Matthew Schwartz, Group Editor of  PR News, was kind enough to ask me to share my thoughts on agency management, specifically how owners and leaders of public relations and communications agencies can better manage the business aspects of their firms. It follows in its entirety, and I hope it brings you value. Please leave a comment regarding how you’re managing your agency more like a business.

Treating PR Like a Business: It’s the Primary Way to Land More Business

Midsummer is the perfect time for public relations and communications-agency owners and leaders to evaluate their companies’ achievements over the past six months. Many will review work product, staff performance, and new business wins, as well as client results and satisfaction. Some will ask, “Are we doing enough to keep up with and get ahead of the rapid changes affecting communications?” But not enough firms take a long, hard look at how they’re doing as a business.

Big mistake.

This is the ideal juncture to analyze business performance. That’s because there’s still time to end the year having met the agency’s business-related goals, if one is disciplined enough to make the tough changes required.

To that end, I’ve developed a 12-point checklist owners should review to increase the chances they’ll be smiling on December 31.

1. You should be about halfway to reaching your 2013 income and profit goals. If not, what critical steps will you take to achieve them? If you never stated those two key measures at the beginning of the year, there’s no way to know.

2. Get you salary/overhead/profit ratios in line. Look at your January 1 to June 30 numbers. Do they break down as Salaries/Benefits 55%, and Expenses 25% (of net fee income)? If not, how can you possibly achieve an operating profit of 20% or more?

3. See if your firm is generating its full income potential by using the simplest formula. An easy first step is noting how much fee income you’re generating per PR professional. The most recent StevensGouldPincus (SGP) study found that for agencies generating $3 million and less, the average was $199,000 per professional. But that’s just the average, not best practice. I believe agencies this size must generate at least $215,000 per PR professional to generate the aforementioned profit margin.

4. Your firm should generate its maximum fee income potential using the following formula. While more complex, this formula is quite easy to set up in Excel and use. For each PR professional, calculate Total Billable Hours/Year x Billable Rate x Desired Utilization %. When you use this approach, and add the dollar amount for each PR pro, you’ll likely find your agency has greater income potential than when you use the simpler formula.

5. Use appropriate billing rates per staffer. You can use a sophisticated formula, which factors in salaries, benefits, overhead and profitability targets for each employee, but there’s an easier way. Simply compare your rates with the aforementioned SGP study, or ask leaders of other agencies in your geographic market and practice areas with whom you regularly share business information. The Council of Public Relations Firms makes such data available to its membership, and those in PRSA’s Counselors Academy readily share this information with one another. This area is worth your focus; it’s extremely tough to reach your profitability goals if you’re charging too little for your staffers’ time.

6. Monitor how long projects actually take versus what you budgeted. While becoming profitable is a science, budgeting is an art. Comparing what you thought a program, project or task would take to what it actually took will make you better at it with each budget. It will pay considerable dividends.

7. Make your team log their hours accurately. You can’t know what your firm really spent on various initiatives if staffers don’t consistently and accurately record their hours. To encourage compliance, explain that completing a timesheet doesn’t generate a client invoice, so they shouldn’t be concerned there’ll be consequences if their hours contribute to an account going over-budget.

8. Be disciplined when creating new client budgets. Many use blended rates, or say, “That project feels like it would cost $20k/$50k/$100k,” when determining budgets. But both choices can have potentially large and long-term negative implications. Instead, take the time to project how many hours per month each staffer will likely take to complete each task, using their appropriate billing rate. Then, review what it actually took in man-hours on the last three similar projects. Not what you budgeted, but what you actually spent.

9. Create detailed budgets and written scopes-of-work for every client. The more detailed they are, the more protection you and your team have when a client calls and innocently asks, “This activity is covered by our program budget, right?” Your Scope-Of-Work allows you to point out why it’s not covered, without negatively affecting client relations. And if you mutually agree to change the work’s scope, it’s critical to change the written Scope-Of-Work, get it signed and circulate it on both agency and client sides.

10. Apply strict rules regarding clients whose activities consistently exceed their monthly budgets. It’s fine to have clients you regularly over-service, so long as you have a strategic reason for doing so, such as helping you break into a new category or giving you the chance to work for a corporation that might ultimately assign you a larger, more profitable project.

But it’s critical that you apply three strict rules: 1) Determine how much time over the budget you’ll provide each month; 2) Monitor carefully; and 3) Decide in advance what actions you’ll take if you consistently exceed your investment.

11. Meet frequently with clients whose accounts typically exceed their monthly budgets. Per my last point, there’s nothing wrong with strategically over-servicing certain clients. But if you regularly over-service clients who don’t meet your criteria, meet with them to discuss the situation. Frame the discussion around: 1) The gaps between budgets and time actually spent; 2) How this interferes with your ability to generate a fair profit; and 3) Your recommendations on how to reduce or eliminate the overage, such as activities that might be jettisoned, or utilizing agency resources differently.

12. Do you have clients who’ll never pay you near what you expend on their behalf? If so, and they don’t match the descriptors outlined in point 10, I’ve got one question for you moving forward: “Why?”

This post originally ran in PR News on July 29, 2013.