By Aaron Schoenherr, Co-Founder, Greentarget
Profit isn’t a dirty word. Pursuing profit doesn’t make you greedy. Managing profitability doesn’t make you a heartless bean counter.
Clients and talent demand an agency with staying power, and the only way to deliver that is to run profitable agency-client relationships. But the way you achieve your desired level of profitability depends heavily on your vision for your agency’s culture.
Greentarget has a relationship-driven culture. For us, profitability is not a business target but a successful outcome that derives from running a healthy business, with strong client relationships, a robust new-business pipeline and an engaged, healthy team. We use profitability as a measure of how we’re nurturing and protecting client relationships. The way we measure it and talk about it helps protect our most important relationships – with our talent.
I believe that agencies tend to be either revenue-focused or relationship-focused at their core. Profitability is critical to either model. And while the profitability of all client relationships will ebb and flow, when push comes to shove and tough decisions need to be made you should ask yourself: which is your team’s north star?
Such a Thing as Too Much Profit
The relationship model impacts the way we view both revenue and costs. Technology, employee benefits and office space keep getting more expensive, but we’re not going stop investing in those things to the detriment of our people. Our vision, to create a destination for talent, drives us to make Greentarget an easy place for individuals to thrive.
Here’s what I think hurts profitability the most: Over-servicing clients and the challenges of scale. Those things can also lead you to burn out your people. That alone justifies tracking profitability carefully.
One of the smartest things we’ve done to track it was to organize our retainer relationships into account groups. Each has a group lead who’s responsible for managing those accounts, projecting their revenue and managing profitability.
We strive for 80% to 110% profitability with each client and group. Anything outside of that range is a red flag that prompts a discussion. Anything below 80% indicates we’re over-servicing the client; that translates not only to lower margins but also potentially to an overworked team. Anything above 110% means we’re under-servicing. That puts us at risk of losing a client when they figure out they’re not getting their money’s worth.
To help stay between those profitability lines, our account leads maintain an open dialogue with their clients about scope, budget and if necessary, how to scale or manage the account differently or identify an incremental budget. They also share and discuss invoices directly with clients – an important relationship touchpoint for us and a connection between the team’s work and the client’s investment in our team.
Profit Sharing and Transparency
A portion of our profits are put it into a pool and divided into shares that are part of year-end bonuses for staff. The share price tracks to client profitability and is communicated every quarter. In addition to incentivizing our people, it gives us a nice pathway to talk with them about how expenses and profitability are trending. It also ensures that account leads are doing everything they can to keep that share price at a healthy level, for their own benefit and their teams’.
Here’s an example of the power of transparency: This past year was the first in our history where the share price decreased. Early in the year, we told the team that their bonuses would be down slightly based on the trend. While it was tough news to deliver, it gave us a platform to have open conversations every quarter about where the business was headed and what to expect during the year. Going into the fourth quarter, the team engaged in a spirited whiteboard session, setting revenue targets, mapping out agency goals and opportunities, which led to an impressive end-of-year push – all tracked on a scoreboard in our Chicago office. We ended up boosting revenue and the resulting share price. More importantly, it turned out to be a great team-building exercise.
Inspirational Words from a Client
We work with a lot of different professional service firms. Since we and our clients deal with many of the same issues, conversations around billing rates and over-servicing can be a bit easier. And these types of business also tend to know what it takes to be a good client. I’ll never forget a law firm CMO who once told me: “I want to be the client that people are fighting to serve, the one that you want to put your best talent on because I’m such a good account for the business and the relationship.”
In other words, he wanted an agency that puts the health of its client relationships and the teams that serve them ahead of everything else. And he understood that you can’t have either of those unless you have a profitable business.
To hear more, listen to Aaron Schoenherr’s episode on the Agencies of the Future podcast.