Weathering an economic storm with recession planning with Drew McLellan

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency Podcast, presented by White Label IQ. Tune in every week for insights on how small to mid-size agencies are surviving and thriving in today’s market. We’ll show you how to make more money and keep more of what you make. We want to help you build an agency that is sustainable, scalable, and if you want, down the road sellable. With 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McClellan here from Agency Management Institute. Welcome back to the podcast. Glad to have you back. This week’s episode is a solo-cast. So as you know, if you are a regular listener, this is when you and I just hang out and chat and I don’t have a guest with me. So it’s just going to be us talking for a few minutes about something that I think is important. So that’s what we’re going to do today, and then I promise I’ll have a great guest for you next week. So before we start, before I tell you what I want to talk about today, I want to remind you if you’re listening to this in real time, so this should launch on Monday, October 3rd, and if you’re listening to it in real time, then that means you could still attend the webinar that Susan Baier and I are doing to walk through all of the research data from the Agency Edge Research Series.

And remember this year in 2022, we talked to agency employees asking them what mattered to them, how they were feeling about their job, if they were looking, why they were looking, if they weren’t looking, why they weren’t looking, just to help you have a sense of where your employee’s heads and hearts are at. So fascinating data, some of it you really need to know. And so we would love to have you join us. It is noon central tomorrow October 4th, and you can go to agencymanagementinstitute.com/october22webinar. So again, /october22webinar to sign up. If you hear this after the fourth, within a week or so, we will have the recording of the webinar on the website. But the downside of hearing the recording as opposed to being live is obviously you can’t ask questions. So we would love to have you join us, I think you’ll find it fascinating and very useful.

All right, so let’s talk about what I want to talk about today. I can’t say I want to talk about this, but I feel like we have to talk about it, and that is the recession. There’s a lot of talk, at least here in the States, that a recession, we’re either entering into a recession or a recession is around the corner. And what I will tell you is honestly, I don’t really care if there’s a recession or not. I believe that the things I’m going to suggest you do to get yourself recession ready, if you will, are things you should be doing anyway. It’s just the importance of doing them now and quickly and well is heightened if there is indeed a recession around the corner. So I believe… And by the way, if you’re not in the US and if your country is having a booming economy, I still think the things we’re going to talk about right now are things that you should be doing. And so these are best practices no matter what, but they are tantamount to your success and your future during a rough economic time so just puts more emphasis on these things that we should do.

So I’ve been talking for a while about the fact that globally, cost of doing business is getting higher for all of us. Cost of employees is for sure higher, benefits higher if you’re in a country where we provide benefits. And so one of the things that I think is really telling is that most of you are paying a lot more money to run your agency today, but most of you have not raised your rates so you are still operating on the same billable rate that you have for the last decade or more. So recession proof idea number one is you need to raise your rates and you need to do it now. Particularly you need to do it on any new projects and with any new clients. I know it is much harder to do with existing clients, especially if you have a contract. But where you can, on the clients that are project based or clients that don’t have a contract, and we’ll get to that in a minute, absolutely, it’s time for you to raise your rates.

So in the US historically agencies, big cities, small city, doesn’t really matter, have been at about $150 an hour. And I’m suggesting that everybody go up to at least 175. For those of you with larger clients who are used to paying bigger prices, you could easily go up to 200. And the thing of it is, honestly, if they’re used to looking at project prices or flat fee prices, they’re not even going to notice that you’ve raised your rate. So even if it’s an ongoing client and you don’t have a contract and you feel like you don’t want to have a big raise the rate conversation because you’ve never had an hourly rate conversation with them, then just make the projects a little more expensive. So if you have a contract that discloses rates, obviously you have to have a conversation with your clients. But moving forward for any new projects, any new clients, make sure you’re at a minimum of 175 an hour. So that’s number one.

Number two, for those of you that keep talking about putting together a new business program, but you haven’t, now is the time. It is time for you to fill that pipeline. Remember, during a recession, it’s not that you won’t sell things but everybody’s going to be slower to decide. So you want to have more people in the pipeline and you want to be able to talk to more people more often so that even if the sales cycle is elongated, you have people in all sequences of the sale cycle so you can keep getting new business on a regular basis. So that’s number two.

Now, let’s talk about your current clients. If you have a contract with a current client, now is the time to get that renewed and be really intentional about renewal dates. So I know a lot of you, you have a contract with a client and it just sort of goes and you don’t remind them that it’s ready for renewal, you don’t give them a new document. A lot of you will say to me, “Oh, yeah, we signed a contract five years ago, it didn’t have an auto renew in it, but we’ve just never talked about it again and we just keep working with them.” Now is the time to get something locked in and for as long a period of time as you can. If you want to, thinking about, “Boy, I want to make sure I get a year.” I was with an agency owner earlier this week and he was saying because of the industry that they serve, they can get three year contracts from their clients. That’s a luxury most of you do not have.

But if you can, get at least a year contract, 18 months, 24 months, and if you have to give a concession to get that contract, maybe it’s a free project, maybe they get the right team of their choice, maybe it’s turnaround time. It doesn’t have to be about money, it could be other things. Maybe it’s more access to your team, maybe it’s you provide some educational resources for their team where you go in and you give some webinars or live presentations to educate their team. Whatever it is, think about what you can do to sweeten the pot so they will sign the contract. Because we know that again, if a recession comes, clients are going to be much more reticent about making a long term commitment so you want that long term commitment made now, if you can, before we are full on in a recession, if a recession is coming.

And by the way, again, this is best practice no matter what, this is something that you should be doing. All of you should have some sort of a spreadsheet or calendar or something that tells you when contracts are coming due so you can properly negotiate a new contract in the timeframe and giving your client plenty of time to think about it and all of those things. We just aren’t really great at that unless you are larger and you have somebody who’s responsible like a CFO for contracts. Many agencies, many smaller agencies that’s on you or it might even be on the account exec, but we’re not awesome at knowing when the contracts are coming due and being great about getting them renewed on time. But now would be a really great time to do that. All right?

The other thing I want you to do is I want you to be thinking about your employees and I want you to think about them from a couple of different perspectives. Number one, I want you to think about them from a really clear understanding on your part of who’s really adding great value to the agency and who, even during a recession, do you need to double down on, invest in and make sure that they are happy, that they’re growing, that they’re challenged. One of the things that we have heard every time we talk to agency employees, whether it’s pre-pandemic, post-pandemic, they want to keep growing in their career and they want to keep learning. And they look to us with varying degrees, as you will hear in tomorrow’s webinar, with varying degrees of confidence that we are committed to helping them grow. And so one of the ways that you can really lock down your best employees is to demonstrate in a very tangible way that you are investing in them, you believe in them, you have confidence in them, you have a plan for them, you know where they’re going next in their career and you want to talk to them about it.

But even though everyone’s thinking about tightening their belt, this is not the time to stop investing in education for your best players. On the flip side, I want you to really understand who are your mediocre players. So go through the exercise of ranking your employees and in terms of their value to the agency. And this is hard to do objectively, it’s really easy to do subjectively based on who you like or who’s most like you or might be your kid, whatever it is. But you need to be able to go through and really rank your employees so that if something happens, if you lose a big client, you are immediately in the position to take action.

So one of the things that certainly crushed agencies in the great recession of ‘7, ’08, ’09 were the agencies that hung on employees when they could no longer afford them and so I don’t want you to get paralyzed in trying to figure out your plan. I want you to have a plan now. The reality is if any of us lose a big client, recession or not, the only way for us to right size financially is to cut staff. We just don’t have… There’s just not enough fat anywhere else in our expenses other than with our employee count. That’s the only place where if we lose a client that we have excess really. And a lot of you have really trimmed your overhead down to the bare minimum. You’ve reduced office space, maybe you don’t even have office space anymore. So even more so the only place where if you lose a big client you can turn the ship around and get back into the black is to reduce staff. And if there is a mistake that almost every agency owner makes, myself included, if there is one mistake that we have all made, it’s that we hang on to employees for too long and we really can’t afford to do that.

So you’ve got to do something right now, which is to put together a plan so that you know if 20% of your AGI goes away, you know the very next day exactly what you need to do to stay in ratio. Because honestly, that’s the critical key to survive in recession. It’s not whether or not you keep all your people, it’s not whether or not you keep your clients. It’s whether or not you stay in financial ratios that are healthy. An agency of any size can make 20% profit in the worst of economic times. Absolutely true, if you run by the numbers. I will tell you there is a silver lining though, if there is a recession, one of the silver linings is it’s going to be a lot easier for us to find good employees because other people will also have to make cuts and they will have to cut meat off the bone, not just fat off the bone so there will be good employees out there looking for jobs at a much more reasonable salary than what we’ve seen over the last couple years. So if there is a happy side to a recession for us as business owners, that’s it.

All right, I’m going to be right back because I want to talk to you a lot about the money side of the recession. But first we’re going to take a quick break. Hey, sorry to interrupt, but I wanted to make sure that you are thinking about how to connect with your clients by figuring out what they love and maybe a few things that they’re not so crazy about with your agency. So at AMI, one of the things we offer are client satisfaction surveys. We do both quantitative and qualitative. So an online survey, but also interviews with some of your key clients. And then we come back to you with trends, recommendations, what they love, what they don’t love, lots of insights around how you can create an even tighter relationship with your clients. So if you have interest in that, you can go under the How We Help tab on the AMI website and very bottom choice on the How We Help tab is the client satisfaction surveys. You can read more about it. But whether you have us do it or you do it yourself or you hire somebody else, it is really critical that you be talking to your clients about what they love and what they wish was different or better. So do not miss the opportunity to tighten your relationship with your client whether we help you or not. All right? All right. Let’s get back to the show.

All right, we’re back and we’re talking about what to do in anticipation of a recession, which as I have said honestly is just best practices and the importance of following the best practices gets heightened because we may be in an economic downturn. I’m not an economist, I don’t know, I’ve talked to lots of folks who think that there’s one coming. I’ve talked to a lot of folks who think it’s going to be a blip. I’ve talked to some folks who think it’s going to be a bigger deal. But here’s what I believe and what I know from my own decades of experience as a business owner and as an investor and all of that, there’s opportunity in every economic condition and there are opportunities in a recession for sure. So I don’t want us going into this worried or panicked. I want us to go into this prepared, I want us to go in thinking about how we need to position ourselves to be ready to weather whatever comes. And so that’s really what this solo-cast is all about.

All right, so let’s talk a little bit about money. So the natural inclination for most people when they hear that there’s going to be a downturn or a tightening, if you will, of the economy, is people start squirreling away cash. And this is actually going to exasperate a mistake that many of you already are making in your business, which is you’re keeping too much cash in the agency. You have an excess of retained earnings. So the best practice, recession or not, is to not keep all that money in the business because what happens is when your bank account is fat and happy and you’ve got 4, 6, 8, 12 months of money in the bank, so you’ve got a huge runway if something bad happens. What happens when you have that much money that is in the agency checking account is you make emotionally based bad decisions.

When you look at your checking account, you see how much money you have, even though 25% of your AGI just walked out the door, you make the decision to keep employees or to keep spending money on things that you have no business keeping. But it appears to you in that moment like it’s not a big deal because you have a lot of cash in the bank and that’s true. But let’s keep in mind a couple things. Number one, you are just financially digging a hole that you’re going to have to dig out of and the deeper and longer you dig, the harder it is to get out. Number two, that’s not actually the agency’s money. That’s your money. That’s money you’ve already paid taxes on, in most cases. It is sitting in your checking account of the agency, but it’s actually your family’s money. And what you’re going to do is you are going to spend your family’s money on bad financial decisions because you are blind to the reality that that’s actually not the agency’s money to spend, it is your personal money. So get it out of the business.

So in good economic times, you know that I am always harping on you to get the money out of the agency and to build your wealth outside of the agency. So whether that’s real estate or betting on the ponies or investing in crypto or whatever your thing is, I don’t care, but you need to build. You need to use the agency as an ATM machine, get the money out of the ATM machine, and put it in other places that will grow for you and your family. That’s a normal economic time recommendation. For those of you that are watching the video, sorry, you’re hearing a little bit of collar shaking and I believe you’re seeing one of our dogs’ tails behind me. So watch for that. It’s like an extra bonus. And if you’re not watching the video, if you’re just listening, you probably still heard the collar a little bit. She’s 13, so I’m not going to boot her out of my office.

Where I was saying, anyway, in normal economic times, I want you to get that money out of the business and put it into other things. Again, real estate, crypto, art, whatever your investment strategies are, you want to build your wealth outside the business. The caveat to the recommendation during a recession is I still only want you to keep what you absolutely have to keep in the agency. But now what I want you to do is I want you to squirrel away cash in a money market account or something like that in your personal name, this is critical, in your personal name so that you can choose whether or not you want to lend it back into the business.

So let me give you an example. You just lose a client and you need to cut staff, you need to cut salary by $100,000 and you’re looking at your list because you’ve done what I’ve asked you to do and you’ve ranked your employees and you know that Babette and Mary are the two people that have to go but you have a lot of money in the bank. You have six months of retained earnings in the bank. You could not earn another penny and you could pay all your bills and pay payroll for six months. So you look at Babette and Mary and you go, “Ugh, you know what? Babette’s going through a tough time. She’s in the middle of a divorce and one of her kids is on cocaine. And poor Mary, her mom has dementia and she’s putting her grandchild through school.” You can come up with all kinds of reasons why you can’t lay someone off, especially when economic times are tight and you’re afraid they’re not going to be able to find a job right off the bat. And when you have the money in the bank, you will elongate their employment far beyond when financially you should.

And I’m not suggesting that all of these decisions are made with no heart. I am not suggesting that. I have made plenty of heart decisions, but honestly I’ve also paid through the nose for some of those heart decisions. And some of them I regret making. Some of them the loyalty wasn’t returned or wasn’t earned or whatever. But because I too had left too much money in my agency bank account, it didn’t feel like a big deal. But the reality is it is a big deal. So the difference is if you move the money out into a money market account into your name, and now you, the agency owner, have to lend, let’s say $100,000 back to the agency, and by the way, you want to create a loan document for this, it really should be a loan that gets paid back.

But when you have to lend the money back to the agency to save Babette and Mary, I’m telling you, you have different conversations in your head and heart and you make different decisions. So this is just good smart management. All right? You make different and better decisions, more fiscally responsible decisions when it feels like it’s your money because it is your money. But when it’s in the agency checking account, it doesn’t feel like it’s yours even though it is. But when it’s in your personal checking account or your personal money market account, it absolutely feels like your money and you are much smarter about how you spend it.

All right. So let’s talk about how much money I want you to leave in the business. If you have no gorillas, if you have no clients that are bigger than 20% of your AGI, the rule of thumb in good economic times is you would keep two months of operating expense, operating expenses, payroll plus overhead. So let’s say your monthly nut without profit is $50,000, I’m just making up easy math, then you would keep $100,000 in the agency checking account and you would keep at least another $100,000 in the money market account that you could lend back to the business. This is during good economic time. So basically you have a four month runway, two months in the agency and two months in your personal account.

If you have a client that is between 20 and 35 or 40% of your AGI, you have to double that. So now you’re keeping four months in and four months out. If you have a gorilla client that is more than 50 or 60% of your AGI, first of all, you’ve got to fix that. But secondly, now you’ve got to keep six months in because if they walk, you’re in a trouble in a hurry. Six months in and six months out. During the recession, you may want to add an extra month onto that. So again, it might be instead of two months, three months. Instead of three months, four months, et cetera, et cetera. But do not keep it all in the agency checking account. It really does just lend itself to really, really bad decisions and decisions that will, especially if you take a couple of hits on the chin, may take you years to dig out of those mistakes. Don’t do that to yourself. Don’t do that to your team. Don’t do that to your clients. It reduces the resources that you have to offer them. So be smart about people and money, for sure.

All right, the last thing I want to talk to you about is attitude and what you project into the office. So this is a conversation we had during COVID too and post-COVID. You grossly underestimate how much your team pays attention to you and draws their feelings about the business and even the industry based on how you are. So if you come in worried, or tired, or worn down, or freaked out, they pick up on that and your emotions transfer to them, only your emotions transfer to them and there it gets magnified. It gets magnified because of a couple of things. Number one, they don’t have your years of experience and they don’t have the totality of what you know, so they’re more ignorant. Number two, they get each other worked up. So if somebody walks into a conference room and says, “Hey, have you noticed that Drew seems really stressed out? I know we lost client X, Y, Z, do you think we’re going to have layoffs?” And then they start getting each other going and then they all start watching you even closer. And so you’ve got to be really mindful that there’s a very thin line, but an important line, between being honest and transparent and being completely unguarded with your emotions.

I believe it is our responsibility, it’s our job, and honestly, it’s part of what makes a great culture for us to be honest and transparent with our employees. Don’t hide the fact that things are challenging. They know anyway. And by the way, they think it’s much worse than it is. The more you tell them, the more actually relieved they are because they know you’re on top of it. They understand the magnitude of it because they just build it up in their head. But number one, yes, we should be honest and transparent, absolutely. But we also have to be hopeful. We also have to have a vision for the future. We also have to remind them that most of you listening lived through and survived the Great Recession, most of you lived through and survived the pandemic. So your agency is resilient, your agency is strong, your agency is going to get through whatever economic thing is thrown at us next because you’re smart and you run the business well. And so you need to keep reminding them that you’ve done this before and you need to talk to them about what your strategies are, about how you are managing to the numbers, how you’re really watching expenses.

But we’re going to still keep investing in education. We’re going to still keep investing in culture. We’re going to still keep investing in learning and getting smarter and better because this is just a blip on the radar screen. And all of you need to know that we are on this, we’re watching it, and everything’s going to be fine. We will keep communicating with you. You don’t need to wonder, you don’t need to worry. We are going to keep communicating with you. But again, and here’s the part, but we are strong, we are smart, we have great clients, we are strong in our industry knowledge or our niche or our audience knowledge or whatever it is that you’re great at. Remind them how good you are. Remind them that you are resilient.

And then show them all the things you’re doing that are giving you hope, that are reminding you that you too will survive if we have an economic downturn, that you too believe that your agency is going to live on for another day and do great work and be around for decades. First of all, you need to actually have that hope in your heart. And if you do all the things that I’ve talked about today, I think it will give you confidence that you’re in a great position to handle whatever comes. And honestly, as you are continuing to find and hire great employees, as you’re continuing to have great success in your biz-dev efforts because you’re actually focusing on them and putting energy into them, you will be filled with hope and it’s your job to infect your team with confidence and hope for the future.

Even if it is we have to go through a storm for a little bit. And who knows, the recession may never come, it may be a blip. Honestly, for many agencies, you’re small enough that it may not impact you or your clients. So first of all, don’t let the news freak you out. Secondly, ready yourself. Be ready for what’s going to come and put yourself in a position where you’re going to be successful. You’re going to survive. You’re not only going to survive, but you can thrive through an economic downturn. You absolutely can. This is the time for you to really be smart about where you invest. I’m not saying stop spending. I’m saying be smart about where you invest in people and with your time, with your money, all of those things. And it’s a great time to gear up and polish off the case studies and get your marketing ready and sort of put a little more energy into the biz-dev side of the business, your outbound efforts. Now is the time to ready yourself and get stronger. And if there’s no recession, awesome, you’re just in a better position. If there is a recession, awesome, you’re going to get through it.

We will continue to keep talking about these things. We will continue to share what other agencies are doing around best practices. I am certainly going to be talking to you more about this if there is a shift in the economy that is more dramatic than what we’ve seen so far. So you’re not doing this alone. If you have not joined the Facebook group, the AMI Build a Better Agency Podcast Facebook group, it’s a private group just for agency owners and leaders, join that. Again, surround yourself. I think we’re up to 1,200 people now. Surround yourself with other agency owners that you can kick ideas around with and you can talk to people about. So stay tuned with us. Stay connected to the newsletter. Jump into the Facebook group if you want, but don’t feel like you’re doing this by yourself. But I can’t come to your office and change the way you spend money. I cannot come to your office and raise your rates. I cannot come to your office and help you rank your team members. Some of this stuff you have to do, and I’m telling you to do it now.

So it is October-ish, October one or two or three, I guess it would be October 3rd by the time you hear this, so you’ve got the whole fourth quarter to ready yourself. So let’s do this. Again, raise your rates, gear up your biz-dev. Remember, people are going to be slower to make decisions so you need more people in the pipeline. Current clients, get them on contract if they’re not on contract or new contracts if you can. And for sure, if you need to, give them a reason to stay, give them a reason to sign. Doesn’t have to be money. Remember that your employees know who has to go if you lose a big client. Invest, invest, invest in the best ones that you want to keep through this season and for several seasons and be really mindful of how your attitude shows up for them. And money-wise, do not do what the knee-jerk reaction is which is squirrel as much money away in the agency as possible. I do want you to squirrel away money, but I want you to get out of the agency first because you’ll make much better decisions.

If you do those things, you’re going to be just fine. Again, every agency can run by 55/25/20. 55% of your AGI is payroll, loaded payroll, 25% or less is overhead, which leaves you at least 20% for profit. You can do that with three FTEs. You can do that with 300 FTEs and everything in between. There is never a reason why your agency has to be not profitable. You absolutely can always be profitable. Remember that. If you just run by the numbers and you’re smart about preparing yourself for whatever may be coming, and if the recession is coming, this is the next thing for us to prepare for, you’re going to be just fine, I promise, you really will. So surround yourself with other people who are thinking about the same things, who are smart, who are generous, who are willing to be helpful. Make sure you keep investing in your own education and your team’s education and we’ll get through this. All right?

That’s it for me today. I will be back with another guest. Or with a guest I guess, I’m not a guest. I’ll be back with a guest next week to help you think a little differently about your business. A huge shout out, and thank you as always, to our friends at White Label IQ. Again, here’s another thing that I actually should have said to you. Be mindful about what you have on staff that you could outsource. That’s another great recession tool is knowing that we can never keep Babette’s plate full but if we had a backup, a resource that we could outsource that work if we had to let Babette go, we could without really jerry-rigging anything with clients.

So speaking of outsourcing, our friends at White Label IQ do White Label PPC design and WebDev. So check them out at whitelabeliq.com/ami. And they’ve got a deal where if you’ve never worked with them before, you can get some free hours into your project. So that’s a great way to sort of tiptoe into prep for maybe having to downsize. All right, go forth. Take a deep breath. This is going to be absolutely fine. You are going to be fine. The agency’s going to be fine. We will walk through this together and I’ll be back next week. Okay? Talk to you then. That’s all for this episode of AMI’s Build a Better Agency Podcast. Be sure to visit agencymanagementinstitute.com to learn more about our workshops, online courses, and other ways we serve small to midsize agencies. Don’t forget to subscribe today so you don’t miss an episode.