How to make an informed agency margin

For most of my career I thought I knew numbers. I thought I understood what mattered to clients. I would often get frustrated when they asked, despite repeated reassurance, “but are you sure this will really work?” I was a planner after all – I should be this voice of certainty, right? Wrong.

When I found myself a Director of my own (shared ownership) company, instead of hearing this voice of certainty in my ears, I often heard the voice of Mr. Micawber:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six, result misery." - David Copperfield, Charles Dickens.

When it is your own money, when slow cash flow bites, when debtor to creditors is out of balance – your basis for decision making is suddenly different. Where you were once sure now you suddenly need more reassurance.

I very quickly grew tired of the phrase “well this is a strategic decision”. I learned this meant that no-one had worked out how to make money out of something when they said it was a “strategic decision”. Investment and risk taking are important but that does not mean it should be without commercial merit. This is how your clients feel. Procurement feel it even more.

Anyway, all of this worrying had a remarkable effect – I became a far better agency partner to my clients. I had heard the maxim “treat the client’s money as your own” many times but I had always thought this was a wheeze from the FD to try and stop me overdoing it on expenses. However, the more I understood how my business made money the more I looked at how my client’s businesses made money. This led to more certainty around answering the question “but are you sure this will really work?” – which after all, is no more than they are paying for and deserve.

So, first and foremost financial acumen starts with the right mindset:

1. If you do not understand how your business makes money why will clients believe you understand their business?
2. If you do not understand how your client’s business makes money how can they trust your ideas will work to grow their business?
3. Once you understand points 1 and 2 it is easier to price your work in negotiations with Procurement. Growing revenue is important but if you do not make margin you do not make money. If you do not price right, you will not make margin.
4. But never forget what your business is all about – you make money from the creative effectiveness of your solutions. You have to have the vision, talent and culture that can make that happen. Making margin matters in this as well. If you have profit you have the flexibility to invest: in keeping talent, in new talent, in new services – all to better deliver on the vision.

But don’t take my word for it – the IPA Commercial Behaviours Survey reveals that a key difference between the best-performing agencies and the weakest is owning the commercial challenge; top agencies are more than twice as likely to own the commercial challenge as the weakest. The key characteristics of this success are:

• Take responsibility for the agencies commercial performance (as opposed to letting external procurement teams effect change on them).
• Understand and be prepared to use different pricing models (e.g. cost-plus vs. value pricing).
• See pricing/selling/negotiation as core disciplines and train staff accordingly.
• Have separate procurement negotiating teams from the pitch winning/day to day client servicing team.
• Track and map clients’ performance to inform future commercial conversations.

You do not need to own your business or experience working client side to get this. If you develop the right mindset then there are lots of great resources and courses at the IPA* and beyond to give you the smarts.

If you are in account management or planning and aspire to greater success with your clients I cannot recommend highly enough taking a more informed interest in the drivers of commercial success of your agency business and that of your clients. Not only might it help you make that next important career step, it will certainly make you better equipped to succeed when you get there.

Join in the conversation on social media by using #IPACommercial.

*Relevant IPA commercial resources and courses

IPA members can catch up on all the commercial content from the IPA here.

Non-members and members can also watch the videos from last year's conference here: 

• Better Pricing: Tim Williams, IPA Pricing Guide
• Better Negotiation; Tom Kinnaird, IPA Scotwork survey findings
• Better NewBiz; Blair Enns

Dale will be chairing the Advanced Commercial Acumen course taking place at the IPA on the 5th October. The course teaches the importance of owning the commercial agenda. It provides the skills to understand a client’s business agenda and use those skills to increase revenues and/or spot opportunities for growth. An insight into the role of procurement and their motivations will also be provided helping you to navigate that relationship in a less passive manner. This course contributes to MIPA status if the (optional) course assignment is passed.

Tom Lewis, the IPA Finance Director, writes a blog column for the IPA called Commercial Acuman.