Time Tracking and Profitability in Service-Based Businesses

Kathy (host):

Well, hello there, and welcome back to another episode of Help! My Business is Growing, a podcast where we explore how to grow and build a business that is healthy and sustainable. I’m your host, Kathy Svetina.

Kathy (host):

One of the highest costs of running a service-based business is always labor, and your team is your company’s greatest resource so you’ll have to track how you or your plan utilizes this resource to make sure that your business stays profitable. An effective way to do this is time tracking. You can either use old-school manual forms or you can use automated applications or software, and if implemented correctly, you’ll see how much of your employee’s time is taken per client, which will make determining the correct fees for clients or projects a lot easier.

Kathy (host):

However, if you don’t do it right, it can negatively impact your company’s culture and alienate your staff. So tracking time is very important in a service-based business, but it needs to be done correctly. So how do you introduce time sheets and have your team comply without making them feel like you don’t trust them or you’re breathing down their necks?

Kathy (host):

A quick reminder, all of the episodes on this podcast, including this one, come with timestamps for topics that we discuss, and each one has its own blog post as well. You can find all the links and these topics and this episode show notes.

Kathy (host):

Our guest today is George Weidemann. He was the founder and CEO of Grey Direct for 21 consecutive years of worldwide growth, CEO of pioneer Silicon Valley email platform Responsys, and CEO of The DRUM Agency. He is the founder and CEO of Relationshipping Consulting, focusing on bringing efficiencies to large-scale enterprises through deep budgetary analysis and process alignment. He also works with agencies on their strategies and plans.

Kathy (host):

Join us.

Kathy (host):

Welcome to the show, George.

George (guest):

Thank you, Kathy.

Kathy (host):

I am really excited that you are here, because we gotta be talking about some really interesting things, and I think one of the trickiest things in the service-based business is managing profitability. And a lot of businesses can get decimated because of that. Because the labor is the cost of doing business, and you have to figure out what type of data you need, and that is usually going to be in some sort of time tracking component, and then you have to figure out how you are going to get it consistently and with as much accuracy as possible.

Kathy (host):

And when you start tracking people’s time, that can also affect the culture of the business if you’re not careful. So there’s always this balance between”I need this data to keep an eye on how the business is doing” and on the other side, how do I do this in a way that it actually works for the business? And you have an extensive background in service-based businesses, agencies specifically, and the businesses that you build, what was the journey of building this out? How did you manage this profitability in their businesses? I’m really curious about that.

George (guest):

Well, that’s a super question. Just to start with, I was 20 years at Grey doing this. And it started out with a startup unit, the first Grey director in New York. And then after 20 years, there were 38 of these around the world. There was about a billion of billing and about 350 million of revenue, about 2,500 employees. So a lot of experience in that space. And then 13 years of building my own agency, started out as New Marketing and became the DRUM. And there’s an art and science of doing that both inside and with clients.

George (guest):

Inside, by the way, I don’t know a service business – accounting firm, law firm, and of course, let me go back to agency because that’s 35 years of experience, cannot be done without time sheets. We used to say at Grey, “It’s people and rent. People and rent. And the rent is this. So people is that.” And you have to really understand the uptake of work effort, as we used to call it by the client.

George (guest):

So would it be good maybe, let me address how that works inside the enterprise before we go to clients and contracts and all that kind.

Kathy (host):

Yeah. And I’m especially interested in what have you found in time sheets’ best practices. What has really worked for the businesses that you work with? Because like I said, this can be a very sticky subject because people feel like you’re keeping tabs on them, but you really need that data to figure out whether you’re profitable or not. You need to hire new people, whatever it might be. So what have you found that really works best?

George (guest):

Well, first of all, two things. So when I got to Grey Advertising, it was mature, and it had serious, real, big bosses, still famous – Ed Meyer, who was the CEO of Grey. Alan Frick was the first CFO, and then Steve Felcher was the CFO for the second part of my career there. And this was back when I’m not sure you could do this today. Well, I know you can’t do it today, but back then, literally, it was no BS there.

George (guest):

If you did not turn in your time sheets, by Friday by five o’clock, you didn’t get your paycheck. Now that’s harsh, but what happened is it was very interesting because it was very harsh, well-managed, and all that, but it was also done like a family. So when people came into the company for the first time, the finance staff gave a seminar on client profitability and said,”Look, you know what, all we’ve got is people and rent and we’re a time sheet culture here, and we really need that because if you don’t do that, we are not going to be able to price ourselves correctly. We’re not going to have profits. Your bonuses depend on this and all of that, and so let’s talk about that.”

George (guest):

And then there was always somebody that said,”Well, here’s how I do it. I’ve found it best if I just do it before I go home real quick. I do that day’s time sheet. It really works for me.” And of course, there were always folks that forget that, and they didn’t get a paycheck and now what? And so forth.

George (guest):

But the other thing that happened is because it’s very tricky for people to do this, they’re the creative people focused on the ads and the effort, media and whatever you’re doing, busy and under pressure and so on. And it’s hard. So guess what? There was always a diplomat from finance that on Monday when the Friday time sheets weren’t submitted, would pay a nice visit to the staff member and say, “Hey George, you didn’t get your time sheet on Friday, and can I help you with that? And really love for you to just take your lunch hour today and give me last week’s time sheet by the end of the day today. Okay, thanks.” And then they would follow up.

George (guest):

And there was always, Kathy, we would find the X number of people over here that, that were not good at it. Sometimes we would pair them up with somebody that was good at it and just have the person that is good at it, call them Friday at noon and say, “Hey, can I help you with your time sheet today?” But I guess brass tack, be honest, it’s hard and you can’t do it without weekly and sometimes daily managing of this.

Kathy (host):

What I heard there is making sure that the employees understand what the benefit of it is for the business. They’re not just putting in time for because you want them to do something. It’s there to drive the decisions, to figure out which clients are profitable. It drives the entire business. It is a crucial data point, and if people understand that, they’re much more likely to start doing it without constant nudges, and hopefully, you don’t have that many nudges.

Kathy (host):

But I also wanted to ask what are some of the things that people were putting on these time sheets? I can imagine what type of project they worked on, how long they worked on, but is it in what type of increments were they putting in? Are we talking about 15-minute increments, or 60-minute increments? How did that work like specifically?

George (guest):

That’s great because I have lawyer friends that complain that their practice has gone to 15 minutes. And so our time sheets were hourly only, and it’s very interesting. Most of the time we could do it with just client, so you only had to put,”I’d spent this hour on client A, and that was it.” If there was projects or there were special client assignments, we could add that to the time sheet so that if that was being billed in some way.

George (guest):

But again, that’s a finance thing where it has to do with how the client’s being charged. And if there’s just a fee where it’s a monthly bunch of hours that they’re paying for and the client doesn’t need to know where the hours are going, it can just be client A by the hour. And so that really, I would say the account director and the finance director need to have a bond there around how is the client going to look at this and does the client need to know what X was inside their total agreement. But I would say that 90% of the time, Kathy, it was just client hour.

George (guest):

And that reminds me of another thing, too. Nothing was strict eight hour days. People would work till 11 getting something done, and so there was no cap. It wasn’t like 40 hour weeks and that, that’s all the hours you could put on your time sheet. We really went over that to make sure people understood is you worked that hour, you, it goes on your time sheet. If it’s Saturday, it goes on your time sheet.

Kathy (host):

And you started talking about using that data with the client, but I’m interested, like how did you use this data with the clients? Or was it just something that you used internally? How was that data really used?

George (guest):

That is a fantastic question, and I’ll tell you why. Most clients have no idea the effort that’s being made on their business because they’re at lunch with the account director and the creative director, or they’re on a presentation where they’re only the people that can fit in the room for that and so forth.

George (guest):

And they don’t see the finance department. They don’t see the IT department. They don’t see analytics on and on, and so you’re backing me up in a way, into wanting to talk about the contract. We were always taught and learned time and again that everything was positive or negative on day one, on what contract you could reach with a client.

George (guest):

And where I’m going with that is in the contracts we had client profitability requirements, at least we negotiated for the best we could get in those spaces. We negotiated the profitability percentage goal. It depend on whether it was fixed fee or whether it was work an hour bill an hour, and the thing that we put together with that were regular reviews with the client.

George (guest):

What that was about was, first of all there was, we did a quarterly and you couldn’t have one of those that there wasn’t some discussion about service. You get an A plus, you get a B, you get a C, we’d like this or and then we would literally present the profitability to the client in which they could see the people that touched their business.

George (guest):

And I thought, “Oh, I thought it was six people?”It’s 14.”Yeah, because you have traffic and you have finance group, and you have this, and you have that.” And it would be extremely educational to the client to see what the work effort, we called it, work effort on their business.

George (guest):

The other thing it did was it increased the strength of the relationship. Why? If you did those meetings, quarterly meetings, right? The contract was right and you’re doing this right. Oh my gosh. You became like another department of the client. But it became social. It became different than just a standoffy thing where they’re paying for X hours and they don’t know what they’re for.

Kathy (host):

How did these meetings look like? Did you have a finance person there in the room? Was it just the account manager? Did they pull up a P&L for the client? They walked them through. How did that really look like?

George (guest):

I love these questions. They’re like, they’re perfect questions. There was always the head that was me, and then it was very important. Good cop, bad cop, okay. Good cop. Bad cop. And so the account director was the good cop. Being all about service.

Kathy (host):

Because they managed the relationship. So it made sense.

George (guest):

Absolutely the bad cop was the finance director or the finance executive. Now you’re laughing. My mistake.

Kathy (host):

That’s how he usually works by as always, a bad cop. Well, we’re good people though.

George (guest):

Well, here’s the thing. The Grey finance people, bad cops, were masters in this meeting because they were bad cops in the most engaging, gracious. great. super. They felt like good cops, even though they were masters at making that bad cop work, not feel like scorpion stings or something.

George (guest):

I could see you doing that because it literally just became explaining stuff that the clients simply couldn’t see or understand without the finance officer explaining. Well, you need to know X, Y, and Z over here. And by the way, that pulled the agency into being a department, because now the client is looking at this saying, “Oh, I see how that needs to be managed.” Because they don’t know how to manage it if they can’t touch and feel what those moving parts are doing to the finances.

Kathy (host):

What I like about this approach is that you really are, even though you’re an outsourced partner, you become very embedded in their business because they can also see anything that they’re lacking in the business. Because if they have a lot of revisions that drive up the cost, maybe there’s a process on their side that might not be working, that they have to go and figure out what’s really happening on their side to fix it so that they can, might be able to bring the cost down. Because if it takes them six people to make a decision and no one can really figure it out, that’s why you have all these revisions that need to happen that might be an internal issue that they have to go and fix, right?

George (guest):

Exactly right. And sometimes the clients would ask for more people to show up at meetings than were necessary.

Kathy (host):

Yeah.

George (guest):

Of course they’re paying for those hours in those meetings, but I think you put your finger on what usually happens when there’s hours overruns, and it’s usually too much complexity inside the client for just getting the work out and approved and done efficiently and it’s hands touching the work, and that was a big piece of client profitability management was going in and asking for some hands to be taken off.

George (guest):

By the way you put your finger on, usually what was running hours over is revisions or too many start,stops. Incidentally, that reminds me of another important thing that was a discipline that had to do with this, and it was strategy. There was a rule is work could not begin without a strategy inside the agency. What? Here’s the strategy doc and it needed to be signed by the account director, the media director, and the creative director. And by the way, in the second agency, in my own agency, we had analytics director signed because you had to have the analytics in place to figure out if it was working. And what happens is if work begins without one of those, instead of on the client’s side, that’s on the agency side of burning up hours where it heads off over here and it should have gone over there , because it’s off strategy. You have to do it over.

Kathy (host):

Yeah.

George (guest):

And I’m sorry, I messed up on that. There was another signature required – the client.

Kathy (host):

Yeah, that’s an important signature. And as, as we’re talking about signature, I wonder, and I’m absolutely curious about this, how did finance fit into all of this? Did they have any input what was happening before the contract was signed to make sure that there was profitability for these contracts? Were they involved in, if they were, how were they involved?

George (guest):

Absolutely. There was never contract and a huge piece of the contractor, of course is the fees and how the fine is. Is it a fixed fee? Is it a work an hour bill an hour? Is it the retainer plus commissions on top and so on? How is this all going to work? Never do that without the finance director completely engaged. Part one.

George (guest):

Part two. There’s another thing that is always fascinating to me. This is hard to do as a C title. We had a weekly one hour staff meeting of the heads of department, so head of account, head of creative, head of media, head of analytics and finance director weekly. And so when the car was driving off the road weekly, the finance director could see, and then of course finance could hear things going in the agency. And so not only could those things be dealt right up front with the contract being done correctly. But then the finance director got a weekly view – account by account of what the issues are and if a financial issue was there. They heard the whole story in those staff meetings.

George (guest):

Now, let me just say, oh my God, it’s hard to do that. Somebody’s on the road, somebody’s busy. And so it was one of my chores as a CEO was just to get everybody to show up once a week for this. But that’s, it’s important to involve finance upfront.

Kathy (host):

Yeah. I like that because when finance is involved in appropriate ways, and if we are have a seat that’s a table we can really help the business. The worst thing that you can do if you have finance in the businesses have them be in their own ivory tower, completely disconnected from the business, and then just hand over the budgets or the forecast. That’s not how this works. You have to know the business and be in the business, be on the sales calls, be on the customer calls, have weekly meetings with the partners. It’s really important to have that connection.

George (guest):

There was another key piece of that too, which is the account directors were encouraged. There were certain big meetings that the client where the finance officers should be invited? Not all the time, but every once in a while. There were quarterly meetings for certain, but every once in a while there was another meeting where we would invite the finance director.

George (guest):

For example, you mentioned if there’s a special project that was going to have hours tracked to it or different budgeting for it, or something like that. Finance director invited.

Kathy (host):

Yep. That makes sense. So George, we talked about the importance of the time sheets. We talked about how you structure the time sheets, and then we talked about the regular client meetings, how important that is. And then the last thing is, now let’s say that you got all this data, you have the client meeting, and you realize that you were only supposed to bill them for a hundred hours because of all the craziness that happened and other revisions, and things got derailed. It turns out that you were 20 hours over. How did you have that conversation? How did that affect the billing? Did you bill them extra? How did that go and guide that conversation with the clients in terms of their billing and in terms of the contracts that maybe down the pipeline with the other clients, or did it affect it at all to figure out, maybe we need to up the contract for this particular thing that they’re doing or whatever. How did those conversation guide those insights that you were making for the client?

George (guest):

Kathy, that is a great question, and it goes straight into these quarterly meetings where those things were addressed – the leader, the good cop, the bad cop. And let’s say we’ve just had a quarter and we had a contract for 20% profit and we had no profit. And so that is tough. And I just want to put that out there. First of these are not easy meetings.

Kathy (host):

Yeah, I bet.

George (guest):

They can be awful, in fact. And by the way, I was always taught whoever keeps their cool, the longest wins. So you, the three of you going into this client meeting where you’ve got losses to deal with, everyone has to keep their cool and you have to be very reasonable. And there’s two paths of it.

George (guest):

Path number one is, and we had clients like this, by the way, I would always make a speech to the client about how profits keep the agency happy, keep the people motivated, and you’re going to get the best work. It’s the best practice you can have as a client is to meet these profitability obligations.

George (guest):

And then the tough client would say, “We’re not doing this.” But let’s go back to the good client first. The good client would say, send us an invoice for the excess and we’ll remit, and we had that. So one of the things that can happen is you get paid and they’ll make it up for the previous period. But then the client said, we’re not doing that. One of the ways the negotiating went down the other path was, “Well, for this fee in the next quarter where the work effort was supposed to be this much, in order to make up the 20%, we’re going to reduce the work effort to that.” And so we’re literally going to take the hours down with the same fixed fee. So that, and by the way, for the client that’s working our bill an hour, it just didn’t happen. The conversation would be, it was too high. How are we going to reduce the hours? And we would get into that discussion, but they would pay.

George (guest):

But for the fixed fee client where they didn’t pay, that became a very difficult discussion. And sometimes they wouldn’t agree to less work efforts. And I think, Kathy, you’ve seen this happen, it would get into making the processes more efficient. Mainly, usually, what ran the hours over was the contract said three revisions and they did seven. And you would get into the flows in a way to control the work effort so that it made sense.

George (guest):

And there were things on the agency side for that, and there were things on the client side for that. Many times the client had too darn many people involved.

Kathy (host):

Too many cooks in the kitchen.

George (guest):

Too many cooks in the kitchen and you got seven revisions where you could, and then on the agency side, the management had to keep the account director, creative director, media director, so on, had to keep the team on path against the strategy and what the client was asking for because we’re a creative enterprise and people have great ideas, and without that kind of keeping on the road, things can drift off and create revisions from the agency side of the table.

Kathy (host):

We talked about what happens if there’s an overage, but I don’t know if you had many times when the client actually didn’t use you as much and they see this huge profit where they start questioning that.

George (guest):

Yes, I was going to talk about that. Thanks for asking that question because, and we had these big Fortune 50 clients, and so there’s a 30% profit and here’s 10 points of it, and that’s a lot of money. And what are we supposed to do with that? And basically we said, “Okay, understood client. We’re rolling that into the next quarter, and we will roll that into the next quarter and reduce your fees.”

George (guest):

And incidentally, Kathy, the reason that’s such a good question. When you’ve had experience and the team knows about this and it does that, what does that do? It just builds the relationship stronger with that client. And it is part of that making them feel like you’re a department in their company that cooperates and helps and does the right thing.

Kathy (host):

Yeah, that, that makes a lot of sense. And I always like to see both sides. It’s like people always focus on,”Well, what if it’s overage, but what if it’s like significantly under? What do you do then?” So I’m glad you talked about that.

George (guest):

Credit the next quarter. Credit the next quarter.

Kathy (host):

I want to circle back to the time sheets because you brought this. As we were talking, it just popped into my mind that dealing a lot with creative people and creative people by definition, don’t really like to be restricted when it comes to.

George (guest):

Oh, they don’t.

Kathy (host):

How did you deal with them being so on top of the time sheets? We talked about how they understood the importance of it, but there’s still this in, I feel like it’s almost like a visceral response. I’m creative. I shouldn’t be the one putting in the time sheets. How did you deal with that pushback? And if you had any?

George (guest):

There’s always and it’s not only, it could be media. It could be other places. It’s tough to do time sheets. You have to get in the space and develop a habit and then just do it. And even then there were weeks where I was traveling, I was this or that where I couldn’t do the time sheet and I had to circle back and do it. And I was always reminded to do it and so forth.

George (guest):

I think it goes back to family discussion if you will, and I think it calls for a meeting. Kathy, if you were the one of the creative people that were having trouble with this, I would like to have a solution where you weren’t singled out. Again, I already talked about the singling out because basically somebody from finance would be coming and saying, “Hey, it’s Monday Kathy, and we didn’t get your time sheet last week. I’d like to get it by the end of the day. Take your lunch hour, can I help you?” And so forth. But then if there’s chronic of this, that would be a lunch where the head of the agency and the finance director were going to host a lunch. Maybe department heads there, and then there’d be six people or whatever. So you wouldn’t be singled out having trouble with the timesheet, but you’d be brought to this lunch, and that would be the focus of the lunch. And it would just be a discussion. And it’s like group therapy. You can basically, “I’m the creative person and I’m not doing this, but I’m sitting there, I’m listening. Oh, Sally over there in media. Oh, I see. And Joe over there in accounts isn’t doing it. And Oh, I get it. And oh, we can’t manage in the profitability. It’s messing up the bonus pool and I get it.” Group therapy.

Kathy (host):

Group therapy is the answer. George, this has been an absolutely delightful conversation, and you gave us so many good insights into how to actually do this. If someone has a service-based business, obviously this podcast, or for smaller businesses, not for bigger businesses, but if they’re really struggling with figuring their profitability out and how to track it and how to manage it, because they have such a big cost in labor, what would be the next step that you think they can take in the next week or two to get them closer to tracking us the right way?

George (guest):

Boy, that’s a really good question, Kathy. And I think it’s a tough question too. I would say crawl, walk, run. I think where I would start, I’ll make it up and I’m leading a small agency. I would have maybe a day off campus just or a half-day meeting off campus with the finance director. Just me in finance and to say, how do we put time sheets in place? How do we make it simpler? Is there a software package over here that we can get that we might be able to use and so forth? And so I would get organized with finance is to putting something that we know we can operate in place and coach about and do all those things and so on. So you gotta get your act together before you take it out into the staff.

George (guest):

It’s crawl, walk, run. And I would start the crawl would be to get really in sync with the finance director over what’s going on, what do we put there. How is that going to work? How do we launch it into the agency and all this kind of thing? That’s where I would start.

George (guest):

And by the way, I’m outta date with this stuff, Kathy. I’m wondering, are there great software solutions for time sheets out there somewhere?

Kathy (host):

There are actually quite a few of them that now use AI so that they’re automatically tracking so that you don’t have to put it in. You just review what happened and they can track it in the background. They’re very non-intrusive as well. There’s options out there, but you still have to have people look at it, and make sure that it’s correct. And on top of that, right now what they’re not doing, they’re not tracking the creative stuff. So if you have someone walk away from the computer and think about it, think about a campaign, think about stuff, you still have to add that in. So they only track what’s in the computer, not outside of it.

George (guest):

So I want to revise my crawl, walk, and run recommendation, about half a day off campus. It’s like it would be the head of the agency, me finance director, and I think they should bring you, as a consultant, who knows these solutions that are out there. And then also you’ve seen the movie.

George (guest):

By the way, that’s another thing. One of my favorite expressions that I learned in the agency business is we are all the goldfish in the bowl. We can’t see ourselves so well. And where that goes is if I’m with my finance director trying to solve something. I want someone that looks at us goldfish in the bowl and says, “Oh, here’s what I’m seeing, and here’s what I recommend.” So I would bring in a consultant.

Kathy (host):

I like that. We are all the goldfish in our bowl, or you cannot read the labor from the inside of the bottle. That is what I usually use. This has been, like I said, George, absolutely delightful. Tell us, please, where can people find you?

George (guest):

Relationshipping.org.

Kathy (host):

Thank you so much for being the guest on the show, George.

George (guest):

Thanks for having me, Kathy. It was a pleasure.

Kathy (host):

Thanks so much for joining us, and I hope that today’s episode delivered insights on balancing the need for crucial time-tracking data of your labor versus your employee’s morale. Also, if you love this episode, you can find all the timestamps, show notes, blog posts. And more on our website, newcastlefinance.us/podcast.

Kathy (host):

And also, before I go, I do have a little bit of a favor to ask. If you are listening to this on an Apple podcast, you could please go to the show and tap the number of stars that you think the show deserves because it helps other people find it and benefit from it as well. Thanks so much. Until next time.