How to Maximize Your Consulting Firm’s Profitability with Marcel Petitpas: Podcast #308

This post was originally published on this site

How do you maximize your consulting firm’s profitability? In this episode of Consulting Success Podcast, Michael Zipursky is joined by Marcel Petitpas who is the Cofounder and CEO of Parakeeto, a company dedicated to enhancing the profitability of agencies and consultancies. His expertise has garnered attention from numerous platforms, including Ad World, DigitalMarketer, and Credo among many others.

In this episode, you’ll learn how to:

  • Utilize cold emails to expand your network while strengthening both professional relationships and outreach skills.
  • Find holes in your business to service your customers more effectively.
  • Leverage content to grow your pipeline.
  • Comprehend your gross margin to facilitate the growth of your firm.
  • Employ Marcel’s formula for pricing your products or services and improve your gross margin.
  • Forecast the ideal time to add talent to your team.

Resources Mentioned:

In this conversation, Marcel emphasizes the challenges surrounding scaling your consultancy and why so many consultants struggle to scale. You will also learn how to utilize cold emails to expand your network while strengthening both your professional relationships and outreach skills, how to find holes in your business to service your customers more effectively, how to leverage content to grow your pipeline, how to comprehend your gross margin to facilitate the growth of your firm, how to employ Marcel’s formula for pricing your products or services, and how to forecast the ideal time to add talent to your team, plus so much more. There is so much to learn from this wide-ranging discussion. Tune in!

Joining Michael on this episode is Marcel Petitpas who is the Cofounder and CEO of Parakeeto, a company dedicated to enhancing the profitability of agencies and consultancies. His expertise has garnered attention from numerous platforms, including Ad World, DigitalMarketer, and Credo among many others.

Marcel emphasizes the challenges surrounding scaling your consultancy and why so many consultants struggle to scale. If you’re someone who is struggling to scale your consultancy, having someone by your side to see things you don’t is imperative if you’re looking to grow your consulting firm. If you want to work directly with the Consulting Success team to receive personalized coaching and support to optimize and grow your consulting business, marketing, and revenue, be sure to visit ConsultingSuccess.com/Grow to learn more and apply.

Let me tell you a little bit more about what you will learn from this episode with Marcel. The first is how to utilize cold emails to expand your network while strengthening both your professional relationships and outreach skills, how to find holes in your business to service your customers more effectively, how to leverage content to grow your pipeline, how to comprehend your gross margin to facilitate the growth of your firm, how to employ Marcel’s formula for pricing your products or services, and how to forecast the ideal time to add talent to your team, plus so much more. Here to share with you his full story and insight is Marcel Petitpas. Enjoy.

Marcel, welcome.

Thanks for having me, Mike. It’s great to be here.

I’m excited to dive in with you and talk about all things profitability and everything else that you have going on because you do a lot of work with different types of professional services firms and agencies. I thought where we could start is going back because you spent about four and a half years at Gold Front, which is a creative company. You were in San Francisco. I’m wondering. Is that where you start to see an opportunity for agencies to focus more on profitability? Did this idea and interest in understanding profitability come somewhere else?

It’s interesting because Gold Front was our first major client at Parakeeto. I started exploring this problem space. I met Josh, the Founder of Gold Front, after I started the podcast. I started the podcast to start talking about this because I noticed that there was nobody else going deep into this area of the business. Josh and I met through that.

Gold Front is a fully remote company. As a Canadian on the East Coast or the other side of the continent, that gave me the ability to get in and start working with him. I was able to get into the weeds at Gold Front in a way that we couldn’t otherwise do with the services that we do at Parakeeto. Those four years informed a lot of learning. It was great working closely with Josh. A lot of his ideas and opinions informed some of the products and services that we designed over those four years to form Parakeeto.

I want to get us quite tactical so we can add a lot of value for everybody to understand. There’s likely a lot of stuff that people are missing when it comes to profitability and ways to optimize or improve their consulting business. Before we do that, take me back to the early days of your business when you were getting started. Was the plan from day one to become specialists in this area of profitability? Did you have a bunch of different services, ideas, and things that you want to take to market or how you want to work with firms? Was profitability very clear from day one?

The problem was clear from the start. One of my first businesses was an agency. I was doing virtual real estate tours back in 2016 before the technology existed to do this with your cell phone. That was a time when the East Coast of Canada was a buyer’s market. Houses were sitting for a long time. They were not selling for much money. I was running into challenges with the fundamental unit economics of that business. “It takes me 30 hours to do this and real estate agents are willing to pay $300. I can’t scale this business beyond anything but being a hobby for myself.”

I was familiar with the challenges of trying to get information on how to calculate things like gross margins and utilization rates for agencies and professional services. There are all kinds of different definitions everywhere you look and it’s not clear what the right framework is. Fast forward a few years, I got involved in software. A mentor that we both know, Dan Martell, called me up. He knew I was looking for my next thing. He said, “I have a friend. His name is Jared. He runs an agency out of Boise, Idaho that does software development. He’s got an idea that every agency and consulting firm I’ve ever talked to needs.”

I got on the phone with Jared. He was running at a much larger scale than I had ever run at. He says, “My team spends 1 day or 2 a week building spreadsheets and pulling data together from all over the place to get us this basic information that we need to make decisions. What is our utilization rate? What’s our forecast? Which clients are profitable? There has to be an easier way to do this. I can’t help but think that everyone else in my position is struggling with this.”

CSP 308 | Consulting Firm Profitability

I said, “I’m familiar with this problem. Let’s talk to more agencies.” We spent a few months cold-calling and interviewing agencies from all over the country. Everybody I talked to was struggling with this. The problem was very clear. The solution is three years of work trying to figure out product-market fit, which is a little bit nascent and elusive but the problem was clear from the start. The positioning got refined the more we had a dialogue with the market and better understood the language that they used to describe that problem and their experience of it.

I love that you didn’t just say, “Here’s an idea. Let’s build it and see what happens.” You engaged the market in getting that feedback. That’s an area that a lot of people struggle with. They know they should probably be talking to more people but the idea of getting on the phone with some can feel daunting and others begin down that path but aren’t necessarily as successful as they would like to be.

I’m wondering. Take us back to that time when you had that conversation with this agency owner in Idaho and said, “Let’s go to market by getting some more feedback to validate our hypothesis.” What did you do to get people on the phone? Why would other agency owners be willing to give you the time of day? Were you positioned as if you were going to try and build something for them? What were you doing to get people to feel comfortable to say yes to getting on a call with you?

After I explain this, I would love to share the insight. While tactically we did everything right, the mental framing that I had done wrong cost us 3 years and probably $500,000. The first thing I decided was we have to talk to agency owners. We did have a concept. We wanted to build a software platform that pulled data together and then reported on these things.

The idea was it would pull data in from all these different sources that they’re already using and then run the reports. I got on Clutch.com, which is a big website that has reviews for thousands of agencies all over the world. I built a scraping bot. It scraped it. I paid somebody on Upwork to get people’s email addresses and started sending anywhere from 200 to 300 cold emails a day. The email that I figured out worked that the best was stroking the ego and asking for advice.

I positioned, “I’m a young person in the industry. I noticed that you’ve been running a firm for a while. I respect your work. I’m working on this thing. I would love to get your feedback. Would you be open to jumping on a call and giving me some advice?” I was able to book anywhere from 2 to 3 meetings a day using that cold email. Looking back, it makes sense. If I get that email now, it’s very hard for me to say no because I remember what it’s like to be that young entrepreneur who’s trying to get started and looking for advice. That’s how I got those initial calls.

I know you want to share the mindset piece. It sounds to me like you’re saying that the youthful, “I’m young,” angle was a big part of what made this successful. If you could clarify, do you think that’s the case? If so, what about everybody else who might be joining us and going, “I’m not that young anymore so I can’t use that?” What might they be able to use to get a similar response?

To be honest, I can’t tell you how much of the young factor was part of the decision-making process. Did it make the strategy more effective? Maybe. Was it a 10% improvement in the response rate that I would have gotten or a 100% improvement? I can’t say but what I can tell you is that from experience even from that point forward, the angle of stroking someone’s ego and then asking for advice is generally a very good way to get a response and get some people on the phone. Generally, people are kindhearted. They want to be helpful.

If you position this like, “You have the expertise and I would like to benefit from it,” most people don’t get those emails or asks every day, even the people that you would think would be inundated with those kinds of things. I would encourage somebody to try it out because regardless of your age if you write that email well, do it very personalized, and research somebody and it’s genuine, it should be effective, or at least it has been for me since that time that I’m not so young anymore.

Stroking someone’s ego and then asking for advice is generally a very good way to get a response. Click To Tweet

I have to ask you about that again before you share the rest of this. How personalized were those emails? If you’re saying 200 to 300 a day, I can imagine that you probably personalized the name of the person, the company name, and maybe one other field that you can merge in somehow but beyond that, can you explain how personalized and custom were these messages that you were sending out?

When I was first trying to figure out what email works, I was writing them all 1 to 1, going on people’s LinkedIn and websites, and figuring this out. Once I figured out the email that worked, the personalization that seemed to catch people’s eyes was there was a line in there like, “I’m working on something in this area. I don’t know if they taught you about that.” I put in the name of the school that they went to. That was this niche piece of information that is not going to show up on a bot list.

Once I figured that out and started getting responses, I went and hired a person to build the list and gave them some tips on how to find what school people went to. Generally, it was on their LinkedIn. That’s how I then leveraged up that personalization but this has always been my thesis on cold emails. It’s not something that we do at Parakeeto but at some point, I’m sure we will go back to doing it. Write the unignorable email or the 11 out of 10 emails and then figure out how to build the list. Otherwise, you’re always going to be trying to write within the constraints of what information you’re getting on that initial list. It’s going to end up looking like everybody else’s emails and get ignored.

That’s such an important part because so many people are thinking about how can they automate and make things more efficient. What they’re missing is that oftentimes, it’s not about volume right away. It’s about value. Creating that email or message differentiates you from everybody else because if your message comes across, and somebody instantly looks at it and goes, “You’re clearly sending this to 100 or 1,000 other people,” and if it feels like that, the response is likely to be very low. I love that you put more personalization. I’ve pulled you away. There was something from a mindset that could have saved you three years. Take us back to that.

When I look back, we did everything right technically. We got on dozens of customer development interviews. We validated the problem upfront. To people who seemed interested, we were like, “Do you want to pre-buy the software and be a part of our early adopter circle?” We got people to pay us for the wireframes that we had for the product that we were going to build.

On paper, we did everything right. We got paid for something before we built it but looking back, there were a lot of false positives. If I look back at what my mindset was then, I just wanted to build the thing. I was selling the product to prove myself right. Looking back, what I should have been doing was finding the riskiest assumptions in my entire thesis and trying to prove myself wrong as quickly as possible. I didn’t do that.

Unfortunately, I was good enough at sales to sell a product that didn’t have product-market fit, build a product that didn’t have product-market fit, and go through that cycle 3 times over 3.5 years until eventually, we landed in a place where we let go of this constraint of having to be a pure software company, started listening to customers in a different way, and removed a lot of the biases that we were bringing to that conversation that we weren’t necessarily conscious of as a team.

When I think back, it was coming from a place of insecurity where I wanted to get to the point where we were building, selling, and scaling so quickly that I was brute-forcing this thing and writing an office validation when mentally, that’s not what I was looking for. I was looking for proof that I was right as opposed to looking for proof of what I might be wrong about. It’s nuanced but that’s very important.

I would like to go a little bit deeper on that. Could you offer an example like, “Here’s what we did to try and prove that we’re on the right track,” as opposed to, “Here’s what we probably should have done that was something big that we were trying to avoid?” I would love it if there’s a bit more of a tangible example you could offer.

CSP 308 | Consulting Firm Profitability

If I went back to the very start, what we did was create mockups of what the software would look like. We got on a call and asked some questions. If somebody seemed interested, then we would go into a sales pitch and try to get them to pre-buy the software. Once we had ten of those, we then started building. What I should have done instead was say, “You’re interested in this. Would you be open to letting me come in for some nominal amount of money or a couple of thousand dollars, get all of your data, do this reporting for you, and work with you to get your feedback?”

Rather than jumping straight to building the software product, I should have gotten my hands dirty and done the consulting first. It wasn’t until I got a chance to work with Gold Front that I opened myself up to that possibility. The acceleration of our learning when we were able to get into the weeds and do something that wasn’t scalable was 10X what we were learning from this arms-length engagement of building software and giving it to somebody.

Half the time, they’re not even using it because they don’t understand. You can’t have a dialogue. It was painful. I would have gone much closer to the problem, gone into the weeds, and looked for all of the things that were wrong. In my mind, I was like, “I want to build this thing. I’m going to sell it. We agreed to ten. I’m going to sell ten. We’re going to build it and then I’ll be right.”

It’s funny. It reminds me of the example you gave about emails. Do more of the custom personalized stuff to figure out what works before you then try and scale it. There are some differences there but that makes sense because when you get in the weeds and you’re doing the consulting, you’re finding not only how to make something work but what are all the edge cases and potential issues, or what are we not seeing. That makes a lot of sense.

You learned that over three years. That would have been, in hindsight, a way to go back and make some changes to see results even faster. Fast forward, you have ten clients that have signed up. Once you have that, how do you take this product to market and start getting even more clients signed up? What was working for you at that time from a marketing lead acquisition perspective? I’m wondering if we fast forward even more to the present day, what are you doing? What are you finding is working best for you to generate qualified leads and bring in new business?

The good thing that we did early on was we started creating content around the problem space. We talk about the Minimum Viable Product a lot when we’re talking about startup culture. I like to reframe MVP as having four stages to it. The first is the Minimum Viable Problem. This is the reason why after failing objectively for three and a half years, we’re still around.

We were able to stick around long enough to find some success because we knew the problem was real. We went out, talked about it, created content, published podcasts, went on other people’s podcasts, and talked about this. When we spoke to the market, they spoke back. They came and followed our content. They reached out to us. They were interested in what we were doing. We had a dialogue. We always had that surface area with the market.

What was missing was getting clear. We have the Minimum Viable Problem. There’s the Minimum Viable Point of View. That point of view was resonating as well. We used to measure these businesses using only finance data but that’s not good enough anymore. We need to do it in a different way. People were resonating with that. It was a process. That’s the part we skipped over.

I mentioned we jumped straight to Minimum Viable Product but before that, you have to understand what is the process that solves this problem in a repeatable way. Software is leveraging a process to make it happen faster, more scalably, predictably, and consistently. We were in a rush. We didn’t take the time to stop and say, “Let’s figure out what the process is.” What we overlooked was there is a lot of change in management, learning, data structure, and all these things that have to happen for us to take data from a company and turn it into a valuable report.

Write the unignorable email and then figure out how to build the list. Otherwise, you’re always going to be trying to write within the constraints of what information you’re getting on that initial list. It’s going to end up looking like everybody… Click To Tweet

It was when we stopped and said, “What if we rebuilt this product and business from the ground up and did whatever it took to make this the best possible solution on the planet? It didn’t have to be profitable and scalable. What would the best solution in the world look like?” When we wrote it all down, we were like, “We can sell this and make it profitable.” We already had leads and calls booking. It was a question of changing what we were pitching on those calls. All of a sudden, we started closing more deals.

At that point, were the leads coming from the content that you were putting out? Was it coming still from the outbound emails that you were sending or both?

We transitioned fully to content. Our strategy was to create a podcast. We would invite people to our show. Mostly, we wanted to be on their shows or blogs. We were borrowing their audience when they came on our show. We would build a relationship and get on there. It was a lot of borrowing attention from other people. That was how we built our initial audience.

We had one lead magnet, the Agency Profit Toolkit. It’s the same lead magnet years later. We have changed what’s inside the toolkit but that was what captured people and got them on our email list. We have been able to consistently get people requesting trials when they were trials and sales calls for the last few years because we were consistent about that part. That was our saving grace.

From day one, it was very clear to you the profitability and focusing on that. We will get into some of the best practices around profitability and how people can find some areas for improvement. I can’t help but wonder. Even though you had that focus, and it was clear to you from day one, as you’re starting to integrate yourself or go a little bit deeper and build these relationships with these agency owners and so forth, I’m guessing you probably saw and must have had a feeling at some point, “They’re not doing X. We could probably help them with that. We could help them to get more clients. We could help them to do this or do that.”

That wasn’t necessarily directly connected to profitability yet it appears that you always stayed focused around that core instead of adding another service or some other way of engaging or helping the marketplace. Did that ever cross your mind? I’m wondering. How did you process those kinds of temptations as they likely popped up for you?

Every entrepreneur deals with this. One of our best qualities is that we see an opportunity in everything but that can also be our Achilles’ heel. That’s true about most people who start a business and that has been true for us as well. We have had no shortage of opportunities to get distracted but our saving grace was that we understood the problem and we had a strong point of view.

That was our filter for everything. I have an incredibly experienced cofounder. He’s amazing. It’s also nice to have that other voice in the room where we’re going to talk about any big decision like that. At least one of us is going to be the sobering voice in that conversation most of the time. We have managed to keep each other on track over the years.

Let’s get into the most common overlooked leaks that you see companies have in their business when it comes to profitability. What are the big ones?

CSP 308 | Consulting Firm Profitability

One of the big challenges that we see is that most professional services businesses don’t know their gross margins, especially if they’re getting financial statements from a generalized accounting firm but even some of the specialized ones. When we look at their P&L, the thing that’s called gross profit on their P&L is their real revenue because the cost of goods sold is generally used to isolate what we would call pass-through expenses. They’re expenses that go onto external vendors such as print budgets, ad spend, external consultants, white label partners, materials, and things of that nature.

If they have a team, all their payroll goes into one big bucket. We’re not differentiating between how much of that is for doing work and how much of it is for the overhead or administrative functions in the business. The same thing is generally true about things like software and other tools. We’re not differentiating between what is meant for delivery as we would call it and what is meant for overhead, which is running the business.

They don’t have an understanding of the gross margin and that makes identifying what the problem is when there’s not enough profit very difficult to do. From there, the other metrics that determine your gross margin are generally not being measured. The first thing though is they don’t know if the problem is that they’re overspending on overhead and administration or if their service offerings are fundamentally not profitable. That’s the first place to look.

Before we go on, let me try and answer a question that some people might be wondering, which is the topic of profitability and measuring gross margin, profit margin, utilization, and all these other things. In your experience, is there a time or a level at which point it makes sense to do this? If you are a solo consultant 2 years into the business, or if you have 2 or 4 people, should you even be thinking about this? Is there a certain level in terms of either revenue or number of employees? How do you think about when this even makes sense for somebody to start spending time on?

It depends on their objective. If you’re a solo consultant, you’re doing all of the work, and there is no differentiation between administrative time and delivery time, or if your objective is to eventually hire a team, your P&L is not going to be useful until you have several people on your team because you’re going to make decisions that are not based on keeping that in balance. Understanding what your gross margins should look like and then planning and pricing your services with that in mind before you ever have to hire anyone is one of the best pieces of advice I can give to a consultant who wants to scale.

I’m sure we have both seen this time and time again. A consultant gets to a level where they have so much work that they’re like, “I have to start hiring somebody.” They realize that they have two major problems. The first is they can’t afford to hire anyone because their pricing doesn’t allow that to happen and still have healthy margins. They also have to go through the leadership, hiring, management, and all of the non-trivial tactical execution of finding people, hiring them, and getting them to produce successful outcomes.

My proposition is let’s take that first problem of you not having the money in your pricing. Let’s take that off the table right from the start by understanding the simple levers here, which is to set your gross margin up for about 70% on a given service or client, figure that gross margin out based on what it would cost you to hire other people to wear the hats that you wear in the business, and start keeping track of that so you can get yourself to a place where you can start making decisions about buying back your time gradually. You will know exactly what it’s going to cost you. You already have the money for it. You can start making decisions about what jobs you choose to do on your work and work your way back.

Why 70%? Where does that number come from?

The way I think about this is first and foremost, too many people try to measure net profit on a per-project or per-client basis. To me, that is a fundamentally flawed concept firstly because it’s way more work but secondly because it makes all of your projects and clients horizontally inconsistent. You lose a valuable insight. You can’t ever compare one client to another client because you’re factoring a bunch of externalities into the measurement of the profitability that has nothing to do with the project itself.

Software is leveraging a process to make it happen faster, more scalably, more predictably, and more consistently. Click To Tweet

My argument is this. Let’s focus on gross margin and then price in overhead, utilization fluctuations, and so on into that gross margin target. If you target 70% on a project basis, it’s because we know that there’s going to be a drop-off generally from the project to the profit and loss statement of anywhere from 10% to 20%. Most of the firms we audit fall right in the middle. It’s about 15%.

What that means is if I’m consistently hitting a 70% margin on my projects, then on my P&L, I would expect to make about 15% less than that. Let’s call it 55%. What we also know is that most firms are going to spend anywhere from 20% to 30% of their income on overhead. That’s going to include salaries for sales and marketing, administration, rent, facilities, lawyers, accountants, and all the other things you have to pay to run the business.

If you subtract 20% to 30% from that 55%, you’re left with a profit margin of ideally 25% to 40% on the high end. Most people are going to fall if they’re performing very well in that 25% to 35% range. That’s why we want to target 70% on a per-project basis and then that leaves us the room to work through the rest of those expenses and land in the right place in the P&L. It’s simple. That’s part of the reason that we set it up that way.

Somebody who might be newer to doing this may not be tracking any of these kinds of metrics or numbers inside the business. Is there any additional advice you would offer about how to start to think about predicting the profitability of a project? Are there any differences around how you think of looking at profitability per project versus per client?

On a per-project and a per-client basis, the fundamentals are going to be the same. It’s just that a client might contain multiple projects or line items of work but when you’re thinking about profitability at that level, what we have to understand is that we have the scope and the price. Those things are related but not the same. Often they get conflated as being the same. They start to get mixed up in the same document.

The first thing that we need to do with any engagement is try to get an understanding of the scope. That’s not to say that we need to be able to predict accurately how much time it’s going to take to get something done. Even if we sell time and materials, what we have done is reduced the scope to an hour. That’s the question of scope, “What will it cost us to do this work?”

If you’re doing a flat-rate project, then it’s a question of asking, “How much time is it going to take me? Let’s try to break that down into 4 or 5 buckets that my team or I might spend time on.” Most of the time, you’re thinking of that in terms of roles, “How much time do I spend being the project manager, strategist, or copywriter?” Think about, “If I were to hire somebody to do that, what would it cost me on a per-hour basis to hire that out?” That helps us get an understanding of the cost basis for that project.

The general rule of thumb is to multiply that by 3, which gets you to about 66%, and round up. If you know how to do a margin formula, which is fairly simple, it’s the cost divided by one minus your margin target. That will give you the minimum price that you need to charge and then add any pass-through on top of that. That’s how you would start thinking about pricing or setting a floor for the price you need to ask the client on any given project or client. Measuring the profitability of that is the reverse. You take a look at how much time you spent, multiply it by the cost of that time or the theoretical cost if you’re the one doing a lot of the work, and then get an understanding, “What was my margin roughly on this work?”

Is there anything that you see firms measuring, spending a lot of time around, and thinking about but does not provide that much value?

CSP 308 | Consulting Firm Profitability

It’s overhead. I’ve almost never seen a firm overspend on overhead. Generally, an agency or a consulting firm is not the kind of business where you’re going to walk into their office and they’re going to have $900 Aeron chairs, 17 foosball machines, and free catered lunch. Overhead is almost never the problem, and yet because they look at their P&L, income, and then bottom line, that’s generally the first place they go. There’s usually a 10% upside in optimizing for overhead.

The real opportunity is in improving their gross margin but that’s generally not where they’re focused and that’s where the massive opportunity exists. There are only 3 ways to move gross margin and 3 metrics that you can measure to influence that. That’s where we have seen people triple or quadruple their bottom-line profit, reduce the amount of overtime a weekend work that their teams do, and even have larger budgets to spend on administration, sales, and marketing. It’s by focusing on that gross margin and improving the fundamental profitability of the business.

There are three. Can you describe what those three are?

Let’s start with the formula for gross margin. It’s your Agency Gross Income as we call it, which is revenue minus pass-through minus your delivery cost divided by Agency Gross Income.

For those who may not be familiar with what is pass-through, can you break that down and explain it for a moment?

One of the big mistakes that we see some firms make is they’re not differentiating between the money that they collect from clients and how much of that is their responsibility to earn. Pass-through would isolate money that moves through you into external vendors for which you are not responsible for the profitability. That would be materials. If you have to go out and buy a website template or a big set of data for an engagement, or you need to spend a bunch of money on print or advertising or hire an external vendor to do part of the engagement, that would all be considered pass-through.

Let’s say, for example, you charge the client $10,000 for a Facebook ads campaign but you spend $5,000 on Facebook ads. Your Agency Gross Income would be the $5,000 that’s left over. That’s what you need to earn with your time and what we want to be measuring profitability against. Once we have isolated those things, there are two metrics that are about increasing the level of revenue that you can handle while keeping your costs the same or not increasing them at the same level. There’s one related to decreasing costs.

I’ll start with the boring one, which is, “How do we decrease our costs?” That’s looking at average costs per hour. The way that we want to think about pricing and scoping work is we take our time and multiply it by the rate that it would cost us to hire for that time. The first place to look is, “How do we decrease the average cost of each hour that’s required to serve as a client?”

Generally, what we do there is look at what is the level of judgment that’s required to go through the process of delivering this outcome and how would we lower the level of judgment required to accomplish more of the tasks in this engagement. By doing so, we can generally hire less experienced staff. Less experienced staff typically is going to be less expensive.

Understanding what your gross margins should look like and then planning and pricing your services with that in mind before you ever have to hire anyone is one of the best things you can do if you want to scale. Click To Tweet

An example for us is I used to do all the work on an audit. It’s about 40 hours of work as we build processes, documentation, and technology. An account manager who costs about half of what I cost was able to do more than half of that work. I come in and do the very high-leverage stuff. If you’re hiring a lot of freelancers, you will feel that immediately in your profitability. If you’re hiring a team, you’re going to feel that over a longer time horizon. Your total payroll will be lower at scale because the composition of your team will be less senior. That’s the first one but that one is not very exciting.

To me, that’s pretty exciting because it’s critical to scale and grow any business, especially in the consulting professional services world. Systems, processes, and things of that nature are what allow you to scale, hire, and train all these benefits. I don’t think it’s boring at all. Let’s go to number two.

Number two, we’re talking about how we make more money with the team that we already have without making any changes to that. The first one we want to pay attention to is what I call the average billable rate. This is a way to measure no matter how you price, whether you bill by the hour, do value-based pricing or retainers, or bill on Trident Layers how much money you made and how much time it took for you to complete the work for the client.

When you do that math across different clients and projects, you start to see patterns, “We make $250 an hour when we build websites but we only make $98 an hour when we do SEO work.” You can start to get an insight into what kinds of projects, clients, or teams are earning revenue more or less efficiently. What I love about this metric is all you need is roughly what was the AGI and how much time we spent. You can look at any section of the business.

Agency Gross Income is the same thing that we were talking about in gross margin. It’s your revenue minus pass-through. As long as you can isolate those two data points, you can look at a week, a month, a quarter, or a year. You can look at 1 client, 10 clients, an entire team, or the entire business. You can slice and dice the business however you want. It’s inexpensive. It doesn’t require a lot of input. You don’t have to run everything through the accounting system. You can start to get frequent insight into what’s happening in the business and get an understanding of where to focus.

One of the big mistakes that some firms make is they’re not differentiating between the money that they collect from clients and how much of that is their responsibility to earn. Click To Tweet

How do you find people who are able to track that? There’s software, tools, and time tracking. You have some software as well. I know that your clients use it. Let’s say for somebody who is newer to this and doesn’t have a massive budget to invest on the tech side, what would be a starting point? What should they be thinking about? What should they be doing to track that information so they can start to see and analyze it?

When you think about it, the specificity of the data that you need comes down to what level you want to measure this at. If we kept things simple and said, “I want to know what the average billable rate is on every project that we do,” then all you need to have is a spreadsheet in which you input our AGI for this client and the total amount of time that was tracked toward that client. There are tons of time-tracking tools that are anywhere from cheap to free.

As long as you have that or even punch the time directly into that spreadsheet, you can start to get this insight. It’s such an inexpensive but powerful way to get great visibility into what’s working and what’s not working in the business. If you notice, “We have a service where we make $100 an hour on average and we have another one over here where we make $200,” and if your entire team started only doing the things that paid you $200 an hour, you would effectively double the amount of revenue that you can do without changing any of your costs. It seems a little too easy but it is that powerful.

It reminds me of the whole 80/20 principle in action. The challenge is not whether something like this exists. It’s finding it. If you can pay attention in almost any business, there’s going to be a whole bunch of these levers. You adjust one and it has a pretty significant impact. Let’s get to number three.

Number three is the utilization rate. This will apply to you if you have a team. Utilization rate is looking, “We have a certain amount of capacity that we buy from our team. How much of that is being used toward earning that average billable rate?” If I have a team of 5 people working full-time, that’s about 10,000 hours of capacity. If I’m 50% utilized, and I make an average of $100 per hour, then that team can handle $500,000 worth of revenue. If I can increase that to 60%, we can do $600,000 but none of our costs have changed. That $600,000 for all intents and purposes flows to the bottom line.

That’s an important one to pay attention to because we find that as agencies start to scale, they can get out over their skis quite a bit in terms of staffing, especially when they’re small, and each hire adds an incrementally very significant amount of capacity. It can take them a while to fill that up. Paying attention to utilization and using elastic capacity or freelancers as you scale to make sure you’re not paying for too much capacity that ends up not being utilized to generate revenue is an important thing. This is where we have seen clients that do project accounting. They’re thinking, “We’re knocking it out of the park. Our average billable rates or our margins are great on every single project yet we’re still not making money. What is going on?” Utilization is usually the culprit in that case.

We’re talking about hiring. One challenge that people are often dealing with and wrestling with is the idea of bringing in people before you potentially need them. It’s that chicken or egg give-or-take. It’s a bit of forecasting. I’m wondering. With all the work that you’ve done with clients over the years, are there any tips, effective ways, or best practices of how somebody should start to think about the idea of forecasting and set themselves up to be better equipped in terms of when to hire or start to think about hiring and putting those pieces together?

This is the first thing that we work with clients on before we even get to measuring those feedback loops I talked about. The first step is forecasting. If you think about it, you can’t measure utilization unless you understand your capacity and you can’t measure average global rates unless you understand the expectations for projects. When we take expectations for projects and a model for capacity and put them together, what we get is a forecast.

The problem that I see most people have with forecasting is they try to do it in a bottom-up way. This is how most of the software tools for resource planning are going to do this. Take a project, break it down into 100 tasks, and assign those tasks to individual people all to get back up to this insight of what are things going to look like over the next three months. That’s an inefficient way to get to that insight. If anything changes, the maintenance cost is astronomical.

As agencies start to scale, they can get out over their skis quite a bit in terms of staffing, especially when they’re small, and each hire adds an incrementally very significant amount of capacity. Click To Tweet

I see bottom-up resource planning as an effective tool for short time intervals on mature work that’s already scoped, priced, sold, and confirmed. That’s to get an understanding of what are we doing over the next couple of weeks. To forecast out over the long-term, I encourage people to take a top-down approach where instead of thinking about work at an individual level, you’re coming back to those couple of buckets I talked about when we talked about scoping and pricing. What are those 4 or 5 different hats that you or your team wears?

If you can estimate those things and then think about your capacity in those broad buckets, then it’s much faster to say, “We have this work in the pipeline. It’s roughly this amount of time,” and then map that to, “We know we have 40 hours of design time per month. We know we have 60 hours of project management time per month. How is this adding up?”

There’s way less friction. You can maintain a broader time horizon and also a higher level of uncertainty in the work without all of the friction of trying to adjust 100 tasks every time a project timeline moves around or we want to run a scenario, “What if we get this? What if we don’t?” I wrote a whole article on this on our blog. That’s my advice. Simplify and focus on accuracy over precision when you’re looking at long-term forecasting and trying to get ahead of those decisions.

There’s a lot more information you have about profitability on your blog, podcasts, and so forth. Talk about your plans for Parakeeto. Is your goal to continue building the team and growing it? Is your plan to keep building to a certain level and then sell it? What are you thinking about the future of this business?

We get asked about that question all the time. Are we building to sell or hold? The way I see this is we’re building this to be a great business that we never have to sell so that if we do sell, we get an incredible multiple because it’s going to have to be a good offer but we’re not building a business that will be a failure if we never have a liquidity event. Maybe I’ll run this business for the next 30 years. Maybe we will have an opportunity to exit. That’s aligned with our values, our vision, and what we want.

I can’t answer that question but what I can tell you is the vision for Parakeeto. We believe that the industry and how professional services are run have changed but the way we measure those businesses has not caught up. We need a new framework for how to measure agencies. We believe that we have developed that framework. It’s to establish that new methodology for measuring an agency to build the technology platform that supports the implementation of that methodology and then to go out and try to educate as many people as possible on how to do this so they can all reap the benefits.

That’s going to include creating a ton of competition for ourselves at the consulting level. We want to disrupt ourselves out of being the people that do the consulting around this and hopefully empower every CFO firm, lots of technology companies, and lots of other consultants to be able to go in and help professional services firms measure, understand, and act on these kinds of insights and ultimately run a better business.

You don’t have the book yet but I’m looking forward to seeing the book whenever that comes out. Before we wrap up, I have a couple of more questions for you. I’m wondering. With everything that you have going on, you’re involved not only in Parakeeto but also in a few other businesses and so forth. What are 1 or 2 things that you do on a daily basis that you feel contribute to you being able to show up being effective, being productive, and working at that level of performance that aligns with what you want to create and higher levels of success?

I’ll talk about the optimizations in a moment but I’ll start by saying that diet, sleep, and exercise are 90% of it. I’m meticulous about my sleep, temperature, light, and what I eat. I get eight hours every night and measure my sleep performance. That’s probably the most important thing that I do.

The industry and how professional services are run have changed but the way we measure those businesses has not caught up. Click To Tweet

How are you measuring it? Are you doing an Oura Ring, Whoop, or Eight Sleep? What’s your go-to?

I’m on Whoop. I tried Eight Sleep and found that it didn’t work as well for me having an AC unit directly in my room that I could set on a timer and have the optimal temperature in the room. Whoop is how I measure sleep performance. I do all the journaling. I’m getting feedback on what are things that are affecting my sleep in one direction or another and then timing cold showers during the day. It sounds like you might also be a Huberman Lab fan. I’m subscribed to all this stuff around temperature and light throughout the day. Regular exercise and diet have made a huge difference.

The way I look at this is I look around and I’m like, “Many people would be in better health if they stopped actively killing themselves.” That’s my first step. I start by not doing things that are detrimental to my health in terms of what I eat, my lifestyle, habits, and so on, and then start focusing on optimization, which is supplementation and some of these other things. What I do on that front is I have a quarterly meeting with my naturopath. We do blood work and tweak my supplementation regimen based on the feedback that we’re getting from the blood work and red light therapy on a regular basis. Those are the things that take me a little bit to that next level.

What’s one book that could be fiction or nonfiction that you read or listened to and enjoyed and think that others might as well?

I have to give a shout-out to my good friend Dan Martell with Buy Back Your Time. I’m very biased because he and I are good friends but it truly is going to be one of those top ten business books that every entrepreneur ends up reading like The 4-Hour Workweek and Good to Great. It’s at that level. I was fortunate enough to have a front-row seat to that when I was early in my career. These are things that Dan has been living for as long as I’ve known him. They have enabled me to be where I am in my career. It’s cool for me to see it packaged in such a way that it can reach the masses and make the impact that it has been making.

Is there anything else that you want to direct people to or a specific URL that you want them to check out?

We have our lead magnet, the toolkit. You’re going to get all kinds of emails from it. You can unsubscribe from them but it’s genuinely valuable. We have had people tell us we should be selling it instead of giving it away for free. If you’re interested in measuring any of the things that I’ve talked about or going deeper into how to do that, we have spreadsheet templates, cheat sheets, and training videos inside the toolkit to help you get those things implemented. You’re welcome to grab that. It’s free at Parakeeto.com/Toolkit.

Marcel, thanks again so much for coming on.

Thank you for having me, Mike. It has been great.

There you have it for the episode between Michael and Marcel. If you want to help support the show, you can do so by either sharing this episode with a friend or colleague or heading over to Apple Podcasts where you will have the chance to leave a rating and review. Here’s a quick reminder. If you want to work with the Consulting Success team to receive personalized coaching and support to optimize and grow your consulting business, marketing, and revenue, be sure to visit ConsultingSuccess.com/Grow to learn more and apply. That’s the end of the line for us. Until next time.

Important Links

Love the show? Subscribe, rate, review, and share! https://www.consultingsuccess.com/podcast

Skip to content