Thanks to hit TV series Mad Men the world at large is aware of the worst excesses of the advertising industry in the 1950s and 1960s. And anyone who worked in the industry in the 1980s and early 90s knows that while the style of decadence might have evolved, the excesses were equally epic, rock-star even in their nature.
Our industry has of course cleaned up its act massively since then. Moreover we are now operating in some of the most difficult economic times since the 1970s and 80s, if not worse. You’d think that most agencies would have learnt the lessons of their predecessors and that excess and corporate vanity would have disappeared from the agenda. Yet, in this, our run-down on some of the biggest errors agency managements can make, you’ll find that hubris can still rear its ugly head.
While the flashy lifestyles and huge expense accounts as well as the fashion for agency founders to have their names above the door have mainly been consigned to past there are other ways that vanity and ostentation can appear. Agencies that shall remain nameless have over-stretched themselves and moved into excessively large, grandiose premises – redundant space and frivolous, expensive decor can often be tell-tale signs of egos gone mad.
Such behaviour also takes a business into the ‘danger zone’ of poor cash flow management where spend is based on potential future earnings rather than a more prudent approach. It’s important to remember that most agencies should be cash flow positive and one that is in debt or where substantial amounts of cash have been taken out should set alarm bells ringing.
A major client loss is all it takes for a fragile, highly leveraged structure to come tumbling down. History tells us that the fall out can be catastrophic. It’s all too easy to have delusions of grandeur and to believe oneself to be invincible. Subsequent attempts to balance the books can be sobering.
Then there’s the issue of sharing. When you get to a certain size, you need to look seriously at ownership and how to distribute the wealth as a means of incentivising people. A headcount of 150 plus where one person owns more than 80 per cent of the business may easily create a culture of resentment. Senior people will rarely stay long when they see no prospect of getting a return. In any case, a business with a high staff turnover is rarely a good one. The most successful businesses are generally those that start up with three or four partners where each has a clearly defined role.
The best agencies will always be looking over their shoulder, seeking out the new trends in the broader marketing and business landscape. They will know that evolving is essential to their survival. Again, our industry’s history books are littered with examples of agencies who failed to innovate and who stuck to fixed ways of doing things or to areas of expertise that technology was making increasingly irrelevant and redundant.
When it comes to other signs of a business in danger, client churn is another. All agencies are at any time just one phone call away from losing a client. Well-run agencies ensure they don’t put all their eggs in one basket both in terms of sector dependency – pity those who specialise in retail - or by choosing to work with a small number of very large clients. But there are some agencies that simply can’t seem to hang on to any sort of client account for very long. To grow profitably, agencies need to be able to retain clients and grow the work they do with them year on year while making a decent margin.
Struggling along at a net margin of 15 per cent is not a long term strategy for growth. It doesn’t allow an agency to build up reserves that can be invested or used as a financial cushion should times get tough. It probably means the agency heads are not paying themselves properly either. This sort of scenario is commonly accompanied by a lack of business development skills. Agencies of this kind commonly start with a core set of clients along with a few referrals but once they try to move beyond their own network, growth stalls.
We’ve left one of the most lethal examples of hubris to the last. From time to time, you see an agency that was once great fall on hard times or even fail. During their heyday some of these agencies may have received an offer to sell. No one is saying it’s an easy decision to take, but hanging on to get an extra couple of million on the sale price can be fatal. Like a greedy gambler it’s easy to get seduced by the thought of a higher price; but as many entrepreneurs have realised, the difference between a sale price of £10 or £12 million and the lifestyle it brings is negligible when compared to the big fat zero that might be the case if they wait too long.
Most businesses have a window for sale and it’s important to understand what that is as well as a good deal when it comes along. Don’t always assume that a strong industry and market for the companies in it will stay that way. If the agency has reached a decent critical mass with a headcount of 30 people plus, more than £1 million EBIT and is in good shape with margins in excess of 20 per cent and growing at 10 per cent then any decent approach should be seriously considered. Many agency founders will set themselves a future value at which they will sell the business and they stay true to this.
We started out commentary on corporate excess and hubris with a reference to the Mad Men era. We only have to look to the start of this century for more examples. Friends Reunited and MySpace were sold at massively inflated prices and if you invested in Scoot.com (remember them?), once valued at £3bn, your shares will be worthless. Quite simply the morale of the story when it comes to selling your business is if you’re flying high and the markets are strong, think hard before you hold out for more. You might come to regret it. The Greek myth of Icarus is often used as a tragic example of hubris and it’s one entrepreneurs would do well to remember.
Keith Hunt is managing partner at Results International