‘New Business Strain’… What is it and what’s its impact?

business1While all of us like being busy chasing new business opportunities, one thing that we most frequently fail to take into consideration is ‘new business strain’.

New business strain can have such a powerful impact, if not managed correctly, it can decimate what might have been a fairly profitable year. It can also have the effect of making the difference between making your numbers and breaking them in the closing months of the year.

Lets start with a simple description of what ‘new business strain’ actually is.

It’s the total cost (both external or internal) applied against new business development activities in the current year.

Most often these are very real and substantial up front costs incurred ahead of your agency benefiting from the subsequent revenue that will come as a result of the wins you have. It also takes into account the sunk costs for those pitches/initiatives that you did not win and therefore have to just eat the costs. For example, if your win rate is 40%. That would mean that you were unsuccessful in 6/10 pitches but still have to cover the costs incurred chasing them. Believe me when I tell you that this can quickly amount to a big number. Having defined what it is, let’s take a look at its impact.

It all starts with budgeting. Agency leaders are quick to insert new business growth numbers while doing their annual planning and forecasting. We are also quick to assume that this new revenue will produce a similar profit margin to that of our existing business….which in most cases is far from the truth. We might also include an expense budget for out of pocket costs like freelance etc to cover new business pitch activity. That is where it normally ends.

Not too long ago I was asked by the CFO to submit my new business budget for board presentation. I did as requested making sure that it included the estimated budget for staff time costs associated with the new business activity. The budget came to just over $2,000,000 for what I consider very modest activity at a very conservative cost per pitch. Unbeknown to me, the CFO submitted his consolidated budget with these costs excluded.

The result:

  • Inability to allocate resources to support our new business activity.
  • having to assign the team we had available to pitch versus the team to win the business. Subsequently leading to a low win rate and ultimately a disillusioned agency.
  • Finger pointing at new business for the low win rate.
  • Unbudgeted freelance costs.
  • Negative impact on service levels and work for existing clients.
  • Overworked staff that lacked creativity and the enthusiasm needed to succeed.
  • Significant attrition of budgeted profit margins
  •  Ultimately an agency in panic!!!!

All of the chaos listed above due primarily to the agency’s failure to budget for the effect of new business strain.

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