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Article: Tracking the success of independent agencies

Published

15 December 2009

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Discover how well independent agencies are performing in the tough economic climate

The key findings are:

  • Independent agencies are performing impressively in tough market conditions: despite the worst recession since the 1930s and a 17 per cent drop in media spend, none of our survey respondents expect revenues to fall in the next quarter or the next year.
  • Two-thirds of respondents have managed to avoid lay-offs and less than 10 per cent expect to lay people off in the next quarter.
  • We attribute the strong performance of these independent agencies to the flexibility that comes from being entrepreneurial and relatively small.

 

Impressive performance in tough conditions 

The environment is 'challenging' and 'tough': agencies are having to work hard just to stand still. Clients' budgets have shrunk, they are more demanding than ever, and they are taking longer than usual to make decisions.

'It's Clint Eastwood-esque: there is the good, the bad and the downright ugly going on.'

The interesting thing is that none of the respondents expects a decline in revenue in the next quarter or the next year. We have apparently just been through the worst recession since the 1930s and advertising spend slumped 17 per cent in the first half of 2009. In that context, the performance of our survey group is not just creditable, it is outstanding. Most respondents feel a recovery is under way, but most agree it is uncertain and fragile: the level of optimism is no greater about the year ahead than about the quarter ahead.

 

The talent shakeout has already happened

We asked respondents to rank the key features of an agency in order of importance. We have long argued that talent (i.e., people) is an agency's most important asset -- as well as its biggest cost. Given this, it is cheering to report that most of the shakeout from the recession has already taken place: a third of respondents let one or more people go in the last quarter, but less than 10 per cent expect to do so in the quarter ahead.


Independent agencies show the benefit of flexibility

The fact that our respondents seem to have got the lay-off process out of the way is impressive: across the economy as a whole, redundancies tend to increase as the economy recovers from recession.

 

Agencies are very people-oriented businesses and we know from our consulting work that they often find it hard to shed weaker members of staff. It may be that recession has forced owners and managers to take those unpleasant but necessary decisions and let go the poorer performers.

Based on our work with a wide range of independent agencies, we believe that the impressive performance revealed by our survey demonstrates the benefit of being entrepreneurial and relatively small. These features of independent agencies give them a flexibility that larger companies struggle to emulate.

 

Other findings
Other findings from the survey are:

  • Agency leaders agree that spend on employment should be 50-60 per cent of GP
  • Spend on training averages £1500 per head
  • Recognition is the most powerful staff motivator -- apart from recession!


Clarity over KPIs: spend on employment should be 50-60 per cent of GP

Gross profit is defined as turnover less third-party costs. Employment costs are not deducted.

We asked respondents about the key performance indicators (KPIs) of a successful agency. The survey revealed a spread of opinion over the appropriate KPIs for operating margin and GP per head, but a high level of agreement over the KPI for spend on employment per U.K. pound of GP earned. This is logical, since operating margins and GPs per head vary between agencies according to how strategic their services are, while spend per head should rise in step with GP.

 

Spend on training averages £1500 per head
The average spend per head on staff training among our respondents is £1531 per annum, or 4.4 per cent of salary.


Recognition is the most powerful motivator

We asked respondents to list their three most effective ways to motivate their people. We grouped the responses into seven categories and then weighted the scores.

 

In this day and age it won't surprise many people that money is not the only -- or even the best -- way to motivate people. Well, maybe it is if you are a merchant banker or hedge fund manager… Staff are most powerfully motivated by the recognition of their peers and their bosses. Money, in various forms -- salary, bonus, equity, comes a clear second, with other 'soft' rewards such as stimulating work, personal development and a positive culture coming next.

 

Leadership rated lowest of our seven categories, but that hides a fundamental truth: it is leadership that causes all the other things to happen. Bear in mind that these findings are the opinions of the business leaders: their staff might give very different responses. One astute comment that wouldn't quite fit into any of our categories was that the most powerful way to motivate staff was to have a recession.

 

Charles Fallon is Co-Founder of S.I.Partners.