Insights

You never know what’s around the corner

We tend to think tomorrow will be like today….and often it is, but sometimes the unexpected throws us off balance and gives us a whole new reality to work with. I was substantially thrown off balance recently which had a fundamental impact on me, my life and my business. More about that later. My predicament got me thinking about agencies and how often their wonderful optimism that tomorrow will always be even better than today.

Without being overly pessimistic I believe an agency needs to at least consider potential risks to their business and mitigate against those risks? Having worked with many agencies I do see some classic assumptions made by agencies whereby they assume every opportunity will come good. I recommend agencies have a regular internal review of their risk factors. The 8 risk factors outlined below are by no means an exhaustive list.

The top 8 risk factors for agencies

  1. Over-dependence: this is very common where a client gives an agency increasing amounts of business. The agency focuses on delivering and fails to build a pipeline of other business from other clients. My recommendation is that no client accounts for more that 10-12% of the business. Venture capitalists, when looking to purchase an agency, will look for similar spread (the top 6 clients no greater than 60% of revenue/no client bigger than 10-15% of revenue).
  2. Specialisation v generalisation: there are two schools of thought here – I won’t go into the pros and cons now. I prefer specialisation however it is important to think about possible implications. For example many years ago I worked for a successful agency and our top clients were British Airways, NW Airlines, Radisson Hotels, Euro-tunnel, Eurostar, Budget Rentacar. We thought we were well spread across different industries and then 9/11 happened. Nearly all business travel stopped affecting airlines, hotels, car rental and Eurostar. Our business was decimated over-night.
  3. Clients reviewing or wanting to change agency: I read recently that at any one time over 60% of brands are considering reviewing their agencies. Just because the client tells you they are happy doesn’t mean you’re ‘safe’. Be proactive. Be strategic. Be a business partner delivering huge value and impact to the client’s business.
  4. Can your client pay their bills? Business is changing rapidly. Some businesses that were once rock solid are now struggling. Some retailers are particularly having difficulties. Beware of being over-exposed to risk like this. Be supportive to your clients but do remember your first duty is to your own shareholders and employees. You are not a bank. How have the agencies working with Debenhams, Bathstore and Thomas Cook been affected?
  5. New business pipeline: typically an agency will lose 10-15% of their business each year. Therefore in order to grow the agency by say 10% you really need a business growth pipeline of 20-25%. (a mix of organic and new business) The trouble can be that the focus is all on delivering today’s work and the future pipeline is neglected till it’s too late. New business typically will take minimum 6, more likely 9 months to come to fruition.
  6. Client-agency contracts: I’m often surprised how easily the situation arises of having either no contract, an out of date contract, a ‘still waiting to be signed contract’ or a contract totally weighted in favour of the client. Check on the notice period. Ideally minimum 3 months.
  7. Agency breakaways: this is a hard one to mitigate against yet can have devastating impact on an agency when senior employees leave to create a new start-up agency taking business with them. At least think through the likely impact and what you could do to reduce the likelihood.
  8. Sometimes agency problems are instant, others can be a slow creeping deterioration i.e. “Death by a thousand cuts” Keep a close watch on those critical KPIs such as profitability and cash flow. Watch for changes, have an early warning system. It is easy for agency profitability to decline consistently each year due to an inability to increase fees or rates whilst overheads continue to increase.

So, my predicament that I wasn’t expecting… I fell off my bike, landed awkwardly and broke my leg in several places resulting in being in hospital for several weeks and off work for over three months. I have a metal plate in my leg with screws. I’m well on the mend now and working again. What’s been the opportunity? Time to reflect, re-consider my priorities and to identify new hopes and dreams for the future.

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