A creative services manager must make many decisions in the course of managing her production process, including organization size, organizational design, when to make capital purchases, and when and what to outsource. Increasingly, the manager is also asked to justify decisions, and they are often asked to justify their team’s very existence. In addition, as a department grows and geographically expands, the ability to monitor and control the behavior of team members becomes more difficult. For these reasons it is critically important to track department costs—preferably at the job level.
What we are really talking about here is the role of cost accounting within our organizations. The earliest references to cost accounting date back to the Italian textile and banking industry in the 15th century. But it really began to take hold in the Industrial Revolution as we moved from small family-held businesses to larger more complex businesses that required production feedback to aid in decision making. Today it is used extensively in all industries.
What creative services costs should be tracked? All variable costs including labor, materials and other outside expenditures should be tracked. These costs vary as a direct result of the level of production—simply put: the more products you create, the more resources you need. In contrast, fixed costs, such as facility costs, are not dependent on the level of production.
It is important to track variable costs at the job level because that gives you valuable information relating to cycle time and variances by job type or client. The inclusion of fixed costs, often applied to the cost of labor as overhead, can lead to bad decision-making. I once read an article about a Fortune 500 CEO that decided to close a division of his company because it appeared that due to his high cost of labor he could no longer make a profit. However, after closing the division he discovered his firm actually made less money than they did before. This was because they had allocated so much overhead or fixed costs to his labor rates the division appeared to lose money. But after closing the division the majority of fixed costs remained and they were allocated to the remaining divisions, making them less profitable.
Most in-house creative services groups are not managed as profit centers; rather, they are managed as a cost centers. That is, they are scrutinized by their cost and benefit to the organization rather than by the profit they are able to generate. So the goal is to minimize costs while maximizing quality output. The pursuit of increased efficiency is a never-ending quest. Changes in technology and changes in the needs of our clients will always make us re-engineer our operations. This would include process design, team size and the roles and responsibilities of our team members. But how is it possible to effectively optimize operations without quantitative feedback?
While it is possible to make good decisions based on qualitative input alone, the odds are you would be relegated to guessing and relying on gut feel to make your decisions. If you have the luxury of time and the ability to experiment through trial and error, you may eventually settle on the on the most efficient make-up of your department. But I would contend that you can get to the same place far quicker with less cost if you have productivity and efficiency data by team member, by job responsibility, by job type and by client.
Another question creative leaders are often challenged with is whether to internalize capabilities through capital purchases and/or through staff augmentation rather than outsource. Again these questions can be answered most effectively when clear job cost data is available. If you’re spending significantly more with outside vendors or freelancers than it would cost to internalize that function, it may make more sense to bring it in house.
Most creative services groups are not indispensable to their organization. These services can be outsourced and are therefore often a favorite target of finance and Lean initiatives. These people are number and data driven. That brings us to the second main reason to track job data: justification of the department and its decisions and investments. If you want to hire a new team member, you may need to prove that this investment is worthwhile. You can do this by providing data on increased demand or by showing the money is already being spent with outside vendors and can be done for less cost by internalizing it. Or perhaps you want to invest in a new technology. You must first show how this will improve efficiency or avoid costs that are already being spent. None of this can be done if you are not tracking costs.
As a department grows it becomes increasingly difficult to observe and control the behavior of team members. By collecting time and output data at the job level you can more effectively set expectations and evaluate performance thereby controlling the behavior of your team. For example, if you expect a certain job type to take 10 hrs of design time to complete, you can communicate this expectation to the team member, and then evaluate their performance against this expectation. If you also track overall efficiency of team members (the level of output per unit of input), you will have quantitative data on the relative value of team members. This will make personnel decisions such as retention, salary and bonuses easier and more effective because they will be based on the value to your operation. In addition, this information can be used to create individual incentives based on those things that the team member directly controls. This isn’t to say to throw out the qualitative evaluation of your team members, as the quality of their contribution is difficult to quantify, but these measures can aid in your decision-making process.
If you are not yet tracking job costs you probably should. If you don’t, your decision making may be impaired by relying on qualitative observation alone. It will also be difficult to justify your decisions and your existence to finance and will be difficult to passively control the behavior of your team. While implementing a system may seem daunting and expensive, the benefits to the organization generally lead to a high ROI.
Related Articles: “Tracking Hours is Not Just for Chargeback Organizations” and “Implementing Creative-Friendly Time Tracking”
For information about how Cella can add value to your business through consulting, coaching, and training, please email firstname.lastname@example.org. This article was written by Cella Consultant Dan Mucha.
InSource’s 2012 Signature Event is only a week away! Have you registered yet for An Evening with Paula Scher: Perspectives on the relationships between in-house and outside creative agencies? If not, hop to it!