7 Reasons Why Ad Agencies Fail

Sales are on the downA few weeks ago, an ad agency, the Star Group, where I had been the CEO in the late 90s, closed its doors. Last decade, another firm, Earle Palmer Brown, where I had President of their Philadelphia office in the early 90s, ceased operation. The demise of these agencies and others is a sad event, obviously for its employees but for its clients as well (PS–Earlier in my career I worked for 12 years at BBDO/New York—they are doing more than fine, so I am not a black cloud).

This week’s Struming looks at the reasons why some firms like the Star Group, Earle Palmer Brown and others fail and why others grow, flourish and have long successful histories. This Struming is not meant to specifically dissect the demise of my former firms, as I was many years removed and I was not privy to the details of their failings at the end. However, there are a few issues that are generally common to ad agencies, and professional firms in general, that tank.

Here are the 7 key reasons why ad agencies fail:

1. Domination of a single account
The loss of a dominant account, one which delivers ½ or more of an agency’s income, is a key reason why some agencies are crippled. It is so, so, so important for any agency with a dominant account to diversify their portfolio. And any agency which has just won a dominant account needs to accelerate their new business program to decrease the dominance of this mega account. My rule of thumb is no account should be greater than 20% of the agency’s total income. An agency owner sleeps better when they have a diversified roster of accounts.

2. Large receivables
This one is kind of obvious. It’s not “income” unless you are paid. In fact, it’s illusory income which can crush an agency. Slow cash flow is a real problem, but non-payment can be devastating and non-payment from the mega account which goes bankrupt can tank the agency. And slow payment of vendors way beyond terms can be a sign that the agency is using OPM (Other People’s Money) to fund its operation. It’s an early warning sign of a business in trouble.

3. Bad fiscal management
All professional services firms are based on the same principle. Labor costs are the #1 cost component. Keep them to roughly ½ your adjusted gross income or so, and you’ll be fine. As they inch up, profits are eroded and then totally eliminated. And manage all expenses prudently. Every expenditure should be evalauted based on its ROI.

4. Lack of focus
Too many side ventures into non-strategic businesses inevitably takes the focus away from the core business, and can drain money. Focus and strong execution yield success, and alas the converse is also true.

5. Greed
If the agency principals are living “high on the hog”—cars, boats, planes, homes, excessive expenditures of all kind–but the agency’s fundamental financial position is weak, it’s only time before house comes crashing down.

6. Lack of integrity of agency leadership
People want to believe in the agency leaders. While everyone in all levels seeks to protect their employment, when agency leadership is weak and, worse yet, lacks integrity, good people leave. (see #7 below)

7. Departure of key people
Hardworking talented people make successful firms thrive. When there’s a mass exodus, clients leave as well. Sometimes agencies over-estimate the impact of the loss of a single talented person. Often the “next man/woman up” can surprise. But a continual talent drain inevitably causes client instability.

Absent the devastating account loss of the dominant account, most failing agencies die a slow death and often its remnants are “sold” at pennies on the dollar to another firm. The slow decline is difficult to reverse since momentum has a way of carrying agencies forward or backward.

In the end, a successful, well-run ad agency is one led by skilled management and combines energized, talented professionals and a diversified portfolio of good clients who compensate the agency fairly and for whom the agency achieves excellent results. When this equilibrium is disturbed, the agency house can tumble. Alas there are many instances when this has been the case.

If you are a wise agency owner, it’s your job to ensure this never happens.

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One Comment

  1. Beth Carey says:

    great piece, Lonny. Right on the money!

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