New Business Wins Erode Agency Financial Health

New business development is a big part of agency life. New business adds volume to replace lost clients, but it also erodes agency financial health. We're not talking about agency profitability, here -- any client can be made profitable if resources are simply scaled to fees. We're talking instead about financial health, and this is an entirely different matter -- its measures are fee and workload.  

"Fee" divided by "workload" equals "price," and the economic fact is that new clients pay lower prices than existing clients. More work is required for less money. That's what lower prices mean in the advertising industry, and it has been a phenomenon for more than a decade. Prices for advertising services have been declining regularly. Every time a client changes agencies, price declines.

Price, of course, is an invisible measure, since agencies do not have a way of documenting, tracking or measuring their workloads. Consequently, they cannot measure the erosion in price for their services. The fact that price is invisible does not mean that it is not declining, though.

Ironically, there is more profit potential from existing clients than from new clients. Consider the following:

  • Unpaid scope creep averages 10 percent of a typical agency’s workload. In some cases, it is as high as 20%. The foregone profit from all of the unpaid scope creep is equal to most agency’s total profits.

 

Unpaid scope creep can be eliminated from an agency's portfolio, and profits can be substantially increased, but it takes management attention, workload measurement and good negotiations to pull it off.  

Senior executives will always be out in the marketplace seeking new business. This is as it should be. Additionally, though, they should be spending an equal amount of time improving agency operations, particularly on Scope of Work issues -- a highly neglected source of potential profit enhancement.