All business owners struggle with agency planning and developing strategies that keep their organizations running smoothly, and more importantly, earn a profit.
It’s especially hard in marketing and communications because many of us work on retainers.
Plus, there’s the added factor of sometimes not being able to stick to a plan because of extenuating circumstances.
And the many HR issues associated with your business.
Not to mention the day-to-day stress of running an agency.
For instance, how do you get started on agency planning if you aren’t sure which clients are going to renew their contracts?
Or, better yet, if you aren’t certain who your next client might be and what resources you’ll need to manage the account?
#SpinSucksAMA on Agency Planning and Profitability
That’s what we talked about with Darryl Salerno, CEO of Second Quadrant Solutions, during last month’s #SpinSucksAMA.
If you don’t know Darryl, he’s sharp, witty, and has an incredible mind for business (and grammar, but that’s another story).
Darryl works with professional service firms to improve their business performance, profitability, systems, and management training programs.
In our #SpinSucksAMA, Darryl provided counsel and advice on how to keep your organization running smoothly and efficiently and how to avoid getting run off course by some of the unexpected bumps in the road.
Here’s a taste of what we learned in the session.
What Can Agencies Do Better?
Martin Waxman, our #SpinSucksAMA host, started off by asking about the biggest challenges agencies face when it comes to running a business.
Darryl gave us a thoughtful response:
“I work with a lot of small- to mid-sized agencies, and I see certain patterns you need to look at and address as you go forward.
One of them is that many agencies are using blended rates. Blended rates are fine for how you go to market with your clients, but you can’t use blended rates to monitor your servicing or your business.
What happens is you’re saying your time, your hour, is worth the same amount as an hour of an assistant account executive. That’s just not the case.
Even if you use blended rates, when you’re monitoring servicing levels, you really need to use market and industry rates that reflect higher higher rates for more expensive people.”
Don’t Work For Free
What about overservicing? That seems to be a problem lawyers and accountants don’t face. Yet it appears to be an epidemic in the agency world.
“One of the biggest areas that creates financial instability is client overservicing. And we could talk about that in a million different ways. But the one area that creates more of a problem in that area than anything else, is what I like to refer to as people doing work below their pay grade.
Someone gets promoted a couple of times and is still doing the same work on the clients, because we’re reluctant to take them off the account.
Meanwhile, they started doing the work when they were an AE and now they’ve gotten three raises and two promotions. And they still work on the same client.
Every time they got a promotion or raise, their billing rates went up.
So the overservicing increased.
Another thing I see frequently is that—especially with entrepreneurial-minded, single-owner agencies—many, many of us are underpaying ourselves on a regular basis.
We’re taking most of our compensation out of the profit at the end of the year.
There’s nothing wrong with that, except that the goal should be for you to make an industry standard 15 to 20% margin. This is after you’ve paid yourself based on what the market will bear.
You can take more money out at the end of the year, but make sure you are accounting for a normalized salary when you do your books on a monthly basis.
Especially if you’re ever going to consider selling your firm. The very first thing a buyer will do is normalize your salary. So you think you’re making 18% profit, but by normalizing your salary, it’s down to about 11%.
Your earn-out is going to be based on that.”
Why Is Overservicing a Problem?
Because many of us love our organizations so much and we’ve worked hard to get where we are, it’s hard to say no to a client.
We know we can help and we want to help, but it’s often at our own cost.
We had a question from the community about this exact challenge.
“Why do you think overservicing is such a big problem for communications professionals?”
“Part of the reason is most of us are billing on retainer, as opposed to actual hours.
I don’t know if it’s the fact that we don’t have confidence in the value of the work we’re doing or we make excuses for why it’s not worth what we’re spending our time on.
If you stand up for the value of what you’re doing, and you’re not fearful about it, you have a much better chance.
The whole idea about making sure you’re getting paid for the hours that are put in is critically important.
If you overservice a client by 10%, that means, in the United States, when you get back from the Thanksgiving break, you’re working the rest of the year for nothing.
If you overservice by 20%, it’s literally November and December. For 30%, it’s like you don’t get paid for the entire fourth quarter.
And if you’re overservicing by 40%, you’re already working for nothing this year.
That’s a sobering thought to have you or your employees put in all of this time and not get paid for it. We have to start standing up the value of what our work is.”
Agency Planning Made Easier
A large portion of the session was spent on agency planning and we asked Darryl for his advice around that.
“You should create a 2020 monthly budget.
You want to compare that to your actuals each month, and see whether you’re ahead or behind the game.
You should review all your billing rates, all your billable targets, and your salaries to make sure they fall within industry standards.
Then you need to monitor your staff utilization and client overservicing each month.
Here are three things you need to review every month:
- How was my financial performance on an accrual basis compared to my budget?
- Where am I at risk of overservicing?
- Are my staff or my employees used sufficiently and hitting their billings and targets?
Those are the key areas that are going to make or break where you’re at, assuming you’ve set everything else up in the correct way.”
Want More from the #SpinSucksAMA?
To join our AMAs, you have to be a member of the Spin Sucks community, but the good news is that it’s free.
Each month, we sit down with an expert to answer questions from our community.
Speaking of which, our next #SpinSucksAMA is on October 14 at 1 pm ET and features entrepreneur and agency owner Marisa Ricciardi on developing marketing and public relations KPIs.
Join the community here and look for the #SpinSucksAMA RSVP details.
For now, enjoy this short audio summary with Darryl Salerno’s agency planning advice.