Episode 400

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It’s that time of year again — we’re going over the top agency trends we’re noticing so far in 2023 and going into 2024. A lot has changed since the last time we went over the data, which means we have a ton of information that you’ll hopefully find valuable and can use as a compass for where to lead your agency through the rest of the year heading into 2024.

As we exit the pandemic era and move into the AI era, there’s a lot to consider in how agencies function regarding what our clients want, how fast our sales cycle moves, how we hire, where we should focus our biz dev, and more.

One thing is certain — many agency owners like you feel re-energized and reinvigorated coming out of 2022. Let this episode be a ray of light that gives you an extra boost of encouragement for the rest of 2023, and keep that momentum going for as long as possible.

For 30+ years, Drew McLellan has been in the advertising industry. He started his career at Y&R, worked in boutique-sized agencies, and then started his own (which he still owns and runs) agency in 1995. Additionally, Drew owns and leads the Agency Management Institute, which advises hundreds of small to mid-sized agencies on how to grow their agency and its profitability through agency owner peer groups, consulting, coaching, workshops and more.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

What You Will Learn in This Episode:

  • The impacts of recession fears on AGI and revenue
  • ROI — the new agency buzzword
  • A growing agency trend in having amazing teams
  • Rebalancing overservicing and overstaffing issues
  • The fading trend of over-specialization of agencies
  • The PPC, SEO, and data analyst job boom
  • A positive trend in agency owner happiness
  • The continued importance of thought leadership and community spaces
  • The agency employee trends of 2023
  • Embracing AI and using it as a tool for your work

“The places where agencies are making the most profit is in things they can count and prove to their client.” @DrewMcLellan Click To Tweet
“ROI is the big term now. So as much as you can prove ROI for the work, that is the buzzword that all of your clients are talking about in their boardroom.” @DrewMcLellan Click To Tweet
“Some of the least profitable work, unfortunately, are ad campaigns and what would be considered traditional agency work.” Danyel McLellan Click To Tweet
“You've got to let the numbers tell you how to staff your business. And it's a hard decision when you think you have the best team ever.” @DrewMcLellan Click To Tweet
“If you're an agency that may be specialized in brand and want to build into strategy, having those alliances and partnerships to get the best work done for the clients is a highly desired position.” @DrewMcLellan Click To Tweet

Ways to contact Drew and Danyel:

Resources:

Speaker 1:

It doesn’t matter what kind of an agency you run. Traditional, digital, media buying, web dev, PR, whatever your focus, you still need to run a profitable business. The Build A Better Agency podcast, presented by White Label IQ, will show you how to make more money and keep more of what you make. Let us help you build an agency that is sustainable, scalable, and if you want down the road, sellable. 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 McClellan here from Agency Management Institute. This is an awesome episode. This is number 400. When I think about it, we have been doing this for almost eight years together, so I am so grateful that you hung around and stuck it out and waited till I could figure out how to do it well. And boy, we’ve had some amazing guests over the last 400 episodes. But as you know, every fifth episode is a solo cast. And so this is no guest. This is just us talking to you about something that we want to get on your radar screen. And as you could tell, if you’re watching the video … You probably can’t tell if you’re just listening to the audio. I have my co-pilot with me for this episode. So my partner in all things including AMI, Danyel Newcom McLellan is at my side.

And we’re going to walk you guys through the trends that we’re seeing that are really impacting 2023 and we think are going to have huge impact over the next 12 to 18 months. We do this every year about this time of year so we’re excited to bring this to you. But first, just a couple housekeeping things. As you know, on the solo cast, we always give away a workshop seat. All we need you to do to be eligible to win a workshop seat … Say that 10 times fast. All you have to do is go wherever you download the podcast. So could be on Google, it could be on Apple, could be iHeartRadio, wherever you grab it, and leave us a rating and review. And then what we need you to do is we need you to take a screenshot of the rating and email it to me at [email protected]. Because you have some sort of login or user ID or handle and ILoveCatsMoreThanDogs22 does not tell me who you are or what your agency is so I can’t award you the seat.

But in this case, Leslie Osborne followed the instructions way back in 2019 and she sent me a screenshot of her review and it’s finally her turn. So Leslie, you have a free seat at one of our workshops or one of our on-demand workshops if you’d rather do that than attend one of the live workshops. So I’ll shoot you an email and we’ll get that squared away. But congratulations and thanks for being a loyal listener. That takes care of all of the paperwork and all of the pre-work so let’s get into the trends because we have quite a few that we want to talk to you about. Danyel, let’s start with the money trends. That seems to be what everybody wants to talk about first, right?

Danyel Newcom McLellan:

Yeah. Absolutely. What’s been going on lately is that 25% of agencies held steady as far as the revenue and AGI, 60% grew revenue and AGI, and then 15 shrunk revenue and AGI.

Drew McLellan:

Yeah. That’s a little different. That’s a shift. Keep in mind, these are the year-end 2022 numbers. So this is how you all wrapped up last year. Typically, what we see is we see more of the agencies showing growth and more of the agencies holding steady. We don’t quite see that double-digit shrink in revenue and AGI.

Danyel Newcom McLellan:

Right. And I think that that’s surprising because there’s been a lot of talk of recession and a lot of unease I think would be the word. So these are promising. Promising.

Drew McLellan:

Yeah. So a couple other things. When we look at where agencies are making money, we’re deeming what we’re about to talk about countable work. So if you’re watching the video, you saw the rabid air quotes, and if not, hopefully you heard them in my voice. But the places where agencies are making the most profit is in things that they can count and prove to their client basically, you give me a dollar and here’s what happens as a result. And as you know, even pre Covid this was a recurring trend that was really growing in terms of the groundswell where clients were really putting a lot of pressure on agencies to be able to prove that the dollars they were spending were having some impact. So regardless of what the client’s goal was, whether they wanted more leads or more web traffic or more sales, whatever that was, clients are being asked by a C-suite or a board of directors to really document and demonstrate that marketing dollars are being spent well. And so some of the most profitable work are PPC and SEO work and media planning and buying. So again, things that you’re doing that is easy for you to say, here’s what we did and here was a accountable result.

Danyel Newcom McLellan:

Yep. ROI is the big term now. So as much as you can prove ROI for the work, that is the buzzword that all of your clients are talking about in their boardrooms.

Drew McLellan:

And the reality is they’re being held accountable for that. And as you know, the tenuous nature of the CMO role or director of marketing role has not gotten better after Covid and so they are naturally anxious to be able to prove that they’re making good decisions, including the agency that they hired and following the recommendations we made. So they’re looking for that. So more profitable work that isn’t quite so accountable, but still as agencies are crushing it in terms of how they are delivering this work and making it profitable. And we’ll talk in a little bit about the average billable rate of this work, and you’ll see the delta between the profitable and not profitable work. But some of the other profitable work is strategy and consulting work. A lot of you are moving away from making stuff and you’re spending more and more of your time really lending your clients the depth of your expertise and your thinking around strategy and consulting. And then PR and happy to say content. For a long time you guys struggled to make content profitable. You really were wrestling with how to help clients understand the amount of time it took to do and to do well and now it seems like clients have caught on to that. And so again, this is more profitable work for many of you.

Danyel Newcom McLellan:

Some of the least profitable work unfortunately are ad campaigns and what would be considered traditional agency work. So people are struggling a little bit more to show ROI of brand. A lot of the, again, more traditional ad campaigns are not what your clients are looking for or are willing to pay a premium price for.

Drew McLellan:

It’s frustrating. I think a lot of agencies were born out of that work and a lot of us, that’s what we went to school to do and what we grew up in our career doing. And so it’s a little disheartening, I think for a lot of agency folks to feel that that work is being devalued. But it’s oftentimes something that clients who sometimes can’t tell the difference … Watch TV and you can see what they put on TV as TV commercials. But I think sometimes clients can’t tell the difference and so the variance in price between letting the TV station do it or letting a local freelancer do it versus having an agency do it is difficult for them to justify because they can’t articulate the difference. So if you do a lot of that work and you want to keep making it profitable, you’re going to have to be able to produce a very viable argument about the value proposition of you doing it versus somebody else.

Danyel Newcom McLellan:

Right. And also tying it to some of the higher, more profitable work in ways that you can through the strategy piece and then having the brand weave into the strategy and help inform the PPC and SEO. So some agencies are doing that really successfully. Using the same vernacular that their clients are using but being able to weave in that brand strategy as opposed to having it lead with the design and concepting of the brand.

Drew McLellan:

Well, and I think that’s using call tracking and all kinds of things like that for sure. So when we look at billable rates … And you’ll see this is what we’re talking about. When agencies are charging for PR on average their billable rate is well over $200 an hour. If they’re doing SEO it’s about $185 an hour. Strategy at 181. Now on the ad campaigns, as we were saying, it’s averaging out at about $130 an hour. So that is a huge delta between the super profitable work and the work that you’re struggling to get done in a profitable way.

Danyel Newcom McLellan:

We’ve been talking a lot about … Or sorry, hourly rates. And I think that most of you have listened to Drew talk about your hourly rate should be at 175 per hour as opposed to what agencies traditionally looked at as 150.

Drew McLellan:

For over a decade we said 150. It really is the increase in some of the internal costs. Our employees are more expensive, the benefits are more expensive, so we just have to make more every hour to be able to cover all of our internal costs.

Danyel Newcom McLellan:

That’s right. And generally though, we don’t like to say that we want … Or we want to do value and not just have our billable rate hour per hour, but that for internally, 175 should be where you’re at.

Drew McLellan:

Right. So very few agencies talk about a billable hour anymore with a client. Some of you if you got hired by procurement probably had to put a billable rate. And in that case you may have had to put a billable rate per team member into a contract, but for many of you, you’re really doing project pricing so it’s a flat fee for a specific set of deliverables. But to Danyel’s point, as you’re doing the math of what are you going to charge the client you really need to be using $175 an hour in your math. And then of course what I want you to do as you’ve heard me say before is I want you to figure out, okay, it’s going to take us 10 hours times 175. But you’re wrong. It’s going to take more than 10 hours. There’s no way around it. We’re terrible at estimating. So we want you to take the 10 hours times 175 times 1.3 and that’s the price you should give clients. At the end of the day when you go back and do your postmortem, that’s actually what it’s going to have taken you to get the work done.

Danyel Newcom McLellan:

Absolutely. Another problem that’s been in our industry for a while, but is really coming to the forefront in this time when we’re having more remote work and some of the biggest threats of our profitability are over servicing the clients and over staffing. So over staffing has been going on for a long time, but I think because of the hiring being such a challenge that we’ve been holding on to employees longer because we think that a warm body is better than nobody at all, and especially having to pay a premium price for a warm body.

Drew McLellan:

Or pay recruiting fees or whatever. So for many of you, you struggle to find decent employees. And I’m happy to say actually one of the things we’re hearing is people are much happier with their teams than they were a couple of years ago. A lot of you are saying, this is one of the best teams I’ve ever had. I love these employees. They’re great. So the good news is, and we’ll talk about this later when we get to the employee section, but the candidate pool is getting better, but you’ve been so burned by the last two years and how long it took you to find a breathing human being that would take a job and anybody who was competent, you were brought to tears with joy that you had them, that some of you are not paying attention to the ratios and you’re justifying to yourself that you should keep more employees than you can actually afford to keep. And so you’ve got to let the numbers tell you how to staff your business.

Danyel Newcom McLellan:

And it’s a hard decision when you think you have the best team ever and all you need is just a little more business. But what’s happening is, again, that new business, and we’ll talk about this later, is taking a little longer to come to fruition. So the numbers are really important even when the decision is very hard. And I think another thing about the over servicing is a key piece. We’re seeing that all the time, especially because we have the people. They’re putting more and more time and energy into the projects that you do have and even with the best of intent aren’t putting in all the time that they’re spending on the client. And so overstaff … Sorry. Excuse me. Over servicing seems like a logical thing to do when people have more time when they’re waiting for more business, but we’re not tracking the time accordingly.

Drew McLellan:

You can’t charge the client.

Danyel Newcom McLellan:

You can’t charge the client. There’s a lot of time ending up in admin and miscellaneous buckets when that’s happening. And so if your admin and miscellaneous buckets are really, really high for time, generally speaking, there’s some over servicing going on. So streamlining processes for efficiency, really encouraging your team to give you accurate time data and not just looking to make a project profitable. Those are ways to help talk through the over servicing of clients.

Drew McLellan:

One of the things we’re seeing quite a bit is that employees who don’t want to get in trouble are only recording on their time sheets the amount of time they’re allotted to do the work, but the reality is they’re spending more time and then as Danyel said, they’re tucking that time somewhere. And so what you’re getting is low bill ability, low utilization numbers, and you can’t figure out why because your people are telling you they’re swamped, they can’t do another project, they freak out when you get a new client. But the reality is, because of the inaccurate time sheets, two things are happening. One, you think they have capacity, and two, they’re spending too much time that you can’t recoup on client work, but they’re not recording it accurately, which means every estimate that you build off of the last estimate is equally wrong and you keep short-changing the agency over and over.

Danyel Newcom McLellan:

And it adds up. The more people that are on a project that are all doing this, it’s a lot of billable time that adds up. So emailing and communication with your clients oftentimes is not recorded. And so all of those emails and communications they don’t want to put onto the job, so that will go into an admin bucket. And I think even prepping for meetings and the things that it takes to actually do the client’s work, they feel that they can’t put against the client project. So retraining your team is a great way to help them refocus on the numbers that matter to you and work to minimize the over servicing.

Drew McLellan:

And I think you have to reassure them that nobody’s going to get fired or in trouble for accurate time sheets. I think this is particularly … Everybody on your team is doing it. All your creatives, all your digital folks. But the ones who really break this rule are the account service people. Because they’re the ones who are being held accountable to delivering on time and on budget and so they sacrifice a lot of their own billable time sometimes to put into those admin buckets. Or some of you have a general client bucket that just is the dumping ground for time that basically they don’t want to claim against a specific job. So having ongoing conversations … And I know you had this issue in your shop.

Danyel Newcom McLellan:

Absolutely.

Drew McLellan:

Having ongoing conversations with your team about the importance. And what you’re doing with the data and why it matters, helps them get over the discomfort and the fear factor.

Danyel Newcom McLellan:

Right. Exactly. And I think creatives, they want to do good work and if it goes outside of what their allotted time is, they’ll add more time to the project to get the work done at a quality that it needs to be. PMs, project managers, are another spot where there’s a lot of lost time. Some agencies feel like their project managers can’t be billable, but that isn’t the truth. It’s a challenge because they touch so many projects, but there’s ways to be able to have them add 15 minutes to every job as they go through the process. And you get much more accurate data on how much of your team is working on that client work.

Drew McLellan:

Yeah. All right. So let’s move to trends that we’re seeing amongst clients and bis dev. One of the trends we talked about last year that is still prevalent today, and if anything is probably a bigger trend in ’23 than it was in ’22, is we went through a season where clients were like, “I need a specialist agency for everything we do.” And they were just parsing out the work in little tiny bits. So they’d have a brand agency, they’d have a PPC agency, they’d have a media shop, they’d have a creative shop. And what we’re seeing now, the trend is that clients are like, this sucks. It’s all these agencies.

Danyel Newcom McLellan:

Exactly.

Drew McLellan:

This is abysmal. A, I don’t want to have to ride herd on all these different agencies. B, trying to get them to work together is painful. And C, my entire day is being sucked up by meetings with each agency and then I have to translate between the agencies.

Danyel Newcom McLellan:

I think also another thing I’d add to that is the data that they’re receiving from each of the agencies that measures the ROI of their work, that they have to take all this different data from all different places and try to translate it in the success of a project. For quite a few years, we wanted to have our agencies have everything in house and that it looked as a value to clients of having all of the parts and pieces in house, which is now, they have an understanding that it takes specialization. And again, they just don’t want to manage all the parts and pieces to get a successful campaign.

Drew McLellan:

So it’s interesting. We went from everything has to be in house and the clients basically calling bull on that. That there’s no way as a 15 person agency you can do all of these things that are so sophisticated and complicated in house. To the pendulum swinging all the other way, which was I want all the agencies to do all the things. And now it’s really in an interesting place, which is they still want specialists, but they’re tired of being in charge of the circus. So what they want is they want a lead agency who’s going to bring them partners who specialize. And so for a lot of you, this is a huge opportunity to align with other agencies that deliver on some of the things you may or may not do. PPC, SEO, PR, web dev, whatever it is that you don’t do.

Or if you are a specialist, if all you do is PPC and SEO, then finding agencies that are more of the agency of record strategy kind of an agency, coming together and creating an alliance where you agree to share partners, you agree how that business is going to be handled, but the lead agency can go in and say, “Here’s our recommendations across the board. We do two thirds of this in house, but the other third, we have three strategic partners that we’re really excited to introduce you to.” And in fact, they might be a part of the pitch or something like that. But when they do that, the key is that they have an alliance. Because in the past, the reason why you haven’t wanted to share clients of course, is because people steal your market share.

Danyel Newcom McLellan:

Right. Again, I think this is great news because a lot of the agencies want to be in that strategic space, and it’s something that clients want. They don’t want to manage it from a strategic standpoint. So if you’re an agency that maybe even specialized in brand and want to build into strategy, having those alliances and partnerships to get the best work done for the clients is really a high desired position to be.

Drew McLellan:

No doubt.

Danyel Newcom McLellan:

And also, to your point, PPC and SEO-

Drew McLellan:

Huge demand.

Danyel Newcom McLellan:

Huge demand. But most agencies, we can’t hire for that. It’s either we’re not large enough that it’s a one position, one man band, and it’s very hard to hire for, to rate success at and then you’re really held hostage to the one person who is the sole one who knows how to do the work in your shop.

Drew McLellan:

And they often get poached or cherry-picked pretty quickly because they’re expensive. They’re in demand everywhere. Not just in agencies but on the brand side and other places. So it’s hard for you to hang onto that one employee. And as w