And is it even important?
I think it is one way to understand the lunacy of some new business programmes and agency life, which keeps the agency on the hamster wheel.
Here is an example of a cost of sale calculation I didn’t do for an agency but bares many similarities to one I did.
The one I did was worse and nobody in their right mind would believe it. In fact we stopped half way through the workshop for what the CEO called a ‘quick chill out.’
When I do it for real I put in real hourly rates and real-time spent, so it is, well, realistic This example though is common place in my speaking with agencies and I hope gives you some reason to change your new business behaviours
The problem by the way is target chasing, i.e. we must meet x amount per month or pitch x amount of times a month. Which I won’t go into detail here. Suffice to say chasing arbitrary targets causes cheating and lack of quality control; (We keep our jobs by hitting made up targets or missing them and explaining why); and not qualifying opportunities. As long as we hit our pitch targets we have a compelling argument to remain employed, phew! You make the rules we keep ’em boss.
I must stress there will always be waste in agencies and their new business programmes, Productivity = Work + Waste. We get paid for work and not waste. And the complete elimination of waste is probably fanciful. And we learn from waste so it can have some value to us too.
In short, waste is the tasks that are carried out, that costs time and money and are not productive. “If they don’t make the boat go faster, don’t do them” as Steve Redgrave didn’t once say & went on not to say, “We limited ourselves to only doing things that would make the boat go faster, if we didn’t think it would do that we realised we shouldn’t do it.”
So how much does it cost to win a piece a business.
We need to calculate all the waste that happens prior to winning a piece of business.
To do this we need to add up over a period of say 6 months the cost of non-productive new business activities.
Firstly how many 1st meeting were attended for free (we don’t charge to meet prospects right, only lawyers do). Then we need to calculate how many 2nd meetings come out of those, are there any third meetings apparently and then add-on quantity of pitches. Then finally work gained and it’s value and more importantly the margin on that work.
Over a 6 month period
Quantity of 1st meetings = 18 meetings
If 2 people go on first meetings and the round trip plus the meeting takes 3 hours and we value our time in the same way we would if being productive at £100 per hour.
Therefore 2 people for 3 hours at £100p/h = £600
18 x £600 = £10,800
Quantity of 2nd meetings = 7 meetings
Like wise as above, yet you probably stated involving creative and strategy people to prepare stuff and take them away from productive work, you can calculate that at will, 20 odd hours maybe. But I will skip the realism, who wants the truth right?
Therefore 2 people for 3 hours at £100p/h = £600
7 x £600 = £4,200
Note no taxis, trains, business lunches, sneaky G & T’s – all perfectly reasonable in my opinion.
Quantity of 3rd meetings = 2 meetings
Do some clients really need meeting 3? Apparently so.
Let’s use the same maths and hope the CEO or a creative Director hasn’t got involved and pushed the hourly rate up to £400 per hour,, of course they should have by now but who wants the truth right?
Therefore 2 people for 3 hours = £600
2 x £600 = £1,200
Quantity of pitches = 4
How much does a pitch cost? Well an agency had to do all of the above firstly. Then we have the cost of the pitch. There are two clear cost a) creative, strategy, planning, printing, powerpointing, props etc and b) the pitch itself.
Let’s say in people time 640 hours in total (We have all seen up to 8 expensive people right spending 8o hours each) are spent and let’s just be kind and stick with £100 per hours although we know that probably by now everyone in the agency has touched the brief, Agency Owner, ECD, CD, Planner (senior, junior and Daddy), young upstart and passer bys…”oooo is this the beer pitch, I love beer and did you know that….” oh and freelancers.
640 x £100 = £64,000 (that’s less than the IPA figure btw) per pitch
4 x £50,000 (lets round it down for God’s sake) = £256,000
Then the pitch itself 4 hours maybe including round trip and say 4 people present (I have seen 8 before, any advance on 8?) – let’s stick with £100p/h
4 x 4 x £100 = £1,600
and 4 pitches = £6,400
So before we have pitch announcements we have spent the above in non-productive activities.
And I have not added in any cabs, trains, boat or planes – cost of direct marketing (design, print, postage, date base) to get the creds meetings, the person who makes the cold calls, the cost of joining the marriage broker who you took to the Ivy 4 times in the last 6 months and promised to get you on the next big one, no cost of recruiting new business people or the pub lunch you had on the way back from any of the meetings or pitches, at least that was money well spent. I didn’t add them on because I am kind and you can feel that, right!
So let’s ask for the bill so far.
£10,800 in 1st meetings
£4,200 in 2nd meetings
£1,200 in 1st meetings
£256,000 in pitches
£6,400 in pitch time
Total = £278,600
Pitches won = 1 and the fees are £400,000 and the G/P is 33% = £133,000
With all he kindness in my heart the agency is down £145,600
You can play with the figures yourself to add in more cost but that is depressing you can increase your pitch rate to 50% that will help lots, ie break even(ish). But remember I wimped on real pitch costs.
My point is this agencies should focus more on productive work with clients and servicing them and qualifying hard on pitch opportunities. Yes they’ll always be waste, you will always have some cost of sale. The benefits of controlling your cost of sales is clear to see and also included staff morale and agency image which helps recruitment.
There are upsides too. An agency will hold on to a piece of business for 2-3 years so we can triple the G/P gained. Also that piece of work may grow and lead to referred business, you may even get referred and win without a pitch, why not, you are worth it after all.