Unlike a Jelly Bean Challenge, agency estimating is no game
At the ISBA Annual Conference last week, we challenged our marketing and branding colleagues to estimate the number of jelly beans in a jar. Yes, you know the game. As you might expect, there were a wide range of estimates. In fact, the range spanned a whopping 10,990 beans. We received estimates as low as 256 and as high as 11,246. For the record, the number of beans in the jar was 2,467.
It appears rather astonishing but I’m not at all surprised. This group performed no better or worse than others in similar experiments. The results are consistent with the theory of planning fallacy, first proposed by psychologists Daniel Kahneman and Amos Tversky in 1979, which is a phenomenon in which estimates by subjects (e.g. time needed to complete a task or costs of a project) tend to display an optimism bias and underestimate the actual time/costs required.
Unlike many natural phenomena which follow a normal distribution (the symmetrical “bell-shaped” curve), people’s estimates of the number of beans were not equally distributed around the actual number of beans. What we found was a significant bias to underestimate the number of beans. In this instance, 71% of the respondents underestimated the number of beans in the jar whilst only 29% overestimated. And, as you can see in the chart below, there was up to a 900% difference when comparing actual to estimate.
This could be why your agency isn’t making as much profit as it could
This game was of course just a bit of fun, but the serious point is that, in our industry, estimating the price on a scope of work (SoW) is a bit like the jelly bean challenge. More art than science, it is subjective. Which is why no two estimators with the same brief will come up with the same price. It is why estimating is the key determinant as to whether an agency makes a profit or not; and why the trust between client and agency is at an all-time low.
What if your agency estimators have an optimism bias?
Imagine if 71% of your agency’s SoWs were underestimates. No matter how talented your team is, how hard they work or how efficient you are at running your shop, there is no way you will make money. Perhaps it is rosier for those that tend to overestimate? Not so. The obvious issue is that you might price yourself out of the market, but more problematic is that in overestimating you’ve also committed resources which won’t be used and that can lead to lost opportunities and revenues elsewhere.
So, what’s to be done? Pay more attention when estimating, get your brightest and most experienced to estimate, gather together all your past estimates and compare them against actual, create a template and implement a process so nothing will be missed? Track and record approvals and changes along the way? In short, yes. But there is an easier way.
The inaccuracy of estimating SoWs is the reason why Scope was created. It’s a tool that turns the art of cost estimating into a science. It uses a live pool of job data from 800+ agencies to help agencies benchmark deliverables, resources and hours. It breaks each deliverable down into component tasks so both agency and client can be crystal clear about what is being delivered for the money, and then that holy grail of finding the pricing sweet-spot between cost and value becomes a matter of course.
Consistent, precise scopes that clients can trust or planning fallacy (Kahneman and Tversky)? The choice is yours.