Volumes have been written about the Pros and Con’s of hiring full-time staff versus using outside contractors. But most research and articles only focus on two things, either the exuberant (and oftentimes under-estimated) costs of full-time employees, or the hassles of using freelancers. Agency owners should be having a different conversation focused on two new realities that are radically skewing the talent management debate in favor of outsourcing to soloprenuers and niche marketing services firms.

The first reality is volatility. The more volatile your industry, more the variable your operating model must be to survive. Yet, despite unprecedented change within the marketing and advertising industry over the past several years, the operating models governing how agencies staff and service clients are largely unchanged. Worse, the big five holding companies continue to cling to outdated pricing and organizational structures, seemingly expediting the demise of the marketing service industry as we know it. Owners of agencies of all sizes would do well to quickly alter their labor models similar to how Hollywood studios pivoted to avoid their industry’s collapse several decades ago.

The “Golden Age of Hollywood”, from 1920 to 1960, was dominated by large studios: MGM, Paramount, Fox, RKO, Warner Brothers. These mega-corporations, much like Omnicom, WPP, Publicis, Interpublic, and Dentsu, believed in-sourcing and vertical integration were best. Big studios even put the most bankable stars under contract to work exclusively with them. The movie industry enjoyed tremendous growth for nearly 40 years, which provided the needed stability and assurance to make their companies huge. But by the late 1950’s, thanks to the popularity of television and the diversification of consumer tastes, it became increasingly difficult to predict which films would be hits, and which would bomb. All the large studios suffered from bad bets and bloated overhead. Many filed bankruptcy and others ceased to exist. To combat this new reality, studios evolved their operating model to mimic the behaviors of smaller, independent filmmakers. As they did so, profits returned and the quality of the end product actually improved. Today’s modern movie studios are a fraction of their former size, with surprisingly few staff, and even fewer hard assets. Instead, they’ve prioritized their value propositions and staffing model to focus on a few core competencies:

  1. Their ability to pick winning scripts/projects
  2. Their ability to provide funding
  3. Their ability to assemble disparate teams necessary to produce a movie (i.e. independent writers, directors, animators, casting directors, talent scouts, costume designer, craft services, etc.)
  4. Their ability to create ancillary revenue streams (i.e. TV rights, overseas rights, tie-in video games, merchandising royalties, etc.)

Today’s most successful studios get full credit for producing great movies and generate enviable revenue, yet do little of the actual hands-on work necessary to bring these films to life.

Similarly, agency principles should foster lean in-house teams that amplify their core competencies, and then outsource everything else.

The second new reality smacking agency owners in the face is the freelancer revolution. Research shows HUGE increases in talented professionals opting out of conventional 9–5 jobs to create their own companies. Digiday reports 1 in 3 agency employees are jumping ship annually. While finding and attracting talent used to keep agency owners up at night, retaining them is the agency owner’s new nightmare.

Many workers within the marketing services industry no longer want to work for big agencies. According to Inc., independent contractors are more optimistic and happier being their own boss, enjoy more flexible working hours, receive better compensation, and attain better work/life balance.

Rather than fight this trend, agency owners should embrace it. Doing so eliminates one of the hardest parts of their job — utilization. Most agency profitability problems stem from poor staff utilization. Any employee that isn’t billable for at least 1,250/hrs/year should never be hired. And ideally, employees should be billable for >1600hrs/year to be truly profitable to the firm.

Key to success is managing outsourced relationships properly. It takes effort, but typically much less work than keeping an in-house employee productive and motivated. Here are a few tips:

  • Don’t outsource responsibility for maintaining client relationships. Your ability to properly service accounts, and to become your client’s trusted advisor, is foundational to your firm’s success.
  • Be slow to outsource anything directly tied to your firms’ core competency. Only do so in times of peak demand, and only then as a compliment to your in-house team, never to run a stand-alone project.
  • Bring in experts to support fringe activities. For example, assume your core expertise is website development and you’ve been hired to build a new e-commerce site. Throughout the engagement, your client has come to trust you. Your team has become familiar with the client’s brand, business objectives, team members, and culture. As the site nears launch, your client needs additional services to support your website, i.e. a launch plan, email marketing, SEM/SEO, website analytics, ongoing content creation, social media integration, etc. You’re doing your client a disservice bynot offering to provide those assets or help shepherd a coordinated effort. While none of those disciplines are within your firm’s core competency, managing your client is. So negotiate attractive rates from 3rd parties that allow you to make a margin on their services you oversee. Add value by assuming the burden of sourcing them, and making sure their deliverables are on brand, on brief, and on budget.
  • Take full advantage of new tools and platforms, such as Commun-o.com, TopTal, or Working/Not Working. These online communities make it easier to procure vetted marketing service professionals.
  • Hire local contractors or small agency partners. Face-to-face conversations help propel progress and can help create synergies which can lead to even to bigger solutions.
  • Make sure your outsourced relationships are mutually beneficial. Many freelancers are happy to take work from you, but few actually provide work in return. Pick professionals or small agency owners who share your target audience and can both give and take work.
  • Always protect your intellectual property by signing non-disclosure and non-compete agreements.
  • Clarify expectations regarding availability and service levels. If you want their fully dedicated attention for the duration of your project, pay for it. Also, buy deliverables that meet specific deadlines, don’t buy hours.
  • Be completely transparent. Much like good general contractors in other industries, be honest about who is full-time staff, and who are sourced from your preferred network of subject matter experts. Good clients appreciate the effort required to find great talent and will respect your honesty.

Clients will pay your firm top dollar to do what you do best. As such, spend most your resources enhancing your expertise. Eliminate full-time positions for supporting roles that exist outside your core value proposition. Offer those services, but utilize others to do the work on your behalf, just like other highly profitable firms in other industries do, for example, Virgin America:

“No one in the airline industry comes close to Virgin America on a measurement of efficiency called revenue per employee. That’s because baggage delivery, heavy maintenance, reservations, catering, and many other jobs aren’t done by employees, Virgin America uses contractors. “We will outsource every job that we can that is not customer-facing”, said David Cush, the airlines chief executive.

Employees are fixed costs that challenge small businesses with fluctuating revenues. Agency owners can manage their expenses in close to real time with contractors and agency partners that adjust to demand in a way they can’t with full-time employees.

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