How to Calculate Cost Savings
Cost avoidance, cost savings—they are similar and sometimes used interchangeably. Some organizations like the term cost avoidance, others prefer to use cost savings. I found these definitions to be most useful:
- “Cost savings occur when there is a reduction that causes future spending to fall below the level of current spending. These cost savings may then be removed from budgets, reinvested, or redirected to other spending priorities.”
- “Cost avoidance refers to reductions that cause future spending to fall, but not below the level of current spending. Often cost avoidance involves slowing the rate of cost increases.” 
Given the above definitions, I am going to use the term cost savings to speak to money in-house creative teams can save their organizations because as in-house teams chip away at agency spend by taking on work that was previously done by agencies, a reduction of future spend against current spending occurs. Regardless of whether you call it cost savings or cost avoidance, what is most important is that it is a metric you should be calculating, as it is an easily quantifiable metric to share with your internal clients and your procurement team.
How to Calculate Your Department’s Estimated Annual Cost Savings
1. Calculate your hourly chargeback rate—whether you are a chargeback department or not, this can and should be determined.
A. Calculate the total cost to run your department:
- Personnel Costs (salaries, benefits, bonuses, overtime, taxes, temp labor, etc.)
- Direct Operating Expenses (travel, meals, employee engagement, training, consulting, technology, supplies, etc.)
- Overhead (rent, utilities, shared services costs, etc.)
If the creative team’s budget is isolated (not intermingled with other teams’ budgets), the easiest way is to get these numbers (and simply the total of these numbers) is from the budget owner, if that’s not you.
B. Determine the number of billable hours available for your staff:
- Start with 2080 (52 weeks x 40 hrs/week)
- Subtract out company holidays (most have 9 days at 8 hours; 72 hours of holidays)
- Subtract out average PTO per staff member (e.g., 15 days at 8 hours equals 120 hours)—your individual team members’ PTO or vacation days may differ—simply estimate the average number of days folks are out of the office due to vacation, sick, personal, etc.
- Based on the above example numbers, there are 1888 billable hours available in a year.
To help with this and the next step, we have a calculator: http://tiny.cc/chargebackrate
C. Determine the utilization (aka billable) goal of each of your team members and the total department—from the admin (if applicable) all the way up to the head of the creative department. Typical goals include:
- Individual contributors (design, editorial, video): 80%
- Team Managers: 20–60% depending on team size (the more direct reports, the lower the billable goal)
- Head of Creative Dept: 0%
- Creative Director (when not head of department): 60%
- Traffic Manager: 0%
- Project Managers: 80%
- Account Managers: this one varies a lot depending on the organization. Some call this role overhead and therefore goal it at 0%, others expect upwards of 80%.
D. Divide your total department costs by the capacity to result in your estimated chargeback rate
2. Determine the cost of your agency competition
- A. The easiest way to do this is to use the 4A’s Labor Billing Rate Study (a new one was just published; note: there is a fee associated with the study). I like to use page 67, which shows the blended hourly rate by region and service. Typically, I simply use the Creative Services Department rate.
- You can also partner with your procurement department to review rate cards provided by your agencies, but these are not usually broken down into hourly rates and this is a much more time-intensive approach
3. Calculate the cost savings
- Take the comparable agency rate (e.g., $175/hour)
- Subtract your estimated chargeback rate (e.g., $85/hr)
- Calculate how much money the company saves for every hour utilized in the in-house agency/creative department ($175 – $85 = $90/hr)
- Take your billable hours total from Step 1c (hopefully you used the calculator) and multiply the hourly cost savings ($90) by the billable capacity of your department (e.g., 20,000 hours) to estimate the annual cost savings your department provides your organization
Don’t forget, cost savings is a significant reason that your internal clients should want to use your team, but if quality and timeliness aren’t up to par cost savings are irrelevant. As you may have heard me say before “cost savings opens the door, but quality and timeliness keep it open.” As an in-house team you have to deliver against all three value drivers: time, cost and quality.