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The $30,000 Agency Write-off And How You Can Avoid It.

Posted by Gary Duke

One area of staff training that is often overlooked in our business is a primer on how an agency makes or loses money. It happens for lots of reasons, but I surmise that senior management often places greater priority on other talent development areas or assumes that it's a topic better left for mid- and senior level staffers. Yet, front-line account managers with little or no knowledge about the business side of things are often placed in the position of having to make judgement calls on the fly that could have very serious financial consequences for an agency.
Case in point (true story):
An ad agency who shall remain anonymous once produced a beautifully designed brochure for a client. The layout included an image of a baby that the agency obtained from the client's own photo archives. The photo was so endearing that everyone agreed it deserved a place of honor on the cover of the brochure. When the final layouts were approved, the agency printed and delivered the finished product to the client for distribution. Everyone was very, very happy.
That is, until the day the photographer and the mother of that darling little baby contacted the client. Turns out the client did not own the rights to that photo and the original licensing agreement excluded use of the photo in marketing collateral. Because the agency's account managers had failed to confirm with the client whether they had secured the proper usage rights for the photo, the agency owned the mistake. To the tune of $30,000 in reprinting costs. Ouch.
As if that write-off wasn't already bad enough, how much incremental work do you think the agency needed to secure in order to make up for that one costly mistake? Given that most agencies strive for an operating profit of between 15 and 20 percent (and that's getting harder and harder to achieve these days), the agency needed to find between $150,000 and $200,000 in adjusted gross income (AGI) just to catch up to where they were before the write-off occurred. Double ouch.
The moral of the story: Teaching your staff members about the business side of how an agency makes or loses money will instill a healthy appreciation for the financial implications of their day-to-day workplace decisions. And while there are no guarantees, account managers who understand and appreciate the agency's business model are far more likely to prevent such costly write-offs from occurring in the first place.
Join me for my upcoming 4As webinar on November 19th: 
Show Me the Money: What You Need to Know About Agency/Client Financial Relationships. Learn more here:
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