A well-run agency is a bit like a duck in water - above the surface everything is calm, but underneath many cogs are turning in the hope of improving efficiencies and turning it into profit. But even with super-human levels of efficiently, if you start with an inaccurate estimate, you’ll struggle to make your desired profit.
Every agency knows this right? So why do estimates often fall short and what can you do to improve estimating within your agency?
Where do agencies commonly go wrong with estimating?
1.Reverse engineering the estimate
Many agencies approach a project, with a figure in their head of what they want to charge. This figure could be what they think the client will accept and therefore, what figure will secure them the work.
With this figure in mind, they try and work back from there, making the hours fit. So, the time estimated is based on the quote, the quote isn’t created from the estimated time needed. You see the crucial difference here!
So a creative gets 5h to produce something because that will fit the budget, rather than because 5h is how long it’ll take.
You may be wincing as you read this because you can see straight away how this project could fail.
Agencies are especially susceptible to this approach when the pipeline isn’t looking so strong. Of course, there is the temptation to just get work in – but this work may not turn a profit.
If you put a real, calculated estimate together, it may feel expensive. But that’s the real amount of time the project is going to take. If you’re charging less, the difference between the two figures is your profit. If you need to charge less in order to win the work - do you want the work?
2. Simply not putting an estimate together
Even worse than reverse engineering - where you potentially have an indication of the potential shortfall - not producing an estimate means you’ve no clue how profitable that project might be…or not. There isn’t much more we can say on this one, other than you may be surprised how often this happens.
Maybe it’s sales spouting a figure in a meeting to close the deal? (Some agencies have told us that they bar sales people from giving figures in meetings, unless someone with an understanding of the real cost is present.) Maybe an Account Director has a feel for what the client might pay and wants to grasp the opportunity to upsell? No matter why it happens, if projects are being agreed without a realistic estimate, then that’s likely to negatively impact that project’s profitability.
3. The team suggests more time than is realistic
You're committed to putting an accurate estimate together, so you’re asking the teams who will deliver the work how long they think it’ll take – great. However, the estimate is coming out very expensive, way more than you know the client is willing to pay.
One issue with asking the delivery teams is that they may over-estimate the time needed. For examples, creatives are born perfectionists, they’ll likely want to produce their best, award-worthy work. But this takes time - time the client may not be willing to pay for.
If you don’t know from previous experience, what’s realistic and where quote-bloat, or in this case estimate-bloat, is happening then this can hinder your ability to win work as you’ll come out too expensive.
How can agencies produce better estimates?
1. Deeply understand the scope and be honest about delivery
Really consider the scope. Break it down and think carefully about each element – what's been done before and what might require R&D work? What exactly has been promised and what are the clients expecting?
Then once you know exactly what needs to go into the project, think of absolutely everything you need to do to deliver it, not just the chargeable work - Account Management for example, or licenses.
2. Learn from past projects
Look back at previous projects and see how long things took in a real-world scenario, within your agency. Whether that’s running reports out of a system or speaking to the people who delivered the previous project. Ask them how long they think it’ll take and work forwards rather than back.
And if you suspect someone is extending the hours required, have an even deeper look into previous projects. See if you can identify when something was client-ready, but extra polishing was added. Learn from these patterns for future estimating. If the client wants this extra polishing, they need to pay for it. Otherwise, the work needs to get to the client sooner. Because your estimate needs to be realistic, but you do also need to make sure your estimate doesn’t cause quote bloat and push the project over your client’s budget.
3. Don’t work for free – in secret
There are some very valid reasons for making a commercial decision to deliver some work for free. But in this instance, don’t do this secretly.
Clearly tell the client what the real estimate is and how this differs from what you’re going to charge them. Otherwise, you’re giving them something for nothing. Give them something for loyalty, relationship building, to get a new client with future spend – but not for nothing.
Also, if you show your client what it would have cost, then you’re setting up your stall for future projects. If you secretly charge them less, you’re setting reduced-cost expectations. And your goodwill could backfire when the next project is significantly more expensive.
You may never make a profit from that client or at least set yourself up for lots of debate over pricing. Nothing turns a relationship sour quicker than an unexpected high quote. Even if it’s justified. If the client’s not expecting it, they could feel cheated.
We’ve heard of agencies combatting this by putting a line in the estimate that says ‘funded by the agency,’ then there is complete transparency. Then next time, when you don’t want to work for free, it’s clear to see where the additional costs have come from.
And if you’ve made the calculated decisions to deliver some work for free, remember it’s still crucial to track costs on that project. Otherwise, a calculated hit of £5k, could turn into £10k of free work.
And finally, if you do go over budget on a client’s project, make that clear too – it’s still work you’ve done for free!
So there you have it...
... the key steps to improving your agency’s estimating. Sounds simple, hey? It is simple really, but the key is discipline. Don’t see any money coming in as a positive, because if it costs you more to deliver the project than the project fee, then it’s not been profitable. But when the pipeline is lean, it can be hard to see this. Be strong, be honest and watch your agency’s estimating improve.
