Keeping it Simple

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As shops grow, they become more complex. They have more processes, procedures, and layers of management. Some of this increase in complexity is necessary, but it’s easy to add too much too quickly. This complexity surplus adds friction throughout the company. It leads to more difficult revgen, inefficient production, and bloated support. BUT, If we remove too much complexity, we’re left with ineffective revgen, production unknowns, and a lack of support.

Our goal shouldn’t be to remove all complexity from an agency, but to find that perfect balance that makes growth smooth.

During growth, the correct level of complexity changes, so there are times when taking on additional complexity in anticipation of growth makes sense.

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How Complex is Your Agency?

There’s no straightforward way to quantify agency complexity. Back in my Wall Street days, I’d use proxies like the number of SKUs, supply chain participants, or even the length of 10-Ks to get a sense of how complex a company was. Agencies don’t have those things.

To assess an agency’s level of complexity, I compare a suite of metrics to other agencies of similar sizes and shapes. AKA, benchmarking.

The metrics in our benchmarks can tell us a lot about how efficiently an agency is running. They give us a sense of how far away an agency is from its optimal level of complexity. When looked at together, they can also tell us where inefficiencies live within a shop.

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Efficiency Metrics

One of the main top-level efficiency metrics we look at is revenue per full-time employee (Rev/FTE). Since this metric can be easily influenced by hourly rates, we need to take those into account when analyzing it.

We expect Rev/FTE to be around $175k for average growth and $200-250k for high-growth shops. This has risen significantly over the past few years with pricing tailwinds from pandemic demand. Back in 2019, the average was around $150k.

Related to Rev/FTE, we also look at employee composition and roles at certain sizes. Over the years, our research has revealed general patterns for when it’s appropriate to bring on certain roles. For example, adding a dedicated HR role too early can introduce a significant amount of unnecessary complexity. This drains resources from higher-priority areas and ultimately slows growth.

Client tenure and average active clients are also great indicators of complexity. Finding and onboarding new clients is expensive in terms of both time and money. In addition, servicing a large number of clients is often more complicated from a system standpoint than serving a few. From our survey work, the average digital agency client sticks around just over two years.

Finally, the end-product of efficiency is your profit margin. Monitor your gross, operating, and net margins and they’ll guide you towards inefficiencies. With a LOT of caveats, we typically see average gross margins around 45%, operating margins around 20%, and net margins around 15%.

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Taming Complexity

Now that you have some tools to detect inefficiency, what can you do to tame it?

If Rev/FTE is low, the first place to check is pricing. If that’s too low, this metric can get nasty fast. If your pricing is in-range, you can then look deeper into team structure, utilization rates, and workflows. One of the most common issues we see is overstaffing on production relative to the amount of work coming in. Accurately forecasting work and capacity adds complexity but it reduces overstaffing.

A good rule of thumb to ensure your employee composition is solid is to only hire when the lack of that position is the next growth blocker. Pre-hiring for either support or production slows growth. It saps resources from real growth blockers (often revgen) and weighs on margins and cash flow. A metric-based hiring roadmap (part of our Comprehensive Growth Evaluation service) can be a huge help here.

The first step in improving client tenure is to ensure your team’s doing good work that meets or exceeds client expectations. Sales and production need to be in sync here. We often see sales overselling what’s possible which leads to poor client relationships down the road. Investing in quality account managers who are in regular contact with clients will almost always improve client tenure. Additionally, the owner (or strategist if you’re large enough) should be jumping on regular check-ins with key accounts to discuss the future of their business. This is less about selling additional services, and more about exploring future challenges and solutions. Again, we’re trading a small increase in complexity in one area(meeting with key accounts) for a large reduction in complexity in another area (backfilling churned accounts).

As far as margins go, if you have accurate pricing and the correct roles for your size, the culprit is likely low utilization. While we’ve all seen salary pressure recently, this is fixed with appropriate pricing. Low utilization can destroy margins. To address it, start with making sure you’re accurately measuring it. This is the only argument for tracking time, but it’s a good one. If you’re accurately measuring utilization, first make sure you have the work coming in to keep production staff 85-90% utilized. If you have the work coming in, take a deep dive into how production spends their time. How many meetings are really necessary? How efficient are the meetings? When are the meetings scheduled (mental switching costs are significant)?

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Bureaucracy as a Last Resort

Notice that in the entire section above I never mentioned “adding process.” These should be the last thing your team thinks about. We work with shops in the 15-100 FTE range, and most of them spend too much time designing intricate processes and procedures that just need to change next month anyway. It’s much easier to create another google doc that no one will ever read than it is to find and fix the real issue.

Structure is important but be careful not to add bureaucracy before it’s necessary.

Adaptability

An adaptable agency will outperform a rigid one over the long term. This is especially true when the environment’s rate of change is high. To stay adaptable, keep complexity to a minimum.

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