“It measures everything, in short, except that which makes life worthwhile”


Why you need more than a P&L to understand Agency profitability. Part 1

Robert Kennedy’s quote was a pretty good response to a recent think tank proposal that costed the loss to the British economy of a bank holiday. Seemed to sum things up nicely. It also made me think a little about how successful management accounts are at measuring what makes agencies profitable.

In order to understand why an Agency is profitable the P&L is the tip of the iceberg, the starting point. Revenue minus costs is the easy part. Trying to figure out and explaining why revenue and costs are what they are should be the challenge facing Finance Directors.

That’s not to say the humble P&L can’t offer you some instant insight into the fundamentals. Starting with revenue, staff compensation and operating profit numbers you can easily work out your per head metrics. This will give you a direct comparison with your competitors and will highlight areas of strength or weakness.

Even armed with information on your relative performance won’t enable you to answer the fundamental question about profitability. It will point at where you should be looking at improving performance but what drives revenue and costs?

Building long term, profitable client relationships with a happy, well-motivated team is the answer to a profitable agency but how do you measure this?

The lifeblood of an agency is the new business pipeline and the value of this pipeline over time along with the conversion rate are key drivers for any agency. In addition tracking the reasons for failure will help sharpen future proposals. What weight you put against a proposal is up for academic debate but as long as you are consistent it is the trend over time you’re interested in. It’s such a simple thing to measure and vital to your future profitability but it needs to be front and centre in reporting.

A happy, well-motivated team is vital to the intangible culture of the agency as well as saving time and money by not having to constantly replace people who leave along with the client and agency knowledge they’ve accumulated. Whilst some churn is not a terrible thing if it gets too high it will eat into your bottom line. Short of polling everyone whether they’re happy each week you can and should measure staff churn. I would also go a step further and measure churn of your star performers who have left to go to a competitor as well as total churn. Learning why people who you would want to keep have left to go to another agency has to be important to know – is it money, career prospects or culture that drove them away or attracted them?

The above are by simple to measure. As an FD making the time to sit down with the new business team or the HR manager to measure these pipeline and people metrics is as important to the long term health of the agency as the monthly accounts.

I’m an experienced FD of marketing services agencies. If you’d like an initial chat about how I could help your agency be more profitable then please contact me on .

How to prepare for a successful Procurement meeting

Person pressing head against wall“It usually takes me more than three weeks to prepare a good impromptu speech”

Mark Twain

Procurement meetings are a routine part of the Agency FD’s diary these days. Whether it’s new business or annual reviews they are part of the furniture now. I’ve written before about how important it is to treat this as a positive development but this isn’t to ignore the fact that this is a negotiation.

Negotiation is a skill in itself and requires a broad range of inter-personal skills. Most of these can be improved on over time with training and experience but in the short term there is only one way to improve the chances of a successful outcome and that is to prepare. And then prepare some more.

So far, so obvious, but I’ve been in too many meetings to miss the opportunity to repeat this. Preparation is your best bet to level the playing field. Your procurement manager has the purchasing power as well as the specialist skills. You have the detailed knowledge of your agency, your pricing and your operations. If it’s important enough don’t have the meeting until you know your subject better than anyone in the room

Only by being all over the detail will you be able to negotiate effectively. To do this you need to understand the following;

Operations. Unless it is a very simple, linear project there will be variables. Is it possible to alter the scope of work? Only by talking to the people doing the work will you be able to work this out. It’s not a spreadsheet exercise. One simple example of this was when we were able to cut the scope down from 3 templates to 1 master template plus amends. By changing the scope of work we were able to fit into the client’s budget but still preserved our margin.

Margin. It’s vital you understand the likely effect on margin. This has to be done on a marginal basis. What revenue will this bring in versus any additional costs? Don’t look at the cost per hour. Once you know your likely margin you know what you can and what you can’t give away. I also much like to talk to talk about fee reductions in terms of the effect they have on margin. 10% fee reductions can sound reasonable until you realise that could be over 50% of your net margin.

Documentation. If you’re properly prepared you will have plenty of spreadsheets, word documents or presentations to choose from. Think carefully about what and how you show this information. You have to tell a clear, convincing story. Especially if is a mixed audience I would try to keep detail to a minimum.

Negotiation. There are many simple rules about negotiation skills. I have some of them written down and laminated on a card in my wallet. Some of them I agree with, some not so much. Find what works for you and use that – being natural will always be more comfortable and more effective. However (apart from preparation) there is another golden rule which is always ask for something in return. If your client wants something, usually a lower price, then ask for something in return. It may be a longer term relationship, payment up front or a longer termination period. If you don’t ask you don’t get.

Realism. Don’t expect to “win” the negotiation. You are going to have to give something away. You need to be in control of what you give away and what you ask for in return. Both parties walking away happy is victory. Think about what your procurement manager needs to achieve and work towards that aim.

It’s a messy business sometimes and the answer won’t pop out of any analysis. You will need to think on your feet about what to agree to and what you need to time to think about. You will need an appreciation of procurement’s target and knowledge of how your agency can deliver that and still deliver a good margin. Square that circle and you’ve done your job well.

The author has spent a large part of the last two decades working towards procurement targets. Never really got there. If you need some help with procurement please email him on