Tony Mikes – Financial Analysis and Management Reporting

Tony Mikes is from Second Wind Network — his Second Life! Tony has been an agency principal, running an agency outside Philadelphia consisting of about 50 employees. Tony spent 8 years out of college as a copywriter, out of sheer chance.

Tony created Second Wind as a Second Life to help smaller agencies, and brings classically-trained advertising expertise into your ad agency. Tony will talk to us today about ‘How do we run this business?’. You have to understand the essence of the agency business. In order to do that, you have to have a history lesson and understand what is happening today. This will allow you to run the agency business in the future. Advertising began with the expansion of the United States in the 19th Century. Publishers sold ad space to agents traveling and selling that space thereafter. Francis Ayer, in 1911, convinced Curtis Publishing to agree to a standard agency contract, because there were no standards at the time. So, instead of buying the ad in, and reselling at a markup, he would allow accredited buyers to receive what became the legitimate agency commission of 15%. The agency had to have multiple clients and be creditworthy. The exclusive 15% commission was the jewel of the crown for this business. Agencies simply placed media and the new media of the day: Magazines. By 1918, agencies had also taken over the creative role. Albert Lasker came along to make his name in advertising. Lasker decided that the copy provided by the brands wasn’t worth anything. Remember this is in a time when there was no commercial marketplace. Lasker created what he called ‘Reason-why’ copy. Prior to that, copy was merely informative. Lasker was working above a tavern in Chicago’s Loop district. A guy runs in calling for Mr. Lasker, with a note. The note was asking Mr. Lasker if he knew what advertising was? It was from John E. Kennedy. They meet and Lasker then controlled every major account in the United States. Lasker retired in 1941 to work for Roosevelt. He wanted to close the agency because no one can do it better than him. His employees convinced him, however, to sell them his clients. That agency is still in Chicago. After Lasker the relationship was between the agency and client — the publisher was on the outside. Once the relationship is in place, you need Account Service. J. Walter Riley furthered this development. He was a navy man, and hired only navy men for Account Service. In 1926, the radio broadcast began and ushered in the golden age of advertising. Agencies made money in three different ways: Media commissions, Marked-up costs, and Time. These combined equal your Billings. All Direct Costs are subtracted to equal your AGI (Agency Gross Income). Subtract your overhead and you now have your EBIT (earning before tax). Markups and commissions are disappearing. We are now looking more and more about billing time.

Today we have ‘Barbarians at the Gates’. Let’s analogize Advertising to Rome. No one could get into to Rome, but the Barbarians are trying to get in. Once the gates opened and they arrived, Rome was over. Who are the Barbarians now? The Media. They are telling their clients to go direct instead of through the ad agency. They are becoming our competition. What else is diminishing the industry? There are 32,000 ad agencies. Small and smart. We need to thin the herd. What else? The vendor. When you turn down a vendor for a service, what do they do? They then go to your client. Finally, our clients are reducing our income. You bring in your creative and the client says, here, look at mine. The greatest Barbarian of our industry is “the new consumer”. They are very empowered. They do not take well to our message. They do not want hyperbole. They are in control of the process and they don’t like the process! They don’t like marketing. The consumer is now directing where marketing will go. There are 73 Million Pigs in the Python — the baby boomers. They bought all of the Elvis and Beatles records; Raccoon Hats and Hoola Hoops. They have controlled the world. They questioned the world. They don’t trust anyone over 30. How did all this happen? Blame Al Gore and his Internet. That ushered in a Power Shift. The marketer used to control the process. The control now is held at the Marketing Channel. But not for long. The Consumer will soon have it back. There is no where to hide. We are now talking about serving the Empowered Consumer.

What’s an agency manager to do? Why do we have Workamajig? It exists because it is very robust up front. You can open projects, create an estimate, create a timeline, issue purchase orders. Well, now, efficiently finally counts. In 2010 and beyond, we will get more efficient. How will this happen? We will look at the Financial Statement. Tony prefers to mirror income accounts with related cost of goods/direct cost account to derive a billing equation. This gives you your AGI and you can measure the relationship between your billings and AGI. This percentage can vary depending on how much media you have but the median is 46%. Then you have Owner’s salaries and Employee’s salaries. The arithmetic median for employees is 18 employees. Second Wind is largely for agencies under 100 employees. All numbers will come from your AGI. Payroll will need to be below AGI. Total payroll should be no more than 50%. It is less than that for Second Wind Members. If AGI is 100%, 50% is salary. Your EBIT should be 20%. Not many can do this, but it is where you should be if you can be efficient.

So we will focus on billing time. There is about 20% slippage — hours worked that are unable to be billed. We have to fix this and recover this slippage. We need to setup systems, processes and procedures to enable this to happen. We have to look seriously at this factor because we are losing all of our other sources of revenue. Let’s be serious about this.

So how do we become more efficient? Try to improve your work flow process. Tony’s job in his agency was getting the elephant through the key hole. First, all jobs will have a number. No number, no worky. You have to enforce that. You need strong Creative Briefs. This enables you to look past the facts and into the insights. Here are the solutions to the problem. Less fear to provide three things when one will do. Second Wind has a course on how to do this properly. What is Account Planning? Superior knowledge of the end user — understanding the client’s client. The epitome on Account Planning is the brief. We need to be stronger on this process (contact tony@secondwind.com). In addition, we have to adapt critical path management in your agency. What’s this? Creating a timeline. We identify all interim steps (Workamajig Tasks) along the way. It makes your life more organized. One timeline is not tough. Integrating 30 timelines and deciding who goes when is tough. You need a solid traffic system for this. The only way you will survive in this agency is to have command of all projects in your house proactively. Tony suggests a Daily Update. No one likes the Monday Morning Meeting. Move the meeting to once a month, 4-7, babysitting provided. Number 1: we ate. Number 2: we b!tched. Number 3: we brought someone in. Number 4: The Wall. Anytime we did a job of note, it went on the wall. So that people could then write their notes, tear the wall down and bring it to the meeting to motivate people to get better. The Daily Update replaced the weekly meeting. About 3:30 in the afternoon the Traffic Managers would try to resettle the day and plan the next day. The AE’s come in from their day. Tell the Traffic Manager what you need, without trying to finesse them. They then can figure out what needs to be done the next day and deliver hot sheets to each desk. This is concluded with a ten minute meeting the next day to review and make sure everyone can do the hit list. Every day. Same procedure. Ten minutes. Tony is advocating taking your slippage time and storing it in another project so that it can be added to other projects later. This is to help you respect your time more.

Estimating. Estimate by Task. You can build them from scratch or use your Workamajig Template. You need to do it Task by Task in order to properly estimate projects as they are coming through. It is what you use to build a new estimate. It can be enhanced by what you know historically (through projects), or you can look at the last job, etc. We have estimating in three categories: Time (how many hours at each task, what do we sell that hour at, what is the extended price); Outside Purchases (vendor costs, marked up; what’s the net, what’s the gross); and Miscellaneous Costs (postage, lunch, etc.). With these you should be able to create a line by line estimate. You should do this for all Projects. Once created, you shouldn’t give it to the client. Give the client a one line estimate with a great description. When you itemize the client goes a la carte; “I’ll hire my brother in law to do this, etc.”.. Some do not agree with this process, but the Estimate should be compressed for the client, expanded for the agency. Once the estimate is approved, you can run one of the most important reports that you can run and allow the employees to see the estimate. Do not worry about the employees knowing what you are making: BECAUSE THEY ALREADY KNOW. So the greatest report would be your electronic job jacket showing the estimate figures, schedule and brief, etc. This is Project Central in Workamajig. Your employees should be reviewing these projects. They need to be recording time on a daily basis. If they don’t have it in by 9:30 the next morning, you might send them home. Time must be entered to manage this. You also want all receipts from Credit Cards in immediately. All costs should be entered as Purchase Orders with pre-pricings. If you have this data you can manage Estimate vs. Actual at any time. We have the capability to do this. The question is are you tough enough to do it? It’s not fun to work this way. We would rather live like the set of Mad Men. But its no longer the world we live in. So, if your actuals are entered you can managed them. Workamajig notifications can alert you if we are endanger of approaching the Estimate. We may need to reapproach our estimate. We’re gonna do everything we can to avoid addressing this when we are billing the project. If you are managing this actively then you have control over the slippage and is transferred to a dummy account. That time is now more likely to be billed as opposed to staying in inventory forever.

But not only that. Make sure you are making money on every hour you bill. You could run an agency Greek Restaurant style: lose money here, gain it back there. Your rates should be based on a calculation. Take someone’s salary; divide it by the number of billable hours you want them to bill in a year. He uses 1600 hours. This is a necessity. Not everyone in the agency can do this (overhead). Multiply this by an overhead factor. How do we gain this? By taking all expenses, not including payroll, but include non-direct payroll, multiply it by the factor you want to make (accountants say 3). In this way you are prescribing your profit up front. What if this number is too high? Pay moderately, and expect them to bill their time more effectively. Using these numbers can help you to determine if you are paying people too much, they aren’t working enough, etc. If you can get 20 points from your AGI you shouldn’t be in business — it’s like kissing you sister, no thrill.

Markups. What’s the difference between a markup and a margin? You need to know this. (moved topics too quickly)

Diary. Keep updates to the project here. Workamajig has this. The Diary is important to tell everyone what is going on with the project. “I’m going to tell you what the client said so you want begin that second comp, that we can’t use and give to the client”.

Digital Assets. There are so many files you can never find them. How much time is wasted finding these files.

Billing. There are a number of ways to bill a client. Advanced Billing per an Estimate. This is good. Get the money up front. Cash is King. Remember you have to make payroll. The trouble for this method is you look like a vendor, instead of a thought leader. Another good system is monthly to date billing. At the end of the month, we bill the time in the job. Finally, you can do rolling billing. Within 48 hours of job completion you bill it. You don’t want the billing sitting around. The Account Manager holds on to it. You bill it as you get it. The typical turn on receivables in agencies is 54 days, where terms are normally 30 days. If you use all of these billing methods where appropriate, Tony promises your turn rate will improve by 12 days. Workamajig is a great tool for this. The problem is us. Not the software.

Retainers. Type 1, the client pays you over and above the project work in recognition of the work you do. Type 2 are panthers. The full retainer. It’s a cage you step into with a panther because you have the fixed rate and it gets over used by the client. If you use this method you have to install a ceiling and floor. You have to communicate up front. The agreement should state what the dollar value for each hour is, etc. Then, “if you over use us by 10%, there is no extra bill (bill sent if more); if under use, no refund, but credit for those hours”. Even Steven.

Risked based compensation. It’s all the rage. The deal says that the agencies compensation is at risk up front, based on performance measured on the results. The client will look for sales or profit increases. You can’t be responsible for that. You can put people in the seats, you are generating the leads. That is the way it can work. You have to set the parameters, and they have to be where you are in co-control. No hard costs in the deal — all billed at net or with a markup. The time is at risk. Whatever you give up in the front end, you want to regain plus an additional 20% since you took the risk (a bonus).

An agency manager needs to be able to manage. You need to be able to review the profitability of client accounts, projects and the overall profitability of the agency.

What else is there to consider? You need to be strategic partners with your clients. You cannot be vendors for your companies. Large companies are moving towards procurement offices, beating down your service rates. Become a partner. Not a service provider. Be one who is involved with the client’s marketing plan; read it, help with it, or write it. You must be able to help them move their brand to recognition.

Good agencies bring a brand forward and communicate the brand promise to their consumer. You are also a brand activator — you can implement the brand to the proper mediums. You are a convergence agency. There are many agencies that can deliver a brand but cannot activate it within the the new marketplace. There are many new media shops that can activate a brand but never build it. You need to do both.

Finally, you must do new business with a passion.

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