The Death Spiral for Scaling Agencies

Summary

In this episode, Nathan and Sebastian discuss the two levels of value within an agency and the three major problems that arise during scaling. They emphasise the importance of understanding the agency business model for any business owner who may work with or be approached by an agency. They explain how value is generated through the solution of problems and how agencies achieve economies of scale. They also provide insights on assessing the quality of internal systems and the accountability of agency employees. The conversation discusses three major challenges that agencies face when scaling: erosion of core competency, staff churn, and client churn. 

Takeaways

• Understanding the agency business model is important for any business owner who may work with or be approached by an agency.
• The two levels of value within an agency are internal systems and people.
• The three major problems during scaling are staff churn, erosion of core competency, and client churn.
• Value is generated through the solution of problems, and agencies achieve economies of scale.
• Assessing the quality of internal systems and the accountability of agency employees is crucial when choosing an agency. Erosion of core competency occurs when agencies expand into new verticals or service lines, diluting their hyper-specialised talent.
• Complacency among key team members can lead to a decline in service delivery and a loss of core competency.
• Client churn is a significant challenge for agencies as it can negatively impact cash flow and lead to a death spiral.
• Understanding an agency's average tenure, up-skilling process, and client retention numbers is crucial when evaluating their ability to scale.

Chapters

00:00 Understanding the Agency Business Model
06:46 The Three Major Problems During Scaling
11:34 Generating Value through Problem-Solving
15:33 Assessing Agency Quality: Internal Systems and Accountability
36:31 Complacency and Employee Churn
43:05 Client Churn

Keywords

agency business model, value, internal systems, people, common problems, novel problems, anti-SOPs, economies of scale, assessing agency quality, accountability, agency scaling, erosion of core competency, complacency, client churn, upskilling, employee churn, P&L structure

Transcript

0:01

Welcome back to the Blues Brothers podcast, the show in which we share the challenges, insights and triumphs that come with taking e -commerce brands from seven to eight figures and beyond and building the remarkable teams behind them. In this episode, it's been a while, but I'm joined back with Sebastian. How you doing? Living the dream, good to be here. Perfect. In this episode, we wanted to focus our attention on a document that we've been putting together, a thesis, if you will, on agencies. We think a lot about the agency business model and how to scale an agency considering that we both co -found and own one. And we've put together a thesis on the two levels of value that exist within an agency, as well as the three primary major problems during scaling. Now as an e -commerce business owner or as a business owner of any niche that might be listening to this, you might be thinking to yourself, well, let's click off now. This isn't relevant to me at all. The reason why this episode is going to be very, very valuable and very relevant to any business owner listening is because at some point during your business growth, you will work with an agency or you will be approached by an agency and likely have a few meetings with them. And so it's really important that you understand and you... take this next 30 to 40 minutes to get a comprehensive understanding of how the agency business model works and how the two levers of value operate, how you can identify them and how you can go to market and better gather information for which agency is best going to support you in solving a particular challenge. This episode is going to be fairly generalized. So it's not just going to apply to EECOM, although we'll pull to EECOM examples because that's our target ISAP and that's what we know well. But it applies to looking at any agency in any single business model. There's two levels of value. There's three major problems. If you understand them and know how to identify them within agencies that you're talking to, you should have much greater success in being able to actually solve issues using agencies to bring them in and solve those issues for you. So how this episode is going to be structured is, Seb and I want to talk a little bit in terms of pre -framing the actual two levers, the three major problems, and then we'll start to tick them off one by one and then summarize them towards the end. So before we dive into the two levers of value, I first want to talk about where value even comes from. What is value with an agency and where agencies end up providing value is that they solve problems. the value is generated through the solution of a problem. And generally speaking, the bigger the problem, the bigger the agency will be compensated accordingly. There's also a secondary point of value that I see within agencies as a comparison of going in -house, which is that agencies achieve economies of scale, which allows them to provide incremental value from you trying to solve a problem in -house. And what that means and people, it's hard to conceptualize because economies of scale is normally thought of within scaling actual product or in units. But as you have an agency, you are able to train larger groups of people at once, which allows for more efficient allocation of capital, which therefore allows you to solve problems with greater efficiency. There are standard operating procedures in place. The systems, this training that's being disseminated across a large team, which then allows those economies of scale that gets passed back onto you in pricing. And so if you try to go and solve a problem, like you try to increase your customer acquisition by two X next month, it's likely going to be a lot more cost intensive for you to go and try to figure that out. Then just go into an agency who's already done it a hundred times and has economies of scale in training people as to how to do so. I'll pass over to you Seb to talk about anything else that you want to talk about before we actually dive into the first level. Sure, well, I mean, I guess I'd just like to briefly introduce the two levers that we've identified, which are systems and people, and we'll explain them at length shortly. But reason these two levers are so important is because internally, an agency needs to be set up structurally to allow clients or prospective clients confidence. in their ability to provide consistent results across their ideal client profile. And so I think before we even dive into the two levers, I think it's very important that we speak to. the ideal client profile in the first instance, both on the client side, you really need to understand what problems that you have that you need agency support on. And then the agency needs to understand what problems they are best equipped to deal with. Now there are two classes of problems at a high level. There are novel problems and there are common problems. And we're gonna be operating under the assumption that the EECOM Operators listening to this are working or looking to work with an advertising agency for common problems that come with advertising for customer acquisition. Do you have a specific example of what the common problem might look like for example, our ICP? It could be an underperforming Google account, which might be tied to Performance Max. Yep. So I didn't find what agency is best equipped to solve that problem, possibly restructure the Google campaigns to enable growth of customer acquisition profitably. We think that for common problems, when you're going to market, when you're speaking with potential agencies, your questions should focus more on the agency's processes than... the individual people who are going to be following those processes. Different story when we're talking about novel problems, but for this assumption, where we're looking at common problems, the line of questioning should be around the agency's systems at a high level. I am ready to get started into the two levers. Anything else to add there? Now let's do it. All right, so the two levers are systems and people. And the first one are systems, which is to do with the internal systems that facilitate consistent behavior and the rapid and uniform dissemination of learnings. Now, obviously we live in the world of marketing, performance marketing and EECOM where the market... is ever evolving, ever changing. Ad account strategies are ever evolving and ever changing. And so that second point is definitely pertinent to our situation, but that is possibly irrelevant if you're operating in an industry that actually doesn't change very much. But do you want to introduce why the value rests in the internal processes that an agency has? If an agency is trying to solve a problem, which is where the value is derived in an agency is solving the problem. There should be internal systems and we could simplify this down to internal standard operating procedures, right? SOPs in place that allow consistent solutions to that problem across the entire team. Okay. You want to be able to join an agency and be put to any different. performance market or account manager, whoever it is in the team and ensure that you're still going to get the same solution as the person next to you that also joins that agency. If an agency is completely reliant on skill at a employee level, it's going to output very wildly different results per client across the board. And so having consistent systems that allow consistent behavior, meaning the same solution or. A good solution is provided to a problem that's consistently given to the agency in combination with point two, which you said, which is rapid and uniform dissemination of learnings is really where the value comes. And the reason why rapid and uniform dissemination of learnings is important is because particularly in paid media, which is where we sit, things change very, very quickly on a month on month basis. Strategies are changing. S O P's are changing, et cetera. And so. If an agency isn't staying on the forefront of being up to date in the latest strategies and then disseminating that through to the wider team through those standard operating procedures, then it is unlikely that you will have solutions delivered that are going to provide incremental value over an adjacent agency or over you going and trying to attack that problem yourself. I think an important caveat here is that when you hear SOPs, you might think, okay, well, I should go to a really big agency who was scaled to 100, 200 employees because the only way that they've done that is to incredible SOPs. And that is true. The only way that you become a very large agency is that you have very rigid systems and you have very strong SOPs in place. However, if you're going to an agency where there is rapid change and the market isn't static, Static SOPs is not a good thing. SOPs are only ever improved if you don't do the SOPs. Because if all you ever did was the standard operating procedure, then you would never do anything else and you would never see opportunities to improve them. And so there is a function here which leads into the second point, which is having people within the team that can identify opportunities to stray outside. of systems or standard operating procedures that are in place to be able to self -improve the solutions that are provided across the entire company, be able to put them into place and then roll them out to the whole company is where the value is provided. And that is a very, very hard thing to do. Okay. You might go to a very large agency who isn't doing that. They have very old SOPs, but you might get an account manager. You might get someone within the team. That's really incredible. They're on YouTube every day up to date. They're on LinkedIn. They're getting the newest strategies and they're fantastic in the domain of your account. However, their learnings, them being on the forefront, it isn't being trickled back up, put into the SOPs and getting disseminated back through the team. And therefore as an agency as a whole, they're likely underperforming. And so that's why rapid and uniform dissemination of learnings is really important so that they continue to innovate and be on the front foot. so that they can provide as much incremental value to you as possible. Any questions on that? No questions, I think that's spot on. I think the reason you really want to inquire about the internal processes or the SOPs that an agency has is because it helps to firstly shorten the timeframe or the time investment you need to validate the competency of one person within that organization who you'll be working with. And number two, it's to mitigate risk. So does that agency have a firm understanding of the problem that you have? What tools do they have that have been built around that problem? And then what processes do they have in place to support the application of those tools to that problem? And so it's about risk mitigation and about just shortening the timeframe to enable a decision to actually go forward with that partner. I personally don't think it's a great, in this case, when again, we're going to talk about common problems and systems around common problems. Throughout the sales process, I think the idea of a client or a prospective client asking the agency if they can meet the person that they'll directly be working with on the account, I think it's a great idea in theory. And I think it's useful to understand working style preferences and culture fit. But I don't think it's going to give you the best answer to is that agency the right fit for you? The reason I say that is because consider you're about to hire someone in -house for a similar role. It's like an in -house social media buyer. Think about how your application process would look like. the screening of CVs, the rounds of interviews that you'll have, possibly a trial phase before you actually are confident to bring them on board for a separate time. And if you're doing a, you know, meet the potential team when you're going to market with an agency and you sit down for 25, 30 minutes with that one individual, I think it's hard to... get or collect all the information that you need to make the best decision. And then again, that's why I think that, you know, a couple of rounds of meetings that you have with the agency as a whole should be better, it will be better used focusing on the internal systems and the SOPs rather than one individual person within that organization. because if the agency does a great job at operationalizing its business or its capability, then you should have trust throughout the sales process. You should have gained enough information to trust that whoever you are matched with, whoever you end up working with, the work being delivered will be consistent amongst all available team members. Yep. I agree. 100%. This has all been very theory based in terms of internal systems. So let's draw out some actual examples that people can take and some questions that can be asked throughout the sales process. You're approaching an agency, you know, now after watching this video, if you take any value on what we say that internal systems is a big lever and value driver. How do I assess the the quality, the standard of internal systems of these agencies that I'm approaching. It's typically something that isn't shared in great detail throughout the sales process. It might be, it might not be. How do I know? And maybe we can relate this to paid media in itself and then people can draw away and apply this to other agencies and other business models. So do you have an example of a type of process that you'd be looking to inquire as an Econ operator? A type of process, let's say, let's narrow down a paid media social ads, a type of process that you would want to expect out of a paid social agency is some kind of structured testing framework. Okay. When it comes to Facebook ads, 101, how to scale Facebook ads is consistent testing over time that is informed and structured. And you're not just throwing tests at a wall and not taking warnings away. And so having a hypothesis in place, going and testing that hypothesis, taking a conclusion based on core KPIs and then using that to inform the next test is really the basics of SOPs and being successful on Facebook ads as an Econ brand. And so the issue there, I think, and this is the question I'm going to pose to you is how many Econ owners know that? And so how do they know to ask that question? And so is there a larger, higher level question that they can ask to identify that answer? I think it comes through, again, let's take it for paid social. When you're going to market, you should give your perspective on the problem or the challenges that you're facing within, say, the confines of the Facebook ad account. You should then allow that agency to gather as much context as they need. to perform an evaluation across your Facebook ad accounts. As they go throughout that evaluation process, then they present to you what the strategy is. You would hope, again, because that agency ideally has SOPs in place, you'll get an understanding of what the strategy of that agency is. And that strategy should be operationalized through SOPs. And so what you need to do then is take a look at the evaluation that they provided or the audit that they've provided. Make sure that you cut through, if you don't understand anything, if it seems a bit a bit flowery that you ask specific questions from a place of even a place of ignorance, it might help you ask better questions for them to communicate in a... in a more simple fashion so that you understand. But then you should be able to highlight the key processes or the key frameworks that they use to implement their strategy. And that should, and for example, that could be, we implement structured testing frameworks on paid social to scale. That agency may have identified that you're currently not. following any sort of structured testing within your account. And then you should ask them specifically what SOPs or what SOPs do you have that pertain to structured testing on Facebook? And if that agency can speak to that, that's your answer. If they struggle to actually present clearly, what the SOP is, how they approach structured testing on Facebook, then that sort of brings up. a bit of a red flag. It's like they're selling you on a concept or a strategy that isn't actually substantiated or supported by a process that they have internally. It's just we'll do structured testing and it's more so a promise rather than this is the SOP that we have on structured testing that enables consistent structured testing across our client portfolio. Does that make sense? Yeah, it does. So it's identified the strategy that's being proposed to you and then start to essentially poke holes at it and just ask further questions as to, okay, so this is the strategy that you're proposing. It sounds great on paper, but what actually is it behind the curtains? What are you actually going to be rolling out materially that's going to be rolled out regardless of who I get allocated to on my account? Yeah. So I guess one other way to break it down, like you've just done is what are they recommending? How is their recommendation going to be implemented? And importantly, why is that recommendation going to help achieve the desired outcome? And so throughout the audit, you'll be presented with a lot of recommendations, hopefully supported by how and the SOPs fit in the how bucket. And so again, unpacking and asking questions around how are you going to be implementing that recommendation and get them to speak to the SOP. Perfect. I don't know if you want to move on to number two, but I think I have a decent segue, which is internal systems and SOPs. They're all well and good except for if they're not followed. Now I talked about previously how there are anti -SOPs. You do want to push outside of SOPs to be able to discover, improve, and then continue to stay on the forefront of. the highest level of service delivery within your niche. However, if there are people just blindly not following SOPs, then do the SOPs even matter is the question. If you're in that sales call and they're saying, yes, we have a structured testing framework, this is the SOP. Maybe they even give you the word document and they say, look, this is the training in house. This is what the steps people are meant to run through. But if there's no accountability in place, if there's no systems of the people, in place, then how should there be any expectation that the SOPs mean anything across a large team? And so that leads into point number two, which is the people, but more specifically, it is the systems of the people. At the end of the day, the agency should understand who is going to thrive within the position that is being placed within the agency. And so the actual people, don't become a huge component of value because the hiring becomes a component of value, which an agency should already be good at. So we're having a built -in assumption here and it's probably for another video completely. We're gonna leave it aside. And instead we're gonna look at the systems of the people. I'll pass to you because this is what you do on a day to day basis. Yeah, so the way in which an agency obligates its people towards the SOPs is the driver of that agency's ability to provide the benefit of having access to the information of a portfolio, which is. a much larger, significantly larger information set than an in -house team has just in the, you know, they only have the context of their specific accounts. And so you're right. People do matter a lot, but for this conversation, we're more so focused around the systems of the people and the accountability of its people to following internal systems. that we've just spoken at length about. So I guess questions that you should be asking your agency is, okay, you have these systems, that's great. What do you do as a organization to upskill or onboard your employees onto SOPs? What measures are in place? for your people to hold themselves accountable to SOPs. How is that then reported to, you know, up the, I guess the organizational hierarchy so that you have confidence that, you know, SOPs are being actually followed at scale or across the organization consistently. And then how are new updates to SOPs then... presented again, disseminated to its staff and then how are they held accountable to upscaling on the new set of SOPs. So it really comes down to how employees onboarded onto SOPs and then how are they held accountable to existing and then new SOPs that are introduced. Any threads you want to pull on that? Not particularly. I think that's spot on. And I think it's concise and it's to the point, which is number one, the agency has to have systems and you need to dig into the systems, the strategy, actually try to peel back the layers and look at the SOPs, so the questions, the very direct questions that you mentioned before. And then number two is then diving into the people, which is what systems are holding their people accountable so that no matter who I go to within the agency, no matter who I end up working with, that there was going to be accountability throughout the entire hierarchy of the agency, as well as consistency in the application of the systems and strategy that you have put in place based on. the incredibly large data set that you have as an agency in comparison to an individual business owner or an in -house team, which we've talked about in another podcast, but so we won't pull on that thread. Yeah. Is there anything else you want to touch on there before we dive into the three major challenges? No, I guess my one major takeaway from our perspective is again, when you go to market, spend your time understanding the processes and the systems of that organization and then how are its people. obligated towards those systems and spend less time focusing on any one individual in that organization. Because if you spend the time gathering information on the processes and the quality assurance around those processes, then you should be able to make an informed decision whether that organization or that agency is the right fit for the problem that you're looking to solve for, regardless of the actual, who's actually doing the implementation when you kick off. Yep, let's dive into the three major challenges that agencies need to resolve whilst they're scaling. Once again, we'll also link this to actionable questions, insights that you can take when going to market. Number one is erosion of core competency. What I mean by this is the founding agency's golden touch. is lost due to the dilution of hyper-focused talent that once held the agency together. Let's break that down a little bit. Most agencies start obviously very small, it's a few people, and the service that's being provided is being usually driven by one or two key players who are hyper-specialized within that skill. And all of the SOPs which we've just talked about, all of the systems are built out from one or two... individuals, very specific domain of knowledge. As the agency begins to scale and the ICP potentially starts to expand or the service lines begin to expand, you will end up having an erosion of core competency due to the fact that the agency to achieve further scale might go into other verticals, which they don't have core competency yet. That's number one. But then number two, is complacency, which is that the core founder or the core individual, it doesn't even have to be a founder necessarily. It could be a starting employee is incredibly valuable in skill within a specific domain, which the agency operates within. they start to be complacent, simple as that. They stop being on the forefront of knowledge. Maybe they pull their hands off the tools. Maybe they stop up -skilling. Maybe they're not on the latest information. And so what once held the agency together, which was that core competency and drive within one to two key players is lost. SOPs fall back. The hyper -focused talent within that specific niche falls back. The teaching falls back. And one of the things that we talk about a lot, me and Sebastian internally is that BlueSense is not just an agency that delivers a service. In fact, we don't believe that an agency should just deliver a service. We're also an education platform, a school in a way, because we want to be continually upskilling and educating everyone in -house to be on that forefront at all times. And so if that also starts lagging behind and you're not using upfront information to upskill the team. that erosion of core competency really starts to play in. And that's a major challenge that most agencies face when they start to scale. Yeah. So I'd like to dive into the why and then the how to identify that when you go to market and you start speaking with agencies. When you say the erosion of the core competency, it loses its golden touch and the service starts to decline. So how is that? How does that actually manifest? So what is the real outcome of a agency moving into new service lines? possibly prematurely, or the agency becoming complacent within their current service line, within what used to be their zone of genius, and that they've now sort of fallen behind. What's the outcome? Yeah, let's, so the first one that you said was if they expand into other service lines, why does that cause an erosion of core competency? The reason it, the number one reason as to why it causes an erosion of core competency is because you can't identify accurately core traits within hiring for the team that's going to fill that vertical. That is one of the core reasons, right? For example, if I was to go and hire a web developer in CSS, how do I know what a good web developer in CSS is? What are my questions? What is my line of thinking? What should the CV look like? What is the average market rate? I have no idea. Number two is that once they're actually on board, and let's say I have done a fantastic job. I went and got consulting from someone else. Maybe I went to a recruitment agency. How do I now build out standard operating procedures and hold accountability on them if I am not hyper specialized within that specific domain? Now I can go and learn it, absolutely. And that is what most agencies should go and do. And in fact, this is what I encourage clients to do is you should not hire us to run Facebook ads if you don't even know how to run a Facebook app, because how are you going to hold us accountable and know what we are even doing? And so the same thing applies when you start to jump into new service line or verticals. Number two was if you start to lose competency on the one service, which is pretty simple, which is just complacency, right? So if the, and you probably have a string to pull here, but it's if the call one to two members of the team that had that hyper specialization become complacent, that's where the service delivery starts to fall off. Yeah, I'll just quickly, sorry, I didn't jump in going back to that first one is expanding into new service lines prematurely. the reason or sort of going back to what we said at the beginning, which is your ICP and the problem that you might have difficulties hiring the right people, or you might have difficulties building new SOPs around this new service line when you're uninformed is because you're ignorant to the problems of that client. You don't, if you're say an ads agency, then you start to open up into web dev. You might have a... a sense of what a few problems are because some clients might be complaining about certain website issues that they've had in the past. But it's unlikely that you've actually dug deep into what those problems were and how they related to the advertising channels or the broader business or the internal infrastructure that the website is sort of rested or nested in. So it goes back down to ICP. Brushing into new service lines when you don't have a firm grip on the problems That's why you have this erosion of core competency or erosion of that agencies competency as a whole Because you don't know really what you're addressing you possibly bring in the wrong people. You don't know how to best solve for those problems That is a, um, I'm going to riff a little bit here, but that is a really interesting point that you raised, which I haven't thought about. And I'm thinking through it right now, which is if an agency jumps into another service line, what problem are they solving with that other service line? The problem normally isn't the problem of the client or the customer. The problem that they're trying to solve is, Hey, these clients also do this. So let me do it. or they're trying to solve their own problem, which is we want to increase average client revenue. So let's also offer SEO. But the actual way that you provide value, which is the very first thing that we said in the episode was solve a very direct problem. And the more difficult the problem is to solve, the more you will get compensated accordingly. And so instead of going, okay, why, what are the core problems within SEO that our clients face? And then going after those core issues within the service. they're solving the wrong problem. Yeah, I thought that was interesting. And that second point you said was just around complacency within the existing service line. That could also be, for example, rapid growth and the people who were driving the innovation of that service line, keeping it on the bleeding edge were promoted into possibly managerial roles where they go hands off the tools. And again, the service line starts to, I guess, fall behind in terms of the market. what best practice is because the dirt is not kept underneath the fingernails of the people now driving the service line who have been promoted. So again, I guess just going to the why that's a challenge that agencies need to correct for and that's why operated need to be mindful of where they're at within the existing service line is if the agency does not maintain curiosity and does not maintain a passion for staying at the cutting edge of that service, then you will just fall behind market. Your SOPs will become outdated and then you're running with strategies that were useful three years ago or even six, 12 months ago that are no longer relevant today. So that's the first major challenge. Second one is around employee change. Want to introduce this one? Yeah, we've established that an agency's value is multiplied by its ability to build systems as well as have people in-house and particularly the systems around those people. So up -skilling as well as holding accountability. If talent ends up being churned at a faster pace than internal up -skilling is completed, then the agency's competency starts to move backwards. So it's really important to investigate the agency's average tenure and employee level because, and you can actually, you could build this out in an Excel shape and run the math, right? But if it takes on average six to eight months for an agency to upskill someone to where they're on SOPs at an incredibly high standard, then they've become incredibly hyper -specialized within that particular domain. Maybe it takes longer, maybe it takes time, maybe it takes 12 months. That's all going to be a function of how well the agency can upskill and train as well as how difficult it is to upskill within that particular domain. However, if they're then churning employees at a nine month basis, then if you start to expand that over time, what you'll end up finding is that it starts to approach an asthma type of 100 % of people are in training. Okay, so if the. time to upskilling is half of the tenure, then you will start to approach an asthmatope that 50 % of the company is still in training. And so the odds that you get allocated towards people on your team that are within training becomes much, much higher. In fact, very probable. And so employee churn is absolutely the killer of so many agencies. It is the absolute killer. And so being able to identify, employee tenure within an agency that you're going to work with is going to be really, really vital. Yeah, I think one additional thing to think about before you go to the agency and you ask the question of what's your average tenure is where you're at as well. So if you're a startup brand and you don't yet have a strong degree of product market fit, you're going to need quite a bit of support from that agency. And so if you're speaking with larger agencies with a larger head count, the question of average tenure becomes a lot more relevant because if it's a larger agency and a majority. of their people are actually still in training because of the high employee churn rates, then it is unlikely, very unlikely that you're gonna be again, given someone who's very competent because generally speaking, if you're a startup brand, you have limited resources, that agency, the large agency is gonna be focusing all their highest... quality staff, let's call it, on the largest accounts. And so if we've spoken about this in the past, which is, if you're a startup brand, or regardless of where you're at, look to be one of the biggest fish in that pond, question becomes a lot more relevant when we're speaking with agencies with short tenure. Absolutely. The other note there before we move on to number three is that if you are, and this is going to be specific to our industry once again, but if you're working with a paid media agency and there's a very high employee churn rate, you will also have a very high rate of change of your direct account manager. And that's going to come with its own problems. Okay. If you have someone on your account who's become very familiar with what works, what doesn't. has become very familiar with your working style, has become very familiar with how to scale the account and what the direct bottlenecks are for growth. If that thing gets passed on to someone else, you better hope that there's very, very good handover procedures and standard operating procedures. And there might be, and there should be, if there's a high churn rate within an agency, that should be a priority for them. And so potentially that's another question that you might want to layer on. If it doesn't sound great, you hear the average tenure and you go, oh. a year and a half, well, I plan to be with you guys for six, seven years. Maybe just ask the question, okay, what are your handover processes? Could I see them? Could I see what the documentation actually looks like? Could I see what the meeting frequency looks like? Do you have this built out in a Monday board? And if so, fantastic, because if they have incredible handover procedures, then it shouldn't really matter too much. if there is a handover every two years or every year and a half, considering that there's accountability, dissemination of learnings and everything else that we've touched on throughout this video. As they are, just as an extension on that, as a risk control, don't just rely on the agency for that. I would definitely suggest, and that comes down to, you know, investigating what reports you're actually gonna be getting upfront before you sign in with an agency, but in -house have a up -to -date document or a trail, you know, a historic document that has outlined. What are, what have been the challenges of growth? What work has been conducted that has alleviated those constraints or that has enabled you to scale? What is the agency working on on a month to month basis? And then you have that trailing document where... Worst case scenario, the handover is poor, you can actually drive that handover process and be like, look, there are no excuses. This is my business. This is everything that you've been testing for the past 12 months. This is everything you've been working on. The successes, the challenges, the failures, what we've learned to equip the new team member with. if for whatever reason it is a rushed handover or they don't have these systems in place to effectively hand over, you can drive that yourself. So I wouldn't completely outsource that responsibility and I would encourage operators to have that information ready on hand. Number three, we've talked about number one being the erosion of core competency, number two being employee churn, number three is now client churn. And this comes down to understanding how the P &L works for a service -based business. If you're an econ -based business or if you're in another business model, you likely have variable costs that move quite dynamically with top line revenue. That is not the case for an agency. And so understanding the PNL structure is actually critical to understanding why this point matters so much. And so if you are not a fan of financial ops, I'll try to skim through it pretty quickly and keep it simple. An agency has a very hyper hyper specialized skill. I've said that quite a few times throughout this podcast. Therefore, they also have a hyper specialized ideal client profile, which is what we talked about at the start. Now, most agencies typically operate between 10 to 25 % net margins, depending on the month, depending on the scale, depending on the geo location, depending on the industry, the list goes on. But let's say it's just between 10 to 25. What that means is that all it takes is for 10 to 25 % of clients to leave for that agency to start negative cash flowing. And why that is the case is because in e-commerce, If we take out inventory purchasing and managing cash flow, cogs will vary on a month on month basis as revenue varies. So if revenue goes down, thank God cogs goes down as well. Okay. If you're doing 200 ,000 and there's a hundred thousand in cogs and then your revenue halves, your cogs will also have yes, you'll have a lot of cash stuck in inventory. It's not a great situation to be in. However, you have variable costs in the agency model. You do not because your cogs are your people and. No agency wants to do any kind of layoff just because of a month on month fluctuation in revenue. And so if an agency is operating at 10 % margins, what that ends up meaning is that if they drop 10 % of their clients, if they have 10 % churn in a month, they suddenly drop to negative cash flowing, which is not a position that they want to be in. So how do you counter that? Let's say you're operating at 10 % net, you lose 10 % of your top line revenue, you're now negative cash flowing or you're at $0 profit. really, really sketchy position to be in, particularly if you're a big business. What do you do? You increase volume through the sales team. You need new clients in the door. You need revenue to grow, but you can't do that because if you would doing that effect, you should be doing that effectively already, right? Your sales teams should already be maxed out. What are you going to do there? And so the only way to do that is to expand the ICP. You've got a bunch of leads coming through the pipeline. Let's say we're an ECOM agency. We don't service businesses, but suddenly we're negative cash flowing and a restaurant, a mom and pop shop comes through the door, they're willing, they're willing to pay a retainer. And we're like, ah, well, let's say that we'd lay off Johnny, or we take on this restaurant. Okay, let's just take on the restaurant because we don't want to go under. And this is particularly going to be the case if you're a very large agency and you need to make decisions at that higher level and you're detached from the service delivery. And so what ends up happening? Well, you can't drive results because they're not your ideal client profile. The sales team has to keep taking them on. And then churning increases even further. So you were at 10 % churn and that was ruined in the company. But now suddenly you're at 15 % churn or 20 % churn because you're taking on all of these clients that aren't within your client profile. And that's not even looking at the periphery of other problems that start to eventuate. For example, employees, staff, and now working on accounts that they don't have SOPs for. that they can't drive results for. Now they're dealing with very, very unhappy customers. And so staff satisfaction decreases, which increases employee churn, which was problem number two. And now the whole agency falls apart. And so client churn is the number one cause of going into a death spiral for an agency. Because the second you drop 10 to 20 % of clients and you churn them out and you're not replacing them. You have to go and expand ICP, which then leads to higher churn and then down you go. Anything to add there? You're muted. Yeah, that's certainly not the situation you want to be in. And that's definitely something that you need to be asking the agency upfront is what is. And take it with a grain of salt. Hopefully you'll get an honest answer. Hopefully they can provide data to support it, but understand what the client churn rates look like. Contextualize that with the scale. So how many accounts they actually have on board because, you know. They have 10 clients, 10 % shown as one client a month. That's probably manageable to get that additional client back. 100 clients, that's 10 clients that they need to look to fill just to keep the current operations covered. But yeah, it starts that negative flywheel. Take on a lot of, you start to expand the service line. So that's number one, an erosion of core competency. people start working on accounts that aren't ICP or that are not supported by SOPs. And so that drives down employee satisfaction, employee churn increases, and the agency starts to go, as you said, into a death spiral. The only addition that I want to put in there is when you're going to ask an agency for attention numbers, know that they can skew those numbers very, very easily in whichever direction they want. And so it is whether you're going to get a truthful answer is tough. And I'll give you two examples. Number one, a lot of agencies will exclude ICP from their attention numbers. And so in that exact example that I just gave where you just took on a mom and pop restaurant, they're not ICP, so they wouldn't count them. in their churn numbers that they directly public face report. Or number two, when they're calculating the actual churn, they're calculating client inflow as the churn rate. I'll provide you with a really simple example. You have 10 clients, you gain two this month, but then you lose two. Your actual churn rate was two divided by 10, because you had 10 at the start of the month and you lost two. So you lost 20 % of your clients, but you could be... smart and include the two that you gained and go two divided by 12. And your churn looks a lot better. And it's very easy to do that. And if you're a fast growing agency, your retention numbers look better. So yeah. Only, only caveat there is I would call that misleading rather than smart. Yeah, I would call it fraud, but it is what it is. Very good. Anything else that you wanted to unpack in relation to those three challenges, cross agency growth. No, I think that was good. Just to recap, it was number one, erosion of core competency, looking at the founder and making sure that they're still distilling information throughout the team. Number two is employee churn. It's ideal to be able to get agency average tenure, as well as ideally how long it takes an agency to upskill someone in -house. And number three is client churn. Client churn is the detriment of all agencies. It throws any agency into it. a death spiral. And so understanding at least a little bit what their retention numbers look like is going to provide you with a lot more confidence that you're going for the right agency to solve the problem. Good. Thank you.