Is Your Agency Effectively Managing an Economic Downturn?

Marketing and communications agencies (especially independents) have been enjoying a long run of strong growth and profitability for the past several years. However, for many firms, 2023 has turned out to be a year of very modest to negative revenue growth.

Tougher times are sneaky as they can creep up on us. Sometimes it takes several quarters to realize times have changed for the worse as it’s easy to just keep hoping things will turn around.

Prosper Group has extensive experience in helping agencies navigate through difficult financial times. Today, we’d like to share some of our insights and ideas from that experience with agency owners.

What should you do if your agency is now experiencing tougher times?

First, don’t panic. The US economy works in cycles so a downturn is inevitable. The good news is these generally last 6-18 months, which are then usually followed by at least a few good years of solid growth. There’s no need to dismantle your agency and damage its value proposition. However, there are still prudent steps an agency owner can take.

After processing the negatives, consider the opportunities presented. Is it possible to strengthen your agency’s competitiveness by adding top talent as hiring leverage switches from talent to agencies? This may mean an adjustment to existing staff in order to afford outside talent. Is it the right time to let go of marginal people if you can find superstars in the changing labor market?

There are other steps you can take to survive and maybe even thrive during a difficult stretch.

The obvious problem is declining revenue which has a dramatic impact on the bottom-line profit of your agency. In a best-case scenario, you’ve been running the firm for a premium profit all along so that in a downturn, while your profits may decrease, you’re still operating at a profit and not a loss.

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 seeing red.

If you’re operating at a modest profit or loss, there are steps you can take to minimize the risk to your agency.

Seven ways to increase your financial strength and flexibility.

1. Start managing your staff costs more tightly.

Total “people costs” are generally 75% of an agency’s cost structure. If your agency is experiencing a downturn, get tougher on staff utilization by running closer to full capacity than you have been for the past several years.

Let attrition take its course. Don’t feel the need to replace staff until you must. Cut back on the use of freelancers where possible. Separate from all marginal team members as you’ll be doing their careers a favor by letting them find a better-fitting job elsewhere for their skill set.

2. 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 actually 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 and conferences your agency attends driving leads?

3. Protect yourself with stronger client contracts.

Negotiate the payment of significant money upfront so that your agency is working off client money and not your savings. Also, ensure your termination clause guarantees that a specific (or minimum) amount of money will be paid to you during the termination notice period.

For start-ups and venture-backed clients, get the termination notice money upfront along with first month or quarter of work to avoid serious A/R write-off situations during a downturn. Consider billing quarterly in advance for clients to build up cash reserves.

4. Build a strong relationship with your landlord.

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. If times are really tough, ask for a three-month suspension of rent payments and add that amount to the back-end of your lease.

Most landlords do not wish to lose a tenant or have one go under. This is especially true given the lower occupancy rates since Covid.

5. Have a contingency compensation plan for you and your team.

It may become necessary for the senior team to take a lower salary during a 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. If you reduce the senior team salary, consider committing to repaying as if that sacrifice were a loan. This can significantly reduce people costs during a downturn and alleviate the need to make tougher staff cuts.

6. Consider offering your key senior people additional compensation based on new business performance during the period of salary sacrifice.

This can provide more focus and increase their motivation for actively promoting the agency and growing revenue. It will also align their goals during the downturn 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.

7. Finally, overall cash management is very important.

Accelerate billings. Stay on top of A/R collections since you can ill afford to be the client’s banker. With as many vendors as possible, extend your payment terms to preserve cash.

Review the non-financial aspects of your agency to increase competitiveness.

During a downturn, there will be fewer new business opportunities so you need to become more competitive and more capable than ever. Carefully review key areas (as we do in-depth in our proprietary Growth Driver Audit).

You should consider:

• A downturn may be the best possible time to develop a three-to-five-year growth plan. Your senior team may never have more mindshare for this undertaking than right now. Some of their recommendations may also help drive short-term revenue.

• An agency’s Mission, Vision and Values are the first steps to market differentiation. What are yours? Are they still right for what you want to be?

• In your agency positioning and messaging, are you positioning yourself as a strategic partner to clients based on your deep knowledge, insights and experience… or as a commodity that simply delivers the standard service offerings which every agency executes?

• Is your positioning 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 so that this critical point is conveyed with every new business phone call?

You should also carefully examine:

• Developing intellectual property included branded products and proprietary methodologies that attract prospects and can be sold at a premium. This can include products, marketing platform ideas that demonstrate deep knowledge or concepts that prove an in-depth understanding of your prospect base. In our planning for agencies, we always find new products and services that can be codified, branded and sold quickly for premium pricing.

• Ensure you have all relevant service offerings that your clients need for success. Be sure all clients are aware of all your various services.

• Also ensure your marketing efforts are consistent and valuable to your prospect base. Expand the size of your prospect CRM and communicate with regularity. Reputation is built over time. Value to readership and consistency of output are critical to success.

• Get closer to clients. Truly understand what keeps them up at night. Bring new thinking in an effort to expand budgets. Have a formal approach for organic growth.

Rally your people round common cause.

Be transparent about the downturn and rally your team around an achievable set of goals.

Establish common cause. 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.

We’re here to help you prosper.

Prosper Group exists to help the owners of independent marketing communications agencies achieve their ambitions and maximize the value of their life’s work.

Our team is comprised of former agency leaders and owners who focus their deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.

To learn more about us, please visit the Services page in our website.