1. Choose your clients if you can

Most agencies are only too pleased to accept business from new clients, or repeat business from existing clients. Indeed there can be nothing worse than winning a pitch only to find your finance director breathing down your neck with doubts about the creditworthiness of the new client.

A little discernment at the outset may avoid pain and bolster profits in the longer term. And it’s not just a question of creditworthiness. Shared aspirations and shared standards will make fee negotiation and collection much easier. Turning away a client is not something to be ashamed of, although it always needs to be done thoughtfully and courteously. Bringing an unprofitable existing relationship to an end is at least as important, after every attempt has been made to put it onto a better financial footing (the fault may not be all on one side).

Industry Professionals Say...

It’s important to consider the whole lifecycle of a client relationship – you tend to over-service in the first six months to show off so take that into consideration when evaluating profitability of a client

Top 3 Tips for Success

• Don’t jump in feet first, use your head and fully evaluate the profitability of each potential client
• Be strong when it comes to what is best for your agency – it’s not worth compromising your margins for clients who will never be profitable
• Aim for a client relationship where you are more than just a supplier – this is where a cultural fit is so important

2. Charge the right price on the right basis

There have been all sorts of ideas about motivating agencies with a performance related fee component, but it’s worth remembering that a beneficial project outcome is not always within the influence of the agency (particularly when the client holds very fixed views). It’s also worth remembering that many clients leap on the “performance bandwagon” as a way to cut fees rather than sharing in the fruits of exceptionally effective work.

So there needs to be a sensible calculation of the likely time commitment by people of different levels of skill or seniority. And the agency needs to have the confidence to spell out the benefits of its proposals and explain how the fee has been arrived at if necessary. Speculative work should be avoided unless the risk is measurable and can be justified in a substantial way, such as for a charity in which the agency believes.

Industry Professionals Say...

You may need to reverse engineer your rates and costs if the project budget has already been set – be sure to not undercut yourself though!

Top 3 Tips for Success

• There are different kinds of billing models for a reason – be flexible in what is going to work best for the agency and each individual client
• Performance based billing models can be difficult to measure – make sure you and the client are on the same page
• Agencies hold all the risk and this needs to be taken into account when you’re pricing jobs

3. Recover extra contract work

Many’s the tale of the agency that thought it could recover over-spends at the end of the project when it was assumed the client would be deliriously happy with the outcome. Don’t bank on it. If the client varies the brief or the agency has had to employ more resources for other legitimate reasons, announce that fact as soon as possible - preferably before the extra work commences - and seek agreement there and then. No-one likes to receive a bill seriously in excess of an estimated or contracted amount without any foreknowledge. “But the client must have realised”, agencies may cry. Don’t you believe it. And even if the added resources were seemingly plain for all to see, the client is entitled to assume that they were part of the package unless the agency says otherwise.

Industry Professionals Say...

The general rule for client recovery is 80/20 - make sure that everyone in the agency knows that success looks like minimum 80 percent recovery.

Top 3 Tips for Success

• Always update the client on overspend or out of scope work the moment you identify it
• Don’t expect the client to understand the inner workings of the agency – make sure you’re transparent about time taken and resources used
• Use an agency management system to produce weekly lag reports and monthly client reports to help identify issues as quickly as possible

4. Collect what you charge

Lots of bills get queried, and quite often with good cause. And every query delays payment. So the first rule must be to respond to queries swiftly and seek to resolve them. If anyone had the time to research it, I suspect there is a direct correlation between the elapse of time from rendering a bill and the likelihood of 100 percent recovery. Even if the query is not justified, there is a high probability that it will be parked in a “pending” tray. Then everyone forgets about it and the parties directly involved move on to new pastures. Try resolving a query after that!

Industry Professionals Say...

Be aware that email and invoice fraud is on the rise – validate all invoices before payment and ensure your finance system is air tight – don’t be a victim.

Top 3 Tips for Success

• Review all bill queries in a timely manner to reduce payment delays
• Don’t overreact to every bill query, deal with it efficiently and effectively, and move on
• Completely remove your “pending” tray

5. Make sure staff resources are used efficiently

One self-evident trend has been the growing proportion of client revenue that is applied to staff costs. Once upon a time the benchmark was 50 percent. Now even companies like Omnicom are reporting staff costs in excess of 75 percent of revenue (gross income), while at WPP it is 64 percent.

It is argued that some of the staff cost is “discretionary” and only paid when revenues are above expectations. In other words the discretionary element is self-financing out of the beneficial addition to revenue. Nevertheless, the higher staff cost will represent a larger percentage of the increased revenue and the operating profit margin may fall unless overheads can be held back and absorb a correspondingly smaller percentage of revenue.

Indeed there is some evidence to suggest that lower margins have been accepted as the price to pay for more expensive staff. In the long term that could be a worrying prospect.

Certainly it would be unwise to think that staff costs should be allowed to absorb a higher percentage of revenue unless there is clear evidence that the growth in overhead costs can be kept in check to compensate, and that the more expensive staff are proving to be more productive in some way or another. Otherwise fees to clients will have to increase or staff resources will have to be curtailed.

Industry Professionals Say...

Explore opportunities with near-shoring contractors or workload split between agency offices to ensure staff are resourced effectively and margins are not impacted

Top 3 Tips for Success

• Aim to spend no more than 55 percent of gross income on employment costs
• Don’t let your staff costs absorb a higher revenue percentage unless you have a plan to reduce overheads or increase productivity
• Keep a careful eye on the cost of freelance staff to balance the need for flexibility with maintaining profitability and quality control

Conclusion

While there are not necessarily any hard and fast rules for success within the creative industry, particularly during a time when budgets are being cut and margins squeezed, making simple changes can ensure your agency is better positioned. Being smart about the clients you work with and the way you charge for projects will go a long way in increasing margins. Likewise, operating a transparent business that acknowledges when overspend occurs and identifies resourcing gaps will mean that you find it easier to transform revenue into profit.