This week, Marcel is joined by Alfie Wenegieme of Cactus to discuss how to build commercial knowledge within your agency to your agency’s advantage!
About Alfie Wenegieme
Chartered accountant and Managing Partner at Cactus, Alife helps small to medium-sized agencies to achieve profitable growth organically through Mergers and acquisitions. He also trains agency staff to be more commercially aware.
Having been a commercial business partner to leadership teams of global agencies, as well as small independent ones for the past 16 years, Alfie enjoys seeing people learn more about their business, alongside the agency business model in general. This ultimately helps them make better-informed commercial decisions.
When Alife isn’t helping agencies, he works out regularly, after taking up boxing and Muay Thai for a couple of years. He also wiles away free time reading plus watching a fair amount of TV.
Points of Interest…
- Why commercial knowledge is important in your agency
- Commercial knowledge and the role leadership plays in its success
- Understanding your agency model = better-informed commercial decisions
- What makes agencies dysfunctional (a rant)
- Pushback Alfie experiences during commerciality training
Check out the video version on YouTube:
Why commercial knowledge is important in your agency
Our hot topic for today is how do we encourage agency owners to develop commercial competency among their broader team? This is something myself and Alife have talked about many times before – particularly as it’s the starting point for everything else, especially as most agency owners become leaders by accident and therefore don’t have that commercial background.
“Whatever kind of agency it is – whether it’s PR, web development, or whatever it is – they get the people that are experts in that field, which is great, but they don’t really know what to look for commercially. Then, they end up with a team who can – yes – deliver the best work and amazing products, but they don’t have that commercial side figured out.”
Regardless of how amazing your work is, if you’re not generating enough revenue and making enough profits, you’ll only go so far. Unfortunately, the importance of commercial competency is often overlooked. Why? Well, as Alfie puts it…
“Either the founders don’t get it themselves. Or, they get it, but they just don’t know how to find it in people. So, as important as it is to go in and figure out what problems the agencies have, and try to fix it, I think a bigger and more important part of what I do is the education piece… starting from the leadership all the way down to the junior exec. Everybody in the agency plays a role!”
Therefore, to a degree, everybody needs to understand the agency model, how the agency makes money, and their role in making that happen. That is a fundamental part of running a successful agency.
Commercial knowledge and the role leadership play
Keeping with why some agencies struggle so much with commercial knowledge when running a business; I ask Alfie about some of the common symptoms he sees when working with a client. What underpins a lot of this lack of shared knowledge around commercial thinking – both at the leadership level and also transitioning down into the team?
“The original problem here is that when people hear ‘finance’ or ‘commerciality’ their minds go to – ‘but that’s what an accountant does, that’s not for me’… So, when I go into an agency, the first thing I’ll do is ask a simple question; ‘What is your profit margin?’ And, sometimes, even the leadership can’t tell me, or they’ll tell me the gross profit instead of net profit. They just don’t understand the concept of it.”
Now, to be clear, we’re not expecting anyone to get an accountancy degree, or become a chartered accountant, but rather a mere understanding of its basis. There doesn’t have to be this immediate mental block just because you didn’t like math in school back in the day! The fact of the matter is, if you want your agency to be properly successful, you and your team must have the basics.
“A lot of the time I see agency leaders who don’t understand the fundamentals. They’re just in a lucky situation where they do great work. They charge the clients X amount, and it just so happens that their costs are less than what they charge the client. And, at the end of the year, they go to their year end accountant, and he tells them, ‘Oh, you’ve made a profit’ and everyone’s happy, right? But they can’t tell you how they made that profit.”
So, one of the biggest indicators that your agency isn’t commerciality-minded is that your leadership (be it the founder, the directors, or the MD) immediately refers you to the year-end accountant regarding any figures. This has been a common challenge for Alfie in his line of work.
However, once he explains what he’s looking for, why he’s looking for it, and how it will benefit the company, then it’s a lot easier for leadership to start working with the account directors, etc. Alfie expands on this, and why leadership can be initially uncomfortable with commerciality from 8:49 minutes***
Understanding your agency model = informed commercial decisions
When Alfie comes in, what are some of those core concepts he starts collaborating on with leadership, before educating the team? If we had to reduce it down to, like, “the 20 percent of things that you must understand to get 80 percent of the results”, what are those benchmarks for him?
“First of all, it’s the agency model. How does this agency business work? Because, a lot of the time, people tend to think something completely different! For instance, I think there’s that desire to please the client and do amazing work – so they forget that there’s a model, there’s a formula to this thing. It’s not just about the top line because you need to get certain other things right.”
As Alfie says (at 12:46***), the agency model is a simple one. However, what makes it challenging is that you’re selling expertise. It’s a lot easier and straightforward if you’re simply manufacturing or selling products. Why? Because you know how much a product costs, you know you can add X amount on top of it and make a profit. Simple. Humans with their levels of expertise are a lot more complex and nuanced. That’s where result-driven data comes into play.
So, once you understand your agency model, then you can understand a few of the important metrics that you need to look out for. As for what those key metrics include…
“Like I said, I’m not expecting any agency leader to go out and get an accountancy degree. However, there’s certain things you need to know. Firstly, you need to know what the Gross Profit is. You need to know what your operating profit is, EBIT, and you need to know what your net profit is. All of these kind of things, and you need to know how to explain them.”
From there, you can then explain such concepts as Over Servicing and Staff Utilization. Once you’re in a position to explain that to your team, then they will – in turn – understand how that feeds into your entire profitability process. This is key.
Then, within that, you can discuss the things that affect your team. There’s a culture as far as commerciality is concerned. How do people see things like pricing, what’s your method of pricing, and the culture around that?
We’ve worked with (a lot of) different agencies whereby only the MD, or the founder, is allowed to quote prices. Then, you go into other agencies, and the intern who joined yesterday is pricing work. That’s quite the disparity! Is there an ideal model for pricing?
“Everyone needs to feed into how you price. However, there is a level of accountability. So you need to outline that ‘This is the process. This is how we come up with our prices.’ Just to ensure that every time you price work, you’re doing it a certain way and you’re achieving profitability every time.”
Giving people the confidence to be able to make decisions based on the knowledge they have about pricing is super important.
What makes agencies dysfunctional (a rant)
So, you have these concepts that exist at the agency level that you’re going to see on the PNL for the whole business, or for a business unit, but you now have to find a way to translate that to the other context in the business. How does this apply to a given project or a client? Moreover, how does this apply to a more specific period of time? And how does this apply to each individual contributor that has influence over the outcomes of a project, of a team, of a utilization rate, and so on?
Coming up with concepts and core principles that can apply to all of those contexts is actually quite nuanced and difficult. I (admittedly) descend into a rant about the idiocy surrounding the idea of net profitability per project. Do join me from 17:15 minutes for that doozy***
In short, we’re trying to take a concept that we would think about at the agency level and push it down to the project level without considering the ramifications. This is where you wind up with an unnecessary level of complexity that makes agencies dysfunctional. They’re devising a price based on this arbitrary set of requirements that aren’t even resulting in profitability. Why? Because the underlying model is all disjointed.
This is where the magic that Alfie manages to pepper across an agency is key. It brings necessary nuance through every level, bridging those knowledge gaps, where I think a lot of the needless complexity traps emerge. So, obviously, he’s aligned with my views on net profit per project, right?!
“I am completely on your side in terms of Contribution… For simplicity, I would rather people focused on Contribution – especially as far as teams are concerned. If you were to achieve an 80% contribution on every single project you do, and you’re not crazy with the overheads, you’re fine, right? Agency model is where your staff cost is your most expensive cost. So, if you measure contribution, I think that’s simple enough on that side. I 95% agree with you and 5% not agree with you. And that 5% is just for me!”
Alfie and I provide more context and pivotal insight on contribution from 19:45 minutes***
Pushback Alfie experiences during commerciality training
I want to dig into some weeds here on this. Let’s start with the misconceptions that Alfie sees or the pushback he gets from teams when he starts working on this when trying to bring everybody in alignment around commerciality.
What are some of the things he sees as dysfunctions, commerciality faux pas, or bad habits that are often pervasive in these agencies once he starts working with them?
“When I go to an agency and we start talking about tracking time. That is a big one, right?! There’s a split consensus on how agencies should, or shouldn’t, be looking at timesheets. The moment I say to certain leaders ‘Do you track time?’ They go, ‘Oh, no, we don’t do that!’ The attitude is that of ‘How dare you tell me about time?!’ There are others when I mention time, they say, ‘Oh yeah, we track time, but we don’t bill on time’.”
Of course, they don’t bill on time, but the very fact that they feel the need to say this means they don’t understand the fundamental reason behind time tracking – which is to glean key data. Data you can analyze, track, and check profit, client profitability, and staff utilization. All the good stuff.
Another pushback Alfie experiences comes in the form of trying to get to an accurate or reasonable utilization target for the teams. This can lead to a breakdown of alignment because, of course, the founder and Alfie are suggesting being between 60% and 70% percent billable. This results in pushback from people because they feel it’s unachievable.
“Sometimes there’s that whole thing of ‘This is what is right for the agency’, but trying to get everybody on board is usually a challenge. I guess it’s human nature! So that’s where, again, the education piece comes in.”
It facilitates a necessary conversation, whereby leadership can outline what they need the information for. Leadership isn’t trying to punish or penalize anyone, quite the opposite.
“All we’re saying is. Do this, this, and this, and let us measure that, and then we can improve it. If you don’t measure it, you can’t improve it. “
Commercial knowledge has got to start with leadership. Why? Because commercial knowledge must inform every decision.
Having a comprehension of financial data is, in my opinion, the level zero of understanding. There may not be a whole lot of sophistication behind it but, hey, at least it’s a starting point!
Then, even as they develop more of an understanding, there is a big gap between understanding this well enough as a founder to make decisions, get some context, and – at a high level – get what’s going on, versus understanding it well enough to have the confidence to start managing down to the team.
From there, you need to manage stakeholders and be able to stress test these numbers in contextual conversations. This requires a level of mastery. This is quite the departure from cobbling together enough confidence to have a conversation with your accountant to have a general directional sense of what’s going on… So, there’s something of a necessary bridge that needs to be built across that gap.
See more from Alfie Wenegieme…
Did you learn anything new from this episode? Let us know in the comments below! We have helpful blogs designed to bolster your agency profitability, such as How To Calculate Your Billable Employee Cost-Per-Hour.
Our next installment of #APP, on September 27th, will see Marcel discuss Billable Rate in a solo cast. Our previous APP blog – Episode 122 with Ryan Watson – can be viewed here…
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