Agency Health Guide
A blueprint for a better agency
What to expect from this guide
This guide was created to help digital agency owners and leaders systematically build better agencies. It will walk you through how to:
- Comprehensively assess your agency’s fundamentals: business plan, processes, people, marketing & sales, clients & engagements, and finances.
- Identify the changes that will help you avoid your biggest risks and seize your best opportunities to achieve your goals.
- Create an actionable plan, prioritized based on impacts and effort.
- Ultimately, improve your agency’s performance, operational & financial health, and personal well-being for yourself and your team.
Think of your agency as a house. This guide will help you with everything from uncovering that leaky pipe before the floor joists rot to prioritizing renovations that will make it a home you will be delighted to live in for years to come.
What is a healthy digital agency?
A healthy digital agency creates great value for its clients, team members, and owners in a sustainable way.
A company (any company) exists to turn resources (i.e., knowledge, time, money, relationships) into something of greater value. The more value created from the resources, the better.
Value is usefulness to you or someone else. That usefulness can be tangible (e.g., more qualified leads for your client) or intangible (e.g., less stress for you and your team).
Healthy companies get better and better at creating value.
A company will be sustainable if it provides better-than-average value to all its stakeholders: customers, team members, and owners. If a company creates above-average value for society at large, it will have an added advantage in attracting the best customers, talent, investors, and opportunities.
“The difference between successful companies and mediocre ones has little to do with what they know or how smart they are; it has everything to do with how healthy they are.”
What to assess to understand your agency’s health
To build a better agency, you need to first assess your threats and opportunities. This will help you protect and grow your ability to create value.
Uncover your agency’s biggest threats and opportunities by evaluating a broad set of practices and metrics, comparing your agency to itself over time and to industry targets and best practices. These are the areas to look at:
- Business plan
- Processes
- People
- Marketing & sales
- Clients & engagements
- Finances
“Execution is a systematic way of exposing reality and acting on it.”
Business plan
A succinct business plan helps you hire the right people, market to ideal clients, and offer the best services to create the most value for your clients, your team, and yourself. Your business plan should summarize all your most important decisions:
- Desired future state: Define why your agency exists and the future you are working to create for yourself, your team, and your clients.
- Core values: Describe the few key principles that guide all your decisions — the things you believe in enough to make big sacrifices for.
- Positioning: Define what problems you solve (your discipline) and who you solve them for (market). This is the niche in which you build and apply your expertise.
- Strategy: Explain how you succeed — the most important ways you create value for your clients and people.
- Plan: Define your current top priority and the major steps to achieve it (what, who, by when).
Each of these should be clear and brief. Some elements (like your plan) may need to be updated frequently, while others (like your core values) will not. You want 1-2 pages that are so relevant and meaningful that you and your team reference them many times a week to guide decisions and keep everyone aligned.
Processes
Your processes are the step-by-step methods you use to operate your agency. Processes can vary significantly from agency to agency, but these five apply to all agencies and are critical to avoid costly mistakes.
- Cash forecasting: A rolling 13-week forecast, updated and reviewed monthly, that covers cash in/out and running balance vs. target cash reserves.
- Client credit management: A clear policy on how much credit you extend and what you do if you exceed it, a creditworthiness check for new clients, and a monthly review of each client’s credit extension.
- Lead qualification: Must-have qualifications for new clients, including when and how each is evaluated. Empower any senior leader to veto a prospective client based on these factors.
- Candidate evaluation: Must-have qualifications for new hires, including when and how each is evaluated. Empower any senior leader to veto a prospective hire based on these factors.
- Business improvement: A simple and dependable plan to surface, coordinate, and action improvements to your agency.
If you don’t consistently follow effective processes in each of these areas, the results could include painful layoffs (from poor cash management or a client leaving with a big unpaid balance), unnecessary team stress (from a poor client fit), or reduced team morale plus severance and re-hiring costs (from a mis-hire). In the worst case, failures in these areas could end your agency.
People
The foundation of your agency’s long-term success is putting the right people in the right roles (including yourself) and then enabling them. A close look at the following considerations will shed light on the health of your team:
- Role definition: Up-to-date purpose, outcomes, and accountabilities for every role.
- Role fit: Rate each person’s fit based on the role definition (strong yes, yes, maybe, no, strong no).
- Proportional staffing: Full-time equivalents (FTEs) per functional and skill area.
- Utilization: Overall and by skill area, engagement team/pod, person, and region.
- Staff tenure: Average number of years your team members stay at your agency.
- Staff turnover: Percentage of staff who left your agency during the last six and 12 months.
- Engagement and retention: Percentage of staff who see themselves at your agency two years from now.
- Staff perceptions of manager quality: Overall and per manager perceptions of trust, empowerment, and support quality.
Marketing and sales
Effective marketing and sales allow you to maximize the economic value you create from your expertise. Tracking these metrics over time will help you assess the health of your marketing and sales.
- Percent of revenue invested in marketing and sales.
- New marketing qualified leads overall and per channel for each of the last two quarters.
- New sales qualified leads overall and per channel for each of the last two quarters.
- New clients overall and per channel for each of the last two quarters.
- New engagements (number and value) overall, for new clients, existing clients, and by category/type for each of the last two quarters
- Cost of acquisition per client and engagement.
Clients and engagements
Your positioning, expertise, processes, and team are all uniquely tuned for a particular book of clients and engagements. Looking at the last six months, these metrics and their trends will help assess the health of your client and engagement portfolio.
- Total active clients and engagements per month
- Gross profit (total and percent) per engagement per month
- Average active engagements per FTE
- Average engagement length
- Average client tenure
- Average client lifetime value (current clients)
- Lifetime value per client active last 12 months
- Percent of revenue total and from each of your largest three clients
- Percent of revenue that owners and team would say “yes” to again, given a do-over option (based on a yes/no per engagement)
Finances
Money is a key measure of value creation and a primary way to access the value your agency creates. Financial metrics help you quickly identify problem areas in your agency, see your trends, and compare your performance to industry targets.
Capture each of the following for each of the past 12 months:
- Revenue
- Revenue per FTE
- Gross profit percent of revenue
- Effective hourly rate (revenue received per hour spent in the service of clients) per engagement, per client, and overall
- Operating costs percent (and percent fixed) of revenue
- Operating profit percent of revenue
- Operating profit per FTE
- Equity (total assets vs. liabilities)
Also, check each of the following every month. For these, the current position and recent trend (last three months) are most actionable:
- Cash runway (in months)
- Accounts receivable aging overall and per client (within terms, 30 days, 60 days, and 90+ days)
- Credit extension per client (include both invoiced and uninvoiced work)
- Debt/Asset ratio
Start assessing your agency’s health
Once you understand the factors to assess, your next step is to divide them into three phases: immediate, near-term, and long-term.
Prioritizing the factors by phase will help you get results much faster. Decide which phase a factor belongs to based on (1) the effort to check and (2) the time proximity and size of related risks and opportunities.
Within each phase, take the time for each factor you’ve chosen to:
- Orient: Learn what it is, why it matters, and what healthy looks like.
- Aim: Set your own target and define what success is for you in the near term.
- Assess: Gather and analyze the data, comparing it to norms and your own target.
- Improve: Capture risks and opportunities you uncover in your assessment and turn them into action (as described in the next section).
Phase 1
Focus Phase 1 on your agency’s foundation. Choose a set of factors that you can assess relatively quickly while still getting a broad picture of your agency’s health. Include both descriptive factors (like staff turnover and revenue per FTE) and predictive factors (like cash forecasting and new engagements).
Wait to begin Phase 2 until you’ve made tangible progress on at least a few issues you uncovered in Phase 1. Assessment is only useful if valuable action follows.
Phase 2
In Phase 2, move further into your agency’s operations, pursuing root causes and the areas to improve that will give you the most leverage. Although Phase 1 may have pointed you to 1-2 areas of the business with more risks and opportunities, make sure to still include all six categories in Phase 2. Then give yourself space to make more improvements based on the insights you’ve uncovered.
Phase 3
Phase 3 is about filling in any knowledge gaps you may have about what inputs create which outputs (good and bad) related to your agency’s most important measures of health.
If you haven’t yet, build a data dashboard with your preferred indicators and predictors of overall agency health plus any key factors related to your current priorities. Regularly share this dashboard with your wider team alongside your business plan. Leverage this shared insight and focus to operate with more effectiveness and less effort.
If done on your own (or among a few partners or senior leaders), with limited time and headspace, your first comprehensive assessment may take a year. This allows some time for improvements in the areas of risk and opportunity you uncover. The good news is that future checks in most areas will take much less effort.
Assessment factors
Below, you’ll find all the factors listed along with the estimated relative effort to check, the likely time proximity of impacts, and the suggested phases for each.
| What | Effort to Check | Impact Timing | Phase 1 | Phase 2 | Phase 3 | Data Source |
|---|---|---|---|---|---|---|
| Business Plan | ||||||
| Desired future state | 1 | 2 | • | Company docs | ||
| Core values | 1 | 2 | • | Company docs | ||
| Positioning | 1 | 2 | • | Company docs | ||
| Strategy | 1 | 2 | • | Company docs | ||
| Plan | 1 | 2 | • | Company docs | ||
| Processes | ||||||
| Cash forecasting | 1 | 1 | • | Company docs | ||
| Client credit management | 1 | 2 | • | Company docs | ||
| Lead qualification | 1 | 2 | • | Company docs | ||
| Candidate evaluation | 1 | 2 | • | Company docs | ||
| Business improvement | 1 | 1 | • | Company docs | ||
| People | ||||||
| Role definition | 1 | 2 | • | Company docs | ||
| Role fit | 2 | 2 | • | Internal workshop | ||
| Proportional staffing | 1 | 2 | • | HRIS | ||
| Utilization | 2 | 2 | • | Project/time reports | ||
| Staff turnover | 1 | 2 | • | HRIS | ||
| Staff tenure | 1 | 3 | • | HRIS | ||
| Staff engagement | 2 | 2 | • | Internal survey | ||
| Staff perceptions of manager quality | 2 | 2 | • | Internal survey | ||
| Marketing & Sales | ||||||
| % of revenue invested in marketing & sales | 1 | 3 | • | Accounting | ||
| New marketing qualified leads | 2 | 2 | • | CRM | ||
| New sales qualified leads | 2 | 1 | • | CRM | ||
| New clients | 1 | 2 | • | CRM | ||
| New engagements (number and value) | 1 | 2 | • | CRM | ||
| Cost of acquisition | 2 | 2 | • | Accounting and time reports | ||
| Clients & Engagements | ||||||
| Total active clients and engagements per month | 1 | 2 | • | Project reports | ||
| Gross profit ($ and %) per engagement per month | 2 | 2 | • | Accounting | ||
| Average active engagements per FTE | 1 | 3 | • | Project reports | ||
| Average engagement length | 1 | 3 | • | Project reports | ||
| Average client tenure | 1 | 2 | • | Project reports | ||
| Average client lifetime value (current clients) | 2 | 2 | • | Accounting | ||
| Lifetime value per client active last 12 months | 2 | 2 | • | Accounting | ||
| % of revenue from your largest 3 clients (total and each) | 1 | 1 | • | Accounting | ||
| % of revenue that leaders & team would say yes to again | 2 | 2 | • | Internal survey | ||
| Finances | ||||||
| Past 12 months each | ||||||
| Revenue | 1 | 1 | • | Accounting | ||
| Revenue per FTE | 1 | 1 | • | Accounting | ||
| Gross profit % of revenue | 1 | 1 | • | Accounting | ||
| Effective hourly rate | 2 | 2 | • | Accounting | ||
| Operating costs % (and % fixed) of revenue | 1 | 2 | • | Accounting | ||
| Operating profit % of revenue | 1 | 2 | • | Accounting | ||
| Operating profit per FTE | 1 | 2 | • | Accounting | ||
| Equity (difference of assets and liabilities) | 1 | 2 | • | Accounting | ||
| Current (and ideally, last 3 months) | ||||||
| Cash runway (in months) | 2 | 1 | • | Accounting | ||
| Accounts receivable aging overall and per client | 1 | 1 | • | Accounting | ||
| Total credit per client (including uninvoiced work) | 1 | 2 | • | Accounting | ||
| Debt/asset ratio | 1 | 2 | • | Accounting | ||
“If everything is important, then nothing is.”
Turn your agency health assessment into action
To improve your agency’s health, work on only a few priorities at a time.
As you identify factors that need work in each assessment phase, weight them based on:
- Size of the expected impact from inaction (for issues) or action (for opportunities), and
- Time proximity of that impact.
Use a simple 1-3 scale to start. Bigger and nearer impacts equal a higher weighting and priority.
Consider also prioritizing one or two quick wins to build positive momentum.
To begin work on an item:
- Define the symptoms — the things that tell you something is wrong.
- Explore the problem and seek to understand the root issue and its cause.
- Define the outcomes you want to create.
- Outline your options for addressing the problem.
- Select the best solution (consider fit-to-purpose, effort being right-sized to outcome, feasibility, and any dependencies).
- Create a step-by-step action plan to implement the solution.
- Action your plan.
- Reassess to ensure the problem is resolved.
For small issues, completing steps 1-5 may only take a few minutes. Large issues may take days of research and many conversations with people inside and outside your agency.
Be prepared to reprioritize your list based on what you learn as you work through this process. For example, you may find a problem that is much bigger and requires more immediate attention than you first expected. Or that the big effort required to solve a small problem might mean there are much better places to invest your resources.
“Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty... I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well.”
You can build a stronger agency and a brighter future
What kind of future do you want for yourself, your team, and your clients? If it’s a bright future, it’s worth fighting for. And if it’s uncommonly good, it will be hard to achieve. You want every advantage possible.
With an up-to-date, comprehensive understanding of your agency’s health, you can invest all your available resources in your most important threats and opportunities. And you will accelerate toward the future you want.