The problem with revenue per head

“Revenue per FTE” (full time employee/full time equivalent) - or “revenue per head” - is one of the most widely used metrics in agency management.

To calculate revenue per full-time employee, take the total amount of revenue and divide it by the total number of employees. Some people advocate for including non-fee earners (like HR and IT) and some don't, but the benchmark number changes accordingly, so it doesn't matter too much.

I regularly speak to agency leaders who tell me they are aiming for a revenue per head of £X because a book told them to (you know which one).

If Rise at Seven had paid attention to the most commonly cited revenue per FTE benchmark of £100,000 per employee per year, it would have hired 30% fewer people and missed much of the opportunity it was presented with.

At least part of the answer to the question “how did you grow so fast?” (£0 - £7.3m and 2 people to 110 in 3 years, as a recap) is that we knew the benchmarks and decided we were more tolerant of risk than they allowed for.

When a measure becomes a target, it ceases to be useful.

Revenue per head is a useful measure for a mature business that changes very little. If that sounds like your agency, you can stop reading now.

But let’s imagine that you need to add a new service line to the business. Perhaps you’re thinking about an AI function and you don’t have the revenue to fund it (because almost nobody does, don’t believe the hype). You don’t have the answers so you’re thinking you might want to hire a big hitting AI expert and the money will come later. Congratulations! Your revenue head is now fucked. Which, in many cases, means that you just won’t make the risky bet.

Realistically, if you’re going to place one bet a year - and you’ve properly prepared to make sure that bet comes off - this short term damage to the metrics isn’t the end of the world.

But if you do this again and again (at Rise at Seven, for example, our policy was to in-house something as soon as we spent as much on freelancers as we would likely spend on a full time salary, which meant we were bringing on board developers, designers, data analysts, paid media professionals and so on when revenue per head for that role might be £2,000 - £3,000 per month) then your revenue per head will always be short of the recommended benchmarks, so there really is no point even looking at them.

Can you even measure anything by one head?

If your agency wins a £100,000 contract and thinks "great, we can add a head", you might be missing something:

You don't need 1 head, you need a percentage of several heads.

Agencies often failed to recognise that, because each new account they onboard requires the input of several people - for example, an account manager, project manager, strategist, specialist like a PR professional - they might actually grow in increments of four people and not a single head at a time. Therefore using a metric like revenue per head and assuming you can cover a new hire based on adding a retainer of, for example, £8,000 a month, doesn’t tell you the story of your profitability.

That new win might require 0.2 FTE for four or five different people.

If you are a full service agency, you know that two of these people might be a project manager and account manager, therefore your project management and account management functions should be massive, because you need them for every single account.

If you are a specialist agency and you deliver, let’s say, only one service, then you know all four of those people are going to be in these specific roles. This makes it much easier to build a pipeline; a graduate recruitment program; proper training, et cetera.

…but the metric doesn’t account for the rest of the people.

What am I getting at?

If you find revenue per head useful, carry on. Personally I think about it in the same breath as “10 people per £1m annual revenue” e.g. when an agency has 30 people, I assume it probably does somewhere between £2.5m - £3.5m revenue, which gives me a shortcut to what their problems might be. But it doesn’t give me a number to optimise.

Here’s what I want: if you are optimising for revenue per head…and you read this article and questioned why you optimise for that metric…you have permission to use something more fitting. Let me know if you want some suggestions.