Accounting is the language of business, according to Warren Buffet.
But accounting for labor costs may not be much of a romance language. Sometimes more like grunts and groans.
Outsourcing can help turn labor costs into a labor of love.
In assessing the overall impact on Adjusted Gross Income consider how outsourcing can effect labor and accounting metrics such as Utilization and Effective Hourly Rate, Return on Management and Overhead, to name a few.
Of course, marketing agencies can’t bill for every hour for which employees are compensated. Having an employee’s time be about 80 to 90 percent billable is an ideal. Then consider utilization (minus benefits, vacation, training, etc.) to clock it in at about 60 percent. And some agencies may find themselves facing a reality of 40 percent, depending on several factors.
Now, imagine a website project that may need some front-end development from a Vue.js specialist and some back-end work from a Ruby on Rails technician. An agency could then utilize those employees on that project. But every website is different. And the whole project isn’t front-end nor back-end, no matter which frameworks are required.
In other words, you’re going to need more firepower.
The right outsource has every essential specialist at their disposal when needed. And any particular technician, as well as the entire outsource partnership itself, can be taken off the shelf and put back on. Utilization is 100 percent. Compare that to just one full-time Sr. Vue.js Developer salary of 120k+ (ZipRecruiter, avg. Aug. 2022).
—ZipRecruiter (avg., Aug. 2022)
$120k+ for a full-time, in-house Sr. Vue.js Developer
Outsourcing is a variable, pass-along cost that could be priced at less than what a full-timer costs while the project is underway. And priced at $0 when it is not underway.
Return on Management
Agencies experience some up times and experience some down times. If that’s when utilization drops back down to 40 percent, employees have to be kept busy. That could mean something in the way of non-essential tasks or it could mean the agency chases some work that might not be the best fit.
Either case is a distraction. Whether the work itself is just busy-work or if the desperate new business creates a negative experience. Managers are then handling all of that employee distraction as well as the business distraction, versus focusing on the core of their strength, the agency’s strength.
On the other hand, if one doesn’t keep employees busy… well, agency owners don’t want to be hiring and firing all the time. It creates bad culture. It’s one thing to see a vendor come and go. But if the co-workers sitting next to you keep disappearing, that’s a different story.
Outsources provide development work but the bigger picture translates to staffing solutions and the return on management that results.
It’s a pretty straightforward outcome… if an agency doesn’t need all those developers and sys admins and animators and renderers and QA and SEO staffers sitting around, one has a lower cost in total compensation. But also, less is required in the office space and furnishings and utilities. And even things like software subscriptions are not weighing down the books.
Outsourcing is not permanent. And it’s offsite… no premises required. Maybe an agency simply fills gaps while it grows its knowledge and client base over the course of an outsource relationship. In time, it can staff up on those skill positions and expand its office space and infrastructure, weaning off of the partnership.
Whether keeping the staff lean or filling gaps while new hires are brought on or providing flexible support to a full-time core staff, outsources simultaneously help keep overhead low.
Partnerships can rein in expenses, add value and keep AGI in a happy place. Let’s face it, labor costs look daunting on paper and they are daunting in practice. Accounting for them can be a necessary evil or outsourcing can bring a little smile back to the bottom line.
People always ask me, ‘Were you funny as a child?’ Well, no, I was an accountant.