cool. We got a couple other good ones here. Thanks, Andrea. Let's go to this top one we might have already mentioned. I think we might have covered this a little bit in the contractor fte. What does that look like? But Onsh asks how to solve the demand and the supply. Like, which one comes first? What's the chicken and the egg here?

And supply resources we have and new train resources. Yeah. Well, to Be honest, I might be talking about demand and supply a little bit differently. I would, but let me, let me try to parse the semantics, I guess, which is like do. So the question is, and you tell me gray, if this sounds right to you, the question is, do I solve resource, New resources I need to go get versus resources I have, but I need to train and make useful for what I have. Like, how do you view that question?

Yeah, I just want to make sure I'm answering the right question and I skipped over the parentheses part. Thinking, oh, it's normal is demand and supply. But you're right, rereading it, I don't think it's normal demand and supply and normal demand and supply. One thing I'd, I'd throw in there if you got normal like chicken and egg. I don't know if I'm going to sell enough. You know, we're in that in between state. There's all kinds of mechanisms you can use to be able to create demand first and buy yourself time windows to generate the supply that needs to come with it. So the common example is like foot in the door offer in the Zen pilot case, like the blueprint that we do, we're going to spend the first two weeks building out this basically playbook of what needs to happen for you. What does ClickUp need to look like? All the other things that need to get fixed here by going right into that, that gives us some flex on the back end to say, hey now, like you wanted to get started solving the problem today, we got started solving the problem today. Most of the time we can go directly out of that into the project. But if we are significantly over capacity, we can buy ourselves or stagger things and say, hey, let's, you know, let's start on this in two weeks or whatever. And clients are going to be way more like, that's just a simple example from zenpilot. But clients will be way more accepting of that kind of time delay once there's already been progress made and there's stuff that they can go work on in that interim. So anyways, there's a lot of, a lot of opportunities there.

Yeah, no, yeah, I think that's right. And I guess the only other thing, if I were viewing demand, which is like people need my services and supply, meaning I have people that do services. Like in general, I would. It's the same hiring example, right. Like I look at what I have and what my sort of objective weighted pipeline is, and if I'm overstaffed, then I have to Solve the supply first. Right.

Regard.

Like obviously I have to go get demand regardless. Right. Like you can't solve one or the other. But if I have too much supply for what I have and think I will get, I have to solve the supply now full stop and then I can go work on demand and the best problem to have in the world is I have to go higher again. What a wonderful thing that would be. You know, if, if, if that's the sequence of events.

So. Yep. All right. Two others. I'm gonna give you the easy one first which is what other tools or platforms do you recommend for traffic tracking profit and margins based on projects and retainers and the ability to track. So you.

Well, I mean.

Oh, go ahead.

I think maybe ClickUp and Zen Pilot has to be part of what I would suggest. Right. Because you, you, you, you guys do this really, you do this really well. You have a good thing. I mean my answer to this question, I love giving the right answer, not the satisfying answer. But my, my, my overall recommendation is like wrong question to ask which is to say like what I want to do is create the process. Right. Ultimately the, you know, you saw that what we are using is like Google Sheets, right. And to be honest with you, almost eight problems out of ten I'm going to use Google sheets because I can get up and going really fast. I can make it do exactly what I want. And the thing that's harder is like how do I get the revenue data, how do I get the hours data, how do I get all the other out of pocket stuff? Yeah, what I, what I will say is like you know we, if you, if you are going to do this stuff there's, there's, there's lots of tools out there. Right. Like we love, we like harvest. Harvest is like a good time tracking tool. It also allows us to do some like capacity planning. It also allows us to do a little bit of, of profitability. So having like a good. But, but my, you know, and then obviously we use like you know you have a good GL. So we use either QuickBooks or 0 for us to actually do the rev rec. These are the, you know those are, those are the primary, a couple of the primary inputs but there's a lot of other things. So anyway, I mean I would almost defer to gray gray. Like what do you think? Because we often are focused on process and our tools are tool sheets.

Yeah, I don't think that differ from that. Like all of our, so like huge transition point for us was bringing on an outsourced like fractional accounting, CFO firm. And it shocked me at first how much wound up back in Google sheets. So I think to the point of like, don't, don't overcomplicate it. Make sure that, like, the core data is right. Makes sense. I think a lot of this is just like the starting point for all this because we could be, you know, we could do a whole nother hour just on this. The starting point for all this is figure out what that scorecard is. What are the metrics? And that's what I wanted to get today is like, not everybody on this call is going to go hire you guys and have a fancy fathom report and Google sheets for all the stuff that not everyone's in this situation. Hopefully some folks are in the situation where that should be the outcome. But seeing the scorecard, what metrics do we need to have? Like, you can figure out a way once you're clear on what you need. And too often, because it's not our query of expertise, it's like, I don't know, there's 57 different financial metrics. I read this blog post and said I should measure. And like, I'm just not going to do any of those because 57. Exactly. So a couple core things is like, that's the process pieces. What do we actually need to find? And we can go figure, like the how to get that is way easier.

Shoestring and bubblegum to start and like build the. Build the habit and then, and then look to optimize automate, make it more efficient over time.

Yeah, and talk to one of us. Talk to upsource or talk to us and we'll help you get to what that scorecard should look like.

Yep.

All right. Ontraul said, you guys are awesome. So that's the compliment, but not the question. The earlier question was how to remove the personal relationship with founders from client billing and scope. Startup founders often ask for a lot of favors, long credits due, assigning projects without mandates. Don't know what that means. And we've always lost money because of that. So I think there's an easy answer and a slightly harder answer here, but any immediate thoughts?

Well, yeah, I mean, I don't know what your easy answer is, but my easy answer is not. Not to do these things.

My answer is the Nike slogan. Right?

Yeah, exactly. Just do it. Yeah, exactly. It's like, you know, this is we know what to do. Like, you're a service provider, Right? Like, the phrase I love for entrepreneurship is good friends pay full price. Right. Like and so you know, don't let these people take advantage of you just because you know each other. It's full stop.

This is all about identity too. Like do you see yourself as a serious business owner or do you not? If you see yourself as a serious business owner and you may have to, you know, assume that identity for a little while, well it doesn't feel true then like be a serious business owner and don't tolerate stuff that you shouldn't tolerate.

Agreed.

Uh oh, Kuba's back in alarm clocks.

We're at time. How did this happen?

We just started Agenda police here.

That's right.

We're over time but this was great and we finished the Q and A right on time so I think we're good to actually go here. Many, many thank yous. Thank you to everyone who attended. This has been great. You'll get a follow up via.