You've heard it all before: Project margins are shrinking. The number of services agencies are expected to deliver on -- and at an expert level -- is growing. Brands are bringing more and more work in-house, making long-term relationships something of the past. And on top of this, agencies are struggling to attract and retain top talent.
It's a competitive market for agencies, and that means that every hour and every dollar has to count.
Increasing the profitability of your agency should be a top priority item for your firm. By focusing on this, you'll not only find yourself running a more stable firm but you'll also improve your client relations and agency brand.
How to Improve Your Agency's Profits
1) Improve Utilization Rate
Your biggest financial investment is your people. These are your most important and valuable assets. Optimizing the utilization rate (the percentage of time spent on billable work) of your employees, essentially creating more productive and efficient team members, will have a major impact on your profits -- especially if you do mostly project-based work.
If you don’t currently know your utilization rate, consider using a time tracking tool to get clarity into the efficiency of your team and project profitability.
2) Reduce Overservicing
While some will say this is just the “cost of doing business,” overservicing is a serious issue. Every task completed that is out of scope reduces the already small profit margins agencies are dealing with. In addition, it causes employees to become overworked and stressed, which can further reduce productivity and efficiency.
One of the issues with this profitability destroyer is that agencies have little insight into when a project is about to go over budget. Being able to identify a project at risk of budget overrun is the first step, which you can easily keep track of with a project management tool. Once you know that a project is at risk, you can communicate with the client if the cause is due to outside of the scope work and make a plan for upselling or creating a change order. In addition, being able to track overservicing problems by type of project will help you to identify if new processes in project scoping or delivery need to be implemented.
3) Implement Long-Term Capacity Planning
Profits on a project can quickly become non-existent if you find yourself needing to outsource work due to a lack of staff capacity. When you create revenue projections for the quarter, be sure to also define or estimate the additional staff hours that will be needed and align these with your plans for hiring. By creating a capacity plan, you can better prepare for growth by hiring proactively and training these individuals before the additional workload becomes unmanageable.
4) Create a Predictable Pipeline of Leads
One of the largest sources of unbillable time is writing proposals, pitching, and finding new clients, basically the new business process. And while it can also provide big booms in revenue to the agency, it can also lead to a lot of wasted time -- and profitability. This is especially problematic if you don’t have a system for qualifying clients or properly vetting the interest and needs of the client prior to sending over a proposal. Too often, agencies complain of finding out that the client was “just looking.”
To reduce the time spent on uncommitted prospects and responding to RFPs from companies you have no relationship with, commit to marketing your agency and generating and nurturing leads by creating content.
With inbound, you can create a predictable pipeline of prospective clients who you can vet their interest through their “digital body language” -- basically the content they read, the actions they take on your website, and the answers to form questions you present. This saves you time calling prospects who aren’t a good fit for your services, and it helps you to identify the high quality, best fit clients you should focus on converting.
5) Create More Stable Revenue Streams
Many agencies deal with the frustration of “feast or famine” -- one quarter the balance sheet is causing you joy and the next you’re worried about if layoffs will be necessary.
In addition, scale in an agency is difficult to achieve. More business means more people and more office space and more resources.
Many agencies are turning to building additional revenue sources for their firm that can help to stabilize cash flow and use the resources they already have in house. For some, this means launching products, such as peanut butter, nail polish, alcohol, and chocolate. Other agencies have productized their services through selling design templates or building a SaaS product.
Consider how you can apply your skills to a different business model, create a commercial product, or package your services or knowledge into a tool or product that people outside of your target audience would find valuable.
6) Make Growing Existing Accounts a Priority
While landing new clients is often the focus for growing revenues, small wins through upselling clients on additional services and projects can be much more effective at improving profitability in your agency. Account managers should be trained and set goals for the organic growth of their accounts.
Doing annual or bi-annual client checkups to determine the health of the relationship is a good practice to employ as this gives you the opportunity to review how happy the client is with your services and to determine the client’s untapped marketing opportunities. Account managers should also send information about new trends and strategies and emerging platforms that would benefit the client’s goals on a regular basis. However, this should not be a practice of simply sending over links to interesting articles. The account manager needs to be able to discuss how the trend is relevant to the client’s industry, and he could include information about the past successes your team has achieved using the tactic.
7) Improve Your Pricing
Pricing your services is about more than inputs and outputs. What is the value of the work you are providing the client? Now, value-based pricing isn’t easy to implement, and there are those who argue against this method, but pricing based solely on the costs incurred by your agency with a percentage markup undermines the value of partnering with your agency.
Consider what services should be cost-based and what services you can price by value. Does your agency’s brand and record of success improve the client’s perception of the value of your services? Are you destroying your credibility by offering a discount right away? What can you charge and how can you present that cost in a way that showcases the value of your agency? Are you using analytics to showcase how your firm is creating value for the client?