Following the profit warning at S4 Capital, Green Square’s Nick Berry warns growing agencies not to ignore the necessary work of building support systems and infrastructure.
The revelations about ‘chaotic accounting’ at S4 Capital last month not only dampened its share price and future growth forecasts, but also delivered a timely reminder to businesses of all sizes that it is worth holding up a mirror to your own systems and operations and asking if they are fit for purpose.
S4 has since hired Colin Day as chair of its audit and risk committee and promoted Chris Martin to chief operating officer – the first of several appointments that Sir Martin Sorrell has stated are the first steps to rebuilding confidence.
As a youngster building my first company, I was once told ‘business is easy except for the clients and staff.’ This is pretty much spot on, but I would add a further challenge to the mix in the form of systems.
Edwards Deming, a renowned American engineer and businessman from the 20th century, claimed “94% of problems in business are systems-driven, but only 6% are people-driven.“
I would argue that is possibly over the top for the people-centric, service-focused marketing sector, but it still highlights that people are often restricted by the systems and processes they are bound by.
Within Green Square we are heading toward a hundred years of combined C-suite experience in the hot seat. We all have war stories regarding system implementations and how poor process has inhibited growth at certain stages. This experience is vital as we assist with businesses in considering their M&A options and aiming to attain maximum value.
Most businesses work hard to preserve a swan-like appearance, where serenity on the surface is upheld by frantic activity below the water. Things were even more stretched at S4, as the auditors discovered when assessing their finance operations. Consequently, the failure of systems and processes to evidence a robust audit trail and reporting resulted in the late filing of accounts.
Many marketing and creative agencies focus all their attention on being brilliant at what they do while ignoring the back-office platform. This can be foolhardy as the former can only scale and blossom based on the latter being robust.
Systems and the ability to scale become critical in businesses approaching 50 staff and above. This is when small business finance and resource management tools become inadequate. In The Drum’s recent Independent Agency Census 2022, there are six financial factors on which they assess performance: turnover, turnover growth, turnover percentage growth, turnover per head, gross profit and gross profit growth.
These factors are clearly fundamental to the underlying health of any business, but on their own don’t necessarily allow for a view of how sustainable and scalable a company’s operations are. This is often linked to sales processes, account management, service delivery, client experience, commercial practice and staff churn. These factors and many others are all inherently linked to systems and processes being strong and unified from the front to the back of house.
As agencies get momentum and start to scale, they often fall into the trap of seeing the solution to every problem as more people. In the words of Michael Gerber, the American Author who is evangelical about processes in businesses, “systems run the business and people run the systems” – so throwing more bodies at a problem as opposed to investing in the underlying systems is rarely the right approach.
Entrepreneurs often by their very nature hate the detail and complexity required for building operational systems. They get frustrated and see it as a waste of time and money. But effective process not only reduces reliance on people and removes single points of failure, but it also relieves stress levels and increases the time available for creativity and innovation.
From an M&A perspective, strong systems mean the knowledge and ability to ‘get things done’ are not tied up within a few people. This is a huge value driver in the eyes of an acquirer. People are essential, but when blended with quality operations, you achieve a secret sauce that is attractive to buyers and can often differentiate you from the competition.
As an example, it is reasonable to expect a business to have access to key management data that ultimately helps to drive decisions and profitability. This includes being able to assess the profit margin of individual clients, projects and service lines. But it is surprising how few businesses have this readily to hand. When analyzing this for due diligence, it often becomes apparent that there are significant imbalances and certain commercial relationships or services that add limited value.
Other processes around recruitment, onboarding staff and ongoing management of HR matters should also be systemized in a way that supports your culture positively and makes you stand out from the competition, attracting and keeping the best talent available. There is strong evidence to prove that haphazard approaches to hiring and inducting staff, along with ongoing employee engagement, will reduce the longevity of tenure and increase staff churn.
A buyer won’t expect you to have the same systems or approach as they do, but if they see a culture that is underpinned with robust process and data to support effective decision-making, they will view you as a mature outfit with a growth-focused management ethos.
On the other hand, when there is a fundamental process issue as with S4, it can take a long time to fix and rebuild reputation. Sorrell has not only admitted the slump in S4’s share price will affect acquisition activity, but also conceded “that clients and potential clients might be less inclined to work with the company in the future, given the chaos,“ according to The Times.
Further to this admission and following the new appointments, Sorrell said: “In a way we’re starting again, not from where we were at the beginning, which was zero, but we’re starting again to build that trust and confidence having gone through an unacceptable event.”
This proves that internal systems can be as important for success as being on the bleeding edge of a new trend or having a great sales strategy, so investing time and money in systems can yield great returns in the long run, as well as being a powerful lever to pull on when considering M&A.
Investment in operations needs to be driven from the top, and those that don’t will suffer in the long run. In the words of the American author Orison Swett Marden, “a good system shortens the road to the goal.“
Nick Berry is partner at Green Square.