If you run an agency, consultancy, or service business you might be running into what I like to call a “champagne problem”. The problem of being able to sell more work than you’re able to do on your own.
Maybe you’re not at a place where you are able to, or want to hire a full-time team, or where you have an opportunity to get a lot of the mundane work off your plate and stick to the strategic stuff.
Whatever the case is, you might be trying to figure out how to start outsourcing your client work without killing your profitability and cash-flow.
The benefit of using virtual assistants is that you’ll often be able to pay them for the time they work and avoid having to carry salaries when times are slow. This makes VA’s a great first step to scaling your agency when your client acquisition is still on the inconsistent side.
In this post I’ll share what I’ve learned from working with hundreds of agencies and teach you the 5 practical steps to outsourcing your client work profitably from the start.
Step 1 – Document Your Processes
If you’re a part of the Outsource School community, it should come as no surprise to you that one of the fundamental steps to profitably outsourcing your work to V/A’s is having good documentation of your processes.
Having solid documentation sets us up for success by doing a few important things:
- Making the process (and ideally, it’s outcomes) consistent so you can maintain high standards for your clients
- Makes your back-end more scalable as it enables you to quickly hire and train more V/A’s to increase capacity
- Decreases risk as it helps to normalize the time it takes to complete the tasks (therefore normalizing your costs and profit margins)
I won’t spend much time in this article talking about the nuances of building great SOP’s, since there’s lots of other great content on this blog covering that already. Just know that it’s the first and probably most important part to getting your client work successfully outsourced.
Step 2 – Track the Scope of Work
The second step in the process is to track the time it takes you to complete this work and/or start tracking the time it’s taking your V/A.
The purpose of this exercise is to ensure you have a baseline idea of the cost associated with completing this task so you can benchmark future V/A’s against that baseline in the future, as well as complete the next few steps in this process associated with establishing and maintaining profitable processes.
If you’re looking for a useful piece of software that helps you quickly and accurately estimate the time it will take to complete projects based on work you’ve done in the past, check out our tools at Parakeeto.
The key at this step in the process is to ensure that the way you structure and track time for your team is the same as the way you structure estimates for your client work.
For example, if you estimate work based on roles (design, development, project management) you’ll want to track time into those same buckets so you can reconcile your estimates against your actual time-tracking data.
This seems like common sense, but you might be surprised at how often this disconnection happens inside of service businesses I’ve worked with.
Step 3 – Determine the Value
The next step is to determine the value of the tasks that are being outsourced, so you can better understand the margin associated with it.
Usually, this is a function of reverse-engineering the way you estimate client work or the assumptions you lean on to come up with your pricing.
We’re building a website for a client for $5000
That price is based on the assumption that it will take us 100 hours at $50/hour.
We’re outsourcing part of the work to a V/A and we estimate that the work will take 25 hours. Therefore the work is “valued” at $50 x 25 hours, or $1250
At the end of the day, this step is all about creating an understanding of the value that is being created by the work that is getting done, as it relates to your client-facing pricing.
Step 4 – Design for Margin
The final step in this process is to design your engagement for healthy margins. How much should you be marking up contractors and V/A’s you might be asking?
The baseline target for gross margin on a service engagement should be between 50-70% if you’re able to achieve higher margins – all the better.
The formula for calculating gross margin is the following:
- Adjusted Gross Income – (COGS/Labor Costs) = Gross Margin
- Gross Margin / Adjusted Gross Income = Gross Margin %
Where Adjusted Gross Income (AGI) is the amount of revenue left over for the agency to earn after any pass-through expenses are paid (ad-spend, print budgets, equipment rentals, etc.)
Where COGS/labor costs are the costs associated to the people you’ve brought in to work on this project, whether they’re internal team members or external contractors.
To calculate your employee cost per hour for internal team members, you’ll need to take their salary + benefits and divide it by their gross capacity. For most employees that comes out to 2080 hours per year (40 hours x 52 weeks)
That means if your V/A costs you $250 and you earn $1250 in revenue from their work, your gross margin on that portion of the work is 80%
Tip: Remember to factor team and project management time into your estimates. Often, outsourcing to V/A’s can buy back a lot of time, but it may still require some time from you to manage and review your V/A’s work – don’t forget to factor that into your price when you’re calculating your margins and charging your client
Step 5 – Measure & Iterate
The final step is to make sure you continue to measure the time and cost it’s requiring you to deliver outcomes to your clients to make sure you can continually protect, or even improve your margins.
You can do this in a time-tracking tool, a spreadsheet, your accounting software – whatever you chose to do make sure it’s easy to get access to these numbers so you’re likely to review them often.
This will help you identify the gaps and opportunities for better processes, more optimized pricing, and ultimately better scalability and profitability. For more detailed content on how to run that iteration process, check out the guide we created on our blog.
As you add more V/A’s to your process and scale your services, keeping a close eye on your numbers will become increasingly important to make sure you always have strong cash-flow and can continue to scale your business.
About the Author
Marcel Petitpas is the CEO & Co-Founder of Parakeeto, a consultancy turned software company that helps service businesses increase profitability and close more deals by generating accurate, data-driven estimates in seconds using their existing time-tracking data. He’s also the fractional COO at Gold Front, an award-winning creative agency working with top silicon valley brands like Uber, Slack, Google, Keap, Robinhood, and more.
When he’s not helping agencies run more profitably, you’ll find him cycling or renovating his home with his fiancé Cearagh, or watching “the office” on an endless loop.
- Linkedin: https://www.linkedin.com/in/marcel-petitpas-20059588/
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