Are you struggling to find the perfect balance for your team? You're not alone. Creating a staffing plan is essential for achieving business success and reaching your strategic goals.
This process involves forecasting, analyzing past projects, and pinpointing areas that need improvement. Your delivery team might say they're swamped, while your financial team claims you're overstaffed. It's tough to know who to believe, right?
Remember, it's crucial to put people first when planning your staff. Make sure your team members have the right skills and are well-rested and well-utilized. By crafting a well-thought-out staffing plan, you'll be on your way to building a strong, effective team structure that drives success and helps you achieve your strategic goals.
In this post, we'll show you how to use objective data to get the clarity you need to decide when to hire and how much staff to add, as well as gauge the efficiency of your investments. Creating a staffing plan is a simple task, but there's more to it than meets the eye.
Stick with us; we'll guide you through this process to set your business up for success!
Step 1: Understanding your business economics
What needs to be true for your staffing plan to make economic sense?
The process of creating your staffing plan can be started by zooming out and taking a look at your business through a set of metrics that will help you answer whether or not your agency is healthy and has the right balance of staff and income.
By understanding the key metrics, and pairing them with your current position and future goals, you’ll have a solid foundation to work upon.
A.) Delivery margin
Delivery margin, or the profit generated from the sales of services after deducting the cost of producing or providing them, is considered one of (if not the) most important metric to track at your agency from a financial perspective. The formula is simple:
Delivery margin = Agency gross income (AGI) - Delivery expenses
Or on a percentage basis:
Delivery margin (%) = (AGI - delivery expenses) / AGI
The delivery margin percentage represents the portion of each dollar of revenue that remains after deducting delivery expenses.
Your delivery expenses, as mentioned below, will mainly consist of your staffing costs and other expenses like tools, fees, supplies, etc. If you’re aiming for a 60% delivery margin, meaning that for each dollar you make as an agency, you keep 60 cents of it, then you must ensure that your staffing expenses will line up with that. If you’re only keeping 40 cents of each dollar you make, you might have to consider a tweak in your staffing plan to hit your goal.
B.) Overhead benchmarks
In addition to monitoring your staffing plan based on the delivery margin you're making, it's essential to ensure that your overhead spending ratios align with your current staffing plan.
Having worked with hundreds of agencies and financial statements over the years, we at Parakeeto have developed a benchmark range that successful businesses should aim to operate within for a sustainable agency. These benchmarks can be divided into three overhead areas:
- Sales & marketing department: Aim for 8-12% of your AGI (Agency Gross Income).
- Administration: Target 8-12% of your AGI as well.
- Facilities: Strive for 4-6% of your AGI.
Keep in mind that the ranges for each department aren't necessarily set in stone, as we understand that every agency is unique. What's most important is that your total overhead (the combined expenses of all three departments) falls between 20-30% of your AGI.
C.) Salary allocations
It’s important to benchmark all of these financial metrics having factored in the cost of your team in each of those buckets. This means attributing each person’s salary across these areas of your organization to understand the impact that their salaries have on your financial health and the balance of these different spending categories as you update your staffing plan.
You may realize that after tallying up salary expenses for your S&M team that you’re far too invested in this team, above the benchmark range listed above. Conversely, the opposite could also be true.
Being aware of salary allocations and adjusting your staffing plan accordingly can help ensure that your organization remains financially balanced and on track to achieve your goals.
D.) Staffing impacts on delivery margin
Let's examine how your staffing can affect your delivery margin, the factors that influence it, and how to keep it under control. There are three factors that impact your delivery margin, all of which relate to your agency's staff: Average cost per hour (ACPH), average billable rate (ABR), and utilization.
Scenario 1:
Imagine you're considering closing a deal and wondering how much you can discount the price while still being profitable. You're aware that payroll is your agency's most significant cost, but do you know how much each hour of your team's time costs you to appropriately mark up those hours?
That's where ACPH comes into play. This metric directly affects your delivery costs and, consequently, your delivery margin.
Scenario 2:
Suppose you're deciding whether to add a new team member. The first question you'll ask yourself is, does this department need another team member?
Utilization, or the amount of time your team spends on revenue-earning activities (in delivery), helps you determine how busy your team is. It's also an opportunity (or risk) for moving your delivery margin metric.
The busier your team is with revenue-earning activities for the agency, the higher the overall delivery margin you can expect (assuming that time isn't spent over-servicing). Conversely, the more your team has to wait for more work to be won, the less efficient their time usage will be.
Scenario 3:
Imagine you have capital to invest in additional team members, and your company offers design and development services. By calculating each revenue stream's average billable rate, or how efficiently revenue is earned, you'll be able to compare the two and decide where you'll get the most value for your investment. You'll also gain more clarity on the revenue capacity a given team member should add to your business.
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Pro tip
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Step 2: Develop a capacity model
Start by creating a capacity sheet where you can model the following details for each team member:
- Salary, benefits, commissions, and payroll taxes
- Role and department
- Total hours worked by the individual
- Number of hours spent on delivery tasks and other departments they may work in
Consider these departments:
- Delivery
- Sales & marketing (internal)
- Administration/back office (internal)
Once you've gathered this data, the capacity sheet will help you understand how much of your payroll costs can be allocated to each department in your business. It will also give you an idea of how many hours your team has available to complete deliverables. You can find a template for a spreadsheet like this in our free agency profit toolkit.
An optional but valuable concept to consider is the role category. The goal is to group your capacity into a few meaningful subsets of delivery. Choosing a role category for each team member might be challenging, but try to make it work by rounding the edges a bit, and we can refine the details later.
For example, here's what a role category exercise might look like for a design firm:
<table>
Employee | Role | Role category ~ Tina | Creative Director | Strategy ~ Trisha | Sr. Designer | Design ~ Tanya | Sr. Designer | Design ~ Tommy | Jr. Designer | Design ~ Tino | Jr. Designer | Design ~ Traci | Project Manager | Accounts ~ Tiffany | Account Manager | Accounts
</table>
This model, with role categories defined, allows you to drop a potential hire into your plan and immediately see how it impacts a subset of your business. It will also show you how much revenue you need to add to fully support them, how it impacts your utilization target, your potential delivery margin and overhead ratios.
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Step 3: Develop a financial forecasting model
Understanding the three values that impact delivery margin helps you build a financial model that projects into the future.
Let's work through an example to see how this is done. We'll start with a simple case of a designer on your team using the following capacity grid, which you can create using the agency profit toolkit:
In this example, we have a designer named Tina who works 40 hours a week (2,080 hours a year) and makes $100,000 in total compensation, including benefits, commissions, and payroll taxes. Tina is expected to deliver 32 hours of work to clients each week, and she's likely to take 30 paid days off this year.
To forecast financially, we need to figure out how much revenue (AGI) Tina can generate using this formula:
AGI = (Capacity x net utilization) * ABR
Capacity
Tina's annual capacity is 2,080 hours.
Utilization
We calculate Tina's projected utilization rate based on her weekly expectation to deliver client work. Out of 40 available hours, Tina is expected to bill 32, giving her an 80% utilization rate.
Gross delivery capacity
Tina's gross delivery capacity is her total capacity (2,080 hours) multiplied by her utilization rate (80%), which equals 1,664 hours.
Net delivery capacity
Before using the formula, we must account for Tina's time off. Converting her 30 days of annual leave into hours (8 hours a day) gives us 240 hours. These 240 hours can't be billed to clients, so we need to subtract them from Tina's original delivery capacity and recalculate her utilization.
Gross Delivery Capacity - PTO Hours
1,664 - 240 = 1,424 delivery hours
To find Tina's net utilization, divide the new delivery hours (1,424) by her total available hours (2,080). This gives us a net utilization of around 68%.
Your standard rate
For ABR, this is the rate you'll charge for Tina's time. Let's say it amounts to $200/hour.
Putting it all together
AGI Capacity = 1424 * 200 = $284,800
You can expect Tina to add $284,800 of AGI capacity to the business, meaning you should be able to sell and deliver roughly that amount of extra work, assuming things work out as modeled.
The levers mentioned above, namely, average billable rate (ABR), average cost per hour (ACPH), and utilization, can significantly impact your margins. If someone is only half as utilized as you planned, they will generate much less revenue for your agency. Conversely, even small increases in utilization or ABR can positively impact your bottom line.
If you feel understaffed but don't have the funds to hire more employees, you may have an efficiency issue with your current team. In such cases, assessing your capacity model and identifying opportunities to improve utilization and optimize ABR to achieve better margins is essential.
Small tweaks in utilization or ABR can significantly impact budgets and margins. By understanding the revenue targets you need to set based on your staffing plan, you can ensure financial sustainability for your agency.
Additionally, since your capacity model includes department allocations, you can get an idea of how much you're spending on each department in terms of payroll and compare it to the overhead benchmarks noted in Step 1 to assess whether you're on track.
Step 4: Develop a planned work model
Developing a planned work model is crucial to plan your work effectively.
This can be as simple as tracking the number of scheduled hours for a project or set of projects and then comparing this to your capacity model to see how much work you have planned and how it relates to your current staffing. This is where the role categories you defined in Step 2 come into play.
For example, imagine you run a creative studio that offers various media projects such as brand kits and websites. Your role categories might include design, development, accounts, and strategy. If you've sold a project for a small brand kit to a new agency that needs to be delivered within a week, you can use the role categories you've defined to list the planned hours for this project.
<table>
Role category | Planned Hrs ~ Design | 40~ Strategy | 3~ Accounts | 8
</table>
Once you have this information, you can compare it to your team's capacity for each role category during that period to determine if your team can handle the workload.
<table>
Role category | Hours/yr | Hours/wk ~ Design | 5000 | 96.2~ Strategy | 1500 | 28.8~ Accounts | 2500 | 48.0
</table>
For example, the design team might have a capacity of 96.2 hours per week, while the strategy team might have a capacity of 28.8 hours per week. By comparing your planned hours to your capacity, you can ensure you're staying focused on your team and risking burnout or missed deadlines.
It's also essential to consider developing a simple set of products or service lines to create meaningful segmentations of your work. This will help you collect better data for estimation and forecasting purposes in the future.
Step 5: Forecasting your staffing needs
The next step involves forecasting your staffing needs. However, before you dive into the details of your resource plan, it's essential to understand the difference between precision and accuracy. Being overly detailed in your plan can harm your accuracy, so keeping it simple is vital.
People often use a bottom-up approach when creating a staffing plan. This involves breaking down a project into smaller tasks and assigning them to individual contributors to understand how their work matches up to their capacity. While this approach is precise and provides insight into team capacity in the short term, it becomes less effective early on in a project's lifecycle or for longer time horizons and can create problems when changes need to be made.
That's where top-down forecasting comes in as a more helpful approach for getting forward visibility into your staffing needs. It's more focused on accuracy than precision and involves using higher-level estimates about projects, often using historical data to estimate the time required by role category. By rolling capacity up into role categories, we remove a lot of the precision that slows down the process of building a capacity model while maintaining a reasonable amount of accuracy when looking forward over longer time horizons and running multiple scenarios.
As the project progresses and the scope and sales process are de-risked, the forecasting process can move towards a more precision-focused approach. Eventually, the project management team will generally use bottom-up forecasting throughout the project to maintain accuracy and ensure that the team has the necessary resources to complete the project successfully.
➡️ Learn more about how to conduct effective resource forecasting.
Step 6: Install feedback loops
When creating a staffing plan, it's important to remember that plans are built on assumptions. Agency operations involve taking assumptions about client work and projecting them into the future. However, sometimes those assumptions are wrong, and the plan falls apart.
So, what can you do to be ready for anything? The answer is to install feedback loops.
By setting up a feedback loop, you can continually improve the accuracy of your models and forecasts, which will have a direct impact on your agency operational efficiency. To do this, you need to track three important metrics: Scoping accuracy, average billable rate (ABR), and utilization.
Scoping accuracy involves comparing your estimates of the time required to complete a project or group of projects with what happened. Did your estimates match up with the actual results?
The average billable rate (ABR) tracks your rates trending over time. Is the ABR different depending on the service offering or the person doing the work?
Utilization measures whether or not you're hitting your targets. Are you using your resources effectively? Is utilization different depending on the person or the role category?
Example:
To set up this feedback loop, ensure that your time-tracking data is aligned with the structures discussed in earlier steps (capacity model, planned work, etc.). Your project names, service lines, products, and role categories should be consistent in your agency's time time tracking software or project management tools. This will make comparing estimates vs. actuals easy and not require hours of data transformation, cleaning, organizing, etc.
Set a regular cadence to measure these metrics, and use the information you gather to adjust your models and forecasts. By continually tweaking your staffing plan based on the feedback loop, you'll be able to adapt to changes in your business and improve your accuracy over time.
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Who can you look to for this information?
When collecting the necessary information to create a comprehensive staffing plan, it's important to remember that you might need help to gather all the data.
Different parts of your business will have separate data and processes relevant to the staffing plan. Your financial, operational, HR, and delivery teams will all play a role in providing the information you need.
Creating a staffing plan is a group effort, but you may be responsible for bringing it all together and making sense of it. Feel free to contact your colleagues in different departments and ask for their input. Collaboration is critical to creating an adequate staffing plan.
Maximizing your agency's success with a staffing plan
A comprehensive staffing plan is crucial for any agency to maximize its success. Your team is the lifeblood of your business, and having the right people in the right roles at the right time is essential.
Creating a staffing plan may seem daunting, but you can make informed decisions about hiring and resource allocation by developing models, monitoring KPIs, and setting up feedback loops. Collaboration with colleagues from different departments is also crucial in this process, as they can provide valuable insights and help collect necessary data.
By dedicating time and resources to creating a comprehensive staffing plan, you can create a data-driven approach to staffing that will allow you to adapt to changes and make informed decisions. This will not only support your agency's success but also ensure your team's well-being.
With a comprehensive staffing plan in place, you'll be well-equipped to face any challenges that come your way and make the most of new opportunities.
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