Fees, Utilisation and Recovery Rates: Getting the mix right in your business
With the DBA Annual Survey Report launching 8 October, now is a good time to address an area of financial management that some design agencies struggle with – the relationship between hourly rates, utilisation rates and recovery rates.
Firstly, a look at what we mean by some of the terms:
Hourly rates have been the bedrock of the design industry since it began. As a sector we sell our time. Rates increase or decrease depending on experience and demand. Some studios have a blended rate where it is the same rate for all staff regardless of experience. Clients can like the simplicity of this approach, while others want to know every last detail.
A guide to setting your rates, by DBA Expert Chris Lang, can be found here.
In more recent years there has been a move towards project pricing and value-based pricing where the agency no longer needs to discuss hourly rates for different skill levels with their clients anymore. There are many positives to this, but you still need to know what you must charge as a minimum to make a profit.
Utilisation rate is the percent of an individual’s time that is charged back directly to client work. For an 8-hour day this might be in the high 80%’s / low 90%’s for a junior designer, but much lower for a more senior position that has to also manage staff, deal with new business development etc.
Recovery rates are the percent of your billable work that you actually bill to the client. This is the numerical value for over-servicing (although there are other reasons for low recovery rates). For example, if you work 10 hours at £80 per hour but you only bill the client £600, your recovery rate would be 75% (600 divided by £800 x 100 = 75%).
Getting the mix right
The way these three figures work together is key to the profitability of the business. You can have high hourly rates, but low utilisation or recovery rates will mean there is little money coming in. You can have high utiliation rates, with strict timesheet rules for the whole studio, but it is pointless if you then don’t charge the client for all that time spent.
A guide to getting the balance right and keeping an eye on your financials, by DBA Expert Gary Baxter, can be found here.
How to do things better
Money – whether you have different rates for each member of staff, or blended rates, or even if you never actually talk about hourly or day rates with clients you need to make sure whatever you charge is going to be enough for you to make a profit.
Time – smaller agencies can get away with not using timesheets, but it is difficult to grow in size without a system in place to manage this. An individual’s utilisation rate needs to go hand in hand with their rate. How much they charge, and for how many hours, gives you their Potential Earnings.
Client Servicing– The most important issue for the business is your recovery rate, because this has a direct impact on your bottom line. The industry average is about 80%. This means that 20% of the time spent working on a client project is written off – it is the equivalent to working for free on a Friday. The really profitable businesses are those that manage their client relations so well that if extra work is needed it is flagged, talked about, and extra time agreed before moving on. They are the businesses that understand when the job is finished – they are not continually tweaking and polishing late into the evenings.
There are other reasons for a low recovery rate. You can read more about them in this guide Recovery Rates: Are you getting paid for all the work you do? by Esther Carder, Partner, Kingston Smith. Make sure you are not guilty of any of these.
2020 DBA Annual Survey Report
Released each autumn the DBA Annual Survey covers fees, salaries, utilisation, income, recovery rates, benefits and trends within DBA member companies. Data is segmented by geography and size of agency to make comparisons more relevant.
Gain a competitive edge: Register for the free online DBA Annual Survey Report launch event and hear valuable insight into how to use the Report’s findings to improve the long-term performance of your business. 8 Oct at 3pm; DBA members only.
Read more about the DBA Annual Survey here and watch the short video below on the value of participating.
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