Theory of Constraints: What’s Hindering Your Agency’s Growth?
Putting me in charge of delivery, your agency would be a huge mistake. I ran my own agency for years have since converted my business to a solo practice. And now, as of this recording in March 2021, I’m head of growth, a gold front category design studio. These roles keep me in my strengths, where I am sure to fuck things up is in tedious client delivery. I thrive on change, creativity and constant learning. I like to do my projects my way. And the more repetition involved, the less motivated I become. For this reason, I was always the problem on the delivery side of my agency business. It was 100% my fault when things were late. Delivery depended on me and I wasn’t very dependable when it came to delivery. I was doing production only serving to sabotage our capacity, because it took me away from my strengths, strategic thinking, creativity, sales, marketing, and put me in a role I underperformed in. Now I focus on high end strategic engagements, making courses and content and running growth a gold front. That is my friends The Theory of Constraints in action, I was able to generate more leads and more sales, but I couldn’t deliver on them. At the time capacity was the problem. In this episode of The served on cell podcast, I’ll be talking to you all about the Theory of Constraints. What it is why you should think of your agency as a system, identifying strengths and weaknesses within the system, and steps to start improving your own constraints today. Welcome to the serve, don’t sell podcast, a show about revenue strategies for creative firms, consultants and independent experts, because your expertise will not sell itself. I’m your host, Liston Witherill. And I am on a mission to make 100 million people, world class ethical communicators, because the world needs more good people. Yes, even in business. If you like what you hear, sign up for my email newsletter at serve, don’t sell calm and get my top 10 podcast episodes and articles right when you sign up. Now to the show. Let’s start with a quick definition. As usual, you’ve heard the show before. You know I like to start with definition. So what is the Theory of Constraints. The Theory of Constraints simply says that your output is limited by the highest output of the individual components of any system. It’s a concept that comes from lean manufacturing, and is helpful in understanding how to improve a system. You know the phrase, a chain is as strong as its weakest link. That’s the Theory of Constraints in practice, enter your firm. Your Business Development Strategy then is limited by the individual outputs of each of the components that drive value creation. Think about the three major drivers of your business development strategy, marketing, sales delivery. By the way, if you want to learn more about business development strategy and a comprehensive theory, it is linked in the show notes of this episode. But back to the program, marketing, sales delivery, let’s say I have a capacity of six in marketing, a capacity of three in sales, and a capacity of five in delivery. That’s the most clients I could work with at any given time. So the maximum output of this system then is three, I could deliver to more clients up to five at a time, and I could produce more leads from marketing up to six. But the system in this example is limited by sales output. Of course, we could then drill deeper and find out that perhaps sales output is limited by sales skills, sales process, proposal writing, negotiation, strategy positioning, lots and lots and lots and lots and lots of other factors. But as this high level view makes it clear the sales function is the limiting factor in the system. Of course, the Theory of Constraints was conceived as a tool for manufacturing firms. It focuses on three critical levers inventory, operational expense, and throughput. inventory is simply the raw product that you have to sell operational expenses, what it costs to prepare that raw material for sale. And throughput is the rate at which the system generates money from sales.
Now, let’s look at your agency as a system. I left a few important things out of the story in the example above. No matter what you do, you won’t close 100% of the leads that you get, nor should you attempt to. If you’re marketing well then you’ll produce more leads than you need. If you’re selling well. You’re closing most of the deals that you should, and your delivery should support both in this way, each of your systems As a theoretical maximum, you may need to expand the system in order to add constraints. So there’s two ways to think about this, adding efficiency, or adding capacity. And the first thing I want you to think about is adding efficiency. And then adding capacity later. Thinking about your firm as a system allows you to prioritize the most important strategic actions you should take. For me, the easiest way to think about this is in the three dimensions of your business development, platform, marketing, the number and quality of leads, you’re generating, sales, the percentage of quality leads your closing, and how profitable they are, and delivery, your efficiency, quality and capacity for delivering client value. For many firms, the first and most obvious constraints are in either marketing or sales. Within each system, there’s a conversion percentage, as well as a maximum threshold. This is easiest to illustrate through the delivery part of the system. Let’s say you have 20 people at your firm, all of whom could bill up to 70% of their working hours. If your average billable rate is 150, or at least you’re targeting 150. And a working year has 2080 hours because it does, we can figure out your maximum annual revenue $4.4 million. I did the math already, you can check it yourself. Yes, I did round up. Given the constraints of the system, we know the maximum firm revenue for the year is 4.4 million. If revenue is below that amount, it’s easy to pinpoint why ABR is below 150. And our utilization is lower than 70%, or some combination of the two. Now, maybe we’ll have to market or sell more in order to get utilization up. But we know what the problem is essentially, in order to raise revenue, we only have four options at our disposal. Number one, hire more people. Number two, ask employees to work more hours. Number three, raise the billable target. And number four, raise ABR options wonder for the best ideas here To be sure, you could ask employees to work more hours but you don’t want to be a shitty boss. And you could raise the billable target, but everybody would leave your company. So really, your only options are to hire more people or raise AVR. We could do the same analysis within marketing or sales to come up with a similar level of clarity about which levers to pull. Within each subsystem of your business. You have three possible constraints, according to the theory, all translated in terms of agency work, equipment, the tools you give your people, people the skill and qualifications of your team, and policy, written or unwritten ways of doing things.
Let’s now turn to some examples of the Theory of Constraints in action. I’ll start with a really simple example to illustrate the point. It was crazy making to watch a former boss of mine buy computers and IT equipment for the team because he tried to save a few dollars on the margin of every unit. This of course, falls under the equipment category. The urge to save a few bucks on tech makes zero sense. Most agencies spend 70% plus of their budgets on people. Tech is an infinitesimal cost, but one that pays dividends because spending a little bit more makes work more enjoyable and faster. Likewise, policies can be a huge impediment to process and therefore profitability. policies that favor more internal approval and checkpoints will naturally slow down the process and reduce profitability. On the other side of that same equation. Internal checkpoints can increase overall quality, client satisfaction and serve as a critical training tool for your employees. Everything is a trade off. Finally, people Oh, the people. Oh, the dear people. One common people issue is expecting your star employee in production to also be great at marketing or business development. I’ve seen and heard about this hundreds of times and it very rarely works. That might happen, but it’s unlikely. The late great Kobe Bryant rip Black Mamba was possibly the best score in NBA history. But several players were driven from the Lakers because it was very tough to play with him. Those aren’t my words. Those are the words of people like Dwight Howard, former multiple all star who just couldn’t stick it out with the Lakers because Kobe was such a pain. Great player probably wouldn’t make a great coach though. having great people in the wrong roles, especially in business development or leadership roles will surely place a constraint on your growth potential. The other side of that same coin is that your hope to convert a top producer into a Rainmaker also reduces your delivery capacity and At the very top of your firm’s rate schedule to let us now turn to pinpointing constraints in your firm. Now that you’ve made it this far, you’re probably wondering how to pinpoint the constraints within your own firm. If you’re the owner, I recommend you start with yourself. The things that made you successful in the beginning, your willingness to do everything and your work ethic will eventually serve to hold you and your firm back. Here’s a list of questions you can answer as a self assessment to find out where you can focus your time and effort to remove some of the constraints in your growth. Do you currently have more opportunity than you can serve? are you closing at least 30% of the perfect fit client opportunities? Is ABR at or substantially above the high end of industry average? Are your employees hitting their utilization targets every month? Are you saying no to projects that aren’t profitable and or learning which ones you should say no to? This is just a short list to get you started. The big takeaway is that you can pinpoint constraints that have the biggest impact on your profitability. No, you’re not a manufacturing firm. But the sooner you think of your company as a system, the sooner you can correct the inefficiencies in it. Thanks so much for listening to the serve, don’t sell podcast, I’m Liston. Witherill, founder and creator of serve, don’t sell. And if you like what you hear, head over to my website served on sell.com sign up for my email newsletter and you’ll get the top 10 podcast episodes and articles right when you sign up and you’ll be the first to find out whenever I have new products or when my courses open up periodically. Thanks so much for listening and I hope you have a fantastic day.