Thinking

Effective Hourly Rate

Why is Effective Hourly Rate (EHR) one of my favorite agency metrics?

Because it helps expose some of the fastest ways to grow profit. Here’s how …

Definition: Effective Hourly Rate (also called Average Billable Rate) = (Earned Revenue - Credits - Write-Offs) / Total Client Hours

EHR tells us what we’re actually earning per hour, factoring in the client hours we won’t be paid for (because of engagement overhead and poor value delivery, expectations management, or client fit).

EHR has clear drivers and levers we can expose and act on.

To see the drivers, first compute your agency-wide average:

  1. Hourly charge rate
  2. Billable % of client hours
  3. % of earned revenue credited and written off

Then compare those agency-wide averages to the numbers for:

  1. Your top 5 clients (by volume of hours)
  2. Each service offering and client type
  3. Each delivery division or practice area

The outliers will show you what is pushing the average positive or negative. (Check the trends too.)

And then the levers emerge:

  1. Clients that need a rate increase or that merit more care (and replication)
  2. Service offerings (and client types) to fix/fire or scale
  3. Divisions/practice areas that need help or merit scaling

Keep focused, and this won’t become overwhelming:

  1. Sort the opportunities by estimated financial value
  2. Assign a champion for each of the top 2 opportunities to uncover what’s happening and the likely causes, then suggest actions to take (with input from the frontline team)

Once you've done this, you can often asses an area in 30-60 minutes. Improvements will take more effort, but the return can be excellent because you’ll only act on opportunities with very positive impact vs. effort.

Let’s take a quick look at the numbers in an example agency to see how valuable this can be.

  • 55% delivery margin and 20% operating margin
  • 2500 client hours per month
  • 88% of client hours are billable
  • Average hourly charge rate of $175

This means we’d earn $385,000 in revenue per month with an EHR of $154.

Now let’s pull a few levers we surfaced to:

  1. Raise our billability by 2% (utilization unchanged)
  2. Raise the average charge rate by 2%

The magic of math means we raise operating profit by 20%, an additional $200,000 per year! That’s the profit from 2.4 extra months of work, without the work. Small changes, big impact!

EHR is the star of the show here. You can do whatever requires less effort to improve it — raising billability and/or charge rates — the effect on profit is the same. (We’ll leave credits and write-offs for another time.)

Don’t miss out on great opportunities to grow profit. It’s the oxygen of your firm.