“Make profit a plan, not a consequence, of your business…” These were the opening words of Miles Welch from Waypoint, presenting at the most recent The Art of New Business event.
As Welch went on to explain, profit shouldn’t be a dirty word; rather it should be viewed as a means to drive the culture and mindset of a business. This shift in focus allows for investment in the agency’s people, which in turn drives the overall profitability and growth of the organisation. For profit to become an integral part of the business plan, the financial health of an agency should be communicated throughout the organization so that being commercial becomes a cultural norm.
When planning for profit, Welch breaks it down into six key areas for consideration:
1) How you charge:
To properly understand where profit is made (or lost) rate cards should reflect the true and full operating costs of the business. Rates are often not in line with an agency’s specific business cost model, either because they are not regularly updated or because an agency is caught up in establishing market-parity.
It is important to review the ratio of non-billable to client-billable time and this should be factored into the charge out rates of staff across all grades. It can be difficult to get clients to pay for senior time, so it is important an agency finds ways to educate clients on the value that senior input can bring to their account.
2) How you service:
Over servicing is endemic in Marcoms agencies. But this needn’t be the case.
Ensuring teams within an agency are Profit & Loss focused, will drive an awareness of the value of their time and the impact of over servicing on the agency as a whole.
Review each client in order to determine whether they offer future growth and profitability and if they don’t, consider other ways to increase billing. For example: cross selling, new services, outsourcing of work.
3) Optimise your people:
Use the data at the disposal of agency (timesheets, billability reports etc.) to assess the performance of individual team members and their value to the agency. Targets should be set for billability and then, perhaps most importantly, measured over time. Cross referencing this data with client profit / margin will paint a clear picture of who are the agency “stars” and who are the “lost souls”.
Allocating a senior member of the team to monitor the optimization of an agency’s people, will ensure this consideration has the greatest impact upon commercials.
4) Align your business model:
Establishing a clear vision and mission for the agency creates alignment and focus for those leading the business. Once a vision and mission has been established, it is key that a clear pathway to achieving this is mapped.
5) Invest in IP:
This needn’t be about developing something at great expense, rather it is about creating “stickiness” with a client. Is there a way to add value or sell something other than hours? This could come in the form of thought leadership or investing in systems that create internal efficiencies.
BUT, as with all elements of a business plan, a product development pathway is necessary to avoid distraction and the creeping of time invested.
6) Measure and refine:
Being aware of important industry benchmarks (GP per head, staff cost ratio etc.) will help maintain the profitability of an agency. Stick within the accepted parameters used in the relevant industry sectors. Any deviation from these will indicate that a change in the operational model is required in order to drive greater profitability.
Similarly, analysis of new business efforts, (what has worked, what hasn’t), can usefully inform an approach moving forwards.
In conclusion, the wider you spread commerciality through the business, the more profitable the business becomes. Small incremental adjustments, identified through measurement and analysis and activated as part of a considered business plan, can drive profitability and agency success.