Depending on your company, you are either closing down budgeting, in the middle of it, or just getting started. And it's at this time of the year that creative leaders should be reviewing their chargeback rates to determine whether an increase is necessary or whether there are cost savings to pass on through a decrease in your rates. Even creative leaders who lead non-chargeback teams may find this exercise interesting--at the very least you will be able to speak to what your team's hourly rate would be if you were a chargeback department. This allows you to speak to the cost savings that your team provides, as external agencies are probably twice that rate.
Getting Started
I am going to share a simple hourly chargeback rate calculation model that assumes a department will charge a blended rate (one rate) across all roles and services--which may or may not be the case for your department. Of departments that charge back, 37% use a blended rate, 30% service-specific rates, 14% rate cards/project rates, and 19% indicated they charge back but not in any of these three methods[1]. If you plan to charge multiple rates, this calculation can be adapted, although there are several criteria you will need to consider in advance, e.g., how to allocate department overhead costs such as admin and manager salaries across the varied rates and what percentage of your business falls across each of the services.
To assist in your calculation, please download Cella's "Simple Chargeback Calculator."
Step 1: Determine Your Department Capacity
Using the above calculator's "Tab a. Capacity"...
- Enter the estimated average number of days department employees receive in the form of paid time off (include vacation, sick, personal leave, etc.) in cell B4
- In cell B5, enter the number of corporate holidays observed by your company. Don't forget to include any end-of-year shutdown days if this occurs in your organization.
- Now you've calculated the number of total available business hours per employee (before any overtime). So while there are 2,080 hours in a business year, most employees are only in the office ~1850 hours per year (give or take depending on how generous your time off policy is). And while in the office for ~1850 hours, no one is productive 100% of the time. There are staff meetings, development meetings, bio breaks, water cooler conversations, etc. In a recent Cella Pulse Survey on time tracking practices, we learned that most individual contributors are expected to be "productive"/"billable" 75-85% of the time. Whereas Creative Directors average around 50-60% or 20%--depending on their roles (whether they are dedicated to creative direction or whether they are also the department head). You're next step in determining your department capacity is to determine the "billable expectation" for each employee.
- Under the "Roles" header, list each title in your department and in the adjacent column (D), identify how many people are in each of those roles. Don't forget to include all roles including yours and administrative staff. Anyone who is on your payroll--whether as a full-time or a "permalancer" (semi-permanent freelancer).
- You have now calculated the billable hours for each role (column A), as well as for the department as a whole (cell D27).
Step 2: Input Your Budgeted Expenses
- Moving to the second sheet in the Chargeback Calculator (B. Chargeback Rate), refer to your department budget to identify the budgeted amount per line item and enter those items into column B. If a line item in your budget is not included in our calculator, be sure to still include that cost in the "other" categories, which you can rename. Only include the expenses you are required to recover. And don't forget to include any agency fees or temporary/contract/freelance staff costs that are paid through your budget and not recovered by other means from your clients.
- Step 3: Divide Expenses by Billable Capacity
- The final step is done for you. In cell B31 your total department expenses have been calculated per the inputs above, in cell B32 your department's annual billing capacity has come over from the previous tab, and then in B33 the blended hourly rate has been calculated.
- This rate is only correct if you bill the number of hours equal to your annual billing capacity. If you bill more, your department will profit (but no one gets a check at the end of the year J). If you bill less, your department will run a deficit. So do refer to your total billings year-over-over to determine if your capacity is in line. You can always increase your capacity with temps, but it is much more difficult to decrease capacity across the year. Your role as department leader is to watch your billings to ensure they are on track and the department is positioned to come in as close to even as possible--no profit, no less. If your capacity is looking too high and a team member resigns, resist rehiring until the work is there.
In her role as Cella General Manager, Jackie Schaffer has consulted for Fortune 500 clients with more than 400 in-house team members and for teams at mid-sized businesses, government entities, and educational institutions with teams as small as four designers. Jackie's management competencies lie in operations assessments, financial management, and talent management, and she has a deep passion for balancing the creative and business needs of in-house shops while providing fulfilling opportunities for the team. Prior to joining Cella, she directed an international team of 80 creatives. During her tenure, she spearheaded the launch and development of the group's India-based team, built an interactive media division, and executed against a new visual identity.
[1] 2012 In-House Creative Services Industry Report. Cella Consulting, LLC, InSource, and The BOSS Group, pg 29.
