Preparing your agency for recession should be high on your list of priorities. The media is abuzz with recession talk at the moment and global economic challenges are plain for all to see.
The end of the mining investment boom, uninspiring government economic policy, sluggish domestic economic performance and global economic headwinds are, according to the experts, key indicators that a recession may well be on the way.
Australia has enjoyed consistent economic growth since 1992, even managing to maintain growth through the 2008 GFC.1 But as business people, it would be foolish to ignore the signs.
Although Australia’s experience of the GFC was tame by world standards, the GFC may well have been the toughest period many Australian businesses have experienced over the last 30 years. Most agencies are younger than that, which means than many of these businesses have ‘grown up’ in a relatively easy economic environment, fuelled by huge changes in the marketing landscape. In this period, business has embraced the digital transformation, providing opportunities aplenty. The marketing sector has benefited tremendously as businesses have had to invest in specialist services that they never needed before.
In a recessionary or even slowing economy, the commercial environment changes markedly. If as a business owner you do nothing do deal with these changes and expect it will be ‘business as usual’, you could get a big shock and your business could suffer quite significantly.
So it behoves every business person to build an understanding of what circumstances might be, how to deal with them in their business and take the necessary steps to harden their business accordingly. Such measures generally represent good practice and will not harm your business but strengthen it, should a recession not occur.
Will a recession occur? That is very hard for the experts to predict. I’m a business person not an economist. I understand that the best course is to make preparations for the worst and hope for the best.
What happens in a recession?
Technically, a recession is defined as two consecutive quarters of GDP (Gross Domestic Product) decline. In this period, consumer and business spending is reduced and it is a time of economic uncertainty. Consumers will conserve their cash and hold back on spending. Businesses will cut expenses wherever possible as a way of stretching their cash. This results in a slowdown of economic activity throughout the economy indicated by:
- reduced investment spending
- capacity under-utilisation
- reduced property values
- increased business failures
- increased unemployment
One can expect the media to focus on shock headlines and no doubt, social media will have a field day with high-impact, click-bait headlines, all spreading doom and gloom.
Whilst businesses will still engage in marketing, expect them to be doing this on tighter budgets and with less enthusiasm. They will be looking to do more with less and will take longer to make decisions and to pay their bills.
What does this mean for agencies preparing for recession?
Here is a list of things you should expect to see:
- Average client spend will reduce
- Client buying cycles will extend, or put differently, it will take longer to win business and it will be more tightly contested
- Clients on fixed contracts, may try and renegotiate or reduce services and costs
- Clients may take longer to pay their bills
- New projects will be fewer and further between
- There will be more competition for new business, and new prospects will have more buying power
- Bigger agencies may do some downsizing and redundancies may result
- High staff wage demands will stabilise or come off
- There will be more people looking for fewer jobs
Clever business people will be able to take advantage of the situation as their competitors take strain.
In summary, in a recession, you are looking at a significantly more lethargic, lower volume market, with profit margins under pressure.
What should you be doing to minimise the impact of a recession?
You need to think and be smart. At some point, the economy will recover and the actions you take going into a recession will have a big impact on how you emerge. What you definitely don’t want to do in preparing your agency for recession, is to damage your long term outcomes with poor short term decisions.
The first order of business is to put your business on a sound footing in relation to your clients. This means reducing or minimising risk and uncertainty and securing business.
This comprises two steps:
1. Manage Client concentration
It is highly undesirable to have too much of your gross profit (GP) originating from any single client. The rule of thumb is no more than 25% from a single client and many would consider even this as extreme. A client that is responsible for a disproportionately large proportion of GP is sometimes referred to as a ‘gorilla’.
Ideally you want say 10 clients, each contributing 10% of your GP or less. 20 clients each contributing 5% is better.
Here’s how this works:
Ideally your GP should be used in the following proportions: 55% to cover staff costs, 25% in SG&A (sales, general and admin) expenses leaving 20% as EBIT (earnings before interest and tax).
If you have a gorilla client and something goes wrong with them and they drop out, then you no longer have the 100% GP you otherwise would have. You only have 75%. This will zero out your EBIT and may force you to have to take some drastic steps to try and get through. If your agency is operating at a lower EBIT, then the EBIT percentage of GP or EBIT/GP ratio should define the maximum contribution of a single client. For example, if your agency’s EBIT is 17% of GP then any client approaching 17% contribution to GP should cause the danger flag to start waving.
This is not to say get rid of your gorilla. But you need to understand your risks and take appropriate steps to mitigate them. You should be aiming to keep all client contributions at an approximate parity level and not let a single client have the power to cause havoc in your business.
It’s good practise to keep a client contribution schedule that you keep up to date every month. In this schedule you include and rank:
- The GP contribution by client for the current/past month
- The EBIT contribution for the current/past month. This assumes that you have adequate and appropriate expense recording in place, which you should have anyway.
- A 3 month rolling GP and EBIT forecast for all clients
Use this schedule actively to manage your client mix.
2. Invest in your existing clients.
Holding on to clients in a recession should be an important focus. Once they stray and potentially start working with a competitor, then it could be really hard to get them back or find another client to take their place.
In busy times, when there is plenty of work, one can get by without the need to invest too much in client relationships, because work is abundant. In times of recession the opposite is true. You need to exhibit commitment to your clients and demonstrate it. Invest in building your relationship and your value to them. This does not need to cost you much but it will bring you closer to them, increase your presence in their business and make you more relevant to them.
You should be devising ways in which you can provide value beyond client expectations. If you can inject some ‘wow’ factor into the relationship you will increase client loyalty and potential referrals.
Other important initiatives to consider to prepare your agency for recession:
Build an anti-recession war chest
In times of economic and business uncertainty, it is quite possible that you could have one or two months of slow, loss-making business, over and above the normal seasonal variations that should be part of your planning in the normal course of events. The likelihood of project delays or cancellations and tight cash flow all increase under recessionary conditions. Not only is it important that you are on top of your cash flow but that you have the means to bridge any cash gaps from your reserves.
How much should you have? Ideally, about 3 months of cash outgoings, but there is no hard and fast rule. It’s a judgement call.
If you are thinking about establishing a line of credit for this purpose, think carefully. In a worst-case scenario, where you have used your line of credit and the business is unable to satisfy the terms of the arrangement, don’t expect mercy from the banks. The business’s directors will be responsible one way or another. So you could end up with a personal financial crisis.
Build strategies to win the competition’s clients
Not all agencies will survive a recession and others will thrive. Not all agency owners have the management ability they really need to get through tough times. Such agencies may fall prey to some of the issues outlined herein. These are opportunities for you.
But you need to be in a position to be able to capitalise on such opportunities. Realise that there will be any number of competitive agencies available to do work for stranded clients. They will not come looking for you, so at the very least maintain your visibility and your marketing.
Better still, devise some strategies not only to take advantage of such opportunities but to create them.
The one thing you know for sure is that a business that is using the services of a competitive agency is in the market. It is entirely possible to win their business simply by appearing stronger and more valuable. A recession gives you an opportunity to make that case much more strongly. Make the opportunity.
Manage your agency by the numbers
With business volume and margins likely to be down, things will be more critical and you will need to manage accordingly. Many agencies that I come across, are able to get by comfortably without the need to manage their businesses tightly. The buoyancy of the market and their ability to sell at a premium can provide enough head room for this practise to be viable, if perhaps unhealthy in the long run. For many, managing by the numbers is simply too hard and their agency is able to get by without the operational disciplines such practices impose.
But when margins are tight, things need to be managed more closely. Any cost overruns will eat into already tight margins and within a relatively short space of time, the business could become unprofitable.
If there is inadequate operational management, this issue could sneak up and become critical before you realise what is actually going on and are able to take steps to deal with it.
To manage your agency better, you need to manage it by the numbers. You need to have the operational disciplines and metrics in place and watch them closely.
The regular reports your accounting system generates are not what you need. You need a set of metrics that will give you timely input that you can make quick decisions with. Productivity, cash flow, client acquisition cost and sales pipeline value are some you should focus on.
This is not a matter for your accountant. This is a matter for you.
Focus on your core competencies
Clients needs can be broader than your agency’s core competencies. Some agencies like to operate as a ‘one stop shop’ by offering anything and everything, using white labelled or outsourced services to deliver, or even employing people without fully committing to make their speciality a core offering. In a strong market, over time and with the right leadership, this can lead to a strong competitive position and good revenue growth. But in a recession, it’s generally a bad idea.
Your highest levels of profitability are going to come from services where you have the highest expertise coupled with the lowest cost of delivery. In other words, where you are most efficient. This gives you the opportunity to not only maximise profit for the lowest risk, but to double down on the focus you need, to keep your agency strong and secure.
Concentrate on business development – your most powerful anti-recession measure
It always surprises me – no astonishes me – how much room for improvement there is for client acquisition and business development in the agencies I talk to. If you think of how you plan and manage a client project such that you deliver the required result, well, that’s a bit like how your business development plan should look, only better.
Businesses that thrive in recessions are lean, focused and pursue new or incremental business opportunities proactively, aggressively and efficiently. They tackle the market consistently and with intent, having invested time and energy in the same way as they do to develop their technical skills. This ability needs time to evolve and develop. There is a lot involved and it’s not usually something that the owners of smaller agencies have much knowledge of or experience at. So don’t think you can simply turn it on.
Many agencies, particularly those between 5-10 staff operate on the feast or famine principle.That means that only when things slow down or when a client no longer has a need do they put focus on business development. So the business has a see-saw existence easily visible in their financial results. In a recession, such an approach is likely to be terminal. In a recession, don’t expect to engage in a spurt of activity and come back with sufficient new work to tide you over for the immediate term. It just won’t happen.
Your commitment to and focus on client acquisition is the survival/growth fuel your agency needs, just like your car needs petrol to go.
If your agency’s client acquisition capability is not vigorous and productive but at the same time steady and reliable, then you have a serious flaw that you should deal with. Not only is this vital in a recession but in good times too. And here’s why:
In a recession, sales opportunities become rarer and much more protracted. If you do not have a well implemented client acquisition system then this is what you are vulnerable to:
- Prospects will be able to shop around more. They will be exposed to other competitive agencies that potentially have better business development capability and your success rate could diminish
- Sales will be a lot more protracted. Everyone takes longer to make buying decisions in a recession. Fact. Your needs in terms of jobs and clients remains constant. The only way to combat the slower progress of sales is to have more opportunities in your pipeline. In this way even though they may be moving more slowly, you have more activity so that you can maintain your revenue momentum. You need to have the capacity and methods to get sufficient volume into your pipeline.
Of all of the issues raised in this article, I consider this to be the most critical.
If building your business development capability is something you have on the back-burner, then I urge you to take action. Even if we avoid a recession, focusing and investing in your business development capability is the single most important commercial success ingredient there is.
Don’t think you ‘probably’ have it covered. The chances are that your idea of what is needed and what is really needed are poles apart. That has been my experience over 17 years of working in the agency space.
In the current climate, the probability of a recession is real. The advice in this article is all important.
But it comes down to one thing: what you do about it. If any of this is news to you you have your work cut out. If you value the work and investment you have in your agency, take decisive action. You can find out more about how to do that here.