Episode 365

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We’ve all been hearing it: a storm is coming. Or maybe it’s not. Depending on who you ask, we don’t know what our economic future holds. But one thing is for sure, if you stay prepared with recession planning, regardless of what the economy is doing, you can hold strong against those unexpected changes much more easily.

In this solocast episode, I will share with you the best ways you can start recession planning even if your agency is financially okay right now. It’s never the wrong time to start looking at how you can operate better, earn more profit, and keep great clients and employees, no matter the economic outlook.

Instead of waiting out the economic storm and wishing you had been better prepared, start making changes today and know that you have the power to pull yourself through anything while still making a profit. You just need to be smart about it.

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.
recession planning

What You Will Learn in This Episode:

  • Things you should already be doing for recession planning
  • Why you should be raising your hourly rates
  • How to prepare yourself against a longer sales cycle
  • The importance of renewing contracts and locking in good clients now
  • The good and the bad of employee staffing during a recession
  • Why having too much money in your agency is a bad thing
  • The importance of maintaining a good attitude with your team
  • Why you can still be profitable even if there’s a recession

“Remember, during a recession, it's not that you won't sell things, but everybody is going to be slower to decide.” @DrewMcLellan Click To Tweet “Even though everyone's thinking about tightening their belt, this is not the time to stop investing in education for your best players.” @DrewMcLellan Click To Tweet “You need to use the agency as an ATM, get the money out of the ATM, and put it in other places that will grow for you and your family.” @DrewMcLellan Click To Tweet “You grossly underestimate how much your team pays attention to you and draws their feelings about the business, and even the industry based on how you are.” @DrewMcLellan Click To Tweet “Most of you lived through and survived the pandemic. So your agency is resilient, strong, and going to get through whatever economic thing is thrown at us next because you're smart and you run the business well.” @DrewMcLellan Click To Tweet

Ways to contact Drew McLellan:

Resources:



Speaker 1:

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

Drew McLellan:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And I’m not suggesting that all of these decisions are made with no heart. I am not suggesting that. I have made plenty of heart decisions, but honestly I’ve also paid through the nose for some of those heart decisions. And some of the