For the past 5-6 years, marketing communications agencies (especially independents) have been enjoying a long run of strong growth and profitability. You’ve earned it. But you can’t take it for granted.
The next recession is coming… and it may be soon.
Many pundits are predicting that a recession may arrive sometime in the next 12 to 18 months.
Recessions are sneaky. They creep up on us. Sometimes it takes several quarters before we start to feel it… and then it’s too late to prepare because the recession is already here.
Are you ready?
At Prosper Group, we believe that agency owners would be wise to start thinking about steps to take now should a recession hit us in the coming quarters. We also believe that smart, proactive agencies can in fact capitalize upon recession to become even stronger, more competitive and add top talent instead of passively trying to just “ride it out”.
We’re here to help. Here are our recommendations to help get you started.
How to get your agency into fighting shape for the next recession?
Start running your agency for maximum profitability.
During a recession, revenue generally decreases which directly impacts the bottom line profitability of your agency. You should strive to maximize profitability now so that, in an economic downturn, it takes as long as possible before your profits turn into losses.
For example: A $10 million net revenue agency operating at a 10% profit margin can sustain a loss of $1 million before red ink occurs. That same agency operating at 30% profit could sustain $3 million in losses before any red ink.
Dig into a deep review of all operating aspects of your agency which can increase competitiveness.
During a recession, there will be fewer business opportunities so you need to become more competitive and more capable than ever. Carefully review key areas (which we include in our Growth Driver Audit) such as your agency’s vision, brand value proposition, leadership’s ability to sell and service the value proposition, digital fitness, meeting clients’ expectations with contemporary and relevant new service offerings, financial management practices and more.
What’s working? What needs to be better (and soon)?
Take a fresh look at how you communicate about your agency to prospects and the market.
Is it as relevant and powerful as possible? Are your areas of “super competitiveness” (such as category/industry specialization and knowledge) being effectively communicated and clearly understood? Does everyone on your staff understand why a prospective client should choose YOU?
Leverage what you know (which is unique to you) and not just what you do (which is generic) to make your website, SEO, presentations and outbound messaging just a compelling as they can be. Be consistent in your outreach efforts.
Use your built-in advantages vs. global agencies. You have at least three:
Your people are the core of your business. Work even harder to get to know every person in your agency.
- Pricing: Independents are usually more efficient than global agencies with fewer layers, fewer non-billable departments and lower overhead. Independents can earn a higher profit per dollar of billings due to the mix of staff and, at the same time, devote more experienced talent to the client’s business.
- What you know: Independents generally have deeper knowledge of the smaller number of industries and specialty categories which they focus upon compared to the larger agencies which try to be all things to all people.
- Better execution: Independents are also much more effective and efficient than the largest agencies at executing client programs. Ensure that your agency team executes at a high level in order to retain your most important clients during slow economic times.
Develop stronger bonds and establish common cause. Make it personal. Create a deep, motivating sense of united purpose, collective mission and WE
. Your staff will rally around you and the agency during tough times, if they feel valued and if they have a personal bond with you as owner.
Building up your financial muscles.
No one can control the timing of a recession. But you can control how prepared your agency is to meet it. By being financially strong and flexible, you’ll be able to deal from a position of strength… not weakness… going into and then during any downturn.
Your agency’s financial strength will not only be key to keeping your own people, it will also help you to add
talent and knowledge instead of losing it. It will enable you to hire exceptional people who have been let go by weaker agencies.
Seven ways to increase your financial strength and flexibility.
Start managing your staff costs more tightly.
Total “people costs” are generally 75% of an agency’s cost structure. If you feel a recession is likely, get tougher on staff utilization by running closer to full capacity than you have been for the past several years.
Managing staff more efficiently before a recession hits means that you have fewer jobs to protect and your overall cost structure will be lower. For example: As staff attrition occurs through resignation or termination, take a very close look at whether or not 1099 freelancers might be a better choice.
Carefully examine where your non-people costs have crept up.
Even though this is always a best practice, most owners let this slip during good economic times. Spending on phone, IT, subscription services, user licenses, T&E and other major items is too often taken for granted but can easily add up to a substantial number all too quickly.
Challenge your team to see how the agency can remain competitive and effective while spending less. Analyze each expense area and ask tough questions about whether or not you’re getting the best value.
Are all of your subscriptions truly being used? Do you need all of those licenses for research, media, accounting services and other software? Can you negotiate better prices and volume discount pricing for supplies? Are all of the trade shows your agency attends driving leads?
Protect yourself with stronger client contracts.
Negotiate termination clauses which guarantee that a specific (or minimum) amount of money will be paid to you during the notice period. Contractually require more money upfront (especially from start-ups and venture-backed clients) to avoid serious A/R write-off situations during a recession.
Be sure to build a close relationship with your banker.
Pay off at least some debt soon to reduce your lender’s exposure. By doing so, you’ll also avoid or at least reduce the stress of making payments during difficult times. Negotiate a more favorable line of credit now because banks become much tougher on loan/credit approvals in a recession. At the very least, ensure that you have an untapped line of credit equal to four times your payroll.
Build a strong relationship with your landlord too.
Landlords are much more likely to help a tenant whom they know well vs. one they don’t. Make sure that your lease gives you the right to sublet a portion of your space.
Have a contingency compensation plan for you and your team.
It may become necessary for the senior team to take a lower salary during the recession to help avoid layoffs of other valuable staff. Letting good people go due to short-term economic hardship can hurt your agency’s long-term value. Think about making a commitment to paying back the sacrificed salaries once the economy turns around.
Finally, consider offering your key senior people additional compensation based on new business performance
during the period of salary sacrifice in order to provide more focus and motivation for selling and growing revenue. This will align their goals during the recession with your need to ensure that the agency survives. This approach might not only help you get through the next recession but actually emerge even stronger on the other side.
We’re here to help.
Prosper Group’s mission it to help independent agency owners achieve their life ambitions. We help them to maximize and monetize the value of their life’s work.
Please contact us at any time. Thank you
Written by Alex Halbur and by Mark D. Johnson of Prosper Group (January 25, 2019)