Like it or not, ad agencies are professional services businesses. You sell your team’s skills and services to your clients at a markup. Of course, if your agency is smaller, then your clients are probably buying your skills and creativity. That means that one of your agency’s KPIs needs to be client profitability.
The problem, as many of you already know, is that clients are very demanding. They want the highest quality of work and pay the minimum. While you can say that for most industries, it seems like ad agencies have the most demanding clients
We have spoken about the pitch process at length in previous articles. It is unfortunate because the whole process puts your agency “on the back foot” because:
- The agency must invest a lot of time and effort free of charge
- The quote must be “competitive” (in other words with a razor-thin margin or even a loss leader in the hopes that the agency can raise prices on other work.)
That said, it’s not all doom and gloom. There are ways to maximize your agency’s client profitability. So, let’s begin.
Start the relationship as you mean to continue. Show your client that you are a professional services business and send them your agency’s Ts & Cs when you start to work with them. This may seem obvious, but these should be prepared with the assistance of a contract lawyer to make sure that it covers the agency.
At the very least these should include terms on:
- Client Confidentiality
- Intellectual Property
- Data Protection
- Commercial Terms
- Clarification of scope
- Payment Terms
- Jurisdiction, etc.
Clients may want to negotiate, and that’s fine, but you have set the line in the sand, and you can negotiate from there.
You may be asking what that has to do with profitability. Well, these terms help to define the terms of business and they put guardrails in place to set limits as to what you can and can’t do.
2. Processes and procedures
Far too many agencies still can’t tell which clients are profitable let alone able to maximize client profitability. One thing that will help is making sure that you have the right processes in place to record income and costs.
It is refreshing to see so many Operations Directors/COOs in agencies. They were few and far between in the traditional agency model. One of the things that their departments should be responsible for is setting standards for processes and procedures. The agency should have a standard operating procedure (SOP) for:
- Client Briefs
- Responses to RFIs and RFPs
- Estimating (including approvals and sending to clients)
- Timesheets – Yes, your agency needs to enter timesheets (or use a genuine alternative) to be able to see your profitability
- Expenses & Vendor Invoices
- And so on
These help a lot not just in maximizing client profitability but to keep your agency running if (like many others) you have a high staff turnover.
They absolutely do help maximize client profitability because agencies literally lose millions of dollars in unbilled expenses.
3. The right numbers
Your agency can’t maximize its client profitability if the data is bad. You need to know what your cost rates are so you can see what your break-even sales rate is. You also need to establish your sales rate to have any chance of meeting any overall profitability target.
We know that clients negotiate, and you may sell work at different rates BUT this information shows you how much you are likely to make or lose before you start a project
You’re in luck because we have a template in our resources that helps you calculate both your cost and billing rates. Download them
4. The right tools
There is an overused saying that “you can’t improve what you can’t measure.”
All the above tips are meaningless when it comes to maximizing client profitability unless you have the software to manage your projects and measure client profitability. Again, we have spoken at length about what your system should have so I will not bore you with the details.
Just be aware that Deltek’s WorkBook has everything that you need to manage your clients and projects effectively. It does this on a real-time basis so you can be proactive.
5. Proper Client Profitability Reporting
If you have the right system in place, then this is a given. To be able to maximize client profitability you need to see it. You also need to see how your projects are faring and whether they are on track or not.
That means that you need visibility as to what the “Estimate to Complete” and “Estimate At Completion” of a project are. This takes your actual costs and adds an estimate of future costs to see how you will land against your budget.
It is incredibly valuable in giving you some warning as to whether you are going to make a loss on a project and gives you the opportunity to evaluate where you’re losing, and course correct.
6. Good Housekeeping
Finally, you need to have good housekeeping in place at your agency. That means that you
- Send clients your Ts & Cs, with briefs
- Follow your SOPs and
- Ensure that costs are collected in a timely manner
- Invoice regularly
- Invoice Out of Scope items separately
That may seem obvious, but we see a lot of agencies that have all the right tools, processes, procedures, etc in place but they don’t follow them
We can say that if you implement all the above, it will make a big difference in maximizing client profitability.
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