Value creation in the Digital Agency market: personnel as driver for value creation
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Employees not only contribute significantly to the company’s potential to increase revenue, but personnel costs also make up about two-thirds of the operational expenses. Companies become more scalable once they manage to improve or retain profit margins while increasing revenue. Improving scalability ultimately drives shareholder value creation. Read more about shareholder value creation in the Digital Agency industry in this article: link.
As personnel is the core driver for both revenue and costs of agencies, improving personnel management would allow Digital Agencies to reach new levels of scalability. How can this be achieved? What challenges do Digital Agencies face?
To identify what levers can be pulled to optimize personnel costs, the dynamics of this cost bucket should first be analyzed. Personnel costs can be regarded as the product of the hourly rate times the number of hours worked (or: productivity). The hourly rate of employees can be understood as follows: minimum requirements determine minimum rate, capabilities of hired personnel explain a higher rate than required and agencies can choose to outsource (non-core) activities. On the other hand, productivity is driven by the extent to which employees work efficiently and the complexity of the work. The logic tree displays the different elements that drive personnel costs.
Managing the hourly rate
Digital Agencies can service their clients by combining their own staff with outsourced workforce. Setting up a solid team comes with two major challenges in this industry: attracting employees and retaining them. Specifically attracting technically qualified personnel has become and industry-wide challenge, known as the ‘War on Talent’. This challenge is recognized by Digital Agencies to be the largest hindrance to realizing growth. Having a strong technical team comes with several interesting side-effects: being able to provide more technical services creates a higher lock-in with clients, which paves the way for more subscription-like (recurring) business models. In addition, more technical staff can also enhance the productivity of labor. Hence, despite technical staff being more expensive, agencies benefit by getting a stronger footprint with their customers and become more scalable.
An interesting solution for Digital Agencies is to outsource non-core activities to lower-cost specialists, rather than in-house. This reduces the pressure of attracting (technically) qualified personnel, and even allows for offering clients a full-service offering. Outsourcing is mostly done by Digital Agencies for providing Cloud and Hosting services.
Most effective factors for attracting and retaining qualified personnel:
Optimizing productivity
Automation efforts and investments in Business Intelligence infrastructure allow Digital Agencies to significantly improve their work efficiency, through boosting speed and increasing billability. Automation of human efforts by replacing them with smart automation systems focuses on the executive side of labor. These smart automation systems can unburden employees from cumbersome administrative or repetitive tasks and even speed up deployment of deliverables.
Most popular ways to automate work for Digital Agencies:
On the other hand, setting up a solid Business Intelligence infrastructure allows Digital Agencies to:
The second element impacting the productivity of employees is the complexity of the work that is to be done by clients. Project complexity is driven by the number of deliverables, the number of deliveries, feedback cycles, etc. Thorough project management, process management and client communication help Digital Agencies in reducing complexity of projects, and thereby increasing productivity.
Grow your team through acquisitions
Acquiring companies, such as competitors or companies that offer complementary products and services, can be a highly effective growth strategy in the Digital Agency industry. Acquisitions can boost value creation, allow for agencies to quickly attract qualified personnel, increase the customer base, expand vertical focus, internationalize with security of business, etc. Read more about growing your business through acquisitions in this article: link.
Increase personnel commitment by making them shareholder
One highly effective way for retaining key personnel, is by making them commit to the future value of the company. This can be done by making them shareholder of the company. Allowing personnel to join the shareholder setting can be achieved through a management buy-out in which selling shareholders sell (part of) their shares and key employees can acquire those. There are two sides to this coin: selling shareholders can secure part of the value of the company and key employees can benefit from future value creation.
About Pride Capital Partners
Pride Capital Partners, with offices in Amsterdam and Cologne, provides hybrid capital solutions (‘private debt’) to companies active in the software and IT sector in the Benelux and DACH region. Pride Capital Partners supports these companies in the step to the next phase and focuses specifically on the following transactions: growth, acquisitions, and management buy-outs. Read more about the benefits of our hybrid capital solutions in this article: link.
For more information, do not hesitate to contact us:
Nick Bootsma
+31 6 30 07 30 79
Anthony van Praet
+32 4 76 60 27 28
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