Episode 393

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Many of us didn’t initially set out to become agency owners when we first started working in the business we’re in now. It sort of happened accidentally, and we put our agency together on an as-needed basis as the clients kept coming in and our services and offerings evolved.

As accidental agency owners, we’re left with a lot of room for error as we try to scale our agencies to fit our core values while also turning a profit. That’s where Herb Cogliano’s expertise comes in.

As an entrepreneur for over 30 years and a consultant helping scale and grow businesses, he knows all the pain points for agency owners as they navigate growing an agency.

Herb will teach us three major barriers to growth: hiring people in line with your core values, identifying general manager-level leadership, and remaining profitable as you and your team adapt to changes along the way. Herb wants us to run our business rather than the business running us. Tune in to learn how to go from an accidental agency owner to an intentional one.

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.

agency scaling

What You Will Learn in This Episode:

  • Three major barriers to our growth as agency owners
  • The decisions around people, strategy, execution, and cash that we need to get right
  • What we often get wrong about scaling
  • How to improve cash flow and profits inside the business
  • How to evolve the business in the right direction
  • Establishing your core values and sticking to them
  • What to look for in good leadership as you plan your leadership succession
  • Creating processes to boost efficiency
  • How to take the fear out of change for your employees

“The four decisions we needed to get right were around people, strategy, execution, and cash. And that was the beginning of an amazing journey for our company.” @hcogliano Click To Tweet
“Labor is a major component of your investment. It's one of the biggest expenses, if not the biggest investments you have in your company.” @hcogliano Click To Tweet
“I want you to run your business. I don't want the business to run you.” @hcogliano Click To Tweet
“People want to have bigger futures. A-players will demand it, and they can get it.” @hcogliano Click To Tweet
“You deserve the company that you want. Don't let anyone tell you differently. You work hard. You're providing an amazing opportunity to your communities and the people you serve. Do not settle.” @hcogliano Click To Tweet

Ways to contact Herb:

Resources:

Speaker 1:

Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money, and keep more of what you make. The Build a Better Agency Podcast presented by White Label IQ is packed with insights on how small to mid-size agencies survive and thrive in today’s market. 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. Thanks for coming back. I have a great topic to talk about. We’re going to talk about scaling your business and what gets in the way of us doing that effectively.

But before we do that, I want to tell you a little bit about what I’ve been doing this morning. What I’ve been doing is I’ve been working on the roundtable topics for the Build a Better Agency Summit. So one of the ways you learn at the summit is that you choose topics that are of interest to you and you go and you sit literally around a table with a bunch of other agency owners and a subject matter expert and you talk about whatever topic it is that you selected.

And so, it’s a great way to learn from other agency owners how they’re doing it, how they’re battling the same struggle or maybe they’ve solved the problem. And so, it’s a lot of you showing up as both the teacher and the student. Then you also have the subject matter expert at the table who’s also giving you some best practices and the benefit of their expertise based on what they do for a living.

So let me just tell you some of the amazing roundtable topics. So getting your agency ready to sell to an employee, defining your agency’s niche, improving sales with the right team, the right roles, and the right tactics, writing the book you’ve always wanted to write, how to leverage AI and media planning and buying, tax strategies to keep more money in your pocket, managing and monitoring cash flow, hiring faster and more effectively, integrating AI into your agency while protecting your intellectual property and reducing risk, how to verify candidates’ capabilities before you hire them, leveraging G4 for your clients’ and agency’s benefit, effectively partnering with other agencies, key financial metrics for running a profitable agency, and it goes on and on and on. So many great conversations.

We do the roundtable, I think it’s three times in the summit, two or three times. So you literally are going to multiple conversations over the course of the summit. If you’re bringing agency employees or team members, then you guys can divide and conquer and cover more ground.

I got the question the other day, is the summit only for owners? The answer is absolutely not. I would say it’s probably not for super junior people, but anybody who’s mid-level or leadership level, absolutely. Lots of content specifically for them surrounding how they can do their job better and how they can support the agency’s goals.

So, anyway, summit again, May 15th, 16th, and 17th. 15th is family day. So if you’re an AMI member of any kind, you’re welcome to join us on that day. The full conference is Tuesday the 16th and Wednesday the 17th. Would love to see you there. Grab a ticket before prices go up or we sell out. Make sure once you grab your ticket, you grab your hotel room as well, because I want you to have a place to sleep, okay?

So let me tell you a little bit about our guest. Herb Cogliano has been an entrepreneur for over 30 years, before he started doing some consulting around scaling. So he was in a family business, helped it scale and grow, made all of the mistakes that everybody makes in that process, learned from it, and now is helping other businesses, particularly service industry businesses, scale and grow their business.

So we’re going to talk to him about what gets in the way of scaling, how do we do scaling wrong, how do we slow down or speed up the scaling process if we want to do that, and all kinds of other things. So I think you’re going to really enjoy him and the conversation. So let’s get to it. Herb, welcome to the show. Thanks for joining us.

Herb Cogliano:

It’s a pleasure, Drew, and looking forward to having a wonderful conversation and looking forward to being available to help your audience.

Drew McLellan:

I’m excited to talk about this topic, this idea of scaling our business. I think most agency owners, their business … First of all, they were accidental business owners to begin with. They somehow ended up hanging up a shingle.

Some of them thought they were going to freelance in between jobs. Some of them actually started it on purpose. But as the business grows, as demand grows, I think about it like … It’s like they bought a little three-bedroom, two-bath ranch, and every time the business needs something else, they add it somewhere to the house. But sooner or later, because it was added piecemeal and maybe without a plan, you’re walking through the kitchen to get to the bathroom, to get to the three-season porch.

And so, this is a topic I think that’s really critical to agency owners as they think about growing their business. So before we dig in, why don’t you tell everybody a little bit about your background, how you came to have this expertise, and then it’s my job to extract as much knowledge out of you as I can in the time we have together. So we’ll do that.

Herb Cogliano:

Okay, thank you. I’ve been a serial entrepreneur. I grew up in a family business at a very young age. We were a professional services technology staffing firm. We also had businesses in education. Everything we did was about helping people find more meaningful employment. When you’re growing up in a family business and growing a business, there’s a lot of unique dynamics that go behind that.

But there’s also a lot of common themes between us entrepreneurs and small to medium market business owners. To your point, we wanted to grow this company from the beginning. We had a passion, we had an idea, and next thing you know it takes off and we’re adding customers and we’re adding new products and we’re adding employees.

What began is what we call the growth paradox. Everything we ever dreamed of with a lot of hard work and sweat turns into something very different. It becomes more complex. We’re now dealing with challenging clients or troubling suppliers, or, unfortunately, we don’t always hire the right employee. What used to be the wind in our sails or wonderful, passionate endeavor turns into drama and unfortunate stress.

So we looked at this over and over in companies and found out that over the years, there was three major barriers to growth that we had to navigate. Number one, leadership succession. As we grew the company, we could only handle so many direct reports, yet didn’t train and develop the next level of leaders to help us with delegation and decision-making. We also found, as we grew more locations, more services, more clients, that it became more complex in communication systems and decision-making and scalable structure.

Then the final thing was we had good products and services, but then the market changed, it became commoditized, and we weren’t changing quick enough to deal with that. So we’ve seen that all over the world in all different industries, and yet there is hope.

Drew McLellan:

So when did you shift from running or being a part of the family business to being someone who helps businesses understand how to scale their business?

Herb Cogliano:

Yeah. I was CEO and was working in the family business for over 33 years. About 25 years in, we were working really hard. We had an amazing team. They were very smart, but we weren’t growing the way we wanted to. It just became very frustrating to work extremely hard, but not breakthrough that next level of growth.

A friend told me about the Scaling Up Performance Platform. I didn’t believe him at first, quite frankly. It just sounded too good to be true. We read the book, we started to implement some very simple foundational frameworks, and the biggest challenge was we didn’t know what we didn’t know. The four decisions that we needed to get right were around people, strategy, execution, and cash.

That was the beginning of an amazing journey for our company. I’ll let you ask me another question before I just keep talking about it.

Drew McLellan:

Well, so it sounds like … I think there are a lot of agency owners that can relate to what you’re saying, which is, boy, they start the business and it grows like wildfire. It feels like everything’s humming and you’re the hot new kid on the block. All of a sudden you’re doubling in size year over year over year. All of a sudden, for agencies, they get to about, I don’t know, 12, 15, maybe 20 people, and they get stuck, right?

Herb Cogliano:

Yes.

Drew McLellan:

All of a sudden growth is heavy and hard, and they can’t quite figure out how to get to that next level, which it sounds like exactly was where your business was when you decided that you needed to figure out how to unpack this idea of scaling.

Herb Cogliano:

Yeah. If you think of people, which is paramount to what you just spoke about, a lot of us owners are doing three to five different jobs. We’re wearing the sales hat, the marketing hat, the ops hat, the finance hat, the IT hat, and what you find is you’re not doing any one of those jobs 100%. As you grow, you have to develop and incrementally hire people, I call it, around the functional table that you can delegate slowly, appropriately for them to take some of that off your back, so that you can get more focused, they can be more accountable, and your business has now more bandwidth to grow.

Drew McLellan:

So let’s talk about that. Let’s talk about a little bit about the idea of growing. So what I heard you say was there are four key components to scaling, which is people, strategy, execution, and cash. In our world, we talk about leadership, biz dev, so new clients, growing those new clients, process, and money. So very similar to what you have outlined. So what do we get wrong about scaling?

Herb Cogliano:

So let’s tell you how we diagnose where we have our issues. Number one, if you’re feeling any drama in your business, it’s normally … I mean we’ve all felt it.

Drew McLellan:

Right.

Herb Cogliano:

It’s normally around people decisions. Either you didn’t hire the right employee, you didn’t market to the right client type, or you picked the wrong supplier, or you have the wrong partner if you’re in a partnership business. But we teach people how to identify hiring towards their core values and energizing people around an aligned purpose, and by defining the right job scorecards in role productivity and results in mind.

That sounds simplistic, but we don’t always do it. When we can slow down and help the owner organize the people processes to make better people decisions, the drama immediately starts to go down.

Strategy. If your top-line revenue and your gross margins are not growing, at least that industry growth rates and scaling up companies normally double industry growth rate, you have a strategy problem. We’ll work on those types of decisions to get you to that right place.

Execution. Have you ever worked six, seven days a week, 10, 12 hours a day, and made no money in your business? That’s the definition of insanity, and we’ve all done it, but we’re not executing. Those type of decisions need to be reformulated to get better bottom-line results.

Then the final one, you and I know if you don’t have cash, you can’t survive. You can’t make payroll. But the big one owners don’t always see in the beginning, you can’t take advantage of opportunities without cash.

That key executive you always wanted to hire who’s finally available, you don’t have enough money. That acquisition that just fell in your lap, you could extend new services, territories, you can’t afford it or get financing. So those are the four areas that would help them diagnose what their issues are and then we’d go help them fix it.

Drew McLellan:

So if I am diagnosing my business, what are some of the things I want to think about? Let’s talk about cash flow, first of all, because, so you know, in many agencies, that is a … One of the things I talk to agency owners about all the time is that growth can cripple a business. That rapid growth where you are taking on new clients and you’re hiring people and the revenue’s 30, 60, 90 days behind before you’re actually going to square up, that can be really crushing to an agency. So how does an agency think about improving cash flow and out of that profits inside their business? Is there some specific tools or tricks or assessments we can do to get better at that?

Herb Cogliano:

Yeah. So we use something called the power of one, which are really seven levers which help you increase cash flow, profitability, and also the valuation of your company. We look at pricing, which is completely undervalued as a strategy. We look at volume, we look at cost of goods, we look at general overhead, AR, AP and inventory days. Service companies don’t really have inventory days. But six of the seven, normally it’s one or several of those that are out of whack, and we start to work on adjustments and strategies through those six to ultimately get it back on track.

Drew McLellan:

Yeah. So I think pricing is a critical issue for agencies. Like every business on the planet these days, our employees are so much more expensive post-pandemic. A lot of agencies came out of the pandemic reluctant to raise prices because they were worried about losing business during the pandemic and all of that. And so, pricing has not really caught up. One of the things that we are constantly pushing our community on is that they really do have to look at raising their prices.

So, for example, in our world, $150 an hour has been the gold standard for probably a decade, and agencies just can’t make money on it anymore. So they’ve got to get to a $175 or even $200 an hour to offset, to your point, the cost of their overhead, which are a big part for our purposes, our people.

So how do you begin … So you talked about pricing, you talked about cash flow, you talked about overhead expenses, cost of goods. You’re right, we don’t have much inventory. So how do you help someone begin to unpack all of that?

Herb Cogliano:

Yeah. So we have a methodology of looking at each of those decisions, and we use very simplistic tools with the owner to help them start working through with their team on how to evolve the business towards the right direction.

What I find is so important, you’re busy, you’re running a busy company. You don’t have tons of time and, quite frankly, you don’t want anybody coming in just flipping tremendous change and turning your business over. So it’s important to, as an owner, understand where your business is at, how much bandwidth you can commit to this transformation, and incrementally do it so that you cannot disrupt the business but revolutionize the business with it.

One important point, I think, for agencies and professional services company, labor is a major component of your investment. It’s one of the biggest expenses, if not the biggest investments you have in your company.

So we do a lot of work with labor efficiency. Would you agree that if you had two employees at $75,000 each, that they don’t always bring the same amount of productivity or value for the $75,000?

Drew McLellan:

Absolutely. Yup.

Herb Cogliano:

I want you to think of the NFL. They have a salary cap. How can one team spend the same amount of money and win the Super Bowl and the team in 32nd place spending the same amount of money coming dead last? They’re not leveraging the labor efficiently. We work very closely with service firms on understanding labor efficiency and getting labor efficiency over time to the proper level that will support profitability.

I had one owner who started with operating profit of just around 5%, which they were not happy with, but they threw people at the problem. Every time they were having issues, they just kept hiring more people.

Drew McLellan:

For a lot of agency owners, they are under incredible pressure. Their people are saying, “Can’t do any more work. Can’t do any more work. We have to hire more people.” So that becomes a subjective decision. In our world, you’ve got to have $175,000 of AGI, so for the audience, gross billings, minus your cost of goods to equal one full-time equivalent. And so, now all of a sudden it’s objective. So how does someone … So I have 20 employees. How do I begin to sort out who’s being effective and efficient and who is not?

Herb Cogliano:

Yeah. I think what’s important is that every role in your company should have an appropriate job scorecard where the people know the accountabilities for the role and the metrics they have to deliver to be productive for each one, whether that’s a certain amount of hours billing per week or a certain amount of project completion. You need to be able to find that as a business owner.

I want you to think about if you’re going to fund a $75,000 to $150,000 employee and you don’t know what those accountabilities and metrics are, you should be asking yourself, “Why am I funding such a big investment?”

Drew McLellan:

Right. Yeah, I think it’s one of the core challenges for agencies. We measure efficiency by how many of an employee’s hours … Not just billable employees, but all employees. When you take all of the hours and you say, okay, look, 75% of all of the hours available to us as a company have to be spent on billable tasks, and 60% of all of those hours actually have to show up on a client invoice. So we know we’re going to overservice them, we know we’re going to make some mistakes. Most agencies when we come in, they’re at 41%, 42% of that effective rate, which means more than half of the hours spent by their employees does not generate revenue.

Herb Cogliano:

I had a client with a similar issue, Drew, where they were working hard. If you looked at any employee around that office or in a meeting, they were definitely busy and they were feeling burnt. But what we found was they were not doing billable hours. They were behind on projects and they were just putting hours into projects that they could no longer bill.

And so, we had a major focus in one quarter of cleaning up the project mess, getting caught up. So while their future hours could be billable, and that ultimately solved their revenue and their profitability. The client earlier with about 5% operating profit got really fanatical about the labor efficiency ratio. Within 18 months, his operating profit was over 25%.

Drew McLellan:

Yeah.

Herb Cogliano:

He just never focused on it before. He just never really knew about it before. But it makes a big difference in our type of work.

Drew McLellan:

Yeah. Well, measure matters. I mean part of this is just where you put some focus. So one of the things I want to ask you is we find that oftentimes the people inefficiency is about process. So I want to just plant that seed. Let’s take a quick break and we’ll come back and dig into that.

Hey there, just a quick interruption. I want to make sure that you are aware that you are cordially invited, not just invited but cordially invited, to join our Facebook group, our private Facebook group. All you have to do is go to Facebook and search for Build a Better Agency and you’ll find the Facebook group.

You have to answer three quick questions, you have to put in the agency URL, you have to talk about what you want to learn from the group, and you have to promise to behave yourself. That’s it. Then we’ll let you in and you can jump into the conversation with over a thousand other agency owners and leaders.

There’s a robust conversation happening every day. People are sharing resources and best practices, and discussing everything from work, from home policies to maternity and paternity policies, to biz dev strategies. So come join us and jump into the conversation. All right, speaking of conversations, let’s head back.

All right, we are back and we are talking about how to scale your business effectively, efficiently, and obviously profitably. So right before the break, you said, Herb, that what we find when we come into an agency oftentimes, and we find an agency’s billability and utilization is too low, that, as you were saying in your story, it’s not that people weren’t busy and it’s not that they weren’t trying to do their best, but that their processor systems were not actually supporting efficient work. So do you find that as well in your consulting work?

Herb Cogliano:

I think it’s situational. I think some people are not using technology correctly, or leveraging process improvement. I think for some companies, it’s about communication breakdowns, wher