“Revenue is for vanity and profit for sanity.” We’ve all heard this adage, but in a large proportion of creative and digital agencies profitability still fails to get the focus and attention it deserves.
This got me wondering why – and so the investigation began…
Having spoken to many business leaders about this topic and compared those findings with our experience here at Waypoint Partners, I have identified some challenges to profit that seem to be present in most agencies.
Firstly, there is often a dilemma about what is most important to a business when focused on growth: revenue or profit? The priorities may change at different stages of the growth curve; however, the consensus seems to suggest that it’s sensible to ensure a healthy balance between revenue growth and profitability to ensure the agency is able to meet its mid- and longer-term objectives and be successful.
With that basic principle above established, I went looking for the areas that prevent that profitability improvement.
I found a series of factors conspiring to either mask the true position or to make the challenge of understanding (and therefore addressing) profitability more difficult than it might first appear. Barriers pop up in multiple areas of the business, covering approach, process, governance, people and culture; hence any attempt to improve the situation will be most successful if the fix plan covers all of those areas.
Selling your company’s solutions at the right price, with the optimal cost to pitch, continues to be challenging. Below are some common problems we have observed.
- The inability of the business to ‘value sell’ their product or service to the client. This leads to the client eroding the price of any proposal in the negotiation, and the agency retaining little ability to protect price.
- Discounting habitually being used to offset poor sales ability in a pitch/sales process. We still see that dreaded temptation to give things away in the sales cycle, mistakenly believing it is strengthening their ability to win.
- Failure to identify and fully account for the true cost of delivery of a successful implementation. These costs that are not product- or service-related, but are critical to the success of the project, are often either missed or mistakenly written to a central cost centre, making the deal look artificially good. Things like project management, customer success resource, travel and expenses, training and familiarisation.
- A lack of understanding of the true cost of winning new business. How many people actively calculate the true cost of the pitch, multiplied by their percentage win rate, and make objective data-based decisions to bid or qualify out? We still see people blinded by a big brand opportunity who therefore go all-out without any objective assessment of their ability to win.
Underweight operational control/governance
- Leaders invest heavily, both cash and time, in the obvious areas like marketing, products and people. However, some don’t invest as much in ensuring they have the solid control and governance measures to understand the underlying costs at a granular level. They also fail to have an inspection method to review them over time, allowing them to then mitigate cost creep in.
- Appropriate and frequent governance allows rapid course correction when issues are detected. It is so much easier to correct when the problem is small rather than trying to pull back from a sizeable write-off position.
Company organisation & culture
- The value most companies have of ’do good things for customers‘ appears to be misconstrued by teams, allowing them to justify over-servicing clients. This results in profit reduction in the relationship, which is often hard to detect unless you have immaculate recording of time and materials used for each customer engagement – which few people do.
- The inability of companies to put ‘customer profitability’ at the forefront in all of their teams without it being misconstrued as anti-customer or, worse still, as greed.
- The temptation to push some customer-based costs into overheads.
- Lack of alignment in the business between sales and operations to ensure optimal resourcing to deliver sold business.
- Assumption that the cost base will remain as is, even with incremental business coming on board.
The above is not an exhaustive list, and other agencies may discover different issues that contribute; however, we have witnessed all of the above as a common theme across agencies.
So, what can business leaders do to build an inclusive and comfortable culture for all staff members that will result in a healthy attitude and front-of-mind approach to ensuring acceptable customer profitability?
- Get profit out in the open in the business. Ensure it’s discussed, seen as a positive thing, and linked to an individual as well as overall company success. Cascade the ownership of profitability into the teams through appropriate objectives and behaviours.
- Make performance management a senior leadership key accountability. Ensure profitability forms part of the KPI measures on both customer and overall company performance, and inspect performance and trends each month in both senior management team and board meetings.
- Dig into the true cost stack for the delivery of your products or services and compare that to the current way you build your pricing. Then further compare that to what you finally sell the solution to your client for, and adjust as required.
- Review your new business objectives, process and competence to ensure ‘value’ is at the heart of the sales you are making. Now you fully understand how and why your prospect will buy from you. This will lead to an increased ability to avoid discounting, and to forecast more accurately both the likelihood and timing of when a deal will land and require resourcing. This maximises your confidence on revenue and profit flowing into the business.
Profit is required for any business to survive and prosper long-term. It makes sense for any leadership group to get it on the table and give it due focus. Socialising the focused efforts to ensure acceptable client profitability amongst your teams is healthy and, if done well, will foster a natural culture of profit growth.
What is clear is that failure to address profitability inevitably leads to cash issues that so many agencies find so difficult to manage. If you don’t have a profit focus in your agency you should be looking to create one urgently to ensure your long-term future success.
Waypoint Partners have worked with over 200 companies and are experts in improving profitability by addressing the above and other challenges. If you are interested in discovering how we might be able to help you, please get in touch.