When and Why Your Agency Should Turn Down Work

Here is a question we receive every week at Upsourced:

“Do we turn work away if it’s not at our target margin? What if resources are on the bench?”

Asked another way.

“Are we okay losing work because we’ve priced it for an ideal margin? Or would it be better just to have the revenue?”

Like many things, the answer is circumstantial. Let’s define some things up front, and then we can jump into a decision framework.

Let’s first define, to the best of our ability, whether your agency is in “good shape.” Upsourced recommends that agencies hold at least three months of cash reserves. Life is okay with a busy team, decent project margins (50%+), a busy pipeline, and three months of cash reserves. Anything less and a discerning view should be applied to all matters in the business. 

For agencies that primarily sell capacity (i.e., not media), the floor for any project margin should be 35%, with 45%+ being okay and 60%+ being strong. This percentage can be a sliding scale that moves with your utilization metrics. Lower utilization in your team means you’ll need a higher project margin to achieve a bearable gross margin in your business. Conversely, if you experience very high utilization (90%+), lower project margins (35%-40%) can be acceptable. Ultimately, agency owners should shoot for an overall business gross margin of 50% or higher. A little lower is fine; a little higher is excellent!

To calculate your overall business gross margin, ensure all delivery labor and contractors are in COGS on your P/L. Some agencies try to overcomplicate this by putting non-billable hours in admin costs or pitch time in marketing costs. This is unnecessary complexity that limits decision-making ability. If you want an actual gross margin for your agency, all associated salaries and benefits of delivery personnel must be in COGS.

Now that we’re on the same page, let’s answer the almighty question we ponder before sending every proposal - is it worth it?

Here’s a simple framework when contemplating your next proposal:

1. If you have resources on the bench and the pipeline is limited, especially at the proposal stage, I would take whatever you can, assuming you’re projecting to make an acceptable floor margin (35-40%) for the project. Why? Because having a bench is a death knell for agencies. If we have resources that are not billing, their costs are going directly to the bottom line. I’ve seen a standard three-week rule in some consultancies: employees let go after being 0% utilized for more than three weeks. That’s harsh, and I’m not recommending it, but I understand why it can be a good regulator for agency owners with little self-control.
   
   
2. I'd be picky if you have resources on the bench and the pipeline is moderate to full. Unless you’re in a cash crunch (less than 3 months of cash on hand!), I would not take on sub-standard work if opportunities at higher margins are near. Take the risk and try to win the higher-margin work.
   
   
3. If you are in a cash crunch and resources are at capacity, you’re likely still digging yourself out of a previous hole. Things get tricky because you’re trying to put yourself on a better path while still making enough money to support the owners. If this is you, I’d take on high-margin opportunities with new hires and low-margin opportunities with contractors. This approach allows you to add to your team if it’s “worth it” and limit your risk in cases where it’s not as great for the business but still brings in critical cash flow. 
   
   
4. Lastly, assuming things are good in the business (cash flow, utilization, and pipeline), I would always defend my price and shoot for 45%-55%+ margin projects. There is little reason to take on low-margin work when the cost/benefit of resources doesn’t support it. If you think the client could be a pot of gold later on, then take a gamble, but limit the amount of those in your business overall. Every business needs 1-2 rainbow opportunities at a time, but you can’t base your entire pipeline on them.
   
   

Do you have other questions about what makes a solid agency? We’re always happy to discuss best practices!