Who wants to work for free? It’s an outlandish question. But that’s exactly what PR firms do when the get sucked under by so-called “scope creep,” or providing services that are not adequately compensated or paid for by clients. As Rick Gould, CPA, J.D., managing partner of PR-focused merger and management consulting firm Gould+Partners, makes clear, PR firms have to push back when clients want additional services. Perhaps more important, agency owners must take pains to educate staffers about how to avoid overservicing their accounts.
Gould also addresses how agency owners can get a better handle on their overall labor costs. Half the battle? Owners need to adopt an “as if” mindset, in which they operate their business if they are going to sell tomorrow. The mental pivot, Gould stresses, can do wonders for improving PR firms’ utilization and profitability.
What are some of the most effective ways for PR and other creative services firms to combat overservicing, or so-called “scope creep”?
Rick Gould: Overservicing is particularly chronic within the PR field, regardless of the size of the firm, and seems like it’s getting worse. Combating overservicing starts with educating your clients on the total costs/budget associated with the campaign/PR project. The client contract is critical, of course. Try not to begin the conversation by quoting a monthly retainer but, rather, an annual contract and how the budget is going to be allocated on a monthly basis. If the budget starts to exceed agreed-upon monthly costs, then you must tell the client that there will be additional costs for the services. It’s easier said than done, but that’s the goal. You need to clearly state in the contract what the retainer includes and lock in a minimum cost to the client.
At the same time, if you promote an Account Executive to Senior Account Executive, you must make sure that the work she handled previously is given to employees who are further down the organizational chart. This way, the person who has been promoted doesn’t continue to do the same level of work. If she does continue at the same level, it will result in overservicing because the executive is earning a bigger salary, but not collecting the top-line revenue to accompany it.
Another way to reduce overservicing: Cut down as best you can on ‘busy work.’ Don’t have umpteen meetings regarding a client campaign. Stop the wheel-spinning. Focus your clients on the results, rather than the execution.
In an increasingly competitive marketplace, how can agency owners boost profitability and better manage labor costs?
Rick Gould: The hardest step for most firms to take in order to spike profitability is for owners to shift their mindset to one “as if” they’re going to sell the firm. This mindset pushes owners to put his or her best foot forward every business day by believing that an external sale its imminent and that buyers are courting them. Owning that mindset also enables agency owners to be more disciplined with profitability—building from a day-to-day operation perspective—and they also become more disciplined with financial and managerial controls when they know someone on the outside is watching. These levels of accountability don’t usually happens without this “as if” mindset.
As for labor costs, C-level managers need to follow a formula: Record each employee’s gross compensation during the fiscal year. For each principal, use a reasonable base salary for the work the person performed (this may be more or less than the amount your agency actually paid them). Include general bonuses paid to non-principals. If your total labor ratio differs from the industry benchmark, you need to look behind the number, analyze why your total ratio may be 62 percent, where the industry benchmark is 56 percent and the goal is 50 percent.
“Ask the PR M&A Expert” is a regular Daily ‘Dog column featuring Rick Gould, CPA, J.D., managing partner of Gould+Partners, which specializes in M&A for PR firms. Gould is author of the recently released, “Doing it the Right Way: 13 Crucial Steps For a Successful PR Agency Merger Or Acquisition.” The column focuses on myriad issues facing PR agency owners and C-suite executives, such as valuations, profitability, key executive retention and utilization. Readers are welcome to submit their questions to tap into Gould’s M&A expertise.