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Dear Commercial Acuman...

Dear Commercial Acuman...
I am a newly-appointed MD looking to improve performance - what financial KPIs should I use?

From a financial perspective, the best business do two things well - service clients efficiently and keep overheads under control.A sensible margin on client work gives you a positive contribution to overheads; control your overheads and you'll achieve a decent profit.

Controlling overheads is your FD's job and relies on a few basic principles:

  • Set sensible budgets on a line-by-line basis, phase them and measure actuals against budget every month
  • Regularly review suppliers and always get three quotes (where possible)
  • Prioritise the costs to manage; property is usually your single biggest overhead, but also keep a tight rein on the types of discretionary costs that can spiral out of control if not checked regularly.

Servicing clients efficiently is based on the same principles, albeit a little more complex, and falls jointly to the MD and FD.

There are two industry-standard models for client-servicing KPIs which both do essentially the same thing:

  • Client profitability and chargeable hours
  • Client write-off and staff utilisation

For me, the Holy Trinity of good client financial management is revenue, write-off and utilisation. Any business that is regularly hitting all its targets in these areas cannot fail to make a decent profit. By contrast, any business that is not regularly looking at all three probably has something nasty and smelly lurking under the financial carpet.

It takes a bit of work to set up a KPI reporting system and it engenders certain behaviours, so it is probably best suited to a business with at least 100 people - or a reasonable expectation of getting there fairly soon.

The Holy Trinity or Golden Triangle approach measures three inter-related elements of client servicing; if you are hitting your revenue targets, not overservicing clients and keeping your staff well-utilised, you can't fail to be efficient.

However, as anyone who has chased timesheets for a living will know, any area that is not regularly reviewed will become a dumping ground. It's not unknown for a business to focus on reducing client write-off but then fail to achieve any improvement in the bottom line. The reason is that people will inevitably become more selective about what they treat as client-billable and so staff utilisation drops just as write-off improves.

You would see the same thing if you focused on client profitability - client contribution (revenue less direct staff) improves, but overheads, including large amounts of non-chargeable time, increase. In this case, the timesheet sleight-of-hand would show up when you review time booked either as "admin" or "investment ".

In either event, the bad news inevitably gets buried where the organisation senses no-one is looking, so you need a set of financial metrics that leaves no hiding place for dumping time.

This gives you a robust set of financial KPIs, but there is an implicit second part to your question; just having the KPIs alone is not enough. You need, as an organisation, to act on them promptly - and ideally anticipate them. That is, if you are 50% of the way through a project but have used 55% of the time, you need to start looking at why and what can be done to get back on track - has the scope increased? Has the client asked for something additional or missed a key deadline? These all need to be discussed first internally and then potentially with the client.

Only if the fault is solely the agency's (if someone was off sick and had to pass the work to another person who took time to get up to speed) is there no need to consider discussing the profitability issue with the client.

The final piece in the jigsaw is ensuring that all staff have a good commercial understanding of he business and good selling and negotiating skills; account handlers who only ever want to say "yes" to a client will always struggle to make decent amounts of money for the business.

And as a final piece of advice, don't forget your working capital - cash is king. Businesses fail not through lack of profit but because they run out of cash.

Top FD tips

  • Set robust budgets and review performance against them regularly
  • Remember that KPIs are historic and so at best an early-warning system
  • To be completely effective, you need commercially-astute agency staff who are supported by the KPIs
  • The KPIs need to be all-encompassing; the bad news will get dumped anywhere you don't look
  • Implementing KPIs can lead to a certain defensiveness; you need to make sure people embrace it as a positive improvement.
  • The IPA has free commercial training with its Commercial Certificate.

Check out more Commercial Acuman columns from our FD Tom Lewis.

Last updated 22/04/2015

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