How Healthy is Your Agency Business?

4 Strategic Operational Functions You Must Consider Reviewing

Guest Post by Jayne Heggen

Your Agency business can change from year to year depending on a variety of environmental and economic conditions. And, current financial monitoring and reporting may not be providing all the information you need to identify underlying issues before they become real concerns.

When it comes to the health of your Agency, traditional financial monitoring and reporting provides good insights into the effects of past actions, not dissimilar to receiving a lab report on one’s blood pressure and cholesterol numbers. Information you must know! Do you have a full understanding of the causative factors behind these numbers?

To manage today’s Agency business health requires a new set of operations dashboards augmenting current financial information. The ability to receive timely information from key operational functions; provides a more comprehensive view of Agency business health. Importantly, data is received in a way that allows for a pro-active response to a set of circumstances versus dealing with the aftermath of a debilitating financial event.

Among the many operational areas we can discuss, the following 4 strategic operational activities must be considered as part of an annual Agency check-up:

1) Client Contract Status

How recently were client contracts (retainer and/or project fees) updated to reflect changes in the work long-term clients are requesting?

Many Agencies avoid revising key long-standing client contracts for a variety of legitimate reasons. When contracts are not updated for long periods of time, ultimately the client account benefits (revenue/profitability) reach a profitability tipping point.

The following compensation terms should be reviewed on an annual basis across all client accounts. This review ensures current client requests align with existing Agency capabilities/ resources required to delivery agreed upon services/products to expectations:

• Original Contract Date
• Contract Review/Modified Date
• Monthly Service Fees/Retainer
• Media Compensation/Retainer
• Creative Strategy/Production Fees
• Outsourced Resource Mark-Up Allowance
• Internal Production and Studio Fees
• Freelance Restrictions

Health Warning: If Agency profitability has fallen below 17%, there’s a good chance your client contract compensation terms are out of sync with the Agency services/products being provided.

2) Back-Offices Support Services Status

Do you have the right back-office support services?

One of the last things an Agency reviews is back-office support. Not because these services are unimportant, it’s because they are complex. These services are often referred to as the indirect costs needed to run the business. They run the gamut from IT fees and equipment to shipping and finance to HR and systems. From an operations perspective, ideally you would want these costs to be in the 14-18% range.

The following is a sampling of questions that need to be asked on an annual basis:

• Are your vendors providing the best possible fee structure?
• Can select services be bid-out?
• Can disbursed services be consolidated under a single function/manager?
• Are licensing fees aligned with the number of users?
• Do you have adequate guidelines in place to manage FedEx, shipping, car services, and other costs adequately?
• Is there a process in place to ensure billable expenses are included in project SOWs?

Health Warning: Agencies who are not reviewing these service costs on a consistent basis can be spending 20-30% of revenue often without even knowing it. Unfortunately, there is no way to retrieve this revenue once it goes out the door.

3) FTE Analysis/Overhead Status

How has staffing/headcount changed over time? Is your Agency rate card current? Is your billing multiple accurate?

All Agencies generate client/department staffing plans; many do not roll-up these plans into an FTE managing model. This roll-up and analysis provide key operational information for how to efficiently and effectively align staffing needs to ensure profitable revenue. An FTE analysis provides the:

• Hours by each department (function/capability) required to deliver contracted work.
• Number of full-time equivalents (title/competency) required to execute the work.
• Revenue forecast scenarios based upon hourly billable rates.

Let’s look at a quick example. You’ve conducted an FTE analysis, and now know that projected revenue does not cover 10,000 staffing hours/equivalent of 6 FTEs. The analysis tells you that $2MM in new revenue must be generated to cover these hours. With these facts, the Agency needs to answer two questions; 1) is generating the additional revenue achievable and 2) over what time period. If it is not feasible to generate this additional revenue in a short period of time, transition plans must be developed for staff lay-offs.

Incorporating an FTE Analysis into the Agency annual planning process provides a quick and simple way to look at a variety of staffing and “what if” scenarios. Once agreed upon, the information provided by this analysis informs Agency hiring/recruitment strategies. Without this information, Agencies may be hiring blindly. This is one of the worst situations an Agency can place itself in…

Health Warning: Without the benefit of an FTE Analysis, Agencies can find themselves in an over staffed situation, impacting its ability to meet % contribution to margin goals.

4) Client Account Profitability Status

How are client account incomes trending (past 3-5 years)? When were discounted client rates last reviewed? Is Agency profitability below 17%?

The performance of client accounts is at the heart of Agency business success. However, not all client accounts are created equally. It is critically important for an Agency to segment their accounts based upon costs to service and profitability. Without this analysis, the Agency may be servicing a client with little to no potential for greater account benefits (revenue/profitability).

A brief look at account segmentations* includes:

• Clients provide profitable revenue and are reasonable in their expectation of services for prices paid.
• Customers act and look like clients, except they want most goods and services for lower than market prices.
• Buyers emphasize and focus on products/services for the lowest price and are constantly shopping around.

Although having “clients” is the best possible scenario for any Agency. Reality dictates that clients represent about 20-30 percent of all accounts. The remaining accounts are customers and buyers.

With this operational data at hand, account plans can be developed addressing the best approach for servicing each client account including:

• Transition customers to clients
• Down-size service efforts to more profitably manage customers and buyers
• Resign accounts that don’t respond to either transiting or down-sizing efforts.

Health Warning: It doesn’t take long for diminishing client account benefits to drag down overall Agency net revenue. Nearly 30-40 percent of client accounts prove to be unprofitable.

Like having a health monitor, a responsive Agency manages the real-time performance of its operations. Having the facts about the Agency’s business health enables teams to react quickly to new issues and risks before they damage the Agency’s value perception and service performance. Without this information Agency’s may be forced to rely on trips to the Emergency Room to get help. Not only is this costly, it may not resolve underlying operational failures that will continue to surface.