It is no surprise to many of us that most new businesses fail. Many blame the economy, changing consumer tastes, brutal competition, too much government regulation and a host of other issues. In conversation recently with someone whom I respect, another variable came up and we hashed it out rather thoroughly. One of the reasons so many businesses, particularly smaller ad agencies and marketing firms are failing or struggling is simply failing to control expenses properly.
We shared some war stories about how we witnessed waste over the years both in places we worked, visited, or where we knew many insiders. On balance, my friend stated that he felt that many smaller to mid-sized ad agencies have the equivalent of an account that bills $2-4 million dollars in paid media if they simply had a better handle on expenses. Here are a few things that popped up plus some comments that a few agency principals shared with us:
1) Some CEO’s say the best way to cut expenses is to always cut staff. When you package up benefits on top of salaries, the savings are clearcut and take effect quickly after severance is paid. This is hard to argue with except that when times get tough, top management often seems to terminate some high level and highly paid employees that can be the glue that is holding the shop together. They can get to a desired number quickly that way. Over the last few years, several old pros have told me that they are down to a few senior staffers and a bunch of low paid kids. They have no bench anymore and everyone is overworked and clients suffer as they continually cut corners on both service and analysis.
2) One CEO says that he has painted himself in a corner regarding expenses. “Nowadays, I almost always cut staff when things get tight. What I learned is that if I give up a perk to the team, it is permanent. If someone gets a car allowance (increasingly rare) or the whole team is off an extra week at Christmas, it is impossible to rescind it without really bad feelings emerging. I try to be more careful about travel and entertainment but I know we waste money there. When it was back to the wall time in 2008-2009, we did some short term belt tightening and everyone understood as they were really scared, but as soon as we picked up a new account things got a bit sloppy again.”
3) A creative head put it this way--“Look, we could save some money by nickel and diming things to death. But part of the charm of working at an ad agency is that things are looser than a bank or an insurance company. We don’t look at the small expenses all that much.” My friend just shook his head and wanted to bet me $1000 that this firm would go under in five years. Time will tell but the creative director seems to be in la-la land.
4) I once suggested to a CEO that waste was rampant. He smiled and said, “I could really put the hammer down if I wanted in this office but I won’t do it unless things get desperate. Don’t you like nice meals when traveling? I know you use your frequent flier miles for your kids.” He then admitted that he was going to let a few quality people go in the next few weeks. Clearly, it was his bat and ball, not mine, but I was amazed.
5) Also, word gets out among the staff about what they can get away with regarding expenses. Once, when reviewing an expense report, I saw magazines, a bottle of aspirin and airport VIP parking on a trip a team member took. When I redlined the items, she said, “The people in production do this on shoots, why can’t I?” My friend said that you just have to be reasonable about travel expenses and be consistent. Everyone can only rent certain types of vehicles, and stay at certain hotels was ground zero. From there, put some reasonable guidelines in place. The $200 bottles of wine should show up only at large client request--most of them do not have that refined a palate.
6) A #2 at a mid-sized agency weighed in as follows--“My boss once told me to always book first class travel; I was told that I was entitled to it. I responded that I was upgraded to first 95% of the time because I am a frequent flyer (platinum status). Why pay for it? Over the course of the year, I could save the company thousands. If you did the same thing with a few other people, you could save a job or two, hire someone you need or pay us all a larger bonus at year end. He was not buying. Finally, when things got tight after a client loss, all of us were flying coach. As it happened, I, the “road king”, was upgraded to first class on a new business trip and no one else was. I looked my fearless leader in the face and said, “Let’s trade seats. I do not need the legroom you do.” He was genuinely grateful and accepted both my seat and my savings argument. A year later he told me we had saved nearly a quarter of a million dollars by buying coach tickets for senior management. I personally delivered the biggest savings and I still almost always had a first class or business class upgrade.”
7) Finally, an agency president whom I have never met but who comments frequently on Media Realism had a sports analogy which was interesting. “When I was in high school, I played on the basketball team. I was not very good and neither was our team. Our coach had us do endless defensive drills. We probably spent 80% of practice working on our defense. Years later, at a reunion, I asked him why he did that. He told me that there were nights when we would shoot 60+% from the floor and others when we hit 30% of the time. He could not control that. If we played good defense every night, we would win some games and keep others close. I take the same approach to my business. When the economy sours, we lose some business. Or, a client gets bought or a new Chief Marketing Officer comes in and we lose an account. I am powerless over that. What I can do, day in and day out, is control my expenses. So, I key on that and it has helped us through some bad times and made the good times even better.”
Are you exhibiting tight cost controls? Unless faced with bankruptcy, the changes do not have to be draconian. Warren Buffett calls his corporate jet, “The Indefensible.” America’s favorite folksy billionaire is a tightwad when it comes to business expenses. Perhaps we should all listen to him a bit more.