how to assess an agency’s health

I love it when I hear agencies boasting about their revenues and team size. I smile, nod and generally keep my mouth shut. But the truth is these are awful metrics to judge an agency business by or to manage towards. What really matters is the net margin, cash flow and revenue concentration: Low margin businesses must chase volume if they want to grow, which isn’t easy in consulting, design and other creative services, nor is it especially desirable. That previous sentence is an example of what we call "British understatement". Businesses that do not manage working capital properly, or have a weak cash position are inherently fragile. A lot of agencies are one late invoice payment away from collapse, and I know of one global agency who boasts endlessly about their blue chip clients but is so poorly mismanaged they can't pay their freelancers. Revenue concentration matters because it determines how much latent risk there is in your business. Many agencies grow around one large profitable client, but struggle to attract new ones, leaving them one leadership decision away from disaster. The key question isn’t “How can we keep our biggest client?” It’s “How could we survive without them?” Aside from that, everyone knows that producing great work quickly — which is table stakes these days — comes from having the smallest number of the best people possible, and that having legions of permanent staff warming the bench makes agencies do crazy, often customer-hostile things to get their utilization up. By implication then, what matters most to an agency business is the cost structure, pricing power, output quality and consistency, and customer acquisition model. Revenue and team size is for willy wavers, not astute business leaders. Here endeth the lesson. | 27 comments on LinkedIn