Essential Concepts for Building a Fulfilling Agency
It’s pretty easy to find advice on starting and growing a web development operation these days, but it seems to revolve primarily around a unique kind of agency: one that doesn’t have to worry about launching sites in our lifetime. There are so many complex strategies, formulas, philosophies and Extreme Iterative Agile Spiral Scrums that it would almost seem that being really successful in this business is beyond the reach of most of us.
But, I know that’s not the case. I’ve spent the past decade building agencies ranging in size from 1 person to 70 people. And while financial performance of these groups has varied over 10 years, I’ve always known how to be successful. It’s not through size, complexity or popularity. It’s a simple formula that addresses each discipline within the operation and it must begin with a solid foundation. Here are a few recommendations to establish your own foundation, based on my experience.
1. Figure out if you’re a strong manager or a “rugged individualist”.
Being able to effectively lead a team is a worthwhile pursuit, but if you’re not good at it or simply don’t have the motivation to deal with with employee drama, you won’t be doing anyone any favors by assembling a team before you’re ready. The larger you grow your agency, the more you need to embrace the challenges of human resources. Do you enjoy those challenges or are you more effective being responsible only for your own performance? This is no time to sing the praises of teamwork. Instead, decide whether your past coworkers have generally inspired you or annoyed you. If it’s the latter, you may want to consider the growing industry of independent contracting. It’s typically not as glorifying (sometimes it is), but it can offer equivalent income and truly does afford the kind of freedom and flexibility that other people only dream about.
There was a time when being an independent contractor meant that you had to do your own sales. Today, “sales” frequently consists of having your buddies recommend you for freelance work at the agencies where they work or simply presenting a few solid project case studies to local shops (Most are outsourcing these days).
2. Grow for prudence, not ego.
It’s a common misconception that the larger your agency is, the more you’ll make as an owner. Revenue means little if you can’t get your team to turn a profit, so focus on quality, not quantity. You may be able to bill $100,000 a year as an independent consultant, but the moment you bring on 4 employees with total annual compensation (salary, health/dental, taxes, unemployment insurance, 401k matching, equipment, and operational costs) of $75,000 each, you may find that you can only keep them 85% billable and that you yourself are only 30% billable because of your management responsibilities. After increasing your billable staff size by 400%, you’re now personally making $30,000 less than when you worked by yourself. Once you start adding non-billable staff (sales reps, receptionist, managers, etc.) and factor in increased recruiting and training costs and you’ll see that profit-per-employee drop consistently -- unless you have a very strong operation.
As Seth Godin points out in his article "An Atomic Theory of Business Size", expanding your agency is not a smooth growth curve -- there are thresholds at which the rules you've been operating under simply break down with one incremental change to your structure.
It’s a fact that a big difference between an independent contractor and an actual agency is that the agency can be sold down the road, resulting in a bigger payday if you own a substantial portion of your entity. If this is your vision, then you may consider lower compensation up-front an investment in your potential sale in the future. This is a worthy pursuit that I have shared over the years, but it should still not drive your growth. Grow for prudence.
3. Reconsider your desire to have partners.
Sharing risk with partners can ease the pressure of entrepreneurship and partners may offer skills that you don’t have. But, they can also take a huge share of your profits and stunt your progress as an agency if your visions are not always aligned. It’s been said that “When two men in a business always agree, one of them is unnecessary.” I would add “When two partners in a business frequently disagree, neither of them will be effective.”
4. If you decide to have partners, plan for the worst.
Business partnerships are a lot like marriages: both require patience, compromise and trust -- and both fail frequently. But unlike marriages, no partner automatically has the ability to end a business partnership; dissolving a business entity typically requires unanimous consent. In other words, if one owner is content to maintain an unfriendly partnership with you, there may be nothing you can do about it.
Ask your attorney about shareholder agreement stipulations such as the buy/sell clause (Typically, any partner can offer to buy out another and that offer must be accepted or counter-offered at a higher level, resulting in a guaranteed and fair exit for any partner.), deadlock resolutions (if partners cannot reach a consensus, the entity is dissolved) and other “stalemate” protections. These are common stipulations, but they are not automatic -- you need to include them in your agreement.
Even better, try to avoid “equal partners.” Sharing ownership 50/50 with another shareholder is a risky bet. While it can be tempting to show how fair the arrangement is by splitting ownership equally (or even worse, having Co-CEOs), this frequently results in stalemates: disagreements that cannot be resolved because nobody is officially in charge. If it makes it easier, require that the 51% partner earn the extra equity and power by requiring him/her to contribute more to the seed funding, carry more responsibilities or agree to swap positions on your next joint venture.
Lastly, consider your corporate structure. Income pass-through entities like S-Corporations can save you money on taxes, but they can also be a huge liability for owners who aren’t in control of disbursements. Any profits in such entities are considered taxable income for all shareholders in relation to their equity, but there is no automatic requirement for companies to actually distribute those profits. Therefore, you may have to pay taxes on $100,000 of income you never actually receive (this is referred to as "phantom income").
Again, such scenarios can be planned for in strong shareholder/partnership agreements. Don’t skimp on legal fees at this stage or it’s likely to bite you later.
5. Build a strong process through simplicity, not complexity.
Many agencies believe that a complicated delivery methodology is the best way to ensure quality. When their process breaks down (i.e. a client complains), they try to plug that hole in their process with even more complexity. Sometimes that involves forking their process into several different variations to accommodate semi-unique project types. Other times it means adding more decision points to an already bloated flowchart. Remember that complexity is not a prerequisite to success, but common sense is. Instead of documenting a process so comprehensive that asking employees to memorize it is like asking Christians to memorize the bible, build a simple flow around your core values and then train your team to accurately interpret those values as they complete their work (read the free audio book “Tribal Leadership,” offered by Zappos.com - http://www.zappos.com/tribal.zhtml). Instead of having separate processes for “Website Redesign,” “Static Website Design and Development” and “CMS Website Design and Development,” have a universal set of project tasks and have the entire project team eliminate unnecessary tasks during each project kick-off. You’ll probably find that this results in far more than 3 static variations of your process and the deliverables for each project will be based more on reality and less on assumptions.
Summary
Starting an agency is a relatively easy and very exciting way to practice entrepreneurship. But, don’t let that enthusiasm trick you into building your business on poorly-planned decisions. They can make the difference between having an established operation in 5 years or starting from scratch in 5 years. Be honest with yourself about your personality, plan for the worst-case scenario and execute strategically.
And trust me on the partners.
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What do you think are the *most* important things to consider when starting out in this business? Chime in through the comments below!
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