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Theory of Constraints: What's Hindering Growth In Your Agency

Theory of Constraints: What's Hindering Growth In Your Agency

Liston Witherill
Liston Witherill
5 min read

Putting me in charge of delivery at 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 writing in March 2021) I’m Head of Growth at Gold Front, a category design studio.

These roles keep me in my strengths. Where I’m 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 the delivery side of my agency business. It was 100% my fault when things were late. 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.

That’s the theory of constraints in action.

I was able to generate more leads and more sales, but couldn’t deliver on them. At the time, capacity was the problem.

In this article, I’ll cover:

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 any system.

You know the phrase “a chain is as strong as its weakest link?” That’s the theory of constraints. Enter your firm.

Your business development strategy, then, is limited by the individual outputs of each of the components that drive value creation.

Let’s look at a picture:

The maximum output of this system is 3. You could deliver to more clients (5), and you can produce more leads from marketing (6), but the system depicted above 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, or other factors. But at this high level view, it’s clear that the sales function is the limiting factor in the business.

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 the raw product you have to sell, operational expense is what it costs to prepare it for sale, and throughput is the rate at which the system generates money from sales.

Your Agency, As a System

I left a few 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 it. 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.

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 you’re closing, and how profitable they are
  • 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, all of whom could bill up to 70% of their working hours. If your average billable rate (ABR) is $150, and a working year has 2,080 hours for each employee, we can figure out your maximum annual revenue:

  • (20 employees) x (2,080 hours/employee) x (70% billable hours) x ($150/hour) = $4.4M

Given the constraints of the system, we know the maximum firm revenue for the year is $4.4M. If revenue is below that amount, it’s easy to pinpoint why: ABR is below $150, utilization is lower than 70%, or some combination of the two.

In order to raise revenue, we only have four options:

  1. Hire more people
  2. Ask employees to work more hours
  3. Raise the billable target
  4. Raise ABR

Options 1 and 4 are the best ideas here, to be sure. We could do the same analysis within marketing or sales, too, and 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
  • Policy: written or unwritten ways of doing things

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%+ of their budgets on people. Tech is an infinitesimal cost. But one that pays dividends because spending a little 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. 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 (R.I.P., Mamba) was possibly the best scorer in NBA history, but several players were driven from the Lakers because it was “very tough” to play with him. 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, at the top of your firm’s rate schedule, too.

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.