Episode 195

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How’s your year going so far? I might have a pretty good idea already. We work with and see how 250+ small to mid-sized agencies are doing every year and there are always patterns that emerge.

Every spring, I give a trends presentation to all of the agency owners in AMI peer groups. Together we explore how those trends are showing up in our world and how they’re impacting the industry.

Then, in the summer – I share those same trends with my podcast audience. If you’ve been listening for a while, you know this is an annual feature of the show.

In this episode, I share the financial picture that is emerging from the data. How are clients spending their marketing dollars? Is this a good time to be an agency owner? I’ll share what the numbers are saying. We’ll also talk about the mood among agency owners and whether or not they’re bullish on 2019 and 2020.

There are too many trends to cover in one episode, so this is part one. Check it out so you’re ready for part two next month.

What You Will Learn in this Episode:

  • Top agency trends in 2019
  • Understanding the rise of project work
  • How to manage after a gorilla client suddenly breaks up with you
  • Why transparency in markups and commissions is so important
  • Why agencies are earning more dollars, but those dollars are harder to acquire
  • How to regain that spark when agency work makes you weary
  • New trends in agency succession planning

The Golden Nuggets:

“Agencies are earning more dollars these days, but each of those dollars is harder to come by.” - @drewmclellan Share on X “Agency owners fall into two camps: the bone-tired and the super-excited. Which one are you?” - @drewmclellan Share on X When the time is right, there are a lot of creative ways you can choose to exit as the owner of an agency.” - @drewmclellan Share on X “The billable hour is almost completely extinct.” - @drewmclellan Share on X “While there are more marketing dollars out there in 2019, more hands are reaching for those dollars.” - @drewmclellan Share on X

Drew McLellan is the CEO at Agency Management Institute. He has also owned and operated his own agency since 1995 and is still actively running the agency today. Drew’s unique vantage point as being both an agency owner and working with 250+ small- to mid-size agencies throughout the year gives him a unique perspective on running an agency today.

AMI works with agency owners by:

  • Leading agency owner peer groups
  • Offering workshops for owners and their leadership teams
  • Offering AE Bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with those 250+ agencies every year — Drew has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Forbes, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”

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Ways to contact Drew McLellan:

Speaker 1: It doesn’t matter what kind of agency run. Traditional, digital, media buying, web dev, PR. Whatever your focus, you still need to run a profitable business. That’s why Agency Management Institute started The But Build A Better Agency Podcast a few years ago. We help agencies just like yours, grow and scale your business, attract and retain the best talent, make more money and keep more of what you make. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.


Drew McLellan: Hey everybody, Drew McLellan here with another episode of Build A Better Agency. This is one of my solo casts so no guests this episode, just you and me chatting about something that I think is important for you. Before I tell you a little bit about this episode, I want to announce the winner of this month’s free workshop. So remember, if you leave a review for the podcast on iTunes or Stitcher or Google, or anywhere where you download the podcast, make sure you grab a screen capture of it and email it to me at [email protected]. And the reason for the email is because many of you use usernames on those platforms that are not easy to translate. So IloveBambi123, not super helpful in me knowing who you are. So if you can just shoot me an email, we put you in a drawing if you will. And we randomly select a name every month.


  And by the way, if you have left a review a while ago, a couple of years ago even, go back and screenshot that and send it to me. So it doesn’t have to be a recent podcast review, although if you haven’t left one, obviously you need to do that first. And then remember that every month we’re going to be giving away a seat to either one of our live workshops or access to one of our on demand workshops. And so either case the value of that’s around two grand and we’re giving one away every month. So there is no reason for you not to take 3 minutes, go ahead and leave a review and a rating, and then get in the drawing for the $2,000 a month price. This month’s winner is Kit Mullins, and I will be emailing Kit and letting Kit know that they are the winner of this month’s podcast drawing. So get your name in there before next month and hopefully you’ll be a big winner.


  So in this podcast, what I want to do is every year, as you know, part of AMI is we have these agency owner peer groups. So these are agency owners who physically come together twice a year for two and a half days, and hang out in a conference room, share best practices, do all kinds of things to learn from each other. And one of the things I do at the start of every year, so in the spring meeting for them, I walk through with them a presentation on the trends that I am seeing across the 250 or so agencies that we serve every year. And so in this episode of the podcast, I’m going to walk you through the first half of that trends report. And then next month, I will walk you through the back half of that trends report. And if you are a long time listener, you know that this is about the time of year that I do this, the same presentation every year. So new trends, new year, new trends. But hopefully you will find it super valuable and feel free to pop me an email if you have questions.


  So the first category of trends that I want to look at is the money. So in terms of money trends, one of the interesting things that happened in 2018 and 2019 to date is that for many of you, the projects, the wins that you are scoring with clients are coming a little faster. Clients are quicker to sign on the dotted line. Agencies are not having as quite an uphill battle to land new clients. But when they are landing work, it tends to be project work. It’s far less likely that it’s an agency of record agreement or a big long engagement. And so what that means is that puts incredible pressure on the agency to multiply their biz dev efforts because winning one isn’t as valuable as it used to be. So you have to win more, which means you need more at bats.


  So agencies are feeling like they have to multiply their efforts to get enough at bats to … Odds are you’re winning more clients, more new clients, but the dollar amount is smaller. So the need to have multiple wins to get to the same dollar amount is a trend that I’m seeing across agencies of all sides.


  Another trend around sort of money and financial metrics that I’m seeing is that for the most part, the billable hour is almost completely extinct in terms of it being client facing, in terms of the way we bill our clients. So less than 10% of all agencies still ever talk to clients about billable hours or bill in that way. Which by the way, does not mean that time sheets are extinct. Time sheets are still the foundational data that you need to run your agency. It is one of the cornerstone pieces of information you need, but having time sheets and tracking time and seeing how accurate your estimates are is an internal agency management tool, not necessarily a billing tool or a client facing tool.


  So more and more, I’m seeing those being separated, where agencies are recognizing the importance of having the data, but that that data doesn’t show up on invoices. It certainly still influences your estimates, but most of you are billing on a flat fee or a project price. And so how many hours you end up working against that project, client doesn’t really see that data because you’re not shoring up the difference.


  Another trend that I’m seeing that’s having huge financial impact on agencies is that when an agency has a gorilla client. And our definition of a gorilla client is any client that is 25% or more of your adjusted gross income. So a client that’s worth a quarter of your business or more, and many of you out there have a gorilla that might be worth 60, 70, or 80% of your billings. These gorillas are starting to behave in a really ugly fashion. And what I’m seeing more and more, and I’m seeing this in large agencies and small agencies, that gorillas are developing what I would call bad breakup manners. And so what I mean by that is that they are literally picking up the phone on a Tuesday and calling their agency and saying, you know what? As of Friday we’re done. We want to break up with you. And by the way, we’ve already remarried someone else. And so you have three days to transfer all the files to our new spouse and we’re done.


  And the agency is completely caught off guard. They had no idea that there was even trouble let alone that the client was that unhappy. So normally in the past, when a client has been unhappy with us, typically we get some sort of a warning sign, or we have a talking to where the client asks us to come in and they express to us what they’re not happy about. And we work on trying to find sort of some solutions to resolve the relationship. But all of a sudden in the last six or nine months, I’ve just been seeing these large clients who know that there are a significant portion of your business, having no regard for what it’s going to do to your agency if they just pull the plug. And so whether you do have a warning or in many cases, what I’ve been seeing recently, there is no warning. The breakups are coming kind of fast, and there’s no recourse. There’s no opportunity to recant whatever’s been going wrong, or to sort of fix it, or to try and reconcile the relationship.


  They’re already on their way to a new relationship and we are in the past. So be mindful of A, if you have a gorilla more so than ever before, do you need to be hustling to try and balance that business and to make that gorilla more of a monkey sized client in your agency rather than the dominant gorilla. And secondly, just know that the window of time between a client firing us is getting shorter and shorter. I’m seeing two weeks, one week, immediate dismissal with no explanation or sort of warning. So be careful about that. I think we’re about one step away from the breakup text.


  I will say, on the upside, in terms of financial performance, that there are more marketing dollars being spent in 2019 than there were in 2018 and 2018 for most of you was a very good year. So the good news is there’s more dollars out there. The challenge is, I think there are more hands reaching for those dollars. So I think you have more competitors than you’ve ever had before, but the marketplace right now is flushed. Clients are spending and they’re spending at record amounts.


  Now for many of you, 2018 was a very good financial year. So we see the finances of most of the agencies that we work with. We see their balance sheet, their P&L and then they fill out special forms for us that sort of track agency metrics. And I will say that 2018 was a really good financial year for many of you. 2017 for a lot of you was a record breaking year in terms of AGI. And I had fewer agencies breaking records in terms of the most AGI they’ve ever billed in a year in 2018, but it was still a super profitable year for most agencies. So 2018, many of my agencies were sitting at 15, 16, 17, 18% profitability, and having really robust AGI growth year over year.


  One of the things that’s threatening our financial performance. And one of the reasons why some of the quick firing has been happening has been around this issue of transparency. So clients are frustrated that they don’t really understand how we bill, particularly when it comes to markups and commissions. And in particular around those issues, media commissions, and even deeper than that, digital media commissions. And so for many agencies, if they get sideways with a client, it’s because they have not been transparent about their markups and commission policies, or they haven’t been transparent that they use a third party, for example, to buy their digital media through. And that there is a markup or a commission from the vendor who’s selling you the media, and then you’re adding a commission to that so the client is really kind of being double dipped.


  And worst of all for many agencies, if you are working with a third party provider for digital media, you don’t even know what the markup is. So there’s this sort of opaqueness to the pricing that is happening all through, particularly the digital media space. But in some cases, the traditional media space as well, and clients have had enough of it. And they’re getting more sophisticated in terms of understanding how all of this works. And so they want us to be very transparent.


  What I’m not hearing clients say is they don’t want us to take a commission or a markup. That’s not their issue. It’s not that we’re taking it, it’s that we’re not disclosing it in our master services agreement or our scope of work documents. So if you are not being uber transparent about any sort of markups, commissions, partnership fees being paid, whatever it is that you’re passing through to the client, you need to fix that and fix it in a hurry before it bites you.


  So again, as I said, most agencies ended the year in the black, both gross billings and profits were up. So we saw an increase in gross billings, we saw an increase in AGI, and most important, obviously we saw an increase in net profits. So for the most part, 2018 and 2019 year to date is proving to be fiscally, a pretty good year for agencies, or year and a half for agencies. But what I’m hearing agencies say is that they’re working harder for those dollars. Yes, they earn more dollars, but every one of those dollars, is a little harder to come by. And that’s a common thread amongst agencies of all sizes. The exception to that rule is a couple of of specific kinds of agencies or certain services inside agencies.


  So agencies that do PPC, I see really well and can demonstrate great results are not finding that they’re having to work any harder for the dollars, that they’re actually finding that clients are falling over themselves to give them more money. And also agencies that are driving the PR side of the business. When I say PR I mean, 21st century PR, so influencer marketing, content creation, building channels out for clients. Also some media relations, some old school PR. Those agencies or agencies that offer that sort of channel inside their shop are also finding that clients are excited about those offerings and wanting to put even more and more dollars into them.


  So this next sort of thread of trends is really about agency ownership. And there are a couple things that I’m seeing amongst the owners that we work with. When I was very young in my career, I was probably still in my 20s, I was sitting with a mentor of mine at an agency I was working at. And he was the ripe old age of probably 40 at the time.


  And I remember him saying to me, “You know Drew? Agency life is a young man’s game. And after you get to be about my age, boy you get weary, you get tired.” And I can remember thinking, oh my God, I’m going to have to reinvent my career by the time I turn 40. Well, what I know today is that he was right, but he was wrong. I do think that at a certain point in time, the business can make someone weary. And this is what I’m seeing with agency owners. I don’t think it has anything to do with age. So what I’m noticing is that agency owners are falling into one of two camps. And one of them is they’re just bone tired. The work is hard. It never gets easier. I was talking to an agency owner the other day and she said to me, “My God, I’ve been doing this for 25 years. When does it get easier? When does it just level out and we can do the same thing for a while?”


  And my response to her was, “I don’t think it ever happens. I think maybe you’re in the wrong business, if that’s what you’re looking for. The truth of the matter is part of our job is to keep changing and evolving as opportunities change, and as channels change, and as buyers change and all of those things, that’s all part of our job is to take that into account and then make adjustments.” So I think there are some agency owners who are just weary.


  And then interestingly, I have other agency owners that are just energized. They are full of energy and they are excited about all the opportunities and they’re excited about learning about all of those. And the difference is not age because quite honestly, some of my weariest agency owners are in their 30s and some of my most energized agency owners are in their 60s and 70s. So it’s not an age thing. What I believe it is actually is, I believe it is in direct correlation to how we as human beings react to this perpetual motion and change that our industry is in. So if you are someone who gets energized and excited about new ideas, new tools, new channels, new opportunities, then you’re on the energized side.


  And if you really just long for calm and sameness and a lack of demand for us to keep learning and growing and changing, then you’re probably on the weary side. And I think this is a really important distinction for you to sort of look in the mirror and say, am I weary or am I energized? Because the reality is this drive, this perpetual motion and change, it’s not going away. If anything, it’s just going to keep speeding up. And so either you’re going to get more energized or more exhausted.


  I will also offer you though this warning or this caveat. I have seen some agency owners that exhibited all the signs of this weariness, where they were just so tired of gutting it out day after day. And then suddenly something happens. Typically it’s a new business win or an amazing hire that brings great energy into the agency again. And the truth of the matter is that that fixed that agency owner’s attitude. So if you’re feeling weary, I am not suggesting to you that you throw in the towel or that you sell the agency for a nickel and open up an umbrella stand on the beach. What I am suggesting to you is really look in the mirror and decide how you feel about the industry and the fact that we are on always sort of the cutting edge of change. Our work reflects cultural changes. Our work reflects communications changes. All of those things. We have to absorb those changes and then figure out how to translate them in a business setting.


  And so if you find that fascinating and interesting and challenging, then guess what? Even if you’re weary today, that may be situational and you just need to sort of hang in there until you get that next new business win or whatever it is that’s wearing you down, because then you’re going to feel energized again. But I am certainly seeing this dichotomy of owners sort of falling into one of the two camps.


  Another thing that I’m seeing amongst owners, speaking of weary is that as an agency owner decides that they want to exit their business, that they want to sell their agency. I’m seeing some really interesting and very unconventional exit strategies. And what I mean by that is in the “old days”, an agency owner would either sell to an outside buyer. Maybe it’s another agency, maybe it’s a holding company. Or they would sell to an investor who had no sort of ties to the business, but they wanted to own a business. And they decided they would buy an agency. Or they would sell to an employee or a group of employees. And in all of those cases, there was usually a contingency that the agency owners stick around for three months, six months, a year, two years, three years, whatever that timeframe was that the buyer felt was important for the owner, or the seller to stay in the business, to solidify the business, to make the clients feel good about the transition, to make the employees feel good about the transition.


  And then the owner, the selling owner exited the building and they never came back. They were done and they were buying a boat or on the golf course or hanging out with their grandkids or whatever it was they were going to do next, starting a new business, perhaps. But interestingly, what I’m seeing is many more owners who are either their succession or actually stepping into the succession, that transition of succession with a very different mindset. And the mindset is I will sell most of my agency, but I don’t want to sell it all. I want to keep 5%, 10% and I want to serve in sort of an advisory role. So I’m not going to have a day job at the agency anymore, but I might be around for phone calls or I might help with some biz dev, introductions or networking, or I might mentor some young employees, or I might not do any of those things. I might be a silent partner. But I want to retain ownership of part of the agency.


  And so, as a reminder, I think to all of us, that there are a lot of ways if and when you’re ready to exit your agency, there are a lot of ways to do that. And you don’t have to do it in one of the two or three most common ways. I’m seeing a lot of agency owners get very creative, not only in the fact that they’re going to retain ownership, but how they’re financing the buyout and all kinds of different things. So it’s been an interesting time to watch agency owners sort of navigate through this season of, I need to start thinking about what is my legacy within the agency? Who am I handing the keys to? And what do I want my role to be in that agency as I hand off the keys?


  So that’s the first half of this trends report. So in this one, we talked about money and we talked about owners. And in the next segment, so next month, we’re going to talk about employees, we’re going to talk about clients and we’re going to talk about tactics that agencies are having great success with in terms of selling into their clients to serve their business. So that’s what’s coming up next month.


  I want to remind you before I say goodbye, that we have built an assessment for you. So if you go to agencymanagementinstitute.com/assessment, you’re going to find an assessment there that’s going to measure your agency’s success in five or six key areas. It’s going to take about five, six minutes to complete. And then a couple of things. One, you’ll get your tally, your results, right on the screen when you’re done. You will also receive them by email immediately. And in July, late July, we are going to be doing a webinar where we look at the assessments and sort of talk through the trends that we’re seeing in those assessments. So what I’m hoping you’ll do, because it helps us. And I think it’ll help you, but I’m hoping you will do is go and do the assessment now.


  So again, agencymanagementinstitute.com/assessment, so that we can get more data from more agencies. So we can talk about whatever trends we’re seeing, but also what I want you to do is I want you to go and take the assessment and then hang onto the email that we send you with your results so that when we go through the results on the webinar, you can compare sort of where your agency is at compared to all the other agencies that have participated in the assessment. We already have a few hundred folks who’ve gone through it, and I’m hoping we can get another few hundred before the July webinars. So if you will go and go and take the assessment, and it’s a great discussion for your leadership team in the short run. And then hopefully we can give you some good insights into it in July as well.


  So that wraps up this episode of Build A Better Agency, this solo cast, where we’re looking at trends that are facing our agencies across the land. I hope that you noticed some commonalities between what you heard and what you are experiencing. And I will be back next month with the back half of this report. But in the meantime, I will be back next week with a guest as usual to get you to think a little differently about your business and kind of stretch your thinking around that.


  So thanks for listening. Don’t forget to leave the ratings and reviews and send me the screenshot, go do the assessment. And most of all, I would take this podcast and take some of the trends that I talked about that you feel are particularly pertinent to your world and your agency, and take them into your leadership team meeting or your all agency meeting, and chat about them and start building strategies to deal with these trends so that you are in control. If you’re looking for me in the meantime, you know how to find me, I’m a [email protected] and I will be back next week. Talk to you then.


Speaker 3: That’s a wrap for this week’s episode of Build A Better Agency. Visit agencymanagementinstitute.com to check out our workshops, coaching packages, and all the other ways we serve agencies just like yours. Thanks for listening.