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The Tao of Digital Agency Profitability

By 17th July 2019 No Comments
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It’s 2019, and despite years of people espousing the death of the “digital agency”, the industry is thriving and confident. Amazing work continues to be produced by top digital agencies around the world, and clients continue to hire agencies to complement their internal teams, in particular when creative or technical innovation is required.

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And not only that, well managed digital agencies are producing world class work whilst also achieving strong profit margins. Yes, it is possible to balance the creative Yin with the operational Yang. But it requires focus and discipline. And maybe a little luck.

Our objective for this article is to distill and understand the main drivers of agency profitability, and provide tips, tactics and techniques that agency leaders can put into practice in their own businesses.

To do this, we asked the leaders of ten digital agencies from the SoDA membership for their secrets of success in the pursuit of healthy profit margins — what has worked for them, what hasn’t, and for any surprising insights and ideas they can share.

SoDA is a member-based network of 100 of the best digital agencies in the world, many of whom are globally renowned for their creative and technical innovation. Lesser known is the amazing talent in the management, finance, operations and sales teams of these agencies, who work in support of their creative endeavors.

The agency leaders we interviewed have run or are still running some of the best digital agencies on the planet. Half of those interviewed have had their digital agency be acquired, whilst the other half continue to work in and grow as independent agencies. Some run global agencies with offices around the world, others are based in one location.

A common thread with the agencies we interviewed is not just the financial discipline, but the quality of the work — with awards including the Emmys, Cannes Lions, the Webby Awards, One Show and pretty much anything else you can imagine. Financial performance and quality work are not mutually exclusive!

After we received the interview responses, we compared these against the SoDA 2018 KPI Benchmark Study, a detailed annual survey that saw 61 digital agencies provide data against hundreds of key metrics. We isolated the data for global averages and top performers and used this to provide benchmark figures, which are highlighted in grey throughout the article. The global average for EBITDA performance was around 10% while top performers delivered margins of 20% or more.

The result of the interviews and qualitative research are eight Key Drivers that we believe drive superior agency profitability:

  • nurture repeat customers
  • reduce project cost overruns
  • maximize billable utilization
  • have keen financial discipline
  • build a strong sales pipeline
  • develop a capability for low cost delivery
  • manage your ratio of billable vs non-billable staff
  • value your people and culture

Each section below includes a description of how that Key Driver impacts profitability, how to measure the impact, and ideas for improving performance in this area.

Acknowledging that there are many flavors of digital agency, we hope that the ideas below will create some awareness of how profit can be maximized, and spark inspiration and action.

Let’s get started!

Nurture Repeat Customers

If you want to improve profitability in your agency and have time to do only one thing, do this. Almost all of the agencies who collaborated on this article recommend increasing the amount of repeat business you get vs pitching for work with new clients.

Long-term client relationships results in higher profit for the agency than individual projects, in part due to the trust that builds with the client (allowing your agency to charge appropriately for your services), and also for the reduced new business costs of pitching. Win rates when bidding for work with an existing client are typically twice as high as with new potential clients, and so the cost of pitching and losing is drastically reduced.

As Bill Fritsch, former Chariman and CEO of Digital Kitchen says:

Serious profitability comes when clients value your work and feel valued by your team. When they prefer working with your organization versus other firms, clients are more willing to work in partnership and to pay more for your service.

A good benchmark is to have over 70% of your annual revenue from existing clients (i.e. clients that were already a client last year) and the remainder from new clients you have won throughout the year.

There are both “hunting” and “farming” components to growing repeat business:

Hunting: when your agency is invited to pitch for a new piece of work, in addition to your other qualification questions ask yourself whether this is a project or an account that you are bidding for. Ideally if your pipeline is strong enough you can turn down opportunities that are project-based, and concentrate your energy on those that could have long-term potential.

Advice from Russ Whitman (founder of Ratio, acquired in 2017 and now Managing Director at Globant is that when bidding for new work, change the conversation from talking about “projects” to “partnership”. Once you have won the project, Russ says “your #1 goal is to sell the long-term rolling program”.

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Arming: keeping and growing a client account requires excellence in project delivery, and so the Project Manager becomes a key role in the business. Some agencies have a compensation plan to incentivize Project Managers based on profitable project delivery as well as growth of revenue with their clients.

Naturally, the PM needs to be surrounded by the right team to guarantee quality delivery. UK digital agency Red Badger take this very seriously, and as Cain Ullah (founder and CEO) says, they —

will only take on a new project if we can resource it with a high quality team with the appropriate blend of experience and resources that have worked on previous Red Badger projects.

Swift resolution of issues is also important. At one of Bill Fritsch’s agencies —

we created a special FIRE ALERT line. If clients had hot issues, this line would be answered 24/7. And whoever was on the Fire line was rewarded for getting answers so clients didn’t have to sweat.

If you are delivering projects well, and managing issues swiftly, you should hopefully have earned permission to ask for more work from that client. As Bill suggests:

encouraging clients to do more with your firm can be as simple as training people to “always have an idea” that leads to the next thing. We developed a reward system that gave significant bonuses to client teams that turned the first project into a second opportunity before the first project was delivered. And an even bigger bonus for winning a third assignment in the same period of time.

A critical aspect of increasing client loyalty, longevity and revenue is to keep in touch with how happy they are with your agency. A client survey on a regular basis can help to benchmark client satisfaction and keep people in the agency focused on continuous improvement. The most common method is using an NPS score to track client satisfaction, along with a number of qualitative questions you could include in a (short) client survey.

This doesn’t replace regular face-to-face discussions with the client of course, whether in a formal or social setting — and this is also something you can set a goal against and measure — all of your most important client accounts should see you personally at least once every few months.

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