The more I think about it the more I think that hourly rates simply do not reflect your true value. For example, if a client asked you to shove everything aside so that you could focus 100% on a project that had to be completed by a certain date, shouldn’t your fee relect the urgency he has imposed on your business? Or what about those projects that can propel your client’s business to a whole new level? Shouldn’t your fee reflect this opportunity for him? Or what about that headline or slogan that only took a couple of hours but shot his brand awareness to the heavens?

Hourly rates focus on effort, not the end results. Well, you say you are all about results. So charge for them!

Lack of focus in professional service firms like advertising agency is unfortunately the norm instead of the exception. Diversification is a natural human response to help mitigate uncertainty. The problem is that diversification is not really a business strategy, but rather the avoidance of a business strategy.

A wide body of business literature documents time and again that the most successful companies are those who are willing to make what business strategist Michael Raynor calls “strategic commitments.” In his compelling book “The Strategy Paradox,” Raynor observes:

“Firms that avoid strategic risk survive
but do not prosper.”

This is a powerful way to think about the question of positioning. It essentially invites you to ponder the question “Do you want to just survive, or do you want to truly maximize your success?” Survival, while certainly desirable in these tough economic times, is hardly the reason talented professionals come to work every morning.

The nature – and power – of trade offs

To define and implement a strategy is to decide which trade-offs your company will make. You can’t offer every type of service or serve every type of client, so strategy is about deciding in which areas you intend to be excellent.

“Faced with this painful trade-off between the returns to the bold commitment and the risk of making the wrong commitment,” says Raynor, “most organizations forgo the possibility of glory for an existence bereft of greatness.” If your goal is greatness, the price is strategic commitment.

A risk?

“The best laid plans of mice and men go oft awry,” wrote the poet Robert Burns, in a nod to modern strategy making. A positioning strategy is indeed a risk, but so is not having a strategy. In fact, the greater risk – at least financially speaking – appears to be in not taking a stand and not making strategic commitments.

The diversification discount

Economists have actually identified what they call a “diversification discount,” which is a measurement of the inefficiencies that arise by channeling money and energy into too many different activities, divisions and product lines. This is chronicled in studies like The Cost of Diversity: The Diversification Discount and Inefficient Investment and Diversification’s Effect on Firm Value.

In effect, you erode both the short- and long-term value of your firm by spreading your time and resources into too many areas.

Don’t ever forget that as a professional service firm, what you essentially sell is expertise, and expertise is gained and maintained by focusing on the areas in which you and your firm can truly be best in class.

You are a good manager.
-You pay attention to details. You never drop the ball.
-You understand how to organize work flow so that the right things get done on time everytime.
-You know where you are financially at all times. You plan accordingly.
-You know how to get the best from your staff. You enable them to love their job as much as you do.

You have six months of operating expenses in the bank.
-Before you buy that new BMW, you make sure you have adequate cash flow to weather any downturns.
-You don’t distribute profits until you have adequate capital.
-You quickly cut expenses if you see a downturn in the near future.

You know who your potential customers are.
-You understand what makes your business attractive to your target customers.
-You build brand preference constantly by using marketing tactics that are right for you.
-You add value to your offering through free or enhanced services and discounts for repeat customers.

You take it slowly.
-You don’t expand until you know there will be continued demand for your services.
-You remember that “tall trees don’t grow to the sky.” Knowing when to exit a business is more important than knowing when to expand.
-You know that patient money always wins over fast money.

Generally, partners either start a business together or are added at specific points in the business’s evolution. However, both situations require the same thought process for the owner. The following are some key things to consider when thinking about having a partner.

1. Having a partner means sharing in less of the profits. Will the potential partner not only make up for this reduction but help create far greater profits?
2. While you might have a majority share, partners must treat each other as equals in the daily operation of the business. Can you do this?
3. Partners must always be transparent with each other. Are you sure you want your partner to know about everything you do concerning the business?
4. Partners must complement each other. They must bring different skills to the table. If you are poor at sales, they need to be great at sales. If you have lousy financial skills, you might want them to take this responsibility from you. If you both have the same skills, you don’t need them as a partner. You just need to hire them.
5. While it isn’t important for your partner to be your best friend, it helps for you to be compatible. Obviously you will be
spending a great deal of time together.
6. You will want to have a partnership agreement drawn up by an attorney. It should specify what happens if a partner leaves the company. Are you ready to lock yourself into a formal agreement?
7. Constant communication holds the relationship together. Can you maintain this level of communication?
8. Lastly, can you give up total control. If not, a partnership will almost always end badly.

1. Proposals written in answer to RFPs that you are very unlikely to win.

2. Proposals which are too focused on YOU, not on THEM.

3. An information dump with no persuasive structure.

4. Failing to offer a compelling value proposition and persuasive business case.

5. Poorly written, full of jargon,too technical, irrelevant content with no focus on key issues.

After sulking for a few hours, you call the team together and together ponder over why you didn’t get the business. You were brilliant at telling the prospect about your process and your outstanding creative work. You even threw up a few slides about
your knowledge of their industry. It was the best presentation you had ever made to a prospect. So why, you ask, didn’t you get the business? The team just sits there, wishing they were somewhere else.

Here’s the deal. What you failed to do was engage the prospect in a dialogue, based on where you thought you could take their business. Generally, prospects don’t want a show. They want a conversation about them. Now, some of you probably think that expressing a point of view at this stage is risky because you haven’t had a chance to apply your patented “brand exploration process.” However, you shouldn’t even be at the table talking to them at this point if you haven’t learned enough to take a stand. Sure it is risky. But a heck of a lot less risky than witholding your thinking.

So next time you are asked to present, think of yourself as a facilitator, not a talking head. The idea is to get them engaged with you. Make them think that you are already working for them. Do that and your chances of winning will probably go up dramatically.

This is particularly true today. Your ability to do things better than someone else based on a functional skill are over. A world-wide market has made access to “best in class” functional skills available to anyone.

The only meaningful way to be different is to know something different. Anything else is a crapshoot.

The two most common valuation methods that I see are:

(1) A percentage of the average of the past three year’s revenues (AGI, equaling the total of commissions, fees, hourly billings, markups, etc.). In some cases, this approach is expressed as simply a percentage of revenues. The median percentage of revenue is 70 percent for general advertising agencies, and somewhat more for digital or other “new technology” businesses.

(2) A multiple of operating profit (EBITDA). AdMedia Partners, Inc., an investment banking and advisory firm specializing in media, advertising, digital, social and marketing services companies, conducts an annual survey among prospective buyers and sellers regarding prospects for mergers and acquisitions. The median multiple of operating profit in the most recent AdMedia survey was 5.0x for general ad agencies.

It should be noted that whatever the multiple, it is applied to “adjusted profit.” “Adjusted profit” usually reflects reported profit with additions or deductions for the difference between compensation paid to an owner, and what would be paid to, or on behalf of, a non-owner executive performing the same duties. As you know, that adjustment could go in either direction. In addition, items such as depreciation and interest are added back into the equation. Usually, the market value is an average of both of these methods of agency valuation.

Stated simply, your agency is worth about 70 percent of last three years’ average AGI; or, 3 to 4 times adjusted net profits. Or, some average of both of these methods.

Perhaps it was your mistake to hire them in the first place. Maybe not. The point is that it is no longer happening and you have given them every chance to step it back up.

As the owner, only you can make these cold, hard decisions. Your staff will be pissed at you. You will feel bad. But you have to do it.

I know an owner who needs to cut a team member right now. But they just can’t do it. The person has been loyal for over ten years and hung in there in good times and bad.

It doesn’t matter. You have to cut them today.

Nobody ever said owning a business was easy.

VISION
A vision is something that is ongoing without a specific end-point in time. Also, a vision is considered a soft skill because it may not be measurable. If your business is a structure to fulfill your greater purpose; what is the purpose? What is the long range picture of your business?
MISSION
A mission answers the following questions. What specific outcome does your business need to be focused on? What approach out of all possible approaches to your vision does your business need to take? What is your market ‘niche’? in what product or service does your business specialize? How will you put your mission into words that will be meaningful and inspiring to your employees? How will you keep your company mission up in front of employees, clients and associates, so they will stay on course?
OBJECTIVES
Objectives are the ultimate goals of your business. What are the long-term and short-term goals of your business? Identify those goals that will achieve your objectives. Create clear and concrete measurements. How many? By when? Design measurement systems for each distinct area of your business, which will be posted daily, weekly, monthly, etc.
STRATEGIES
Strategies are plans and skills that allow the business to achieve goals on the way to fulfilling your business mission and objectives. What is your action for your business? How will you get to where you are going from where you are now?
STANDARD OPERATING PROCEDURES
Standard operating procedures are the foundation and the rules of conduct for your business. This is the vehicle that will allow people to know if and when they are not operating true to company’s principles. What does your business stand for and what are the business commitments? What is the motivating force behind your business? By what principles will you operate? Write out an employee handbook or a company manual.
ORGANIZATION AND ACCOUNTABILITY
Organization is the system by which your business achieves specific purposes. Define what the business, departments, and individual employees are responsible for.
EXECUTION
Execution explains the measurement of actual results vs. the budget. Where can these resources be obtained and what will they cost? What are the appropriate actions?
BUDGET
A budget is an estimate of income and operating expenses for your business. Prepare an operating statement for your business for all 12 months.