Your agency may be hiring new recruits and winning more business, but are you keeping things profitable at the same time? Here, Jay Neal, founder of The Agency Works, finance and operations consultants to the creative industry, identifies the classic growth traps for agencies and how to avoid falling into them.
Everyone’s busy, your agency is doing well, so why waste time getting your people to fill in timesheets. Capacity is obviously being utilised and you’re getting loads of new business so what do you need time reports for?
Let’s get back to basics. ‘Turnover’ and ‘profit’ and the two are very different things. Firstly, just because money is coming through door doesn’t mean time is being well spent. And that directly impacts on your profitability.
The financial success of any agency is a direct result of the reporting process it puts in place and its attitude to the business process. Creative, design, PR or digital - if what you’re selling is based around capacity planning (selling people’s time) then a robust reporting structure that gives you accurate and useful information about the business and its resources has to be a critical part of day to day agency life – for everyone in the business.
Ensuring that all projects and jobs are accurately estimated, revised and managed on a regular basis will enable you to calculate target revenue. Regularly reviewing your number of income earners, their utilisation and the required hourly rate will give you month-by-month details.
It’s being able to monitor projects within the agency and give you transparency on current team capacity that will highlight if your business is over or under resourced, keeping your agency health and profitable.
Kent Valentine, director at digital agency Draw Group, London, recently told me: "Client over-service and the hum of a busy agency often go hand in hand. The challenge most agencies face is that the former can create a false impression of the latter. If all the activity is coming from over-service, not only must you not hire, but also you just direct the focus of the existing team back to profitable work. Only then will you get a realistic picture of the work the agency is currently processing."
Over-servicing for over-servicing’s sake
As sure as day follows night, there will always be an element of over-servicing in agency life. Financially successful agencies make an allowance for this by budgeting for a healthy rate of over-service, which doesn’t hamper growth but is realistic.
You need to ensure that you have accurate estimating processes in place, alongside accurate time-recording and a resource-level costing model so that the actual costs of carrying out the tasks are taken into account. When all three of those things are in place and happening – accurate estimating, daily time recording and actual cost recording - it will allow for your agency to monitor the progress of the jobs, not just on an ‘actual hours’ verses ‘estimated hours’ basis, but also from an ‘estimated cost’ verses ‘actual cost’ perspective too.
This is important because you could end up using a more expensive resource that has ‘burnt’ less hours (because they are more experienced) but has cost more than was estimated!
Stuart Wells, MD of digital agency WickedWeb, recently shared this with me on the subject of over-servicing: “I seriously dread to think how much profit we have burnt by over-servicing over the years, and in digital, with a loose Statement of Works and poorly governed change control procedure it can easily happen.
“A well-disciplined operations director can put a stop to unquantifiable over-servicing if they have the time data they need. Over-servicing will always play a part as that’s the alternative decision to losing a client and cutting staff, both which go against the instinct of an agency owner. But the over-servicing needs to be quantified so informed rather than blind decisions can be made about staff and clients.”
Keeping all the plates spinning at the same time can be stressful, especially for account handlers who are often managing multiple clients, internal teams and dealing with new business. They are the masters of multi-tasking. However, it’s more important than ever at busy times of growth to keep existing clients happy and part of that is ensuring proper systems are in place to flag up any potential problems.
Obviously, you want to encourage a positive relationship with the client, but one that also protects your business. Review points should be put in place on all projects, for example, reviewing projects once 25, 50, & 75 per cent of the budgeted hours or cost have been spent. At each of these points the agency and account handling teams need to be aware of the percentage of deliverable they have achieved verses the percentage of time or cost that has been used.
If they have spent 25 per cent of the time but only delivered 10 per cent of deliverables then a strategic decision needs to take place on how to rectify that situation. It is easy to deal with if you assess at each of the key percentage points rather than at the end of the project.
Agency growth is exciting and can be rewarding for the whole team, but with growth comes extra pressure. What you want to avoid is staff burnout.
This is not just an issue if people are off sick: stressed staff, if poorly managed, can become a real performance issue which can then eat in to profitability. If people are too tired to work to their full potential then the business suffers.
If you are managing the capacity of the agency correctly and ensuring that the client is paying for the work being delivered, then there should not be the culture of working overtime just to client demands.
Justin Taylor, MD of marketing communications agency Graphitas, recently told me: “Instead of hiring people, should you be firing clients? In agency life there will always be the non-profitable customers. Before embarking on a recruitment drive, take a look at your client list and evaluate the true value/cost of each client to your business. Maybe firing non-profitable clients offers a better way forward than hiring additional staff.”
Bums on seat
Are you in a rush to hire people, in a panic to get bums on seats and service clients? Stop, and think. What do you really need to spend to fulfil demand? Do you need full time hires or could you use experienced freelance help or part time support?
By jumping in to recruiting more staff because it ‘feels busy’ you could end up with more people than you need leading to difficult (and potentially costly) decisions further down the line.
Stuart Wells, MD of digital agency WickedWeb, told me: “I used to look at new recruits with an element of relaxed optimism that it was a positive move leading to growth, happier staff and happier clients. Now we put the agency first and ensure there is a financial benefit to a new hire rather than an operational one. The two are very different and quite often oppose one another.
"When you add up the real cost of a bum on a seat including the software, hardware, and even cost per sqare foot in your London office, it’s alarming. Growth has to be quantified as you can only ride that wave so long without the data.”
Knowledge Is Power
Finally, if you know your way around your own agency, you’ll find the ‘growth spot everytime.
If you know the ins and outs of your business, its capacity, profitability and performance, ideally in real time, you can make informed decisions and make sure that you're delivering satisfaction for all!