With the UK only recently announcing its return to recession, businesses across all sectors are vying to be as efficient as possible so they can maximise the chances of growth and profitability in the months ahead. In particular, marketing agencies among other service businesses face a set of unique challenges due to the fact that – as their key ‘product’ is people’s time – many give many hours of their service away for free. If you sold t-shirts, you’d never dream of giving them away for free, after all. This is something agencies have grappled with for many years, but given the uncertain economy and the demands from clients to do more with less, it’s something that needs urgent attention.
This growing focus on agency profitability was recently explored in research conducted by NetSuite and Loudhouse. The research polled agencies in the UK and US to find out their outlook for the year ahead and identify current factors that influence agency profitability and operational efficiency.
The study found that, despite the volatile environment, the majority of agencies across the UK and the US remain optimistic that they can achieve increased profit margins over the next 12 months. However, this outlook comes despite what seems to be common knowledge of certain operational challenges, such as the perennial struggle with over-servicing and disparity in how clients are treated. 72% of agencies admit to committing disproportionate resources to “big name” clients, while almost half routinely give free services to new clients. These practices probably don’t come as a huge surprise to those who work in agencies, but with the economy tighter than ever, the specifics of the level of overservicing need to be assessed in the context of potential return, and with an eye to turning those clients to profitability sooner rather than later.
Neil Backwith, a former CEO of communications agency Porter Novelli, provides his take on the research:
“There are a lot of misunderstandings and misconceptions regarding the management of profitability in ‘Agency’ businesses. This research highlights a number of the issues and yet more remain hidden. The biggest reason for many firms never quite getting a grip on profitability is their failure to really understand the basic principles of doing business by selling time.”
“Take Client (or Account) Profitability for example, (an area where conventional ‘Agency’ wisdom and the principles of selling time oppose each other) an area where over-servicing rears its ugly head. We all know that eliminating over-servicing would improve our client profitability and so we spend a lot of effort trying to do just that. However let’s just assume that through our diligence we have been really successful and eliminated over-servicing entirely so that every account is delivering our targeted profitability, does that mean that we are now a really profitable business? Well, no actually. Because just by killing over-servicing all we have done is create lots of unsold capacity! The real secret to business profitability is People Profitability – ensuring that every client-facing person is needed and properly utilised on ‘paid-for’ work.”
“Now the statement about People Profitability is easy to make. But to manage a business in that way requires proper integrated systems – right through from job costing to time capture, from billing to management accounts, from setting hourly rates to capacity management.”
“None of this is difficult, it’s just that it’s all inter-related. Any change, however small, in your staffing structure will have an impact on your hourly rates and/or billed hours targets; so it’s easy to see why a fully integrated business system is the way to go.”
A fully integrated business software suite that combines employee time-capture with core resource planning tools, is one way to empower agencies to manage their organisations more effectively. The research backs this up, highlighting that 51% of agencies cite integrated IT systems as the most important aspect of managing operational profitability. However, paradoxically, only 69% are currently satisfied with the systems they currently have in place.
Agency growth today is undoubtedly too often occurring at the expense of profitability and working culture. Addressing this issue is an urgent priority if agencies are to avoid the spiral of service degradation, staff and client churn and a shrinking pool of profits. A single, cloud-based IT system can play a big role in delivering the insight needed to address client servicing issues, but first agency leaders need to recognise that they are not facing an insurmountable problem, acknowledge and prioritise the issue and put the wheels in motion to tackle it head on.