MANAGING AN AGENCY FOR PREMIUM PROFIT – Step 9 in becoming a Momentum Agency
This is the ninth and last in a series of nine pieces which share our in-depth thoughts on how your firm can become a Momentum Agency. These are agencies that consistently outpace the industry in terms of revenue growth, profitability and a culture that attracts A-level talent.
Momentum Agencies strive to achieve high levels of financial performance.
First, Momentum Agencies drive themselves to achieve consistent year-over-year revenue growth. Their goal is to grow revenue by at least +10-20% per year. They fully understand the old adage that “If you’re not growing, you’re dying. You just don’t know how slowly.”
Consistent revenue growth is proof of a healthy and meaningful brand proposition. It demonstrates that the agency’s brand has taken root in the marketplace.
Second, these agencies also push themselves for strong and consistent profitability. Their goal is to earn no less than a 20% operating margin on the low end and 30% or more on the high side. This indicates that the senior team understands how to run the business at a strong to above-average profit.
To ensure this level of profitability, Momentum Agencies are closely managed to adhere to these ratios:
People costs at 50% or less of net revenue (Excluding bonuses but including group insurance, payroll taxes, Pro D and 401-K).
Space costs at 7% or less of net revenue.
Marketing and new business costs at 4% or less of net revenue.
Managing to these ratios should earn the agency a margin of 30% or more.
Momentum Agencies are intentional about managing for profit.
For these agencies, growing profitability is never left to chance. It is the direct result of planning, control and a non-stop commitment to reaching their financial goals.
They design their financial management systems around the drivers of profitability. Their management of the pricing model and agency overhead expenses is disciplined and consistent.
Everyone from the CEO to the most junior assistant is required to input their timesheets on time and accurately. This is critical to understanding what things really cost and how long activities actually take. This also helps reinforce when new hires are truly needed. And it helps the firm to always have an accurate read on over- or under-servicing of clients.
Momentum Agencies understand that people costs are roughly 75% of their cost structure. They know how important it is that staff time is efficiently and effectively managed. This starts by developing an appropriate structure where:
Salaries, targets for billable hours and hourly billing rates are aligned for profit.
Multiples of these salaries, target hours and billing rates are developed to ensure a strong profit.
Freelance costs are marked up 100%. (A $100 per hour freelancer should be billed out at $200 per hour.)
You have a financial model? Great. So now actively manage it to increase profitability.
Each staff member must hit his/her billable hour target for the billing rate design to work properly. If staff exceed their billable target, profit goes up. If they fall short, profit drops quickly.
Momentum Agencies use these tools to meet or exceed objectives:
Capacity planning for the upcoming quarter to understand anticipated over- or under- staffing so they can make decisions ahead of time and proactively.
They plan to 10% excess capacity so the agency can take on unexpected work without burning out a team.
Each month, executing a staff allocation process that works to balance culture with each team member having enough assigned client hours to meet their targets.
As client work changes from plan, the staff allocation process is adjusted weekly to reflect ebbs and flows in new client work.
As work is removed from a staff member, new work is assigned to ensure everyone meets their billable target even with shifting client work.
Agency, practice, team and individual utilization and realization reports are analyzed to determine productivity levels for group and each person.
These agencies also carefully avoid over-servicing clients and aggressively eliminate it if it occurs. They understand that chronic over-servicing of an account cheapens the agency in the eyes of that client in addition to eating away at profits.
They teach mid- and senior-level talent to identify and bill for “mission creep” (the incremental work that clients request over and above the agreed-upon scope of work). They also review monthly billing closely to identify any potential incremental billings that can be added before an invoice is sent to the client.
Tight and accurate budgeting will also increase profits.
Momentum Agencies understand that you start making or losing money at the client budgeting phase. They’re very thorough in how they scope work, detail major program assumptions and build flexibility and protection into their budgets.
Their approach to budgeting is granular and carefully constructed from the ground up. All important financially-related details are considered beginning with the hours assigned to each role that touches each and every program tactic followed by the calculation of “hours X rate” for each person involved.
This becomes the starting budget. These agencies then add 10% to protect themselves in case a projection is inaccurate. Vendor expenses with markups are added. The standard surcharge is also built in. The total of internal costs, vendor costs and fee are added together to derive the total budget.
When it’s time to review the budget with the client, always keep in mind that presenting the budget is an art. The most profitable firms understand that budgets are predictions of future activity and no one can predict the future down to the specific dollar.
Momentum Agencies present scope-of-work budgets in dollar ranges to reflect that the work actually required can be more than anticipated. They also add two footnotes to each scope:
This budget is a good faith estimate with a possible variance of plus or minus 10%.
Movement of dollars between budget categories may be necessary in the event that the agency goes under in one budget bucket and is over in another.
In short, better budgeting will make you more money.
Keeping payroll costs in line with revenue.
Momentum Agencies have a growth-oriented set of hiring triggers and staffing architecture based on accountability to achieving financial and operational targets.
Senior hires generally precede revenue because these are the people with the skills and experience to make additional revenue happen. Other hires are made after new revenue is won.
Revenue management targets are set for senior leaders. As the senior team gets close to its target, a new senior hire is made. For lower levels, targets are set for billable hours. Hires at these levels are made only after management is confident that the revenue level will continue.
Additional opportunities for increasing profits.
To the extent possible, try to negotiate markups on all client costs that go through your accounting system.
These can include a reasonable surcharge on (among other costs) the agency’s investments in research, data and other subscription services which help to better serve clients but where it’s difficult to track the usage of them.
Today, social media advertising buys are very common. Be aware that most firms mark these up by 15-20%.
Many agencies are now also adding “success fees” to their budgets for work that helps build or protect revenue streams for clients.
One more suggestion? At least once a year, convene your firm’s mid- and senior-level people for a two-hour brainstorming session to generate new ideas for how the agency can increase profitability. Include a candid evaluation of potentially outdated activities, services or reports which cost the agency money but no longer provide value to clients… or dropping an unprofitable client which just can’t be turned around?
Finance, Operations and team leaders must work together as a team, not separate departments.
The finance and operations functions at Momentum Agencies adopt a partnership mindset with team and practice leaders that ensures they are effectively integrated into the overall business.
Finance and operations have two important roles:
Protecting the assets of the company.
Helping account/practice team leaders to manage their teams and clients by a) providing the information required to make informed decisions and b) ensuring that teams have the necessary tools to be productive.
Finally, Momentum Agencies know how to protect themselves.
Too many agencies aren’t very careful about protecting their own interests. In particular, here are four significant issues where Momentum Agencies always seek contractual clarification:
Getting paid upfront – Never be the bank for your clients. While most are honest and financially reliable, some aren’t. Not getting repaid after the fact for a major production or media buy can bring an agency to its knees. Protect yourself with a contractual right to be paid upfront for all or at least most of any significant out-of-pocket costs.
Indemnification – Ensure that all of your client contracts include the client’s unrestricted indemnification of your agency against any suits or other actions brought against you based on the work you do for that client (barring gross negligence on your part). These include but aren’t limited to claims made in marketing communications which the client has approved in advance.
90-Day Termination Notice – This was once a common contractual protection for agencies but has been reduced in recent years. Its purpose was to give agencies time after termination by a client to unwind the staff and operations which they put together for that client. Today, having that protection is as important as ever. In all new client/agency contracts, propose a 90-day termination notice period as a starting point. You may just get it. Even if you don’t, you’ll still be better off with 45-60.
Special circumstances -- Is there anything unusual about the products, services or business practices of any your clients (or the client/agency relationship) which should be covered contractually to protect you? It’s worth thinking about.
When your agency has MOMENTUM, it’s almost unstoppable.
Momentum Agencies do an outstanding job in managing the nine variables that drive growth and success over time. In our experience, these growth drivers are:
A compelling mission that attracts talent and clients.
Defined vision with a strategic plan on how to achieve it.
Differentiated and compelling value proposition defined by deep knowledge and expertise.
Strong leadership which extends far beyond the agency owner/CEO.
Organizational structure and talent that effectively and efficiently sell and service the value proposition.
A belief in core methodologies and process.
Culture (including formal training around those methodologies).
A dedicated new business development function. (Note: Growth Drivers #1-8 have been covered in recent Prosper Group mailings. In-depth pieces on each are available in our website’s Resource Library.)
Understanding how to manage an agency for premium profit. (Today’s topic.)
Agencies don’t become Momentum Agencies by accident. It’s the result of unrelenting focus, self-discipline and commitment to ongoing excellence in each of these drivers of long-term success.
We have the experience and people to help you improve your agency’s performance for any or all of those growth drivers. Please don’t hesitate to contact us to discuss your goals, needs and how we can be of service. We can help you generate some momentum.
Prosper Group is here to help you succeed.
We exist to help the owners of independent marketing communications agencies achieve their ambitions and maximize the value of their life's work.
Our team of former agency leaders and owners focus their deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.