Welcome to episode 69, with agency profitability expert, Marcel Petitpas in which we talk about the agency account manager’s role in making sure projects are delivered profitably in a creative agency.
He shared:
- the most common reasons agencies are unprofitable
- some examples of where agencies can tighten up
- what he’s seeing the most profitable agencies doing differently
- the importance of the account managers role in agency profitability
- and what he thinks of value based pricing.
There are lots of wonderful, useful nuggets of wisdom in this conversation and I found this discussion with him so valuable. Once you’ve listened to the podcast or read the transcript below, don’t forget to go over and see the resources that he’s provided. He talks about his toolkit and also the agency pricing quadrant.
A reminder that my next Account Accelerator training programme starts on 15th September and helps anyone in a creative agency account management position, and who is responsible for the agency’s forecast, to grow their existing accounts. If you’d like to learn more about the programme, go to my Training page. You can book a 20 minute call with me and we can see if it might be a good fit for you or someone else in your team. At the end of the podcast recording or transcript, you’ll find out what other participants have said about going on the Accelerator programme.
Transcript:
Jenny 0:02
Hello, and welcome back to the creative agency account manager podcast, I just want to give a quick shout out to anyone who’s been listening for a while and has taken the time to write to me to give me some feedback on the podcast. Also, for those of you have left a review on Apple podcasts. It really is amazing to get this feedback. I’m so pleased when people tell me that they get value from a podcast and that they’re finding the episodes useful. That was always my intention. Please keep the feedback coming as if you leave a review, it means more people can see it. So, thank you so much.
Today, we’re talking about the agency account manager’s role in making sure projects are delivered profitably in a creative agency. I’ve invited an expert Marcel Petitpas, and he’s going to talk to us about the most common reasons agencies are unprofitable, and some examples of where agencies can tighten up. He’s also going to share what he’s seeing the most profitable agencies doing differently. You might want to take a note of that. Also, the importance of the account managers role in agency profitability. He also mentions what he thinks of value based pricing.
Now, there’s lots of wonderful, useful nuggets of wisdom that he’s going to share with us and I really found this discussion with him so valuable. If you’re an account manager, or you’re running an agency, hopefully you’re going to get some value from it. Let’s go over to the introduction now.
Jenny 00:00
Today, I have Marcel, Petitpas, who is the founder and CEO of Paraketo, I’m really excited about this chat, as he has a consulting and technology company that helps agencies track the right metrics and improve their profitability. There is a huge need for this in the agency world. Marcel also happens to be the host of the “Agency Profit Podcast”. Marcel, a very warm welcome to the show.
Marcel 00:37
Thank you for having me. It’s a pleasure to be here, Jenny
Jenny 00:39
Marcel, we have chatted together before, and I’m really excited about delving into these questions, because they are super relevant to both agency owners and account managers. Shall we start by me asking, and you answering the question, how did you arrive at the decision to start Parakeeto?
Marcel 00:58
It’s a great question. I first became familiar with the challenge of answering what seems like a simple set of questions. When I ran my first agency, it’s the first business I ever ran, called Real Tours Media, we did real estate and virtual reality services. So 3d models of houses. This was back before technology was good to do this, whereas now, just about anybody can do it with their phone. At that time, I was asking myself these questions as a small agency owner, and it was painful to try and get a resolution. It was also hard to get answers to the nuances of how to measure these things. Questions like, what exactly is the gross profit of a service? What’s included? And what’s not included? What exactly is the utilisation rate for an employee? What’s included in their capacity? What’s not included? What exactly is a billable hour? These things seem obvious, but when you really dig into the nuances, it’s not very clear, there was not a lot of information on the internet, and there was just a handful of people that were talking about this. David C. Baker, Drew McClellan and Jody Grundon at Summit CPA. These were some of the people that had some of the early resources, but it really wasn’t at a level of depth that I felt I was able to get what I needed. So anyway, long story short, I was able to figure out enough to know at that time, when the real estate market wasn’t very good, there was not enough margin in my service for me to scale. So, I walked away from that business, and I became interested in software. A few years later, a good friend of mine, Jared, called me up. He runs a software development agency out of Boise called Royal Jay. He said, “Look, I spend hours every week in spreadsheets, answering these questions, there has to be a better way to do this”. We started chatting because I totally understood the problem. A mentor of ours, Dan, had also seen this problem time and time again. And that really was the jumping off point for us to say, “let’s start figuring out how to solve this problem”. It’s been a long and windy road, but I think we’ve arrived at a great solution.
Jenny 02:50
Amazing. So can you put in a nutshell, what Parakeeto does?
Marcel 02:56
I can try, we have three steps to solving this problem. The first is about auditing and assessing and making sure that the agency is clear on their strategy for how to measure things, because I think the conversation often starts at tools, right? We all think that the tools are the problem, but very rarely have we worked with clients where they had to change all their tools. Almost nobody has come into a sales conversation and said, I think I have the right tools, or I’m happy with my tools. The reason for that is most often what’s more problematic is there isn’t clarity on what’s being measured, why it’s being measured, what questions it’s supposed to answer, or exactly how it’s going to be measured. As well as at what levels of the business it needs to measure and how frequently.
Until those answers are clear, then we can’t really properly assess any tools or understand how to set them up to achieve those objectives. At first, we audit the agency and really get clear on how much profit is being left behind and why and how they should be measuring things to close the gaps. The second step is, of course, setting up a system that helps them track all those things in the proper way and make the best use of their tools. Then the last piece is an ongoing, almost like a fractional COO type service with a data team behind it. So just like a fractional bookkeeping and CFO type service would take care of all your finances, and you sit down with them every couple of weeks or every couple of months to look at the numbers and make strategic decisions. We do the same thing for the non-financial data in the agency, the time tracking and project management data, really helping to empower our clients with data that helps them really dig into the nuances and make better decisions in the business.
Jenny 04:35
Amazing. It sounds so thorough. And obviously it’s a combination of the tools you use in the background, but also most importantly the thinking. You’ve obviously had a lot of experience of working with different independent agencies I would imagine.
Marcel 04:49
Yes, that’s right. We have worked with some holding company agencies as well, but mostly independent.
Jenny 04:54
Okay, excellent. What are you typically seeing? What are the patterns that are emerging in terms of identifying the most profitable areas of these business?
Marcel 05:04
Well, it’s funny, because when you really think about the core of this business model, it’s very simple. There are only about three reasons that an agency is not going to be profitable. Then it’s just a question of isolating. Which one is problematic or which combination is problematic for that particular agency. But if you think about the fundamental math, it’s how much income does that agency generate? Then we want to make sure we’re clear on how much of that actually belongs to them. So, we’re moving past their expenses and ad spend and things of that nature. Then there’s the question of how much does it cost them to earn $1 of that revenue? And that’s really what we think about generally as gross profit, we call it delivery margin, as sometimes we get into fights with accountants about what gross profit means. We just use different language. But, generally where the problem lies, is in the relationship between the revenue that they earn and how much it’s costing them to earn that revenue. We’ll talk about a few levers in there in a moment. Then of course, lastly, is overhead. So, once they’ve earned $1 of revenue, they have a certain amount of money left over, they still have to pay for rent, lawyers, accountants, their website hosting, as well as admin salaries and founder salaries and often sales and marketing teams. That usually takes up anywhere from 20 to 30% of their agency gross income. So once that’s all been pulled out, ideally, there’s a profit margin left behind 20, 30, maybe 40% after compensating the founders.
Most of our clients come to us thinking, “oh, I spent too much money on my bookkeeping”, or I should use the $50 version of the software instead of the $100 version. The reality is, most of the time, the problem is spending too much money to earn $1 of revenue and they should be trying to spend less than 40 cents for every dollar that they earn of the gross profit margin level. There are a couple of different levers that affect that number, but that’s generally the core of the problem.
Jenny 06:49
Interesting, just a side question, that’s just sprung to mind. Agencies typically, and we could argue for hours on this I’m sure, we charge by the billable hour. But we shouldn’t be should we, because what we’re delivering is a lot of the time, depending on what kind of agency it is, is thinking and how can you put an hour on thinking and strategy and creativity? I’m just interested in your view on this. How many agencies do you come across that value price versus the traditional billable hour?
Marcel 07:25
I think I’m going to have a very different perspective on this than a lot of your other guests. Those of you out there listening and you and I Jenny – because we’re in the industry. I’m sure your feed is full of other agency experts. I love following everybody else in the industry. But I do feel like I’m constantly being bombarded with messaging that basically makes me feel like if I bill by the hour, or if I have hourly conversations with my clients, I might as well be riding around in a horse and buggy and faxing things; that it’s antiquated; that you shouldn’t do it; that it’s crazy. I don’t think that’s true; I think far too many people that are value-based pricing are not ready to do it. It is a very advanced pricing model and it requires you to have a lot of value in the sale that you’re making. Which is a contextual thing. It’s very, very hard to anchor your price to value if the value is not there relative to the client. The other thing is risk; if you’re going to value price, but you’re doing very risky work, with this contract model the whole idea of it is that you’re absorbing an outsized amount of risk in order to capture more value. But if the inherent risk of that type of work is high, you’re going to have to value price at such a high level that it might not actually be the most beneficial contract structure for you or the client.
So, in my opinion,
I don’t think that hourly billing is fundamentally bad; Nor do I think value-based pricing, flat rates or abstracted time material models like selling Sprint’s or selling months of a cross functional team, or some other kind of tricky way of packaging up what is essentially time materials. I don’t think any of those are bad and what you have to understand and ask is “is how much risk is there in my service offering and how much value is there in my offering for this particular client”. And using that information, identify the pricing model that helps you balance risk and value and ultimately maximise the profitability of that engagement while still closing the sale.
We have a video that goes into what we call the pricing model quadrant, which is how we assess this for each service offering. But yes, the TLDR is I don’t think hourly billing is necessarily bad. What so many people get caught up on, and I’ve heard this said before, is that you can never be profitable billing by the hour. That’s crazy. Of course you can, the only thing that matters in your agency is that you spend less than 40 cents to earn $1. So, if your cost per hour on average is 40% or less than your hourly rate, there’s no problem with that. If you’re not of course eating hours for free, not billing the client, your utilisation is going to be very important in that situation. There are other factors but fundamentally if you can keep your margins at that level you have a healthy business. This is true no matter how you decide to present your pricing to the client.
Jenny 09:58
Well said – I like your answer, and I suppose it gets even harder for those agencies that have enterprise level clients with strong procurement departments because they love to compare agencies, and agency hourly rates and everything else, so it’s much, much harder, even if you were trying to go for the value based pricing model.
Marcel 10:20
Yes and I want to remind everybody with an Enterprise Client the thing that’s nice about time materials based billing is that it offers you protection in the contract. If the scope changes, if the client decides to change the scope on you, or the requirements weren’t super clear, or they’re asking you to do something that’s very hard to scope, you don’t have to be quite as on top of it. You set that expectation perfectly at the start because you have mechanics built into the contract to share risk. So, it can actually be a really good thing to price that way if you’re getting into an engagement where there’s a lot of risk involved, or this client could completely change things up on you.
Companies like Media Monks, for example, a huge agency, and really reputable, they do huge enterprise development projects for lots and lots of money. They use a time materials-based pricing model for a lot of their engagements where they’re selling a cross functional team, you know, on a sprint basis. But when you really boil that down, that’s time materials, for example, I’m going to give you half of this person’s time, and all of this person’s time for X amount of money per time period. You are just abstracting away from the hour, but the mechanics are the same. Because what they know is when they get six Sprint’s into this enterprise development project, the entire scope is going to be different than what they thought it was when they started. And inevitably, those projects often turn into very long engagements. Where they thought it was going to take 12 months, and it ends up being a three year thing because it just continues to evolve. But it doesn’t matter because they’re getting paid the whole time, and their margins are baked into their pricing. So, they’re good.
Jenny 11:52
Yes, and I suppose, Martin Sorrell, who owns Media Monks, has run enough businesses in the creative space to know what works and what doesn’t from a profitability perspective. You have got to listen to that. That’s an interesting case study. Can you just share a couple of examples of how you’ve helped an agency address those kind of profitability areas?
Marcel 12:16
Generally, when we do the audit, it becomes very, very clear what the problem is. There are usually three problems that exist. So, assuming that delivery margin is the issue, one of the easiest to identify is overheads, because then it’s just a question of cost cutting. Which is not always a fun thing, but often, a very straightforward thing to do. It is harder where you spent too much money to earn $1 of revenue. Question is “what are the three ways in which we can address that problem?” The first, is often utilisation. They might be paying for 10,000 hours of capacity every month or every year, but they’re only using 20, 30 or 40% of the time that they’re buying in bulk towards the things that bring money into the business and also towards moving client deliverables forward. Generally, as an agency, you want to spend more than 50% of that time on things that are in your revenue. For example, if more than 50% of your time is not productive and earning revenue for the business, it’s going to be very, very challenging for you to be profitable. And when I talk about that 50% benchmark, which I mean for everybody in the company, including the person that cleans your toilets, does sales, etc. If we zoom out and look holistically at all the payroll that gets deployed in the business, unless 50% or more of that is being deployed against things that are in revenue, it’s very hard to be profitable. Because essentially you are having to factor in a lot of non-productive labour. So, to make sure your utilisation is in high producers these should be, on a weekly basis, anywhere from 75 to 90%, billable and on an annual basis, take 10 to 15% off of that. These are some general targets.
The second thing is the average billable rate. For every hour that the team works, on average, how much revenue do they earn? Most of the time people are think, “Oh, well, I charge $150 an hour”, which is all fine and great, but, if you spend twice as much time on every project than you thought then you are actually making half that much money. That’s an important thing to pay attention to. Because of course, if the team has 10,000 hours of capacity, and they’re spending twice as much time on things than you think they’re going to, then they’re going to be able to earn half as much revenue. This is pretty material, as this is probably almost all of your delivery margin or gross profit out the window if you’re not managing accounts properly. So that’s the second piece; being efficient and really thinking about how much cost do we incur when we do things which usually comes largely down to the volume of time required to get something done.
The third lever is the cost per hour. If my cost per hour is $10, I don’t need to have a very high average billable rate to have great margins, if I can make $100 per hour and my cost is $10.00 those are amazing margins. But, if my cost per hour is $70 per hour because I hire very senior, very experienced people, I need to charge a lot more money to be profitable. The other thing is a vanity metric, when people compare rates or they talk about revenue per FTE. It’s not a very useful metric, because it doesn’t consider the cost per hour. Ultimately, what matters is the margin. So the second strategy here, if you can’t increase your prices, or there isn’t necessarily an opportunity to get sufficiently more efficient in the way you do things and cut the amount of time it takes is to look for opportunities to hire less experienced or less expensive talent, whether that’s offshoring going to more junior people, or maybe hiring white label resources, so that you can bring that cost power down. This reduces the requirement for a higher rate to be profitable. At the end of the day, those are the three levers you can pull to ultimately get the fundamentals in place, which is being able to spend less than 40 cents to earn $1 and have a 60% delivery margin on your work. If that’s true on the P&L, then you should be fine.
Jenny 15:48
Excellent, I feel we’re going to get into this in more detail. Obviously, the account manager in the agency is key to this, because like you say, if they’re spending double the amount of time that is actually billed for, or estimated for on anything, which could be due to different things; maybe they’ve got an extra demanding client; maybe not being efficient internally. There are all kinds of things. Talk me through what you think the role of the account manager is to ensure that the agency is profitable.
Marcel 16:20
This is a great question. Firstly I’ll preface this by saying that the role of an account manager historically has been a little hard to pin down exactly. If you ask 10 different agencies, what their account manager does every day, you’ll probably get 10 different answers. However, I think you and I can agree that at the core of this role, there is always a bit of overlap in a couple of important places of managing that client relationship. Ideally, a good account manager should be looking for opportunities to retain and expand the business with that client. Often, they’re going to be the person that’s at the centre of a conversation with the client about what’s coming up next for them, the work they might need done and what other needs that the agency can meet for them. Ultimately, they represent the client internally, and when the rubber hits the road often it’s the principals of the sales team or the project managers and they have to now come up with scopes and price and timelines for things. The account manager plays a very, very important role in all of this.
What is fascinating, and
what we’ve observed recently in some of our audits, is that some of the most profitable companies that we’ve audited basically only do account management, project management and sales, maybe a little bit of strategy. They outsource almost everything else. So, imagine they sell websites, they have an account manager on the account, and they maybe have a person in the business that’s good at strategy and at a high level. Creating a brief essentially. Then there is a white label partner, that charges them a flat rate to build the website. For example; the cost to them is $20,000 plus hard costs for the website. They will charge $150 up to $180,000 for it. When you think about that, you’ve got an account manager and a strategist, they might have to invest, I don’t know, 40 or 50 hours to get this project done from start to finish, and they’re earning $160k. In that case, if they’re charging $180 their average billable rate is insane. What this goes to show is that those are two of the highest value roles in the organisation, essentially the account and relationship management.
So as an account manager, recognise that you play one of the most important roles in the business. Really leverage that when you’re representing the client to the internal team and you’re working through this scoping and pricing. If you can understand these things well and understand the mechanics, contract structures, and how to negotiate that with the client, as well as pricing models and margin, then you can really be at the centre of making sure that all the ongoing work, which is the most profitable by nature. You don’t have to spend money to pitch the client or pick them through the sales process. This is the opportunity to add the highest profit revenue to the business. You do that through great relationship management and great expansion. So, I think account managers are critically important in this and can be one of the catalysts to really separating an agency that otherwise would be flat or wouldn’t grow as fast if it wasn’t for proactive expansion and retention of clients, which is one of the bigger challenges for a lot of the agencies we work with. They really haven’t mastered this yet.
Jenny 19:22
I have a feeling that there’s quite a lot of agency owners whose ears have just picked up on what you’ve just said, because that is quite a compelling business model that you’ve just described, and in particular where agencies are so highly profitable because they are outsourcing to a white label provider. Are they always outsourcing to a separate entity, a white label provider, or do they use a network of freelancers? What have you seen in terms of how it’s operating?
Marcel 19:57
I have seen a mix. Some have a couple of partners that they build deep relationships with. Essentially what they’re doing is recognising they are not great at operations. So, they find somebody who is. They are really great at strategy, sales and positioning and they are having value conversations, and they can do that, because they’ve taken all the risk out of their business. It’s recognising your strengths, leaning into them and then finding a partner who’s amazing at operations. They’re super organised, they get things done on time, they do great work, but they probably suck at sales, or they’re just not very comfortable with it, or they prefer not to do it, that’s a great marriage. We have seen situations where they have one or two or three, depending on the scale, good partners that they focus on. We have another client right now that their core team is probably only about 25 people, but on average, they have around 70 people working for them, at any given time, with venture freelancers. They are very much this kind of freelance style. Similarly, they get individual freelancers to commit to project based prices for most of their engagements. Then their value pricing goes back to the client. This is a way of basically looking at, where’s our core competency, drawing a line there, and then pushing everything that’s not a core competency out of the business. This is a great lever to pull to reduce risk. Which if you really want to be getting into value-based pricing, or a flat rate, is the biggest lever you need to pull to get there and take the risk out of the business.
Then you can really anchor yourself to flat rates, or to value prices without it being a big risk to you and putting you in a position where you might be losing a lot of money. Or you might be really struggling with the operations of the business because you still have to scope stuff. Because otherwise, how do you resource plan? How do you hire? How do you make sure people are not working evenings and weekends? So yes, I see a spectrum. But the fundamentals are generally the same. It’s just the idea of saying, how can we take this risky stuff out of the business, and push it to people where it’s their core competency? And then often the second question is how can we get contract negotiations happening in such a way where we further minimise the risk to us by getting them to commit to flat rates?
Jenny 22:00
It’s kind of is a win/win situation, isn’t it? As you say, first the starting point is play to your core strengths. Then there is an argument to say that if you don’t have those external delivery people on your books, and they are running their own business and from a freelance perspective, they want to do a super great job for you, then you could argue that in some respects, they are more highly motivated to make sure that they come in on time and on budget from what they’ve quoted you. There are also a lot of highly motivated people all around for those agencies that are running this model. What is the percentage billable or percentage that you would say should be billable for the project manager and the account manager? You said 75 to 95% before and I’m just wondering,
Marcel 22:54
That would be a benchmark for more of a pure producer. I am thinking about designers, copywriters, developers, etc. Of course, we know for projects and account managers, that’s generally going to be quite a bit less. Because generally, just tracking time as an account or project manager in and of itself can be a really daunting task, as your day often bleeds away in small five-minute increments. That’s just the way that the job works, you’re hopping around from one client to another, and it can be hard to attribute your time if you are being asked to track time to a specific client or project. The targets for those project managers and account managers is going to be much lower, usually from 40% but I have seen on the high end, 70 to 75%. But that’s in situations where they have been absolved of a lot of administrative responsibilities, and they’re very much tactical, but because we see the role of a project or account manager span so much, depending on what the makeup of that role looks like, it’s reasonable to expect that their billable expectation on a weekly basis will be much lower, usually a good 15 to 25% lower than your average producer of the business.
Jenny 24:00
That would make sense because, particularly from the account management perspective, if they are spending extra time looking to grow the account and looking for additional opportunities, then they can’t attribute their time to an existing project. This is fantastic and compelling. Can you share any tips or advice for those managing the client relationships to help them operate in a more profitable way? Can you give a flavour of some examples that you’ve seen or how? For example, I’m just thinking about if you’re starting to work with an agency, and the account management team is maybe not putting their foot down enough, or they’re not pushing back on the client enough, or perhaps they’re not being strong enough. Can you give me a flavour of what you’re seeing.
Marcel 24:48
This is a very wide question. I’ll start with the problems that we often see come up at the account to agency level and of course a lot of this is going to come down to what’s the makeup of the team. Is the account manager wearing both account and project management hats? Do you have those two layers in place? And of course, we see all kinds of different structures being placed there. But, if we assume that the primary responsibility we’re talking about here is being essentially the representative of the client, and looking for opportunities to expand and grow them, there are a couple of things that we see that are challenging and, when we get into this order taking dynamic, a lot of this is just going to come down to the things that you teach.
An order taking dynamic can be challenging, because of course, as an account manager, that often leaves you with very little time to go through a thorough planning exercise with your internal team. Really make sure you have your ducks in a row when you go to the client to have a pricing, scoping or timeline conversation. Because often, when a client comes to you with a request, they need it yesterday, that’s not always the case, but often, you’re going to be putting yourself in that position. So of course, it starts with being very proactive, looking for those opportunities to partner with the client, looking down the road so that you can come to them prepared.
You can even start, and this is kind of a sales tactic in a sense, we do this a lot, not because it’s a tactic, because it’s a real thing, where it’s like; “hey, we have a certain amount of capacity, in the next quarter or in the next couple of months, and we’ve talked about these things that are important to you that are coming up – I just want to make sure that we can get some stuff locked in that’s important to you so we don’t end up having to delay your timelines or end up having to reduce the scope in order to meet your needs”. This is a really effective way to actually get sales across the line and take more control of that process of setting timelines and scope and pricing. Based on the idea that if they don’t lock you in, you’re going to have to sell that time to somebody else. That’s just the way that the business model works. This is especially easy if it’s true for you, which for US law a lot of the time it is so it makes it easier for us. So that’s one big thing.
Jenny 26:52
Love it keep it coming, Marcel, you’re doing really well, I’m scribbling notes.
Marcel 26:59
The next thing that I would say is, I think as an account manager, you should become really well versed in two things. There’s a lot of training, – and you offer some of the best training I’ve seen on this – around how to essentially sell well as an account manager, and that you’re not so much a hunter, you’re more of a farmer. It’s a different way of selling, much more consultative, and much more my style. I enjoy that way of selling a lot more, because you’re just being helpful as often as possible and looking for ways to add more value to the client. That’s amazing, and you want to make sure that you know how to do that. But where there isn’t as much training and information. Some of this you can grab for free in our toolkit – is around understanding the nuances of the contract structure, and how that impacts the way that an engagement runs with a client. This is one of the things that we can get tripped up at, especially if we’re in an agency that has a lot of these things going on. For example,
some agencies are paid by the hour, some are on retainers, some are on retainers that are based on hours, and they have rollover credits, or they don’t, some are project based, some are value based. When you’re not crystal clear on what the contract terms are with that client and you start to get into a negotiation conversation, or they’re asking for additional scope, or they want to move the timeline around, you can lose your sense of what you’re anchoring to.
Because if you’re billing by the hour, the way that you have that conversation and manage the scope and manage expectations is very, very different than if the rate is flat. The dynamics of that contract and how your profitability moves around is different because the risk sharing is different. It’s essential to really dig deep into that, and I’ll provide a video for the show notes. Also, I’ll send a link to you that talks about the basics of the quadrant I talked about earlier.
I think that’s a critical thing, because if you’re always clear on “Okay, this is a value-based client so I’m anchoring myself to value” when they talk about deliverables and scope and so on, or “I’m anchoring myself to timeline”. These are the two levers that I can pull and use to adjust and protect our margins in this conversation with a client. This is a really powerful skill to have and can make a huge difference in protecting all those little moments that you’re responsible for as an account manager that can erode a lot of the profit off engagement over time.
Jenny 29:13
I think that’s a great point. I’m wondering how many account managers I’m working with currently or have worked with, who have actually looked at the contract? Perhaps this depends on the agency size? Also, when you take over an account, how long has that account has been with the agency? for example, if you’re joining the account, would you look back, or think to look back at the contract. Thank you for providing the link because I think that will be valuable.
Marcel 29:46
The last thing is really understanding the fundamentals of what makes a project profitable and becoming more interested in and involved in the process of scoping because what often happens, and this is talked about as a “healthy tension” in agencies, between the account and the project manager where the account manager is pushing for the client and advocating for them, and of course, the project manager’s job is to protect the team, they end up in this healthy conflict. Hopefully that stays cordial the whole time, but I don’t really see a reason why that has to be seen as one versus the other. I think tension is healthy there. But by and large, those two folks should be able to sit on the same side of the table, and understand that it is okay – we need to meet the needs of the client, but we also need to meet the needs of the agency. They should agree that there are some fundamental truths about the business model that if they don’t protect these truths, it puts everybody’s jobs and livelihood at risk. The fundamental truths are, we need to basically spend less than 40 cents to earn every dollar that the client’s proposing to give to us, and we need to keep our eyes open for risk and account for those risks in the way that we structure the scope of work.
Being more involved and understanding those fundamentals gives you a superpower as an account manager, because you can see around the corners more. It just helps you do a better job of making sure that you understand how to have a conversation with the client. Understand when you have some wiggle room, and when you don’t. Understand how to give yourself those trapdoors as well.
A really good account manager wants that project to be scoped in a profitable way, because that gives you back-pocket ammunition down the road. It gives you little freebies that you can give out because you’ve left some room in there. Just like a great writer that’s writing a story for Netflix series, they’re going to leave themselves some trapdoors in case they happen to get signed on for another three seasons – you want to do the same thing as an account manager. You do that by and large in the scope of work, and in the way that things have been priced.
The third thing is pay attention to the actual mechanics of how things get scoped and estimated, so that you understand how that works and you understand what options you have when you get yourself into tricky situations with the client.
Jenny 31:55
Another great point, I think this more commercial thinking is really needed. Another point that I see and I don’t know if you see this yourself, is account managers or project managers, depending on whose responsibility it is in the agency to price the job, sometimes rely on what they’ve always priced a similar scope before, without looking back historically, to see that this type of deliverable, this type of project consistently comes in over budget, and yet we’re not adjusting our pricing. That could be the fact that there’s no internal review of the price of the projects, or it’s just a habit that’s formed and no one’s really paying attention to it. Is that one of the things that you uncover sometimes?
Marcel 32:41
Absolutely. And I want to double click on this for a moment, because I think it’s easy for us to sit here and talk about the implications of the agency making less money. But there is the worst by-product and think about this for a moment, for example – I estimated it’s going to be 1000 hours to get this campaign done for a client, but it ends up taking us 1500 hours, the deadline is probably not moving in that situation. So where do those 500 extra hours come from? they come from people’s evenings, they come from the weekends, they come from hiring additional staff that’s not needed. Then the agencies over staff, and are constantly laying people off – anytime they miss an RFP, or a big client fires them.
These are the things that I really care about. I have to ‘sell the chocolate’ of, “you’re going to get more money” because the owner is often the one signing the check to hire my company to help them with this, but I don’t get out of bed every morning because I want the CEO of another agency to buy another yacht or get a third summer home, I’m really interested in making agencies a viable place to work, there was a period of time when that was eroding a lot. The story that I heard all the time and the understanding was, you go to an agency, it’s going to suck, but you’ll cut your teeth and then eventually you can retire to working for a brand that treats you like a human being. I don’t think there’s any reason that this needs to be the case. Agencies can be very profitable while still respecting people’s boundaries and having 40-hour work weeks. But when we miss good projects, it is the collateral damage that I’m most worried about, and is much more costly than the short term loss that is incurred on profit, because that affects team retention and affects hiring. Those dynamics are harder to measure, but they’re very, very expensive. The other thing that I’ll say on this, and I say this all the time, is that
so many agencies are suffering from indigestion, not starvation. They just happen to feel the same. Think about this for a moment, if you’re constantly selling work to meet certain revenue targets, so you can make payroll and pay overhead, but that work isn’t profitable, the team has to invest all kinds of extra hours that just don’t exist in order to get the work done. They’re constantly saying, “we need to hire more people”, “we need to hire more people.”
We have seen many, many times before, a company grows, they’ve doubled in size or tripled in size, the profitability of that business is the same or worse than it was when they were smaller. The owners are making less money even though the size of the business is much bigger. That’s great for somebody’s ego, but it’s not serving anybody.
We have helped clients grow over 40, 50, 60% year over year without hiring a single person, just by changing the quality of the revenue and practising revenue replacement. So instead of selling a new project, and then saying, “okay, we need to hire a whole bunch of other people to do this because we’re at capacity”, they take that project, and then they go to their worst client and say, “we need to renegotiate our terms”. If the client says, “okay, we’re out of here”, there is no problem, as they just replaced that capacity with much higher quality revenue for fixing indigestion. The best-case scenario is that the client says, “okay, I agree to your new terms” and now you have two clients that have a higher quality of revenue, and you can actually afford to get more capacity for it. So, think about that. Those are the implications of properly scoped properly priced work. It’s not just about the bottom line, it’s about the effect that that has on everybody in the organisation. And that effect is substantial.
Jenny 35:47
That’s a good point, do you help the agencies renegotiate their terms with clients as well, in your consulting capacity? Or is that just not necessary?
Marcel 35:57
Well, we’ll refer you to lawyers for a lot of the legalese that is written into the contract. But one of the exercises that we do with all our clients is the one that I’ll share in the video, the pricing model quadrant, to really just get clear on what are the mechanics that are appropriate for the different types of service offerings based on the risk and the value of that service offering? Which of your service offerings? Should you be pricing hourly right now because it’s hard to scope, or the way that you need to solve this problem for the client is inherently iterative, or anything that you need to use an agile methodology for? Very, very hard to do that on a flat rate because how many sprints is it going to take? Well, we don’t know. And the whole nature of an agile methodology, if you’re really doing it properly, should mean that you’re learning new things and changing the scope at the end of every two weeks. The things that we really help with are getting clear on how should the contract be structured? what kind of risk should we be trying to protect ourselves from and share with the client? Then in what ways do we talk about price to try and take advantage of a lot of value that might exist or try to overcome a lack of value that exists in the service offering? Because sometimes we sell commodities, and that’s okay, that’s just a different way that we must think about pricing those things and having the price conversation with the client. You can flip things around. I had a conversation with a client the other day where I was saying, you have a team in the Philippines, you can be wildly profitable, charging $50 or $60 per hour, the industry average is $150. I would encourage you to talk about your hourly rate and sales with the client, because there’s a really good chance that none of your competitors are pricing at that rate, and that might actually change the client’s perspective to asking for everyone’s hourly rate. Now, if even on aggregate the project costs the same, they will think they’re getting better value from you. There could be wildly profitable 80% gross margins on that $50 per hour.
Jenny 37:43
Also being transparent that you have your team based in the Philippines? because, I am just thinking that the client, then will think well, the quality is going to be a bit lower.
Marcel 37:54
Well, that’s an interesting thing. I don’t know that he has to tell the client that his team’s in the Philippines, or maybe he’ll say, you know, we have our architect’s centre. How much of that do you want to share? I think it comes down to your sales process. But at the end of the day, if all you are sharing is, yeah, we’re going to get this website done. Here’s our portfolio which looks good. Here’s some testimonials, and all the social proofs are there, and now they’re asking the question, do we hire this agency at $50 an hour or the $150 an hour agency to get the same outcome. There’s a case here, you’ve changed the dynamic of the conversation – that you might seem like a better value. The client might not care why you can do it cheaper, and it might not even be cheaper, it might cost the same amount of money. We get wrapped up in this idea of value-based pricing. There’s a lot more nuance to this. It also depends on who the client is, what you’re selling to them, how big they are, what their budget is, and how you set up the frame of the conversation, to position yourself for getting the most value and the lowest risk out of the engagement.
Jenny 38:54
Yes, there’s a lot of unknowns. On that I’d like to say it is a case-by-case basis, and what’s appropriate, what’s not. Just while we’re on the subject of pricing, I’m curious about your thoughts on this – let’s suppose you’ve got an agency that’s been working with a client for a few years what’s your advice when it comes to general yearly increases in pricing? What’s your view on that?
Marcel 39:23
I think it makes sense to have a cadence to review your clients pricing. Over time, what tends to happen is you increase your prices and you change the way that you do service offerings, those things are all going to evolve. At some point, your oldest clients often become your worst, and that’s a bit of a sinister dynamic, isn’t it? Because often, those are some of your favourite clients if they’ve been around for a long time, but you start to resent them because the contract terms get worse and of course, your client’s not going to reach out to you one day and say, I’m worried that I’m not paying you enough. You know, it’s funny because I do this. For some of my freelancers that haven’t reached out to negotiate their price with me in a long time, the ones that I want to keep around, I reach out to them, I say, “hey, I’m worried that it’s been a while since we’ve sat down and talked about this scope, I just want to make sure that like this is equitable”. But I’m doing that as a self-serving thing, really, because I just want to make sure that they don’t fire me because I’ve become their shittiest client. That’s probably not going to happen for you as an account manager and you have to now do your job – which is to find a way to have those conversations. Even if you just sit down and say, “hey, it’s our yearly pricing increase”, that’s one way to do it. But you’re putting yourself at a risk, and it’s not a very fun conversation to have, A better way to do this is actually doing business reviews and find ways to evolve the scope of the engagements that you have with clients to then have a justification for re-scoping and repricing the engagement and ongoing path. So look for opportunities to add things, modify things and change and frame that all in a way to be coming from a place of service, of how can we better serve you? What are some more things that we can help you with? How can you get more value out of this engagement? In doing so you open the scope up again. The idea is how can we get the scope open so that we have an opportunity to tweak it, as opposed to coming in and having this very difficult conversation of, it’s the end of the year, I want to give you the same thing for more money therefore, getting you less value out of this, which, no matter how friendly the client is, that’s logically a very difficult thing as a client to wrap your head around. You feel like you’re losing something, because objectively you are, but if it is hidden behind the veil of the scope is changing, then those lines get blurred a little bit. It can be an easier pill to swallow. You might not even realise that it’s happening to you – that you’re getting less for more, because what matters is your perception of what you’re getting, and how you value that.
Jenny 41:50
Yes also, inflation rates – currently we’re recording this in August 2022, and the inflation rates are through the roof. So even to keep up with inflation, you’d expect if you’re working with an agency, from a client’s perspective, to see some increase, and maybe as you say, quite rightly, there’s a timing thing when you have that conversation, and if you’re not doing a great job for the client, it’s not a good time to even talk about it, but if you’re demonstrating on an ongoing basis, how you’re adding value, and you’ve been doing that consistently, then it’s an easier conversation to have.
Marcel 42:31
Yes and there’s one more thing I’ll say on this, which comes back to what we talked about earlier, two things have really helped with this, number one having data and number two, understanding the contract structure. Because if you go into that conversation, and let’s say for example, it’s a flat fee, the hardest ones are retainers, because those tend to not evolve a whole lot, you have to push those to evolve. Let’s just say they’ve been paying you $150 an hour for 40 hours a month, and you’ve got this team that they work with. That’s the worst-case scenario in terms of renegotiating. You could go in and say something to the effect of, “we’ve noticed you’ve been asking for a lot of deliverables, and we’ve been pushing to get them done within the month, but in order for us to keep this level of velocity, we actually need to allocate more time to your account”.
Because you understand the structure of the contract, you can have a justified conversation about how this increase in scope or increase in price is going to help them or it could be we need to assign a more senior resource because some of the requests that are coming in are more complex and we want to make sure that we meet the level that you expect. Similarly, if it was a flat rate contract, there might be another conversation where it’s – “you know, we’ve started doing a different set of things, and we agreed at the start of the quarter” – which happens every time you do a flat rate retainer, you agree to four things, and then you end up doing six or eight- “we want to continue to meet those needs, let’s have a conversation about what it looks like for us to plan for that as we want to make sure that we’re still hitting your deadlines, and we’re still meeting your needs”.
Understanding the contract, and then having some data to help support that conversation is a really powerful tool to be able to understand again, what you’re anchoring yourself to, so that it’s a logical conversation with the client, because a lot of the time they don’t want to go through the pain of firing you and finding somebody else to do it. It’s way easier to just pay a little bit more money and not have to deal with all of that. But they need you to give them a logical reason why that change is happening.
Jenny 44:20
And you’ve really given a lot of value there for myself, thank you. I can see if someone is having to have that conversation pretty soon, they’ll probably be pausing the recording and listening again. You said that beautifully, by the way. I could talk to you all day, Marcel, but I am interested in what are some of the changes that you’ve seen over the years working with agencies? Do you think it’s getting better? Do you think it’s getting worse? What do you see?
Marcel 44:51
It’s really fascinating. I still think that service-based business models are some of the best business models in the world. There are things about them that are very hard, they’re hard to scale, they’re hard to measure, hopefully, we will fix the measuring part, but you still have to deal with humans and you’re still selling time. That’s always going to be hard, however, there is very little friction to get them started up. The profit margins if you’re doing them well, should be 70, 80 %. I’ve seen some companies with 90% gross profit margins. Pretty much the only other industries you see those margins in are software, education and selling courses, basically selling products that are not tangible in nature. The next best business model after those two is a service-based business model. But the advantage of the service-based business model has is that unlike a product, you can change it very, very quickly. Because it’s just about changing how you do things, changing a process, and you can sell things and then figure out how to do them later. So, it’s incredibly good at finding product market fit. It’s incredibly adaptive.
One of the things that I’m seeing is a lot more boutique and smaller agencies, we’re seeing the fragmentation of the mega agency, the full-service agency, and everybody is waking up to the fact that a couple of things are really important in this new world. Number one, being very clear and specific about the problem that you solve as an agency, we talk about this as niching. A lot of people get caught up in the vertical or horizontal mechanisms of that, what platforms or services do we offer, or what specific industry do we sell this to. But really, underneath all of that it is being clear about what problem you solve. In doing so you generally position yourself for a higher value engagement with the client because you have expertise in solving the problem that they have.
Then the benefit to that is it allows you to create better systems and better structure and allows you to keep the business smaller, and smaller generally means it’s more fluid and more adaptable. If we’ve learned anything in the last couple of years is that things change, and they change fast. That’s not going to stop, things are only going to keep changing, and they’re only going to keep changing faster. There is a lot of allure to running a smaller shop getting away from this large conglomerate, large holding company. You even see the holding companies take this kind of attitude now as well. They would rather have a portfolio of specialised shops than some of these massive full-service agencies of the past. One of the big shifts I’m seeing is the movement towards micro agencies, the movement towards really being clear about core competency, and the closer to somebody’s core competency they are the more profitable they become. That’s just a correlation that we see in the numbers. If they’re properly niched, they’re more profitable and if they niche and outsource all the stuff that they’re not good at, they’re even more profitable. That’s a trend that I’m seeing and the observation I’ve seen in the numbers. There’s one piece of advice I have for folks on how to think about moving into the future ; ask how can you just get closer to the thing that you’re uniquely amazing at and start to let go of everything else?
Jenny 47:53
Amazing, really good advice. Thank you so much. Just out of interest. Are you seeing any kind of inkling of doom mongering about the economy where we’re heading into recession, etc?
Marcel 48:08
Yes, of course, you know it is the same kind of conversation we saw through COVID. But I think we’re going to see the same dynamics that we saw through COVID, this has been the case for us. This is interesting, because I’ll get meta on this, but you know during COVID, we saw some agencies close their doors and have their worst years ever, and we had other agencies had their best years ever. I think in this recession, which I’m calling the Patagonia Vest recession, which I got from Scott Galloway, because it’s outsizedly affecting all the people that have had it really good for a while, which is all the tech companies that were super overvalued – we’re seeing that we have a couple of clients that serve SAS companies, they’re not having a good time, right now they’re struggling, a lot of them had to do layoffs. We’ve had to make a lot of adjustments to right size the business. Whereas typically, when you see a market force like that, it’s like whack a mole, one industry goes down, but then another side of the market typically sees some upside. Where we get to zoom out and look at all agencies, for example, if plumbing all of a sudden becomes a really popular thing right now or home services, there are agencies that serve those clients we get to see where things are going up and where things are going down and we’re sufficiently insulated. But this is why I think it comes back to adaptability. If you’re an agency that specialised in software right now, you’re probably really, really terrified. You’ve probably had a rough couple of months. But this is where it’s important to be able to recognise, okay, what are some of the shifts that we can make? How can we take this problem and solution and repackage it and adjust and adapt? The faster that you can make those adaptations, the more resilient you’re going to be. There are going to be agencies that are affected by this, but again, like any market event that’s drastic, it’s not going to affect everybody in the same way, and it’s really going to be about paying attention to your specific industry or niche as opposed to thinking about the economy as a whole. Asking yourself, Is this recession going to have an outsized impact on the person that I serve most often. If that’s the case, then you probably want to start thinking about how to either shift your focus or get the business into survival mode so you can ride this out and catch the wave on the way up, because that’s the other thing that we know about recessions is anybody that has cash typically comes out the other end of that way better off, and anyone that’s over leveraged, typically doesn’t do so well in the recession. You’re going to have people in your industry that have cash that get to the other end, and then they start cleaning up market share. Those will be the people that you want to have on your roster when you come out of the recession.
Jenny 50:31
Great advice. I would just like to ask do you have any final words of wisdom, advice, anything that you haven’t said that you think would be valuable for either agency owners or account managers?
Marcel 50:53
I’ll close with and now just thinking about the account managers, because I love that your show is just for account management. We needed this show. And you, you made it thank you for that. So, for all the account managers out there, understand that you have one of the most important roles in the organisation. If you’ve ever had this thought and because I hear this conversation all the time, a lot of agency owners see account management as this bloat layer in between the client and project management and think, what if we just get rid of that? Or, why can’t the client just talk directly to the delivery teams? – and there are all kinds of reasons that shouldn’t happen. Understand that what we see is even in the most stripped down version of an agency, account management is still one of the most important and still one of the most high value functions. Own your role, get really, really good at it. Then I think you will have lasting power in this industry, I find it very hard to believe that in the next couple of decades, of all the things agencies are going to stop doing that account management is going to be one of them. The last piece of advice is just keep investing in yourself and investing in your skill set in this role, because I don’t think you’re going to end up like, truck drivers that get replaced by self-driving trucks from Tesla. I don’t think that’s on the near horizon for you. Your skill set as an account manager will translate to lots of other industries as well, you can go into client success and software, there’s so much skill sharing there. So, don’t be afraid to really commit to this career path, if it’s something that you feel is compelling and really a good fit for you.
Jenny 52:24
Oh, my God, I’m going to get that quote, because that was so uplifting, and probably a lot of account managers needed to hear it as well. Thank you for saying that. That was fantastic. And I obviously echo everything that you’ve just said. Marcel, let’s finish with who would you like to be contacted by and what’s the best place to reach you?
Marcel 52:43
Right, so if you’re an agency owner, and you’re not making as much profit as you think you should be, and you’re doing over $750,000 a year in bookings, then you should reach out, let’s have a conversation. If you’re an account manager, and you feel like your boss would be doing a better job of running the business, you’re welcome to reach out as well and get a sense of what we do but tell them to connect with us. If you got some value out of today, and you want to dig deeper into some of the things that I talked about, make sure you head to the Parakeeto Toolkit, I’ve got a whole bunch of training videos, spreadsheets, cheat sheets, and work documents that will help you facilitate some of these conversations and understand these concepts. They are all free. I will of course, make sure I fire a link to Jenny after today’s interview to give you access to that pricing model quadrant video, which I think is a really powerful framework for account managers to get an understanding of.
Jenny 53:31
Fantastic, and we will make sure that we put that in the show notes. Thank you again, Marcel. This has been absolutely superb, so loved having you and thank you for coming.
Marcel 53:40
Thank you for having me, Jenny and I look forward to having you on our show very soon as well.
Jenny 53:44
Love it. Can’t wait. Thank you
I really hope you enjoyed my chat with Marcel, I certainly did. Don’t forget to go over and see the resources that he’s provided. He talks about the toolkit, and that’s at the Parakeeto Toolkit. Also the agency pricing quadrant. The URL is a bit long to read out, but we’ll certainly include it in the show notes.
Finally, a reminder that my next account accelerator training programme starts on September the fifth 2022, helping anyone in a creative agency account management position, and who is responsible for the agency’s forecast to grow their existing accounts. So, if you’d like to learn more about the programme, go over to my website, account management skills.com/training. You can also book a 20-minute call with me and we can have a chat to see if it might be a good fit for you or someone else in your team.
I’ll finish with what other participants have said about going on the programme and I look forward to seeing you on the next one.
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What results have you seen from the “Account Accelerator Training”? Watch the video
Zach Anderson 00:03
My confidence as an account manager. It’s hard to put into words just how much more comfortable I feel. Because now I feel like I’m armed with the knowledge that I need to make real money, for lack of a better term, as an account manager, especially in my personal professional reaction, and also for the agency that I’m employed by. That is a big outcome for me. Also being able to look at all of my clients with their potential in mind, looking beyond what’s happening day to day and being able to take a step back and really feel confident in how I’m projecting the relationship for the future. Now we are having conversations about getting into an exclusive relationship where we are brought in as more of a retainer, for lack of a better term, as opposed to them having to go to multiple agencies.
