Multiple billable rates for Your Creative Agency?

Multiple-Billable-Rates

One billable rate to rule them all; probably not. Depending on your agency and work you do it can make sense to use different methods to organize your billable rates. The following are 4 common methods — I recommend 3.

  • Blended Billable Rate. This method is very common because it makes project planning and invoicing really easy. All work has one billable rate — no matter who does the work.

However, a blended billable rate can cause problems. With juniors, seniors and partners all charging the same rates, on complicated projects clients might get a lot of Senior/Partner time at the same rate as Junior Talent. On simpler projects, client are paying Seniors/Partners “rates”, but mostly getting Junior Talent. One of the ways to manage this downside of a blended billable rate is to agree in your proposal on a ratio of Junior, Senior, and Partner level involvement in the project.

  • Individual Billable Rates. This method makes sure that clients are being charged based on an individuals education, certifications, experience and specialization.

However, using individual billable rates is not without problems. First, you have to manage multiple billable rates. Second, planning is more complicated. In order to provide an accurate project budget and project plan, your creative agency has to know who is going work on the project. Last, delegation becomes more important. Seniors/Partners can quickly use up project budget if they do work that could have been delegated. However, encouraging delegation is not necessarily a problem: it can help with talent development.

  • Role-based Billable Rates. Clients don’t want to overpay for Junior talent, and you need to be able to plan projects without knowing who ho is going to be on the project. You need a compromise.

The solution might be role-based billable rates. This allows you to charge for the level of service provided, while being able to easily create project plans. An added benefit is additional protection of confidential compensation details.

  • Task Based Rates. It can be tempting to charge different billable rates depending on the task. I do not recommend this method. Unless the rate you pay your employee changes based on the work they do, this method obscures the costs associated with doing the work. While it might work for a small creative agency it is not a best practice.

Yet, what method is best for your agency? It depends on the work you do. Your work determines the ratio of Juniors to Seniors to Partners, and how they engage on projects. This ratio determines the best method for organizing your billable rates.

  • Production. Client hire you because they know that you have the staff to get work done, because your team does it all the time. You are known for efficiency. Because of your specialization and processes, most work can be completed by Juniors with guidance from Seniors. Clients understand this, and value the training, specialization, and process the agency provides Juniors.

Seniors and Partners are focused on training, improving operations, and business development. Improvements to profitability come from improving recruiting and training juniors through better processes and technology. Production agencies are highly scalable, and can be very profitable. In fact, most creative agencies are Production agencies.

A Blended Billable Rate works well for Production agencies. Juniors do most of the work. Seniors and Partners provide some oversight, but are mostly focused on building the business. As long as clients understand this relationship, the benefits of easy planning outweigh any downside. Client’s know that they are hiring mostly Juniors.

  • Expertise. Client’s hire you for your experience. They know that your employees have a unique expertise with a certain type of project. Perhaps you specialize in a rare technology. In these firms the majority of work is handled by Seniors. Juniors provide a supporting role — eager to gain experience. Partners are focused on business development, and recruiting Seniors. Expertise agencies aren’t as scalable, but can be as profitable as Production agencies.

Individual billable rates work best for this type of work. Knowing who is important. Clients arrive looking for specialized expertise, and often a specific person. Projects can’t be planned without knowing who is going to work on the project. Individual rates allow agencies to maximize profits, because adjusting billable rates by person captures the value that specific person provides.

  • Innovation. This is the rarest type of agency, the least scalable, yet most attractive. Clients’ hire these agencies for raw brainpower. They specialize in doing work that no-one has ever done before. They employ almost no Juniors. Work can only be done by Seniors and Partners. Even tedious and boring work has to be completed by Seniors and Partners, because it can impact the entire project.

Role based rates work best for this type of work. Partners and project managers probably have an idea of the type of roles that are required. However, as the project progresses they need the ability to add/remove people on the project. This gives them flexibility, while being able to charge clients for differences in abilities.

In conclusion, setting your billable rates is the first step to being able to create accurate project plans, and improve your employee utilization.