The marketing and communications industry has made great strides in recovering from the recession, however, today’s environment is still tougher than it has ever been – having settled into the ‘new normal’. This new landscape encompasses many aspects from intensifying procurement demands, heavier client pressures, changing roles and decreasing margins but the one that is arguably the biggest cause for concern is the last one. According to a recent Kingston Smith report on the financial performance of marketing services companies in 2015, agencies are seeing revenues rise but due to decreasing margins, it is becoming harder and harder to transform that into profit, meaning that teams are not recognising enough financial success for the work they put in.
Despite the two primary resources required to run an agency – people and supplies – being within management’s control there are still agencies struggling to make a reasonable profit. So what can be done to halt this worrying trend?
First and foremost is that it is essential that this becomes an issue for the whole agency. It shouldn’t just be an isolated problem for finance teams or management, but rather a sense of commercialisation must be ingrained into every aspect of the creative process so to ensure teams are working together to maximise profit levels.
Secondly, it’s about paying attention to the detail – charging the right price on the right basis, recovering extra contract work and collecting what you charge. In the first instance it can seem quite simple but many of us working in the industry will recognise that it is easier said than done.
When it comes to charging the right price on the right basis, some agencies pull costs from a rate card or some go for the big hit with a performance related fee component. There is no right or wrong answer but it is important to remember that there are different billing models for a reason and agencies who are flexible in their remuneration models will often experience the most success. Additionally, in most instances agencies hold all of the risk with projects and this needs to be considered.
The concept of recovering extra charge work can be touchy, particularly if it involves a difficult conversation with a client. However, you don’t want to be the team assuming that you can recover over-spending at the end of the project just because you’ve secured good results. Using an agency management system to pull weekly reports and monitor over-spend in real time means you won’t end up out of pocket.
Invoicing is never easy, often they are queried or require amendments. A key part of ensuring a strong revenue stream and opportunity for profit growth is that these invoices are dealt with promptly. A number of companies changed their payment terms during and post-recession to protect cash flow and the last thing an agency needs is a payment cycle extended further because a query wasn’t dealt with in a timely manner.
Finally, it’s about the people, both the clients and staff. Choosing your clients is a luxury that many agencies don’t have. However, that doesn’t mean that agencies shouldn’t think twice, especially when it comes to the viability of the project or account – a little discernment at the outset may avoid pain and bolster profits in the longer term.
On the other side of the coin we have staffing and accurately resourcing for projects. A badly resourced agency has teams overworked and on the edge of burnout while others sit around with nothing to do. It is essential agencies consider all elements of resourcing from agile teams, freelancers and off-shoring. Additionally, a strong agency management system will remove the headache – easily identifying project gaps, allocating teams and accurately forecasting for issues and financial implications.
The agency that is able to address each of these points has the best chance of transforming revenue into profit – no easy feat in today’s environment, but something everyone should be striving for.
For more information on how your agency can receive the financial recognition it deserves and succeed in the new normal, download our whitepaper for free below.