Episode 110

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Drew McLellan is the CEO at Agency Management Institute. For the past 23+ years, he has also owned and operated his own agency. Drew’s unique vantage point as being both an active 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 — he 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, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”



What you’ll learn about in this episode:

  • Why all agencies weren’t made to grow to the same size (and why that’s okay)
  • Why agency owners have to work extremely hard when they’re at 0-5 employees and why all the employees in an agency that size have to wear multiple hats
  • The bench strength problem for agencies with 5-12 employees and why there might only be one employee with a certain skill and no one to back them up
  • Why the systems in processes must change for an agency once it hits 12 employees
  • The change around 15 employees that takes an agency from being a family to being a team
  • The decision-making process: why decisions are made collectively before agencies reach 12 employees and why agency owners need to take more autonomy at times as the agency grows
  • Why around 35 employees is a great size for agencies in terms of cash flow (and why a gorilla client can be very dangerous at this point)
  • Bigger, better clients and bigger, better employees: why 35-65 employees is the point where agencies “level up”
  • Why bigger doesn’t equal more profitable for agencies anymore


The Golden Nugget:

“In the Mad Men days, bigger was always better for agencies. That’s not true anymore.” – @DrewMcLellan Share on X


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Ways to contact Drew McLellan:

We’re proud to announce that Hubspot is now the presenting sponsor of the Build A Better Agency podcast! Many thanks to them for their support!

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, Build A Better Agency podcast presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25 plus years of experience as both an agency owner, an agency consultant to you, please welcome your host, Drew McLellan.


Drew McLellan: Hey everybody. Welcome back to another episode of Build A Better Agency. So today’s episode is one of my solo casts. So rather than having a guest with me, this is just going to be you and I having a conversation typically around a topic that has come up with a lot of agency owners in the recent days. And it’s just something I want to make sure that I put on your radar screen and that you’re thinking about. So today what I want to talk about is I want to talk about the challenges that agencies have as they grow.


  And one of the things that is true as an agency of five people is different than an agency of 250 people. But every agency of 250 people started as an agency of five people. And they went through a transition in certain stages and they made conscious choices and they made trade-offs, there’s pros and cons in every sized agency.


  And what I want to do is I want to walk you through what I think are sort of the breaking points, where you have to change and fix some things, or you’re going to be stuck at that certain size. What are the breaking points? And what is the evolution look like from being a small agency to something much larger? And what are the trade-offs of an agency like that?


  And then that way you can start to recognize the signs of, oh, oh, we’re getting close to that breaking point. I need to be thinking about how we need to pivot the agents here, change the agency to evolve into this next stage. So if we’re going from caterpillar to butterfly, what does that look like? And what are the trade offs of that? Maybe I want to stay a caterpillar. And that’s certainly a choice that you can and should be consciously making at each breaking point.


  So I just want to walk you through those and tell you a little bit about them. So all agencies are not created or grown to be equal. And again, depending on why you started your agency if you’re the owner or why your owner started the agency, if you’re on the leadership team. That’s going to dictate what size is the right size to stop. So I’m going to walk you through each phase and then hopefully that’ll give you some things to think about as you approach 2018 and you start thinking about your one year and maybe your three-year plan, so you can be ready for those changes when they come.


  So, all right, let’s start with a brand new agency. So typically for most of you if you’ve been around for awhile, you can remember back to the days when you started your shop and you were probably, maybe it was just you, maybe you had an employee or an intern. Maybe you had a business partner, but you were certainly from in the zero to five employee range.


  And for those of you that are listening, that are new to the agent’s business, this may still be where you’re at today. So here’s the deal when you are at the zero to five employee range. In this case, pretty much everybody who works at the agency is about the same. They all look and sound the same. And the reason that is, is because they are doing a variety of things every day, lots and lots of hats. And so everybody is just trying to scramble to take care of the clients. And oftentimes what that means is that you’re all doing a little bit of everything. So there’s no specialty. Everyone is just pitching in where they can. From the owner’s perspective, the owner is truly the butcher, the baker, and the candlestick maker in a zero to five agency.


  So they’re typically working with clients all day and then they’re doing administrative work like billing at night. So this is the time when an agency owner is working super long hours and they’re not only directing their own activity, but they’re directing everybody’s activity. So everyone is getting their go-to instructions from the agency owner. The owner is sort of quarterbacking all the activity. And odds are the team is very young and inexperienced. Why? Because the agency just started and the owner doesn’t have a lot of money in most cases. Sometimes there’s exceptions, but for the most of you, if you think back to when you started, you didn’t have two pennies to rub together. You certainly were not hiring a senior person unless somebody was coming on as a partner. But otherwise your first employee odds are, was a kid right out of college. Maybe they were still an intern. You were paying them little to nothing. And by the way, you had no training for them.


  So it was really a baptism by fire, just come on in, come into the kitchen, put on an apron and get to work, right? In terms of operations, an agency that’s zero to five, depending on how tech savvy the agency owner is. But mostly you guys are reinventing the wheel every day. You might have some Excel spreadsheets, Google docs, but you’re constantly reinventing the wheel. And for every client, everything is custom and you are saying yes to anybody who’s got a box here. You are not only stressed super thin, but you’re not doing anything with enough consistency or frequency to have any sort of efficiency in the agency. The other interesting thing about an agency this size is that most decisions inside the agency are made as a collective whole.


  So every decision is sort of a weed decision and the owner is basically running a big democracy and everybody pitches in and everybody has to say. In terms of finances, an agency from zero to five people is very hand to mouth. So it’s a feast or famine. When we get money in it’s great, everybody gets to be paid or fed. But there’s these dry spells and maybe everybody else gets paid, but oftentimes the owner goes hungry, the owner doesn’t take a paycheck. Lots of cashflow challenges in the zero to five space. Because a lot of times you’re working with smaller clients. They try and stretch up their bills. It’s just a challenging time as a young agent to kind of climb out of that. In terms of marketing and sales and new business, really at this point, your prospects, anybody the agency owner knows.


  So they’re going to network meetings. They’re talking to their buddies. They might be talking to somebody at church, but they’re pretty much trying to get anybody and everybody to give them a chance to prove to them that they can take care of their marketing and advertising.


  Oftentimes, what this means is that the client mix at this size is completely random, literally I butcher, baker, and candlestick maker because whoever has money and says, yes, they’re our client. All right. So let’s look at the agency that goes from five to 12 employees. So now all of a sudden we’ve got, when you’re five, six, seven, we’ve got to put skeleton process in place. A lot of the knowledge is tribal knowledge. So the employees that were there back when it was five and a lot about the client, typically there are not a lot of processes yet to record all that information. So everything is verbally passed out from employee to employee to employee.


  But we’re beginning to see the skeleton of a team at the five to 12 mark. Oftentimes at this stage, the owner’s role is that they are client [inaudible]. So they are doing a lot of strategy work for our client, but they’re also still really in the weeds. They’re taking a lot of calls, all the hands are doing a lot of work. They’re working a lot in the business. They’re also trying to drum up sales, but they’re so busy that it’s hard with client work. It’s really hard for them to carve out the time to do sales. And they still have a lot of administrative duties. Until you get to that eight, nine, 10, 11, 12 stage. So in the early phase of this category of agencies, you’re not really hiring anybody who’s not billable.


  As you get closer to that 12 mark, odds are you’re adding either an office manager or a billing clerk or an accountant, perhaps, but most of you have probably not that much money, right? But somebody to help you with the admin. And oftentimes it’s one person who is doing the office management, all the HR paperwork, and is also doing all of the accounting functions in terms of AR and AP and paying bills and that sort of thing. Still the owner is thinking of everyone as a collective. And many, many of the decisions are a we decision. Every once in a while, the owner will surprise everyone by making a decision on his or on her own. But for the most part, it’s still very much a democracy. In terms of leadership, everyone is being directed by the owner, but by now, especially at the 10, 11, 12 sides, there might be a couple of senior people who have been hired. Who are A, little more self-directed and B, maybe taking some of the less experienced people under their wing.


  The team though is very, very thin still, and everybody is still wearing a lot of hats. And oftentimes you have one person who has a skill, but no one else in the shop has that skill. So you don’t have a lot of bench straight. You don’t have a lot of backup. And so when the agency gets busier, it’s really a crunch time on the team because everyone may have a specific skill or expertise, but multiple people don’t have that same skill or expertise. At this stage also, a lot of times the agency is fleshing out the team with contract labor or freelancers.


  The operations and the systems at an agency in the five to 12 range are very basic. Maybe you’re using Basecamp or Trello. Odds are for accounting you’re using something like QuickBooks. You have no onboarding of staff or clients, right? On the client side it’s like, sign this document, give us some money. We’re off to the races for work. But there’s no sort of getting them indoctrinated into how you work or the processes inside your agency around billing or approval processes or anything like that.


  And the same thing is true as you add staff, it’s pretty much a so glad you’re here, here’s your desk. By the way, you have a client meeting at 10 go. But not a lot of formal onboarding or training. Really the only systems that are in place are what I call the survival system. You have some basic accounting systems. You might have some basic job and project tracking systems, but nothing sophisticated yet odds are at this stage. Now on the finance side, by now especially as you’re getting close to the 10 or 11 or 12 employees, this agency has started to enjoy some financial success, but it’s very feast or famine.


  So you have really high highs, but you also have some low lows. So the agency’s finances are ebbing and flowing pretty erotically at this stage, especially if you have a gorilla client who is dominating the billing. Because when they are slow to pay or they disagree with the bill, everything kind of clamps down. Cash flow is a huge issue at this size. So again, you’ve got more people on staff, so your overhead, your expenses are getting higher. Your fixed expenses are getting more robust between the staff and your office space or whatever you have, your overhead expenses. But you’re still running pretty thin on clients and client billing. And so when someone doesn’t pay on time, it really pushes you into a crunch. In terms of marketing and sales at this stage, again, the owner’s doing some networking, but really what’s happening at this stage is by now the agency has some awareness of the marketplace that employees are out and about.


  Maybe they’re going to AMI meetings or BMI meetings or something, but they’re out and about a little bit. They might be sitting on a board and you’ve cast this net and whenever fish swim into the net, that’s what you eat in terms of new business. So again, the client mix is pretty erratic because whatever swims into the net, if they have money and they have a need, we go, yes, of course we can solve that problem for you. And so your client mix is going to be maybe if you’re lucky, 50%, what I call on-purpose. So in a niche or in a specialty area, and the other 50 is going to be outside of those niches and really is anybody that walks in the door. And with that, it seems like a really great time to take a brief pause and then we will get right back to the show.


  If you’ve been enjoying the podcast and you find that you’re nodding your head and taking some notes and maybe even taking some action based on some of the things we talk about, you might be interested in doing a deeper dive. One of the options you have is the AMI remote coaching. So that’s a monthly phone call with a homework in between. We start off by setting some goals and prioritizing those goals and we just work together to get through them. It’s a little bit of coaching. It’s a little bit of best practice teaching and sharing. It’s a little bit of cheerleading sometimes. On occasion you’re going to feel our boot on your rear end, whatever it takes to help you make sure that you hit the goals that you set. If you would like more information about that, check out agencymanagementinstitute.com/coaching. Okay, let’s get back to the show.


  So now it gets really interesting. So the next point and the point that really is the breaking point where everything that you’ve done from zero employees to 12 employees, you’ve done some minor modifications, but you’ve really just sort of layered on a little more process, a little more tribal knowledge, more senior people who are able to do things. So maybe some of that stuff comes off the owner’s plate. And at about 12 employees, everything breaks down if you keep working the way you’ve been working. So remember this is everybody doing a lot of different tasks. The departments roles are very fuzzy at best. A lot of account people are also screening in a creative role. But now at 12 or 15 people that gets pretty uncomfortable. So that’s the equivalent of you wearing clothes as a kid that fit in three years ago, but don’t fit anymore.


  So everything’s being very constricted at the 12 to 15 mark, and that’s really it’s time to really choose sides. So this is the time when the agency for the first time has to define a new normal with great intention. This is the first time that the agency really will break. If you don’t refuse new process and system to acknowledge your larger size. So the agency owner’s biggest role is defining the new normal with intention. They’re spending more time on BizDev, but they also have probably decided that at certain point in time, everyone needs to fall into departments. So all of a sudden we’re getting much more prescriptive about the kind of work that someone is doing on behalf of the agents. So odds are you’re not a copy contact person anymore. You’re either going to choose the creative department, or you’re going to choose accounts service. Odds are somebody who is doing web dev and also graphic design is going to choose between those roles.


  Everyone’s going to kind of fall into a box if you will, and don’t get me wrong. This is still an agency that is small enough that everybody is bleeding out of their box, but for the most part, they are living inside their box. So you’re still wearing multiple hats at 12 or 15 or 18 employees, but it’s getting more defined. All of a sudden, you may have some hierarchy in the department. So now the agency owner is also assigning and growing department heads. The owner is spending more time with clients on high-level strategy, and hopefully as an account team that can take over some of that day-to-day work that the owner have been doing. This is also an interesting time for owners in terms of sort of emotion and also an interesting time for the team emotionally. So where someone has been on staff from the time you were three or four employees, and they’ve grown up with the agency and now it’s 12 or 15.


  And for the owner obviously who’s been there the whole time, one of the shifts that happens at about 15 or 18 is we go from being a family, a small, intact family to being more of a team. And for a lot of owners is challenging to not know what everybody’s up to all of the time. I’m not touching all of the clients all the time. I’m not in the meetings anymore. I actually feel a little out of the loop as an owner at this stage. And so for a lot of owners, there’s a sadness to this that they feel a little more disconnected from the team. And so don’t be surprised if you’re entering into this stage, that you’re feeling a little bit of that. So it’s exciting to be growing and to have more structure in your agency, but it’s also hard to acknowledge that things are changing.


  The decision-making at this agency size also starts to change. So at the 12 to the 20 stage of the 12 to 35 range, now, all of a sudden the agency owner is introducing… And by the way, this is hard for owners. Is introducing what I call the one, two, three level of decisions. And what that means is level one decisions are, hey, everybody, we have a decision to make, gather round I’m going to describe the decision to you. We’re going to vote and whatever choice wins democratically amongst us all, that’s going to be what we go with. That’s a level one decision. A level two decision is, hey, I have a decision to make, I want everyone’s input, but I’m going then make the final decision. And a level three decision is, hey, you guys, I made a decision that I want to tell you about it.


  So at 12 and smaller, almost every decision is a level one decision. Let’s make it as a family. Let’s make a democratically, but at this stage, especially as you get closer to 20 people or larger. Now, maybe 10% or 15% of the decisions are really a level one decision. There’s a lot of level two decisions, and there’s probably another 20% of decisions that are level three decisions. By the way, guys, I made a decision, I want to tell you about it. So this is often a shifting culture for an agency, and it’s good to talk about it as you’re going through it so that everybody knows what to expect. Because the first time an agency owner comes back and says, hey, I made a decision. And the team is like, well, we didn’t even know that decision was on the table and I have an opinion about that and I want to talk about it.


  That’s annoying to the