We write elsewhere about having a balanced mix of client accounts—a few big clients, some middle-sized accounts, and several smaller bread-and-butter accounts that provide steady work if not huge profits. This balance helps protect a smaller ad agency against account losses; a balanced account mix means that if even a large client leaves, you have a good foundation of other accounts to support you until you can win an account to replace that one you lost.
We also have written about the need to keep a well-filled new business pipeline to ensure you can keep incoming business flowing, lessening the need to worry about an unexpected account loss. With a steady flow of prospects in your “in-development” pipeline, you can quickly focus on the prospects you are most likely to win and soften the blow of that big client taking their business elsewhere.
Finally, we write about the need to regularly review current accounts to see if you are meeting account profit expectations, as well as providing clients with the results they need. But there is another area where balance is important.
Balancing Risk Across Accounts
Here’s an idea to think about as you examine your account mix and build an annual business plan: Are you balancing risk/reward across all accounts?
Many agencies have adopted risk/reward performance agreements, wherein the agency assumes a percentage of risk on a project, and based on the success of the outcomes, has an opportunity to earn bonuses scaled to the level of success. A well-crafted risk/reward agreement gives the agency a chance to earn far in excess of what they would be able to earn in a time-plus-cost-based billing model.
When we refer to balancing risk/reward, we refer to ensuring that you have a mix of high-, middle- and low-risk agreements in place. This requires good financial oversight of the agency’s cash flow and other financial performance measures, and tight management of client relationships. You may even have clients with whom you have cost+ arrangements, basically billing on estimated cost/hours plus a markup. While many agencies are moving away from cost+ to other pricing and billing models, it can be wise to have a few bread-and-butter accounts that serve as a base for your risk/reward account arrangements.
Managing Account Risk
The Director of Account Service should meet regularly with agency leaders and the agency’s financial manager to review and discuss risk/reward agreements, and assess how those agreements are (or are not) meeting expectations. Understanding which clients or projects are the best choices for high-risk agreements, and which are better maintained at a middle- or low-risk level, can help you protect your agency, keeping tabs on profit and revenue.
The Director of Account Service must also meet frequently with AEs to ensure they are working closely with assigned clients, and doing all they can to maintain and grow accounts. Nurturing client relationships is an essential part of overall risk management.
Finally, the accounting department should be involved in and informed as to any risk/reward arrangements, so they can keep an eye on how cash is flowing from those accounts, and be alert to changes that may indicate potential problems for the agency. Accounting is also key to managing risk/reward justification, billing and collections.
As you conduct ongoing planning reviews, make sure you keep an eye on any risk/reward agreements, and how those balance out across your total account mix. Account management must consider more than scale/client size; it needs to assess risk against profitability to ensure that the agency is stable and protected from client departures.