Richard Brett: What is 'rev rec' & which metrics matter?

Which metrics should you track, to run your agency as efficiently as possible?

In this episode we speak with Richard Brett. Rich is a seasoned FinOps professional with 15+ years of experience, including a decade in the agency world. Rich has played a key role in scaling agencies, setting up financial processes, and supporting sustainable growth.

Rich will take us into a deeper dive of agency finances, starting with revenue recognition – recording revenue when it's earned, not when payment is received – and explain why this is so important.

Next, we’ll discuss key metrics and the kind of decisions you’ll be able to make using each:

• Utilization: see how effectively your team’s time is allocated to billable work, helping identify resource optimization opportunities.
• Recovery: shows the actual revenue generated from billable hours worked, highlighting areas of over-servicing.
• Billable paid: shows the proportion of billable work that is successfully paid for, helping assess the financial health of client engagements.
• Future month work value: projects the expected revenue from booked hours in upcoming work, allowing for proactive resource and budget management.

Finally, Rich will tell us 5 ways we can influence margins through agency rate cards.

Rich now runs his own consultancy, Rich Brett FinOps, providing bespoke financial services to agencies.

Follow Richard on LinkedIn: https://www.linkedin.com/in/richard-brett-36903590/

Follow Harv on LinkedIn: https://www.linkedin.com/in/harvnagra/

Stay up to date with regular ops insights. Subscribe to The Handbook: The Operations Newsletter.

This podcast is brought to you by Scoro, where you can manage your projects, resources and finances in a single system.

Transcript

Harv Nagra: 0:00

​This podcast is brought to you by Scoro. Scoro is an agency platform that brings together your quoting, project tracking, invoicing, and agency reporting into one place. Imagine building your quote in the same place where you're tracking your budget, including time, expenses, and supplier purchases. Sending invoices that let you see how much you have left to bill, and knowing when you get paid, and being able to monitor your project margins. That's next level automation, and you don't get that in spreadsheets. Bonus, it's got a beautiful user interface. That's why I brought Scoro into my past agency. Sign up for a free trial at Scoro.Com or if you arrange a demo call, tell them Harv sent you. Now, back to the episode. Hey all, welcome back. In previous episodes of the podcast, we've talked to guests about agency finances. Most of us coming into agency Ops don't usually come to it from a strong finance background. And in my case, there was a lot of learning on the job, and getting some of the blanks filled, in my knowledge, by my partner in crime at my past agency, our finance director. All of that to say, it's okay not to know everything. We're on this journey together. I'm learning from our guests in each and every episode, and hopefully you're able to take away some of the stuff that you're learning and apply it as well. So today we're taking that finance conversation further. We're going to be talking about how ops and finance work together and diving deeper into key metrics that you should be striving to implement to help you get your agency running as efficiently and smartly as possible. Our guest today is Richard Brett. Rich is a seasoned FinOps professional with over 15 years experience, including a decade in the agency world. He began his agency finance career at We Are Social, where he played an important role in scaling his company from 50 to 150 employees and implemented key processes and systems over his tenure. In 2019, he joined Cayenne, a digital agency where he led finance and operations, ultimately helping the agency double its revenue and achieve its best year during the pandemic. Most recently, Rich has decided to branch out on his own and founded Rich Brett Finops providing bespoke financial services to agencies. I'm thrilled to have Rich on the show today so he can share his insights with us on agency finance management, sustainable growth, and key metrics. Rich, welcome to the podcast. Thanks very much for being here.

Richard Brett: 2:53

Well, thanks for inviting me.

Harv Nagra: 2:55

Rich, I wanted to start by asking you about the growth journey at one of the agencies that you worked at in the past. I read that you saw a triple in size to 150 people while you were there. Tell us about that. What period of time was that? What enabled that growth? What did that look like?

Richard Brett: 3:10

Yeah. I mean, I think, I think we joined, I joined when we were about 50 people and it was kind of just off the beginning of the sort of social boom, I guess. So we were in a great place and the bigger agency network agencies weren't quite doing it, but they were starting to see that what we were doing was great. But we were still quite young and it was basically just a collection of really good people who were good at what they did. And I think as we got bigger, I mean, that was probably a six year journey for me from, you know, 50 people to 150. And I went in as just a management accountant who had no idea about agencies, didn't really know about management accounts either, but we were just trying to figure things out. And I think thinking about that question is that I think the biggest change for me is that we grew up over that time, and we grew up fairly quickly after I joined in the way we hired people, the way we talked about things, but also the systems we used. Like it was, we had more grownups, we used to say there's more grownups in the room. And I think we were all really good at the doing and creating great work. The back office stuff wasn't that great and I guess we started asking more questions about what's this? And then we were looking at things and then a CFO came on and they then said I see you're looking at this, but have you looked at this? I think that was the progression for a lot of the company was, we were all kind of doing stuff, but there was no one there going, yeah, but have you thought about this and what that means? And then you go, ah, yeah, I did see that, but I didn't do anything about it. Cause I wasn't sure what it was showing me or what I need to do about it. So I think a lot of the time for me, it was being able to go to someone else who had experience in the business, say, yeah, you're doing it right, but what about this? And what normally followed was you needed systems and processes to then allow those thoughts to become, well, how are we going to do that? How are we going to make it even better? So I think a lot of it was just growing up and just hiring slightly differently, you know, people with different skillsets rather than just, you know, what you'd call just brilliant, like geniuses. And a lot of people I've worked with in that time are now running their own agencies and were brilliant at what they did. But weren't really asked to care that much about finance. So I think our average age was like 23 at one point. So they did not give much of a damn about timesheets. So...

Harv Nagra: 5:18

Right.

Richard Brett: 5:18

That was a challenge, but I think gradually you taught people why it was important and over the years we got to a good place.

Harv Nagra: 5:24

Hmm. That's a really nice story. I love that you talk about growing up and, you know, a lot of agencies go through that growth journey and that maturity journey. It sounds like you were asking the right questions of each other, was that just, was it the CFO coming?

Richard Brett: 5:39

We brought in a COO, a CFO, head of client services, head of production. And I think we brought in all those sort of like C suite type roles because the owners have moved into a different space. They weren't the best people to do that because they were more creative. So therefore it was a case of getting people in who could do that skill set and run that bit really well. It just gave us a bit reassurance that we were doing things right and then continue on it. But also if we want to change it, a COO would then help us maybe implement that. So it was kind of all those different bits allowed us to say, well, we need to do this, I'm going to go and speak to the head of production about how they can help, how the head of delivery can do that, how a head of client services can do that. So, it was everyone challenging each other while still delivering great work without hamstring, you didn't want to stop that. We still needed to create great work.

Harv Nagra: 6:24

That totally resonates. So from there, you've now started your own FinOps, consultancy in the past couple of years. What kinds of things are you seeing in agencies? Are there any common or typical mistakes or issues that are quite apparent these days?

Richard Brett: 6:38

I mean, it's exactly what we had at We Are Social, really, was that people are doing what they need to do. And often that's cash based. It's like just making sure they've got enough money to pay the bills, to pay staff, and not looking forward that much. And what I found is a lot of the time what people are doing, looking forward, is just new business pipeline or pipeline. It's not what costs are we going to incur if we hire this person? What about if we hire this person? What does that impact on the P&L? And I think that's completely normal because a lot of people become agency owners by accident, like they're freelancers who then hire somebody else and they hire somebody else. Then suddenly they've got an agency and what they're really good at is design or strategy or SEO or whatever it might be, and then they just add people in and there's no one who really brings that together. I think what I've seen from doing this, and obviously I come from a big agency background. When I first started, I was then working with a six or seven person agency, I was like, they didn't really need to do this stuff. But actually they do, because if you're doing that now. You're going to be better than all those other agencies that aren't doing it. And you'll be better placed to be even better when you're going forward. It doesn't guarantee success, but I think it's that reassurance of what do we need to do to grow sustainably rather than just grow, but not know how we did it.

Harv Nagra: 7:56

Right. That leads me to our next question, which I think in some ways you've kind of been alluding to there in your response, but you know, when an agency grows, there might be an assumption that things can get less efficient and more complicated. And you know, that very well may be the case if you're not being proactive in addressing some of those operational or financial areas, but you talk about growing sustainably. So talk us through a bit about that. What do you mean by that? What does that mean?

Richard Brett: 8:23

I think, it's one of these things I, when I first started thinking about doing this, I saw a lot of people talking about growth, just generally, like you need to grow, you need to grow quickly, hire people, win as much work as you can and worry about it. And I think one of my pet hate phrases that one of my old directors used to say is cross that bridge when we come to it. Well, I, I'd kind of like to prepare for that bridge. And I think a lot of what I mean by sustainably is that you make decisions that are not just on gut feel, but they're based on as much knowledge as you can. So that when you say, no, we do need to hire this person, it's not that a month later you go, Oh no, it turns out we only needed them for a month and now we haven't got any more work. So for me, growing sustainably is making decisions that allow you to make the agency bigger, grow revenue, but also keep profit at the same level. Because what will often happen is in that messiness, you might grow revenue, but your profit drops. But you go, yeah, but at least revenue is growing. So, yeah, but you could have probably kept revenue the same and your profit would have been better. So a lot of the growing sustainably is, is about trying to just make sure that you do things that aren't going to hurt you six months down the line. So therefore it's really trying to direct owners to think about the decisions they make and i'll say to them quite a lot is, it's okay to spend money as long as it adds value and that value might not seem that obvious but if it adds value then it's a good thing, but equally you need to then say at some point, well, it's not adding value anymore, so let's stop it and that might be a license fee or it might be a system or it could be a person or a freelancer, but you need to be looking forward and going, we don't need this. And I think a lot of agencies are guilty of looking at the past and going, Oh, we, we did brilliantly last month.

Harv Nagra: 10:00

hmm.

Richard Brett: 10:00

I don't really care if you did great last month because the next three months look terrible. Like what we're doing about that we can still impact and affect change in those months, we can't do anything about what happened last month. So growing sustainably is about trying to work out. What do we need to do to continue on the path we want to go down whether it's growing revenue or growing ebit or hopefully both of those.

Harv Nagra: 10:23

Really good advice. So we're going to get deeper into what I'm calling metrics that matter. But before we get into that. I know you wanted to speak about revenue recognition. Tell us, uh, what that means. Why is it so important? And how does it work?

Richard Brett: 10:37

I I mean, I think people know me that that's all I talk about is revenue recognition and it's it's just, it's so important because If someone says to me i've done a million pounds this month and it was just an invoice they raised, but they've delivered none of the work, then you just invoiced a million pounds. That's great. It's still great, but it doesn't help you understand true performance. And what revenue recognition does is it builds in way more than just the numbers. It gets the departments thinking about resourcing, what timesheets actually mean, and true performance of the business. Because I always give an example to people when I'm talking about it is that, if on the last day of your financial year, you invoice a million pounds for work to be delivered next year, you've booked that a million pounds in this year, you're doing all the work next year. So you've taken all the revenue, but none of the cost. And that's what you're trying to do with RevRec is to say, each month, how much of what we have invoiced, have we actually delivered, so we might have invoiced£20k, but actually it was only done half the work, so we should only recognize£10k of that work. And the reason for that is that when you look at your P&L, and look at staff costs, those staff costs should relate to the month you've just done. And if you then compare that against revenue, that is for work for the next six months, it's going to look great. And what you get then is you might have peaks and troughs months where you've invoiced loads because you forgot to invoice for three months. Well, didn't we have a great month? And then the next two months, God, why have we had such a terrible month? It's because if you recognize it when you invoice, unless you're invoicing at the end of each month based on what you've done, it's not going to relate to your staff and what have actually been delivered. So then it really gets you focused on, well, actually, have we delivered this? You know, if the client came to us at the month and said, I'm only going to pay you for the work you've done, what's the point? How much of that budget have we actually spent? So it really makes people think about how they spend their time about resourcing and it, then it really helps your forecast and it's just so important to get right and I don't think it's easy to make those decisions about whether you need to hire unless you do it because you're hiring someone based on when you invoice, not when you actually need to do the work and you know, a project of 100k, you might invoice up front, but only do 5k a month one, you might do 50 in the next month and 45 in the last month.

Harv Nagra: 13:02

Mm-Hmm.

Richard Brett: 13:02

You need to then maybe bring in extra people for those bigger months, but not the first month or freelancers to support it. And that's where it all plays into. If you get that mindset of, well, how much work have we actually done? And then use timesheets to help you say, just to support that number, you can start to actually see true performance rather than just invoice performance. And it's not doing it wrong. You're completely allowed to do it. But if you want to grow sustainably, you have to understand when is the work that we've sold going to actually be delivered. And that's when you need systems and people to help you understand that.

Harv Nagra: 13:33

I had a question there, if somebody is listening to this and say, well, okay, that sounds great, but how do I start?

Richard Brett: 13:38

I mean, I think I could probably massively over engineer a really expensive solution for you if you want one, but I think if you are just a small agency, I think it's about understanding it and then just building something in your brain that says, Okay, if we've got a project that splits over, it's a three month project, let's just put some rough percentages as to when we think we're going to deliver each of those pieces of work. Because normally you have an estimate that is broken down into phases anyway. So let's just say, Oh, we've done phase one in month one. Let's just book the revenue for that. So for me, if you don't have the people in place to do it, it's not the end of the world, but what you're trying to do is be as accurate as possible. So the more accurate you can be, when you look at timesheets or resourcing plans, and that levels up to something, the better, because then that then describes what you're seeing in the P&L in terms of revenue you've booked. But as a simple approach, you would just say, right, the end of the month, let's look at all the projects we've got, how much revenue we think we've done on each of those projects, and let's just take that number and that's fine because it's better than not doing it. And I think that's the main thing is to just understand those principles of let's only look at the revenue we've done this month. And let's make sure that the freelancers, if we brought those in, are also showing, because what you don't want to do is have the revenue in month one, one month, the freelancers, the following months, because then you see revenue here, but costs there, that month looks great, month two looks terrible. And it's just about trying to have that balance. And as you get more used to it, you start to see how metrics around EBIT and staff ratio and utilization and recovery all play into that number when you go even deeper, how that impacts your rate card, because if you're looking at P&L that's just made up numbers, what's the point? What's the point of looking at it?

Harv Nagra: 15:21

Excellent. So I can see how, everything that we're gonna be talking about now kind of branches into this and, and fits underneath. So onto the metrics, utilization, and this gets talked about a lot, let's start there anyway, very briefly, at least. so over to yourself.

Richard Brett: 15:36

Utilization is one of those things that is talked about a lot, but does anyone actually really understand what they're saying when they say it? I think actually a lot of people are probably wrong about how they talk about it. but my view is that utilization is how is a person's time being used in the agency? And that should be broken down into things that you need to know about. So for me, it's billable utilization. Non billable utilization, new business utilization and internal. And ideally from an agency perspective, you would like everyone to be as billable as possible, because in theory, that means that you're charging that back to the client and straight away that levels up to revenue, because if everyone is working full time, you'd expect to see revenue be really high. Because more utilized people in an agency where you're charging people for time, should see higher revenue. So the flip side of that is if you see really high utilization and low revenue, something's up. So you need to then uncover that. But you need to have a strong basis for how you set that utilization up. And for me, that is working days in the month, less holiday. That is your working hours because you can't work when you're on holiday. So therefore every single utilization percentage should be run off working days, less the days that then that person is not in the office, because then you can roll it out to person, role, department, skill and agency, and therefore you can see it across the board and really zero in on an agency number that says 73%. Yeah, but what does that mean for design? Actually, design did 90, but strategy did 50. Okay, that means strategy aren't busy. Let's go and figure out what's going on there, let's zero in on that. So, yeah, I think that's it. It's really important, but utilization is also historic. So it only really helps you to understand what happened. What you really want to do is try and get ahead of that. And that's why you need to be resourcing because resourcing defines how someone's utilized. And a lot of people do not utilize or do not resource enough.

Harv Nagra: 17:33

hmm.

Richard Brett: 17:33

They rely on timesheets to tell you what they did when actually you should know, because you booked it in the first place.

Harv Nagra: 17:38

hmm. Mm hmm. And then you can actually see, you know, your, your capacity to take on more work or whether you've got too much on and you need to bring in the freelancers or whatever, or at least turn something down and so on. So yeah.

Richard Brett: 17:49

And if you get really good at it, you times that time you've booked on each of those clients by the rate card. And that tells you what revenue you should be doing next month.

Harv Nagra: 17:55

Mm. Excellent. So utilization, now we're moving into recovery. So what is recovery?

Richard Brett: 18:01

So I don't know if this is my old CFO, we, we call it recovery, which is effectively how much of that time that you spent on client work is actually paid for by the client. So if you work 10 days for a client and they pay you for those 10 days, you've got a hundred percent recovery. So it links up to utilization and it's a really crude example, but if someone's a hundred percent utilized and does 20 days on a client, but the client only pays you for 10, yes, you're a hundred percent utilized, but you're only 50 percent recovered. So technically you're only 50 percent utilized because although you're doing it, you're not getting paid for it. That could be over service or it could be for whatever reason, but recovery allows you to then take that data of how much time did we actually spend in timesheets or however you want to do it, you could do it quite crudely if you're not doing timesheets. And compare that to the revenue you booked through revenue recognition. You can then say, well, we, we booked£20,000 worth of revenue, but we did£22,000 worth of time. Okay, we over serviced. Why is that? It could be that you over recognized or you had to do a bit of extra work out of scope. But equally the other side of that is you did£20,000 worth of revenue in the month, but you booked£18,000 worth of time. It could be because we managed to use a junior designer rather than the designer that we sold. We still delivered the work and the client was still happy about it. We were just able to use someone who was a bit cheaper, but that's going off the rate card, it's not cost, it's rate card. And again, you can see that, you do that properly and if your system's up, you can see that by project, by client, by department, by agency, across the whole group. So you can really zero in on it. If you're not doing RevRec, you can't do it because you're comparing£20,000 pounds of timesheets to a£100,000 invoice that you raised, doesn't mean anything. So again, it comes back to, if you're not doing RevRec, those utilization statistics and report and recovery reporting that you're doing don't really mean anything because you're not comparing apples to apples.

Harv Nagra: 19:52

Got you. So we were then moving into billable paid. So again, what does that mean?

Richard Brett: 19:58

So it's kind of what we talked about already, which is you basically multiply your utilization by your recovery. And I actually remember when we started doing this at, one of our agencies and we just went, what should we call it? And I think it might've been that we were doing it already, but, or we already knew about it, but we hadn't called it anything or we weren't maybe tracking it properly. But it was like, how come utilization is so high? And revenue is, you know, where it is, but we know the recovery. We know utilisation. So if we times those two things together, actually get to a place where we can see what actually every hour that we work, that's billable, how much of it is paid for. And that's what billable pay is telling us. Because if we times utilisation by recovery, and it's a hundred percent times a hundred percent. Then your billable paid is a hundred percent. If you times a hundred percent by 50% recovery, your billable paid is 50. The other side of that is if utilization is 50%, but recovery is a hundred percent, you're still at 50. Which one of those is better because that might be better because at least when people are working on it, they're getting paid rather than the other way is recovery is bad. Yeah. They're all working on stuff, but they're not getting paid for it. And that's when it's really up to an ops person and a finance person to work together with client services and project managers to go, why is this happening? What are we seeing here? But again, you're trying to predict it by using resourcing, because if you resource correctly, you'll see it coming because you'll see£20,000 worth of revenue but only the£25,000 worth of timesheets plus resource booked means you're going to overservice. You can then try and get ahead of it and try and reduce that down. So billable paid is kind of just a metric that takes into account both of those things and should explain what you're seeing in the P&L. A fairly classic thing that agency owners say is everyone's really busy, but we're not making any money. Well, it's probably because everyone's on client work, but it's not paid for, or you're not charging enough. And that's why you, you want to try and rule the things out that you can to then dig into it. And if it's actually, we are actually this busy, we are actually recovering a hundred percent, then that then directs you towards, well, then the rate card must be wrong, or we've got too many costs in another place. Because if you're getting paid for all the work you're doing and you're working all that time on client you should be making money. It's then trying to work out, well, what is the reason for it then and you're always just trying to work out why? And that's where data becomes so important and using good systems to help you do that and good people to understand why are we seeing what we're seeing and you can't have one without the other, you know It's impossible to have really great profit without seeing high utilization and high recovery in theory unless you're doing value pricing in which case recovery would be off the scales because you're not doing any timesheets, but you're booking loads of revenue.

Harv Nagra: 22:38

Right. I think the the gist here, is that you can collect a lot of good data, but you really have to have it set up to actually help guide you. And you can get to a place where you're steering your organization in a really smart way. We are going to talk about right cards as well, but there was one more thing we had highlighted, previously to talk about, and that was future month work value.

Richard Brett: 22:58

That's, yeah, again, I mean, this is why it all works so nicely because it all streams from RevRec to forecasting to utilization to timesheets and how you want to do it is that a lot of stuff you read is about, yeah, we've got timesheets in, but no one's talking about resourcing and then, you know, what is the best system for resourcing is...

Harv Nagra: 23:17

hmm. hmm

Richard Brett: 23:17

I'm sure there are plenty out there, Harv, I'm sure. uh, And everyone needs it in different ways. But I'm spreadsheet spreadsheets happy. It's good enough for me because if it does the job, you need it to do, then that's completely fine. Obviously, the more you automate it, the better. But future work value is basically saying, okay, if I times every single hour I've got booked in October by the amount I sold that person for to that client, I can see the value of work that we're supposed to be delivering next month. And you can then compare that if you're doing revenue recognition and forecasting to go, well, then how come I've got£50,000 of work booked in my system, but I'm saying I'm doing£100,000 worth of work. Or the other way around, I've got£100,000 worth of work booked, but I've only got£50,000 in the forecast, because it could be that you've forgotten to book something in, or it could be that you've over recognized something. And that's, that's what you want to try and do, because you want to try and get ahead of that. You know, if you're only looking at timesheets, the time to change things is gone. If you're resourcing, you can still affect change on those numbers because you could, you know, pare someone back and say, can you stop working on that? We've run out of budget, or we need to go back to the client and ask for more budget, or actually we can throw a bit more resource at that because we've got a bit more budget. You can't do that if you look at timesheets because it's already happened. So it's trying to get ahead and go what is the future work value and when's it going to hit in our numbers because If you see a big peak where you have loads of design in November, but all your designers are fully booked, you might need to get a freelancer in and that's going to hit your P&L because you've got the cost that needs to be brought in to service it. Otherwise you're inflating your numbers and you won't be able to deliver.

Harv Nagra: 24:47

Absolutely. Excellent. All right, Rich. Next, we're going to talk about rate cards. I've heard you say that there's a number of levers you can pull in your rate cards that can boost your agency margin before we get into it. Can you tell us what those levers are?

Richard Brett: 25:00

Yeah, so, it's the price, utilization, recovery, the role that someone's doing and then the overheads.

Harv Nagra: 25:07

Excellent. Okay. Let's, let's get into each of those a little bit deeper, starting with price. How does that relate?

Richard Brett: 25:15

Well, I mean, it's obvious if you build a rate card on a price, and if you don't sell it at that price, you're not going to make the margin that you did your rate card on. So it seems fairly simple, that if you're going to try and sell something, you try and sell it at the price you want to, and I think I woke up one night and was like, huh, actually, if you discount your price by 5%, you actually have to do 5 percent less time if you're on that sort of basis to try and make the same margin back that you would have done a full price. So, if you're going to discount your rate, only do it on 2 basis, like, maybe it's a long term contract where it's been secured for longer, or it's a full time person. So you can actually then manage that price a little bit. And also know where that margin is because different roles should have different margins. So it might be that you can discount some roles and still make a 20 percent margin and another one. You can't, but it's just about managing that number and knowing where you've got those those levers.

Harv Nagra: 26:04

Excellent. Okay. So then you were going into utilization.

Richard Brett: 26:09

Yeah. So utilization is I build my rate cards and say, well, I'm expecting this person to spend 80 percent of the year or their month or whatever time period, on client work. When you do that calculation, you have to be really clear because if they're not going to hit 80%, then they're not going to be working on client times, therefore not going to pay for themselves as easily because if you then if they only then do 50 percent have to pay for themselves with only 50 percent of their time and therefore their time they're not spending on client work has to be paid by other people. So when you set your rate card, it's important to set a rate card with the utilization that's realistic. And in theory, if you can get away with it, have it lower than you need it to be. Because then if someone hits more than what you set at 70 percent and they hit 80, then you should make more money because suddenly that person is now paying for more of their full salary as well as other people's.

Harv Nagra: 26:57

Yeah, that makes sense. And you get into kind of a dangerous space if you're overestimating what your targets are across the board, you're just fooling yourself and you're going to be in a lot of hot water at the end of the year.

Richard Brett: 27:09

Yeah. And as I think I've said it before, but I also don't like utilization target as a thing either. It should be a minimum requirement because people hit targets, they stop. And it's like, no, if you do more than 70 percent that's great because that means you're going to make more money for the business and that goes back into investment for the business. So I think it's, yeah, you just don't want to go too high because if you go high, it should mean your rate card could come down. If you're spreading, you're making people are paying for more of themselves. If they can't achieve it, then that's just, it's not real. And they're not going to be able to pay for as much of themselves. So yeah, you just have to be more realistic. And that's where the data is so important to make sure that it's not just, I think it's 70%, it's like, no, it's based on fact. This is what we did last year. So we're tracking to this year. So let's go with that.

Harv Nagra: 27:51

Absolutely. All right. Excellent. Okay. Then over to recovery.

Richard Brett: 27:57

I mean, it's, it links into price in some ways. If, if you sell 10 days and you do 11, you're going to reduce your margin. Because that day that you're not being paid for, it's not going to be sold somewhere else. So it's just really important that you just are aware of how many days you've sold or how much time you sold and to track it, especially if you've discounted as well. If you discount a rate and then over service, you're just doubling up on margin hit. So I wouldn't say that just because you discounted, you should be more aware of that, you should always be aware of over service, and just track it and know that, that's a way to do it because it is so, you lose so much margin from just spending more time than you should do, because that's not how your rate card would be calculated. It's on the basis that you get paid for your work. I actually build in a recovery into my rate card calculation to say, I don't expect to get full recovery. And then it gives you a little bit of extra buffer that, you know, if you set that at 90, 95 percent and everyone hits 100, then you know, you're going to make margin back in a different place.

Harv Nagra: 28:52

Nice. That's a really good tip. Okay. And then we are onto the role and how that factors in.

Richard Brett: 28:59

The role for me is that if you sell a senior designer, try and use a midweight. It's not as simple as that, and I think often you'd say, well, if it's five days of a senior, then it must be eight days of a junior, or if it's eight days of a junior, then it's five days. That's not how it works. Like that's very simplistic approach to resourcing, but it's a case of saying, if we can sell something as a senior designer rate, and that rate's higher, but we could use a midweight and then we can get the senior designer doing something else. Actually, again, you can make margin in both places because you're making it on the senior designer doing their work, and the midweight is then on a senior designer rate card, but it does come down to how you solve that work. It's a value piece. It's obviously the quicker you can do it, but to the standard that the client wants, then you're going to do well. So I think it's just about understanding where those roles are, and then filling capacity. If someone's free, then you might as well just use them on that piece of work as well. Doesn't mean that we had to finish it, but it might just speed things along a little bit. So it's just being aware of what you sold and then trying to sometimes go under it. And if you need to go over it, then maybe give them less time to do it and see if they can. If they can't, they can't, but at least try and take that approach.

Harv Nagra: 30:07

And then onto overheads.

Richard Brett: 30:11

I mean, it's obvious if, if your rate card is set with overheads in the business of an amount and you spend more than that, then you're just taking it straight out of margin. And you don't know what bumps, you know, when you set a rate card, maybe at the beginning of the year, it's really hard to know that, you know, electricity and rates might go up by 10%. So you would always factor that in some sort of way in a budget, but you just need to try and be in control of it. It's the only thing in some ways that you can control to a point is what you're going to spend on the business. You can't control a client being difficult about time or budget. Whereas if you can control overheads and know that we've got X to spend on overheads this year, if you maintain that or go below it, it should help your margin on a rate card as well.

Harv Nagra: 30:51

Excellent. Thanks very much for taking us into that, Rich, and that leads us really nicely into our next question. When it comes to, when it comes to reviewing your rate cards, is this something you recommend quarterly, annually, what are your thoughts?

Richard Brett: 31:05

I mean, I think if you can have something that is kind of ticking over in the background and checking you, as you progress, as, you know, overheads might increase. I think to do it as a point in time is good because often you will have agreements in contracts with clients that say you can negotiate a rate card once a year. I think what you can't just do is constantly change a rate card because it just becomes an ops headache for one thing is, well, what did we charge that one out at what, what rate card was it? I think it's good for me to do a, an annual rate card review, and you might then do a part of a six month,'are we still doing okay?' Did we get those utilization rates right? But really what you're doing is you're not going to change the rate card necessarily. You're just saying, well, actually we need to try and push up utilization or we need to focus on recovery. So it's not about necessarily changing the rate. The only reason you might change the rate is if you suddenly have a big increase in overheads and you have to factor that in, or you have three new hires that you hadn't accounted for. You might need to just maybe tweak a couple of rates, but just because you set a rate card up on a basis doesn't mean you can sell it, you know, I could go into business and say, this is the charge. This is based on your calculations, this is what you should charge your client. And this gets you 30 percent margin if you achieve it. But if you can't sell it, it's irrelevant. Like, you know, you need to have a rate card that is built in the correct way. You understand where the margin is. But it could be sold and that might be blended rates. It might be rates by seniority. It might be just one rate for the whole business. Whatever you choose, you have to make sure you understand how that's put together and then put people in place who know what their job is. And ultimately it's, if you've sold 40 hours at a hundred pounds an hour, don't do more than 40 hours because they won't make money.

Harv Nagra: 32:42

I think there can be that misalignment, you've got these senior level people, so you build rate cards around that, but then when it comes to building your quotes, you're like, well, I can't get away with charging that, so I'm going to use this kind of reduced rate and then everything gets thrown off and, there's no point in designing your price structure, around that kind of model.

Richard Brett: 33:02

People who know, have spoken to me, know I'm not a big fan of gross profit for exactly that reason is that you can manipulate it. And fundamentally, for me, a project is if we've sold£10,000 worth of time based on, hours and roles of someone, at the end of the day, good project management or management of that project is that we still stick within 10,000. Even if we're using different people, we still stick within that 10,000. If we've sold 40 hours, let's not do more than 40 hours if we can help it. If we are going to need more than 40 hours, can we try and change the team slightly so that, it's more junior people or me of a blend. This is why FinOps is a thing is, this is really going quite into ops, but has a real financial impact. A finance person will set up a rate card, but if you're not working with ops to know, well, what's our recovery, what's our utilization, you know, can we actually even sell that? A finance person setting up a rate card and saying, go and sell it for this is irrelevant because if you can't sell it, or it's set on the paces that everyone's 90 percent utilized, but actually most people are 75, it's not going to work. So that's why I think FinOps in general is that, you know, the two circles of the Venn diagram, it's that bit in the middle of going, yeah, okay, but how are we actually going to do that? Because, I'm not resourcing people, you are. Tell me what you're having with resource in that project. Oh, we didn't sell enough hours. Okay. Then next time, let's make sure we sell more hours where they didn't want to pay for more. Okay. Well, that's a challenge we've got that needs to go to sales. And I think that's just how it all links in together. It's finance and ops do need to work together really closely because there's no point one side of that doing something that doesn't help the other or finance doing something that doesn't help ops or that they just completely butt heads. It's about trying to make it the best it can be that gives everyone the ability to make the right decisions. And that's why I think it's important to try and be as close to the numbers. And understand how it actually sits on the ground and not just be sat there, saying, well, how come the numbers are rubbish? Well, actually, I need to understand why they're rubbish and to do that I need to understand how we booked that in, how we sold it, how we built the rate card, how utilized people are. And it's digging into that detail. I used to sit on, probably bothered our traffic manager way too much back in the day because,

Harv Nagra: 35:10

Hmm.

Richard Brett: 35:11

You know, ultimately, if I looked at the resource bookings and saw a number that was different to what I was seeing in my numbers, I was the one who had to answer that to say, well, how come we're not hitting our numbers? But I can see loads of people work really busy, but our numbers aren't good. If you just then throw that onto ops or a resource manager or a traffic manager, it's not good enough. I think you do need to be able to understand both sides of it. And I think you have to work together to understand what are those issues. It's not as simple as just saying, well, we've only got 40 hours, so only book 40 hours. Because if you need to do more, you need to do more in an agency, you have to deliver to the client. So then it's about ops and resource and delivery and everybody else going, we accept that we're going to have to over service on that one. It's going to impact our numbers, but we have to do it. Otherwise we might lose the client. So it's making that commercial decision to make sure that you're all aligned. It can't just be, well, finance said we had to do it because then the rest of the business will be annoyed because suddenly it's about the numbers, but actually most agency people want to deliver great work. Unfortunately, we also have to make money. So you can't do one without the other because soon it'll start to impact the quality of the work or it'll start to destroy the quality of the numbers. Really, you want both of those things'cause they need to be aligned together. And I mean, I did, I probably did spend too much time resourcing, but it gave me a real good understanding. And when I implemented, the ERP system, it meant that I had an idea of how it should work and we worked really hard to make sure that it helped the business. But it also gave the data to finance that made us be able to make decisions as well. And if you didn't do that, it would be a system that was really good for one, but not the other.

Harv Nagra: 36:46

Rich, before we wrap up, you talked about ERP systems and then there's, there's also the kind of, set up where you could just have a lot of separate systems. Do you have a point of view on that? Do you, do you prefer the all in one or...

Richard Brett: 37:00

I mean, I, I think I prefer the all in one because I think if you're going to create estimates, do timesheets and resourcing all in one place, you're surely going to see efficiencies there because all that data, it's matched up. Challenge is, can smaller agencies afford it and do they need to? It's part of that growing up phase is, as you start to hire people who are more senior, it's likely they'll start asking more questions and the systems you've got in place will probably be able to be fudged to give you what you want, not the most efficient. So I think up to a certain size, using different bolt on services to give you what you need, you know, maybe a resourcing piece of software, a timesheet software, a CRM, your accounts, Xero or QuickBooks or whatever it is you use. But there is a point in time where it's like, this is becoming a bit of a headache because how things join up. And it's at that point, you then need to go, is there a system that solves all these things in one place? And what I kind of see it as you could probably get a system that can solve a hundred percent of your problems, but you only use 20 percent of it, or you could use a hundred percent of a system and it solves five lots of 20%. So what's the right place to do that? A tipping point is understanding, no, we probably need to now embed a system, but that really also depends on what the future looks like because it's in quite stable growth and low EBIT, it's probably not the time to embed a system because it's a big workload associated to do that properly and get it set up properly.

Harv Nagra: 38:36

Mm hmm. Yeah, I think I agree with you there. There comes a point a lot of the things that you know, we talked about also is about being proactive. So I think there there is a time based on what your goals and objectives are as an agency that you need to look forward and say are going to wait for for a while. But I don't think you ever want to be in a position where you wait for things to start creaking or or worse before you make that decision. So

Richard Brett: 39:01

And,

Harv Nagra: 39:01

I like how you put that.

Richard Brett: 39:02

and often like if you've got your processes set up and then you embed a system, that system will probably be implemented better anyway.

Harv Nagra: 39:09

Mm

Richard Brett: 39:09

But if you've got kind of sketchy processes, putting a system in will not help it because systems are run. In ways that well, how do you do this if you don't know you'll either don't do it properly or you'll then start embedding a system where the processes don't match to how you do stuff. So there's the growing point where the people start saying, well, I need to do it this way, so I've embedded the process. We now need to get the system that matches up to it because a spreadsheet is not good enough. You know, I was an agency where we had a Google sheet for a lot longer than we should have done. It worked, gave us what we wanted in some ways, but it got to a point where it was starting to creak. And it's like, well, actually this only gives us certain bits of what we want. And it's not efficient of us enough to then go, let's take this data and use it. And that is when we put in an ERP and that was a huge project. That was ongoing for a long period of time, we just had to get it right. And if you don't get it right, it's a big waste of money.

Harv Nagra: 40:07

Definitely. Thank you for going on that tangent with me,

Richard Brett: 40:10

That was a tangent, wasn't it?

Harv Nagra: 40:13

Rich, so if someone's listening to this and thinking, okay, there's a lot there that we need help with, whether it's fractional stuff or just getting their heads around a lot of the things that you've talked about today, RevRec and these metrics and getting all of that set up, where can they find you?

Richard Brett: 40:26

I mean, the best place is through LinkedIn where I very sporadically have a decision to post something because it feels important. And if you went down to my feed, you'll see a lot of this stuff. I'm very focused on RevRec and metrics and then just reach out to me. I'm hoping to launch something in the next few months which is to do that product of a review audit and triage and help people just get that view of, do you know what I could do with understanding where we are in that journey and be guided towards what we need to do. So I'm already hoping to sort of launch that over the next few weeks and months. And for me, that allows me to just contact and help more agencies, which fractional stuff can't do because I just can't be stretched that thin. So it's really about trying to help as many people as I can. But give them the tools they need to go and fix it themselves and then support them on that journey. So yeah, the best way to do it is that LinkedIn at the moment. Yeah, that's it really.

Harv Nagra: 41:15

Excellent. We'll put a link to Rich's LinkedIn in the episode notes, of course and Rich, once you launch that new auditing process or tool, great to have you back at some point to talk us through it.

Richard Brett: 41:27

That'd be great.

Harv Nagra: 41:28

Tell us how it works and all that kind of stuff.

Richard Brett: 41:29

I need to figure that out first. So yeah.

Harv Nagra: 41:31

Well, thanks very much for joining us today.

Richard Brett: 41:34

Thanks Harv. It's great to meet you. And thanks for all the questions. Really good.

Harv Nagra: 41:37

Absolutely. Hey all, loads of great takeaways there from Rich on how to bring better FinOps to your agency, including how essential he views revenue recognition is to every agency and how utilization, recovery, billable paid, future month work value all plug in help you make smarter decisions. We also spoke about the factors that can influence the margin on your rate cards from utilization, recovery, roles, overhead, and pricing. And Rich also spoke about systems. He was using the term ERP, which means Enterprise Resource Planning. It sometimes gets interchangeably used with PSA, Professional Services Automation. Overall, what these terms refer to are systems that bring together your quoting, project and financial tracking, resource planning, time tracking, invoicing, and reporting all into one place, rather than separate systems that do just one piece of the puzzle. Before I go, a reminder that you can sign up for The Handbook: Operations Newsletter at scoro.com/podcast, scroll down and you'll see a newsletter signup form, and you'll get the takeaways from every episode in your inbox every other week. That's it for me. Thank you so much for joining us and we'll see you in the next episode.