The Agency Business: Challenges abound when firms move past the $10m mark

Whether the growth is fast or slow, firms oftentimes struggle with psychological or physical obstacles when revenues swell to $10 million. Andrew Gordon discovers ways to ease agencies' growing pains

Whether the growth is fast or slow, firms oftentimes struggle with psychological or physical obstacles when revenues swell to $10 million. Andrew Gordon discovers ways to ease agencies' growing pains

Bite Communications has grown at an incredible pace in the US.

In 2002, the firm had $712,000 in revenue. Thanks to its acquisition of Applied Communications in mid-2003, and client wins since, the agency soared to $8.2 million by the end of 2004. And now with Sun Microsystems naming Bite its lead US agency, US revenue will easily cross the $10 million mark.

But that doesn't mean being an agency with double-digit revenue is easy. Few agencies grow at the pace Bite has. But fast or slow, growing past that $10 million mark carries with it major business challenges, both physical and psychological.

"How do you grow a service company without giving up what has worked before?" asks Burghardt Tenderich, Bite's North America GM. "That is the challenge. So many agencies struggle around $10 million."

But why? Edward Moed, managing partner with New York-based Peppercom, which grew 15% to $8.1 million last year, suspects it's both financial and mental. When agencies get around that number, things start to change. More revenue means more employees, which can change the way partners manage the agency. Just check with any of the agencies that soared and then crashed and burned after the dot-com bust.

"The most important thing is to have the right people, especially the next line of management," said Moed. "The VPs are the level that is critical to maintaining quality. But you need to have lines of responsibility. You can't have too many cooks."

Moed points to Waggener Edstrom, which had $77.7 million in revenue last year, as an agency that has maintained that entrepreneurial spirit.

Many agencies struggle around $10 million because the founders and partners have a hard time letting go and empowering other people, says Tenderich, based in San Francisco. Agency heads need to empower other managers because, as an agency grows, it becomes impossible for one or two people to do everything.

"If you don't empower those other people, they'll leave," Tenderich warns.

Lynn Casey, CEO of Minneapolis-based firm Padilla Speer Beardsley - which grew 9% last year to $10.3 million - getting past $10 million is a milestone that boosts staff morale and catches the eye of prospective clients. But agencies need to be prepared beyond having enough staff to service accounts. Such growth also impacts infrastructure, as well as accounting, HR, IT, and business development.

But Casey says that if agencies do it right, growing close to and beyond $10 million enables them to add more services and attract more complex clients.

But at all stages of growth, agencies must be prepared and anticipate more business, not react after the fact.

Otherwise, "they don't have the staff to handle the new business," says Bob Angus, president and managing partner of San Mateo, CA-based A&R Partners. "If you don't have the right management and staff in place, you will deliver a different kind of business. You have to grow first, and then you can scale with clients."

But be careful, warns Susan Butenhoff, president and CEO of Access Communications. The San Francisco-based agency grew 11% to $8.8 million last year.

An incremental increase in revenue can be overwhelmed by an increase in expenses. She says her firm is expecting 31% growth this year, but with that a 42% increase in operating costs to handle that growth. Those expenses come from a more sophisticated level of technology infrastructure and support, larger office space, and headhunter fees. And at that size, an agency needs a few anchor accounts with larger budgets.

"Then there is your culture, which becomes even more critical," says Butenhoff. "It's easier to nurture a sense of who you are when everyone knows each other. But the larger you get, you face the danger of teams getting siloed."

Angus agrees that beyond the larger office space or new services and practices are the people. It's that next level of management that is needed to maintain the agency's culture and work ethic, he says.

"It's important for agencies to think about what growth means," Angus adds. "We have the ability to deliver more to the market than ever before. If you're smart about it, getting bigger can make you better."

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What to consider when growing

  • How will it impact the agency culture? What needs to be done to protect it?

  • How large will the senior management team need to be? What will the hierarchy be?

  • How will growth impact infrastructure (technology, office space, etc.)?

  • What are costs of growing staff?

  • What services/skills will need to be added to attract larger clients?

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