Growing pains: How to avoid the 10 biggest mistakes agencies make while growing

John Reese, SVP of marketing at Mavenlink, lays out the common set of challenges you can prepare for to be successful in today's business environment

Whether you specialize in branding, media relations, content marketing, digital advertising — or all of the above — there is a growing demand for marketing services. In fact, it’s an incredibly exciting time to be at an agency. There are forces in the economy driving increased demand for your services, and there is a tremendous amount of opportunity to build and grow your business.

However, the dirty little secret is that growth is actually very challenging. It’s exciting, and it’s scary. Or as some like to say, it’s the best worst problem to have. That’s because growth impacts all of the dynamics in your business. For instance, it will change how work gets accomplished, who’s managing initiatives, how resources are distributed, how much money you make on each project, and the laundry list goes on.

In the past, you could wing it and get by. Today’s business environment demands speed, resourcefulness, and agility, and unprecedented access to information and global resources is putting tremendous pressure on your margins.

So, what can you do? Here's a common set of challenges you can prepare for:

Mistakes #1-3: The People Pains

This is an obvious place to start. At an agency your product is your people, thus you must invest in a capable team to deliver work. There are three main blindspots agencies should look for when hiring to meet growing demand for their services:

  • Mistake #1 — Incorrectly forecasting staffing needs. As your business grows, you either need more people to staff the workload or you need to increase your current resources utilization rates. Many team leaders look around and see a productive team and incorrectly jump to the assumption they are at capacity, thus the knee-jerk reaction is to hire when new business comes in. Avoid making such rash decisions, and instead invest in tools and processes that will help provide true visibility into the utilization of your team. Increasing the utilization of every person on your team by one hour will increase profitability exponentially. Of course, teams can also be over utilized. When revenue justifies the cost, you should be ready to hire. This will help you avoid the flip side of this issue — which is burning your people out.
  • Mistake #2 — Hiring full-time staff for short-term needs. This means you hire a web developer, for instance, because one client requests a six-month web development project. The more appropriate route would be hiring a contractor to fill this short-term, specialized need. Hire full-time staff when the work need is both long-term and provides unique value by virtue of the role being in house.
  • Mistake #3 — Hiring the wrong people. This typically stems from hiring too fast. The person can do the job — but are they a good cultural fit?  Some estimates put the cost of hiring the wrong employee at up to $50,000 per instance.  Make sure your candidate can not only do the job, but also integrate well with the team. Relaxing your hiring standards to meet an immediate need can sound enticing when the hiring market is tight, but in the long run it will hurt your business.

Mistakes #4-7: The Profit Pains

Although growing an agency translates to increased revenue, this doesn’t necessarily result in bigger profits. Here are some of the profitability challenges growing agencies face:

  • Mistake #4 — Introducing new services without a good reason. The wrong reason to introduce a new service is because a client asks for it, or even worse because your competitors are offering it. Introducing new services almost always comes with new costs. Reality is, you are rarely profitable with new offerings until you have a few projects under your belt. As agencies see potential dollars for services outside of their existing swim lane, it's natural to explore growing horizontally. Successful agencies calculate the cost that leaves them with comfortable margins before embarking on something new.
  • Mistake #5 — Taking on unprofitable work. This growing pain stems from taking on work you can perform, but doesn’t drive profit. Avoid saying “yes” to every request your client asks. Step back and consider: Will this work drive a profit, or will it potentially leave you breaking even or operating at a loss? Many agencies need to look at profitability across departments or client portfolios, which means having an understanding of the margins that every project brings in to your agency. Then you can do more of the work that makes you money, not just work that brings in revenue
  • Mistake #6 — Saying “yes” to work you can’t deliver on. Every agency has a core competency. As they deliver great work, they build trust with their clients who then increase their spending and project scopes. Without considering if they have the ability to deliver on this work, many agencies are quick to say “yes.” When the deliverable doesn’t meet client expectations, a lot of non-billable time is often spent trying to make things right and preserve the client relationship. This cuts into margins.
  • Mistake #7 — Not giving financial control to your day-to-day people. Most agency people think about their contribution to the team in terms of billable hours. They enter their hours in a time-tracker and at the end of the month, the accounting team delivers a report on the overall profitability of a client or specific project. Having a disconnect between the day-to-day team and the real-time financial implications of their actions, is a missed opportunity to keep everyone empowered, and accountable for profitable results.

Mistakes #8-10: The Process Pains

The same tribal processes that work for small teams break down when they turn into larger agencies. This means a healthy, consistent audit of processes is necessary as your agency grows.

  • Mistake #8 — Not having a formal statement of work (SOW) process. Unlike proposals, a SOW is meant to be detailed. They build trust and set expectations between the agency and client. Avoid using cookie-cutter documents for SOWs. If you aren’t customizing your SOW in detail, you are missing the opportunity to ask the important questions and reveal the true needs of the clients, and that is as bad as not having one.
  • Mistake #9 — Bulk resource scheduling. This is the idea that you distribute hours to your team every month, that are then tracked in a system and due at the end of the month. The risk here is inaccurate tracking. If you schedule 40 hours for a project, and perhaps your resource spends 30 or 50, they will still likely enter 40 because that’s what they were allotted. This results in serious margin leakage, and you may consistently under-budget work.
  • Mistake #10 — Not tracking the cost of new business. The best and brightest agencies spend the bulk of their time winning new business. This can be new projects with existing clients or courting new clients altogether. Rarely does anyone manage the financials of these endeavors. Do you know how much time, and money, you spend winning new business? When you compare this to the value of the new business you won, are you really making money? To drive true profit, you must know the cost of winning new business.

Project and financial management tools can help you avoid these common mistakes of growing agencies. Which tools you select are up to you. The major takeaway is that if you are growing, these challenges will crop up. Will you be ready to avoid the growing pains?