Is your agency running on the spinning wheel?
The advertising and marketing communications industry has always been very competitive and dominated by a handful of global players. Nonetheless, myriads of small- and mid-size agencies populate the arena in which some fail, others are very successful and many are caught running on the spinning wheel.
With the cost of media going down, centralized global communication becoming a standard for global brands, agencies fight for local clients with budgets – often the fight ends up with a considerable reduction of the prices. Nowadays, agencies invest a fair amount of money and resources to respond to RFPs. Often, in Italy, agencies not only sign agreements, giving away any rights on the creativity and strategy presented, but also are forced to mark-down prices in order to have a chance of winning.
Agencies strongly believe in the FITD (foot-in-the-door) tactic, therefore they lower their rates in order to win the new business. This is a Russian roulette: sometimes it works but more often than not it just doesn’t work. Hence, the agency has a new client, more revenue but none other than little margins. The entire agency has now embarked with this account where the client expects high-quality services, the team is stressed out and there is no margin of error, the smallest mistake will erode the little margins. Welcome on board the spinning wheel!
Not too long ago, I embarked in a quest for discovering who was using an analytical system to monitor productivity, efficiency and marginality in our industry. I spoke with different agencies during the Lions at Cannes, met with CEOs to investigate whether they had this piece under control, but nobody had a clear answer. Among the small and mid-size agencies there were only a few that were using softwares, the vast majority was completely in the dark about this topic. I was aware that there was no statistical value in my research, but it was a good starting point for tackling this problem.
At Polk&Union, we are very analytical and we were determined to discover the real efficiency of the agency. We started by looking at the agency applying the Law/Consulting firms model. We all are in the service business, we all sell intellectual thinking and need people to do that. Therefore, we implemented a new system in the company to help tracking the whole process, from sales to invoicing but with a great deal of attention to the budgeting phase.
How to determine working efficiency in order to increase the business’ profitability.
Although we work with international clients, we based our assumptions on the Italian market, since we operate under the Italian labor laws. Out of the 252 working days in a year, once we factored in holidays, vacations and hourly leave of absence, the working days became 220 (not including sick days and unpaid leave of absence). A regular 8 hours shift results in 1760 working hours per year. An agency should run at 75% efficiency rate, which means that out of a regular day a person works 6 hours on billable accounts and 2 hours on internal activities (internal meetings, emailing, calendar, coffee breaks, chatting and so on). According to this rule, each employee has 1320 billable hours that must have some form of present or future revenue attached. Working on a pitch is accounted as billable hours to sales/new business because it might yield to possible revenue. Now, assuming that you know the cost of labour and the total costs of your agency usually labor cost is around 40-50% of total costs, it should be easy to calculate the hourly selling price of each person in the agency.
When a new order funnels through the pipeline, we staff the team and assign the resources based on the complexity of the project, allocate the amount of hours for each member of the team and add the desired margins.
Here is the first reality check: is your selling price still competitive? If yes, you move to step 2. If not, check if you have been too aggressive with your margins. If the margins are in line, then your agency is facing either a “sandbagging situation” or an “inefficiency problem”. The good news is that both are fixable.
Let’s assume you have a top-notch team, your final price is in line with the market and your brand equity can hold that price. The team starts working and billing the time spent on the project. It is unreal to track every minute, you may risk to slow down the agency, so you have to take this exercise as an indicator.
If everything goes as planned, you are in a good situation, but often this is not the case. The least of the evil is that your team was able to deliver on time, but spent too much time on the project. The worst is that they missed the deadline and spent too much time on the project.
Spending more time than expected on a project could happen for many reasons:
- wrong time allocation during the budgeting phase;
- poor project management/poor performance;
- very demanding/crazy client to deal with;
- adding more time to cover up for personal activities;
- a magic combo of them all.
Regardless of the reasons, you have no more margins and now your agency is working simply to pay the bills.
The process of tracking the time spent on each project will soon highlight the good clients from the bad ones and the efficient employees from the inefficient ones. This will help you focus on more profitable clients and train the inefficient employees to become more efficient. As far as the employees who hide behind the hectic life of the agency, aka the Sandbaggers, since they will have to log their own time, they will either admit their inefficiency or that they are sandbagging. Either way, they will be forced to change or soon they will be gone.
Agencies are not accustomed to the consulting firms model. It requires a lot of experience in mastering the skills of time allocation, proper tracking and project management to bring the team back on track before it is too late.
It is an inevitable path because as prices continue to decrease there will be more pressure on efficiency. Many agencies have tried hiring unskilled employees, outsourcing or offshoring in order to keep the cost of labor down, but poorly skilled employees will lower the quality of your output and result in higher client turnover and negative brand reputation.
As far as our experience, the final result of our journey, we restructured the agency, closed many accounts that were draining resources by putting too much stress on the employees and not carrying enough margins. We concentrated our time with top clients, trying to deliver higher results and worked on training the team to be more productive and efficient. When pitching for a new business, we calculate the risks we are taking based on the anticipated profitability and consequently we can make an informed decision.
This is a good way to jump off the spinning wheel and start running a profitable business that can share its successes with the employees that made it possible.