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May 26, 2016 // 7:00 AM

When Should Your Agency Hire Its Next Employee?

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No matter what type of agency you manage, hiring is one of those challenges that cannot be avoided. Hiring the right person is expensive. And hiring the wrong person -- or the right person at the wrong time -- can be even costlier.

There is, at least, some good news. While it’s nearly impossible to identify the perfect moment to hire, there are key indicators that suggest when it might be time to start growing your team.

1) Lack of Specialty Services

How many successful public relations agencies just do PR and nothing else?

Perhaps I should rephrase the question: How many successful public relations do PR and nothing else?

PR is expanding to include everything from SEO to branding to visual communications and content creation. So, when a client requests a specialty that you aren’t able to deliver on, when they suddenly need help with social strategy or reputation management or something else you can’t offer, one thing becomes abundantly clear: You’re going to lose that deal.

Does this mean you should beef up your staff with experts in every area? It’s not a simple question to answer. You can try to map out the total cost of hiring new employees (recruiting + salary + taxes + benefits + bonuses) against the perceived cost of losing certain deals, but that in and of itself is a limited view. It doesn’t address larger concerns.

By not having an experienced digital team on staff, are you not only losing out on immediate business but also longer-term customer opportunities? What specialties do you need in-house to keep your current clients happy (and referring new business)? Can you tap into agency networks such as PRGN or Worldcom to leverage shared services? What types of specialties align with your overarching business strategy and brand identity?

Knowing the answers to questions like these can help you make the right hiring decisions.

For smaller firms, this may be as straightforward as bringing on one or two new employees. For mid-sized and larger firms, it may make sense to acquire a smaller agency that has top-talent in a specialty your organization is lacking. This seems to be a recent trend. According to the Holmes Report, in 2015, more than half of the agency acquisitions appeared to be motivated by the need to gain new capabilities.

2) Strong New Business Pipeline and Limited Employee Capacity

There is no single hiring formula that works for every agency, except for this one: If you have a strong new business pipeline and limited employee capacity to take on additional work, then it’s almost certainly time to hire.

Let’s take a look at this in a bit more detail. Say you have six potential projects in your pipeline, each with a 50-90% chance of closing. How do you know if your employees will be available to take on this additional work in the months to come?

There are three ways you can go about doing this:

  1. Magic (Not ideal. Unreliable. Purported to have negative side effects.)
  2. Excel (Limited. Not real time. Not linked to accounting, CRM, or other systems.)
  3. Technology

An employee resource platform or your project management tool can help you manage employee capacity and forecast three or six months from now. Armed with this data, you’ll be able to determine the optimal number of employees or contractors that are needed to service new accounts. Will this take some work? Of course! But if you master capacity management, you’ll see a direct and positive impact on profitability.

3) Low Profit Margins

This can be a scary question: How much money is your agency making? Perhaps more importantly: Is it making enough? According to the Gould+Partners 2014 Agency Profitability Survey, U.S agencies saw an average profitability of 16.2% of net revenues.

How did top-performing agencies keep their profit margins high? In part, by keeping their costs low. Gould+Partners, experts on agency mergers, acquisitions, and operations, recommends that total labor costs stay at 50% and operating expenses are set at around 25%.

Low profit margins may be linked to overservicing. To impress clients or manage expectations, account executives often work more hours than they actually bill for.

This happens with retainers, with value pricing, and even with hourly billing. Overservicing is a blight on the industry. (Cue the ominous music.) When your employees perform free work on behalf of your clients, it not only distorts the true cost of your offering and limits your ability to maximize current revenue, but it reduces your employees’ capacity to take on new work.

Do you need to hire someone specifically to reduce overservicing? Hopefully not. The first step is to reduce overservicing and improve your project estimating and scoping and employee time management. And your COO and CFO should watch employee utilization, employee billability, and other key operational metrics like a hawk.

There is also a well-known scenario where hiring more employees can reduce long-term costs and increase margins. If you’re growing and have a healthy pipeline, it may be wise to bring on junior-level employees to compliment your senior-level team. These young executives will allow you to deliver services against retainers at a significantly lower cost to your business.

4) Need for Transformative Talent

For smaller firms, it can be challenging to break into the Fortune 500 market and win business away from the big name agencies. One way to win more high-profile clients with bigger budgets is to reach deep into your wallet, and hire a "rainmaker." This is someone who knows the right people, has proven success in bring in new business, and can have an immediate impact on generating prospects.

Of course with this method, like any other, there are some drawbacks. These hires are generally expensive, they may not be a cultural fit (as they are used to working in a larger agency), and worst of all, they may not be able to deliver success without the backing and brand recognition of a larger organization.

Regardless, if you take this route, make sure you include strong incentives such as profit sharing, restricted stock options, or LTIP to retain this key hire and incentivize him or her to achieve results that help grow your agency.

5) Hope to Generate More Revenue

This is a trick section! Hope is not a strategy and hiring employees based on desire -- and desire alone -- is a recipe for disaster. 

We can all agree that there’s no one-size-fits-all approach to hiring for agencies. But if you start with metrics that matter -- employee utilization, revenue-per-employee, employee capacity, new business close rate, etc. -- you’ll be better equipped to determine whom to hire and how quickly to do so.

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Topics: Talent & Recruitment

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