Lean Business: Capacity Management, Overhead, and Your Business

Many smaller companies that provide creative services struggle every day to manage their capacity and their overhead. Because, as in many other industries, business is cyclical, these smaller agencies, design shops, and marketing firms tend to exist on boom/bust cycles throughout the year. In the creative industries this is an everyday fact of business: overhead is constant, but revenue ebbs and flows throughout the year; some months there are so many clients and so much business that these service providers are forced to hire contractors or freelancers just to handle the extra workload. Other months, when business is slow, managers are left trying to keep their employees occupied and struggle to make the books balance.

The human capacity that a firm employs is an asset as well as a detriment to doing business. Having a solid and talented team in place allows a business to grow, to develop core skills, to provide consistently high-quality services to its clients. But that same base of employees also represents expense in the form of overhead: salaries and  benefits as well as capital expenditure in the form of computers, software, telephones, desks and chairs for each worker. Plus, best practices for office space requires around 200 square feet of rentable space for every person on your team. The trick is to find the right equilibrium for your company.

First, do the math: if you assume that a full-time worker is making a modest $40,000 average salary and your office rent is $20/sf annually , a quick back of napkin calculation takes you to an annual cost of over $54,000, or around $4,500 per month per FTE. So a company with a team of 5 full-time employees, would expect those 5 to represent a total expense of around $22,500 per month. Of course, if this was your company, that would be in addition your own meager salary and benefits, not to mention to all of the myriad other fixed expense your business incurs. Once you add these up, it is not a huge stretch to assume monthly overhead for a company of this size and shape at around $30,000 per month. That’s a big nut to cover for many small creative service firms, especially during the slower months of the year.

So how can that 5-employee company manage its human resources to maximize capacity while reducing overhead? By using a mix of FTEs along with freelancers and contractors many firms can expand and contract their workforce in synch with the workload. This is not a new or novel concept – for instance, many small companies contract with a part-time bookkeeper who might 10-20 hours per month and is paid only for the hours she works, with no other expense associated with her work for the company.

Creative service companies are well versed in hiring freelancers when the workload requires and many outsource work to specific vendors and contractors, particularly those whose expertise is not core to the services offered. But hiring freelancers can be challenging for many reasons, chief among them finding workers with the requisite talent and skills. There are tons of great freelance designers out there, but your business may be in a place where they are scarce. There are also wonderful freelance software developers, but they too can be tough to identify and demand for their services is great; the very nature of freelance hiring means that the best of these workers may not always be available when you need them. For just this reason many companies maintain a rolodex (remember those?) full of go-to freelancers, but even that is no guarantee that you will have the right person available for the job when you need them.

My model for a small creative-services company would look like this: an employee base and overhead costs that are equal to what the firm would expect to bill in the slowest month of the year. So if the company is hitting that $30,000 per month revenue number we used above, they would have that base of 5 full-time workers and an office that is right-sized for the core team. With these elements in place, the firm could expect to break even or reach modest profitability even in the sluggish months. And during the busy times capacity could be ramped up and profits maximized, by leveraging an on-demand workforce of qualified and tested freelancers and contractors to service their clients efficiently and effectively.

There are many best-practices defined across industries for identifying, recruiting, and managing freelance workforces and there are resources available to help companies do so. In a subsequent post, I’ll discuss some of these and how creative-service companies can leverage  and benefit from them. For now, take the time to analyze your own company’s skill-sets, capacity, overhead, and client challenges. You may be surprised at some of the inefficiencies you identify.

Photo: Arnold Reinhold, Wikipedia