Most agencies are set up out of passion. Founders want to be in charge of their own destinies and making waves in the industry. These are rarely businesses set up for purely commercial reasons. Yet, obviously, they need to run at a profit and have commercial strategies in place. How do agency leaders marry the two together? And is the Holy Grail of £100k per head really worth pursuing?
My advice to agency leaders is consistent. Run the agency in a way that either achieves your financial objectives or run it in a way that makes you want to walk in through the door every day. What does good look like to you? Because there is no right or wrong when it comes to success, the same applies for a ‘successful’ agency.
However, one thing that often crops up in conversation is the ‘Holy Grail’. This refers to an agency achieving £100k in gross profit or revenue per FTE resource across the entire agency (so includes non-fee earners).
For example, in an agency that has an FTE count of 20 people, the gross profit should be £2m. The other ratios that should run alongside this include the percentage of total salary costs to gross profit (aim for 60-65%) and your overheads, which should be around 20%.
Is it worth the chase?
This is not actually a bad measure to aim for. However, it could affect that fun, care-free atmosphere of an agency, once added to the mix. I said earlier, most agencies start out as passion projects. Nobody was really looking for high profit margins or thinking about selling. And if your sole aim is finding this Holy Grail, you need to run your agency within very strict commercial parameters. Which is absolutely fine, if you’re willing to do that. But it’s not often something that runs parallel with the hopes, dreams and aspirations of founders.
I regularly converse with agency leaders on the Holy Grail of £100K per head. If selling the agency at some point in the future is on the agenda, then this will be just one of the KPIs that a prospective buyer will be interested in. To be ‘sale ready’ the agency will need to be commercially and operationally disciplined to achieve the KPIs required to get the valuation.
If they aren’t looking to sell the agency and are happy for the business to achieve 10% EBIT (earnings before tax and interest) with a smiling and somewhat more relaxed workforce, that surely has to be a good thing!
The number one KPI is to be doing what you love.
After that the KPIs that I would always be looking at are:
- GP per head
- Cost per head
- Staff cost % to GP
- Overhead % to GP
- Close ratios
- Number of hours sold across disciplines
- Recovery / profit by client
- Recovery / profit by type of work
If you’re on top of these and are managing them to your objectives then you will always be in control of your agency.
It’s never going to be easy to strike that commercial and creative balance. Setting up an agency is often done ideologically. The commercial aspects start to pinch as the agency grows and develops. I would never advise anyone to seek the Holy Grail unless they have an absolute laser focus on commerciality (and if they do, then all power to them). You’ve got to run your agency your way. The rewards may not be as financially impressive but they will be much more in line with your initial vision, which is a reward in itself.