Implement a 4-day work week at your agency

Why it’s hard to make the shift

The traditional work week in agencies typically involves long hours and intense work schedules, leading to what many of us industry vets look back on as a toxic work culture. While things have gotten better over the last decade, agencies and service firms are still falling behind other industries that are embracing reduced and flexible work schedules.

The 4 day work week is limited by the inherent tension that exists for any professional services business. Agencies sell time. Moving to a 4 day work week directly limits the amount of time agencies have to sell (no matter what pricing model they’re currently using). Agencies are incentivized to maximize the amount of their team’s hours they’re able to arbitrage, making it difficult to embrace this kind of change.

The good news is that it’s not impossible and there are simple KPIs that can help firms understand what exactly needs to be true to make this work financially.

What exactly is a 4 day work week?

A 4 day work week can take different forms that affect when and how much you work, and there doesn’t seem to be a whole lot of consensus on an “official” model. One interpretation is to reduce your team’s capacity by 8 hours per week, regardless of when the team is actually working or how many days they are online. Another is to keep the same workload but spread it over 4 days instead of the usual 5, without changing the overall capacity. There’s also a middle ground where your team enjoys more flexibility, dedicated internal work days, limited meetings on certain days, or other variations to make the work week more manageable.

For the purpose of this post, we’re going to assume that a 4 day work week corresponds to a reduction in capacity of 8 hours per week (the equivalent of one working day per week), reducing weekly capacity from 40 down to 32 hours a week.

We’re going to explore the different ways a firm can adjust to this new capacity without it impacting the bottom line, creating a win-win for the team and the agency.

We’ll cover:

• How this is going to impact your team’s Utilization
• How this is going to impact your team culture and work/life balance
• How you can compensate for this immediate 20% reduction in your revenue capacity

Baseline scenario: 5 day work week

Let’s look at the math of a typical agency running a standard 5 day work week. We’re going to start with these numbers to see the impact of shifting to a 4 day work week.

Imagine a scenario where this was your agency’s financial and operational situation:

Full-Time Employees: 10

Let’s define a few of these numbers so that we’re all on the same page:

Delivery Expenses

What it costs your agency to deliver your work, typically comprised of your staffing costs (salaries + benefits + payroll taxes) on the delivery team.

Overhead Expenses

Your Administrative, internal Sales & Marketing, and Facilities costs, combined, along with the salaries of those who are on those internal teams.

Capacity (Hours)

The number of hours in total that you’re buying from your team each year. Typically this is 40 hours a week, for 52 weeks a year, or 2080 hours. For 10 employees, that’s 20,800 hours.

Utilization

The amount of time that your team (as a whole) will be spending on revenue-earning activities. How much of their time is spent on client work? In this case, let’s call it 50%.

Delivery Capacity

The amount of Capacity (hours) multiplied by the Utilization Rate. In this case, 20,800 * 0.5 = 10,400 hours.

Average Billable Rate (ABR)

The amount of revenue that your team earns for each hour they put into a project. If you had a project that was $200 and you spent 3 hours on it, that would be an ABR of $200 / 3 = $66/h.

Agency Gross Income (AGI)

The amount of revenue you’re earning minus any Pass-Through Expenses that should be coming out, that your team isn’t responsible for earning (i.e. advertising budgets, print budgets, white-labeled services). In this case, it’s the Delivery Capacity multiplied by the ABR.

Delivery Margin

The amount of money that is leftover from your AGI once you’ve paid your Delivery Costs. In this case, there is 44% leftover. (1.25M - 700K / 1.25M = 0.44)

Profit

The amount of money that is leftover once you’ve removed Delivery Costs and Overhead Expenses. (1.25M - 1.0M / 1.25M = 0.20)

So we’ve got an agency that is running a reasonably healthy 20% profit margin. Let’s see what the exact same team looks like minus one day of work for all team members while holding everything else (salaries, utilization, ABR) constant:

Baseline scenario: 4 day work week

As you can see, with one workday erased from the board, your team’s Capacity drops, which in turn drops your delivery Capacity, and after paying for the team and your overhead expenses, you’re running a break-even show.

Financially, you couldn’t say yes to your employees. It wouldn’t make sense. But there are operational levers that you can use to increase the efficiency by which you work to bring these numbers closer in line with what you were doing before changing to a 4 day work week.

Let’s open this up.

Option 1: Cut your costs

The most simple (on paper) option here is to decrease your costs. In the example, we’re spending $700,000 a year on Delivery Costs (which are mainly your delivery team’s salaries) and $300,000 a year on Overhead Costs (which are your administrative, internal sales & marketing, and facilities costs).

Unfortunately, this option will involve reducing the absolute profit of the agency (as in, the $’s in the bank account). However, the relative profitability can be maintained by getting expenses aligned to AGI at the previous levels. So while the AGI might be lower, the percentage of that AGI retained as profit will remain the same.

By the way, this is the least attractive way to compensate for the 4 day work week. Overhead expenses Your team on a 4 day work week is only able to generate $998,400 in AGI.

In the 5 day work week scenario, where you were profitable doing $1,250,000 in AGI, you were spending 24% of that on Overhead Expenses. Let’s carry over that percentage to our new AGI figure:

$998,400 x 0.24 = $239,616

To maintain the same ratio of overhead expenses, you’d need to cut costs from the original $300k down to 240k.

Delivery Costs

In the 5 day work week scenario, your team was spending 56% of AGI on Delivery Costs. To maintain the same ratio with our new AGI of $998k, you’d need to spend:

$998,400 x 0.56 = $559,104

We’d need to bring Delivery Costs (aka your team’s salaries) down from 700k to 559k.

With both cuts, here’s what our new financials would look like:

In this scenario, you’d be running the same margins as a 5 day work week, but you wouldn’t have the same throughput.

However, the absolute profit for the agency will have decreased from $250,000 down to $199,680 due to the lower AGI capacity of the business.

This is clearly not a fun way to compensate for the 4 day work week, and often will require adjusting the team’s compensation down to reflect the new capacity they’re bringing to the business. Most teams won’t be excited or open to that tradeoff. So what else can we do to adjust the business and pay for the 4 day work week?

How about maintaining the same costs, but reaching the same amount of AGI as well?

Option 2: Average Billable Rates

The efficiency by which your team earns their revenue is another lever that you can pull to make a 4 day work week feasible. For each hour that your team spends working on a project, how much revenue is generated?

In our example, the ABR is sitting at $120/h. This kind of metric is calculated by taking your AGI (project revenue minus any Pass-Through Expenses) and dividing it by your delivery hours (any time your team spent on projects, regardless of how much of that was billed to the client).

Keep in mind that ABR is calculated in the same way no matter what your pricing or billing model is. Whether you bill hourly, flat rates, retainers, value-based pricing or something else, the formula is always the same.

Let’s take the original AGI that the 5 day work week team was able to achieve, which was $1,250,000 annually, and divide that by the 4 day work week delivery capacity that your team has available to work on client work, which was 8,320.

ABR = $1,250,000 / 8,320

ABR = $150

What this means is that you’d need to increase your ABR from the original $120/h up to $150/h to reach the same level of AGI that it had while the team was on a 5 day work week, making the 4 day work week feasible.

Essentially, the team earns that day of capacity back by finding ways to earn the same amount of revenue in less time. That can come through increases in efficiency (spending less time to get the same work done), increases in pricing, or a combination of the two.

Here is what our financial chart looks like with that change:

In this scenario, the absolute profitability of the agency remains the same at $250,000. Everyone wins!

Option 3: Utilization

The third and final option that you have to reach the same level of performance on only four days of work per week is to increase your team’s Utilization. That’s the amount of time that your team is spending on revenue-earning activities. The formula looks like this:

Utilization = Capacity / Delivery Capacity

In our 5 day work week scenario, we had the following:

But in our 4 day work week scenario, it looked like this:

To figure out the utilization rate needed to make up for the AGI difference between the 5 day and 4 day work weeks, we can divide the 4 day work week capacity by the 5 day work week Delivery Capacity:

10,400 / 16,640 = 62.5%

This means that the firm would need to hit a 62% Utilization Rate to achieve the same level of AGI with a 4 day work week as they would in the 5 day work week scenario. Here’s what that would look like across the board:

This could be achieved by finding ways to reduce the amount of administrative or non-billable work each team member has to do. Making optimizations to resource planning and project scheduling processes, getting better at forecasting, etc.

Small improvements

It’s unlikely that you skyrocket one of these metrics easily. What’s more likely is that you’re able to make small improvements in each area to make up for it. Here is what a new chart could look like if you see small bumps in each key lever area:

As you can see, a combination of all three levers can help get this agency close to its original profitability by making small incremental improvements. Remember that there is an infinite number of combinations that can lead the agency back to a sustainable place.

Non-mathematical considerations

Shifting to a 4 day work week comes with its own set of challenges and things to consider. It’s important to tackle these upfront to ensure a smooth transition. Start by discussing what the underlying needs are from your team to understand which version of a 4 day work week (or any other kind of flexible or reduced work culture) will actually meet their needs.

Discuss how fewer work days or hours will impact client interactions, managing tasks and meetings, handling time off, and communication on the non-working day. Be prepared for emergencies and decide if internal meetings need rescheduling.

Don’t forget to think about compensation adjustments and how freelance or contractor teams will be affected. It’s crucial to be clear with your team about what to expect, involve them in the decision-making process, and welcome their feedback. Remember, implementing this change will be an iterative process, so try experimenting with different utilization rates or pricing models to find what works best. Communicate that success may require adjustments along the way. By collaborating with your team, taking small steps, and setting clear expectations, you’ll be better equipped to navigate the challenges and increase the likelihood of a successful transition to a 4 day work week.

Closing thoughts

As we navigate the twists and turns of 2023, professional service agencies are facing their fair share of challenges. In an ever-evolving job market, attracting and retaining top talent requires fresh approaches. That’s where the idea of a 4 day work week comes in—a potential game-changer that promises a better work-life balance and gives you an edge over your competitors. But before taking the leap, dig into the numbers and assess the practicality of this transition.

To make the 4 day work week (or whatever change to your culture you’re thinking about) a reality, you need to consider key factors like Average Billable Rate (ABR), Utilization, and cost-cutting. These elements hold the potential to shape the financial feasibility of your new work schedule. However, it’s crucial to tread cautiously and evaluate the ripple effects this change may have on your services and team dynamics. Every facet of your business will be impacted.

For a successful transition, rally your team around this idea. Engage them in the decision-making process and tap into their valuable insights. By working together, you can analyze which levers can be pulled to strike the perfect balance—ensuring productivity remains high while offering the well-deserved perk of extended weekends that stretch on indefinitely. Remember, it’s a collaborative journey that will require finding the right formula tailored to your agency’s unique needs and aspirations.