What is the Half-life of Your Agency Resources?

Over the years, I have had the fortune of observing many businesses across hundreds of industries. Some of them are clients, some are peers, and others are the workplaces of friends and family.

Many of my posts come from these very same observations, and this week is no different. Today I wanted to share an observation from how the “big 4” accounting firms operate their business, based on input from many of my friends and family who have worked for these organizations.

Now it may be a stretch to compare a 250,000+ employee organization with billions in revenue to the agency world, but I can give it a shot. There are actually more similarities than you might imagine.

Both provide professional services to other businesses (i.e. clients). Both traditionally adopt a partnership structure, as well as a hierarchical organization. Both need to sell business to clients, deal with accounts receivable and try to scale up their services to grow profits. Both have to recruit top talent, put them in a position to succeed, and give them a path to success.

It’s this last point that is the source of inspiration for today’s post.

How much is a billable hour worth?

The “big 4” accounting firms are hierarchical in their organizational structure. You start out as a “staff” level 1. After two years, you are eligible for promotion to senior staff.

Two or three years after that, you are eligible to become a manager. Then after 3 to 5 years, you can become a senior manager. Then after another 4-7 years, you can put in your partnership application. For every 100 people who enter the organization, maybe 10 remain for the coveted partnership positions when their time comes.

You could call this survival of the fittest, or you could say that the other 90% came to their senses. Either way, that’s the simplified picture of how these businesses work.

When it comes to billing for time, the partner may bill their time at $2,000 per hour. And the staff may bill at $100 or less per hour. The rest of the staff and manager positions are billed at say $200, $500 and $1,000 per hour.

With this type of billing, the company is declaring that 1 hour of the partners time is equally as valuable as 20 hours from an inexperienced staff member. I started to think of this as a “half-life” situation when it comes to billable resources.

How do you allocate your time?

In the “big 4” scenario, it’s obvious where time should be spent. A partner is so valuable, that they should only be brought in during the most important scenarios. It’s more profitable to have a staff work on a problem for 19 hours than to involve the partner.

Or to burn 9 hours of time for a senior. Or to have a manager burn 4 hours on the problem. Or two senior manager hours. You get the point.

These organizations can tie out these efforts to profitability using a simple calculation. The time of a partner is so valuable that it must be used in only the most necessary of scenarios.

Shouldn’t agencies work the same?

When it comes to running your agency, shouldn’t this work the same?

Does every problem faced warrant your expertise? Or would you be better off handling it with more junior resources?

Are you able to distinguish between the work that you must do and the work that doesn’t require your expertise? What about the profitability of this decision?

While it’s not recommended for most agencies to implement the hierarchy of a “big 4” accounting firm, you can learn from their approach.

What holds us back from this structure?

Why wouldn’t every agency want to implement this structure? Probably a combination of short-term thinking and a high degree of difficulty.

Instead of hiring one employee at a time, you would need to recruit 10-20 new “staff” each year for a recruiting class. You would need to have the revenue stability to support such a large class, and the fortitude to see the plan go through.

Instead of keeping things small, focusing on lifestyle and keeping relationships personal, you would need to treat the business like a revenue machine.

You would need to sacrifice your identity and make business a numbers game. You would need to say goodbye to your “fun” little business, and become a corporation.

Many of us don’t want to make that level of sacrifice, myself included.

Learning from outside perspectives

But that doesn’t mean we can’t learn from the example of these tremendously profitable, globally iconic firms.

They have mastered structure and hierarchy. They know where their time is most valuable, and where they can make the biggest impact.

This is why I find so much value in observing all of these businesses. It helps me decide if something is worth my focus, but more importantly it helps me understand what not to do.

Every time we peer into another scenario, our businesses become more valuable.

I hope you enjoyed the view.