Improving Agency Profitability

Improving agency profitability always features highly in industry surveys. Perhaps it’s normal given that every business exists to make money whether it’s in its interest or not. However, this is a ‘hot topic’ for creative agencies because their profitability has been eroded over the past 20 years.

We have spoken about this a lot in the past (so please check out our blog) but the main reasons for this are:

Clients are more sophisticated and demanding. They now question every estimate and want every cost to be justified. The larger clients have procurement departments whose “raison d’etre’ is to cut costs.
The increased competition from the consultancy firms, the digital agencies, the man in the garage, etc.
The increasingly expensive pitch process.
The changing fee models. Fewer commissions and retainers and more ad-hoc project work.

What can agencies do to improve their profitability?

Processes and Procedures

At Agency Soft we provide software solutions for ad agencies so you might have thought that the first item on our list would be to implement a new system. It’s not. The most important thing that the agency can do is to set itself up for success is implement a standard set of processes and procedures. In some businesses, these are called Standard Operating Procedures (SOP’s) and should cover everything from preparing for a pitch, preparing an estimate, time & expense, to receiving cash. Every process should have an SOP.

I know that this is not what many of you want to hear/see but this is the foundation of any good business. Without it, there is no point wasting money on tools and software because it’s the equivalent of building a house on shaky foundations. For those of you that have implemented software, be honest, how successful was it? If was not, how well defined are the processes in your agency?

I have heard the counterarguments, but “Mike, we are a creative agency, and we don’t want to stifle the team’s creativity with lots of rules.” Our job is to deliver great work for our clients, not be doing boring admin, and so on. I understand, but the truth is that most other businesses have this in place, specifically the consultancy firms that are buying up agencies. You also don’t have to create these from scratch. Just write “agency SOP” templates in Google and you will find some great examples.

Timesheets

This and the next point refer to an adage that I live by. You can’t fix what you can’t measure and you can’t improve your profitability unless you can see it on a real-time basis.

Improving agency profitability is impossible, in my opinion, without having staff enter timesheets. Approximately 70% of your operating costs are staff costs so you cannot see project/client profitability without a way to allocate staff cost over projects. There are alternatives but the simplest is the use of timesheets. This is another topic that we discuss in our blogs because it’s not perfect, but it is the best way and will get better as AI and technology will assist with more accurate timesheet registration. That may not be what you want, but let’s not go there for now.

Cost & Sales rates

Timesheet data has a multitude of values. With this can see:

Staff Chargeability
Actual hours vs. estimates
Dedication to Fees and retainers
Overwork

Perhaps most importantly of all, it allows us to allocate costs (and sales value if we want) to the hours. This in turn allows us to better estimate/quote client work, and to assess client/project profitability. We have a resource that talks you through the calculation so please download it if you have not already done so.

The importance of having the right tools

Here is where the right software comes into place when it comes to improving agency profitability. I don’t mean email and spreadsheets, but software that’s purpose-built for agencies to manage their businesses. Ideally, this software will incorporate collaboration and task management features so that users are in it all the time. This encourages more accurate time entry as users are more likely to enter time on a real-time basis. This in turn means that your agency can see project/client profitability on a real-time basis. If the software is really good, it will also allow your agency to predict if the project will be profitable and allow you to proactively manage it.

Having the right software also means that you can review projects and learn from them. These learnings can then be incorporated into new projects which should improve their profitability. The more information that your system collects, the better your estimating and tracking will get. It’s a virtuous circle and will not just improve agency profitability but the agency as a whole.