How Leaders Think with Kenny Lange

If you're sitting here and on one screen is this podcast, on the other screen

is this, like, really complicated dashboard of 15 metrics. The first thing you can do

is just, like, drag that to the little trash icon, and then let's restart,

and let's just look at one thing. That would be the that would be my

advice.

Welcome to the How Leaders Think Podcast, a show that transforms

you by renewing your mind and giving you new ways to think. I'm your host,

Kenny Lange, and with me today is Ryan Watson. He

is a partner at Upsourced Accounting. He is an experienced

operations and finance leader for creative agencies and venture

funded startups. As a partner at Upsource, he helps scaling

agencies, build better plans, see the future, and drive profits.

I could have used you many, many years ago. Prior to

Upsource, ryan led operations and finance for a large influencer

marketing and ad agency. Man, I'm

apology around this. Apology, apology. All

right. That's cool. It stumbled me I should have asked that before. No, don't worry

about it. What? It's me and all my imperfections. Where

he built the team to over 50 people, and that's no joke at an agency

and 10 million in annual AGI before selling to

Quotient Technology, which is publicly traded

Q-U-O-T. If you're interested in getting some stock in June

of 2018, welcome to the show, Ryan. Kenny, thank you

for having me. I appreciate it. Just be fun. Absolutely. So,

Ryan, tell me what is on your mind?

What's on my mind? Yeah. Good question. So I'd

say a thing. I mean, look, that's a loaded question. There's a lot of things

on my mind right now, but not least of which my wife is

pregnant and due in, like, a couple of weeks, and so I'm really getting my

head around that. So it's our third. But from a business standpoint,

I'd say the thing that's on my mind the most frequently, a thing that we're

often talking about here at our firm. This is a

way of thinking, a framework of thinking that has I don't know. It's

just kind of hit me in the face in terms of, like so I'll say

that I've read every blog

post around KPIs for your

creative agency. Right. This is often the first question that we get when we get

a new client, which is like, what should I be looking at? How should I

be evaluating my agency? And if you were to try to solve this problem on

your own, you'd go read all of the thought leadership around this, and you'd read

the blog post that says, hey, you know, 20

KPIs. Here the 18 most important KPIs you should manage

for your agency. Right. And

I've just heard that enough to say, like, look,

that is not the way that I would have you think about your agency.

Right. A way of thinking that we've come on to recently

is that there's probably just

one, there's probably just one, maybe two things that you should be really focused on.

And the things that you should be focused on are very contextual based

on where you are in the lifecycle or the

growth of your agency. And there's a lot of reasons why I

feel that. But I would just say life, this is a thing that just keeps

coming up. And I'd say as of late, we've tried to

formalize our thinking and even improve and change some of the ways we're working

with our clients to really get hyper focused on what should

you really care about? It's not the 18 things, it's the one or two things.

So you're seeing people are trying to

take in all these KPIs and they think they're all

important all right now, and they've got to implement those.

Is that what you're seeing? And if so,

how is that hurting agencies and their

process and their progress? Because you mentioned the lifecycle. So

is that keeping from reaching the next stage? Yeah,

totally, right. And we can get into the

lifecycle and how we see the world or whatever. But to answer the question

directly again, what we see are people

who are coming to us, and they're trying to help themselves, and they're reading the

blog post that you and I have read, and they're saying, okay, well, the people

in the world are saying these are the I should have a dashboard. I

should have a command center. And that command center has these 15 KPIs on

it and I got to measure each of them, right? I got to look at

my gross margin and my utilization rate and my rate per hour, my

revenue per FTE, and I got to look at my operating profit, et cetera, et

cetera. And again, so that's what they're

being told. And they feel like, okay, I've got to evaluate all of these and

I got to react to all of them. I guess the

most common sense would tell you that, well, you

can't measure and manage to all of them, right, at some point there's

just too much going on here. So there's a number of reasons why

I would say think is a bit of a is challenging and in some

cases it's self defeating. One of the ways is just like,

take for example, okay, let's say I have an agency that has a gross

margin problem, right? We like to see agencies north of 50%.

Of course, that's just a heuristic. But if I'm in the

30% area, I have a gross margin opportunity, right?

Okay. But if I were to look at all these other KPIs,

if my gross margin KPI is flashing red, so are a bunch

of others, right? Like my operating profit is also probably not very good. And you

know what? My revenue per FTE is probably not very good. And there's all sorts

of things. There's the lack of focus but there's also just the

very human thing. When you're looking at a financial dashboard and everything's

flashing red, and you feel really bad about yourself, and you feel like, oh, my

gosh, there's this mountain that I can't possibly

overcome, and what I would rather do is just put my head in the sand

and just forget it, all right? And that, to be honest with you, is a

real human thing that we see even with our actual current clients.

Because when the news is bad and it feels like there's no clear path

for the news to get meaningfully better, it's like, what's even the point?

Right? And so that is a big reason why we like,

saying, okay, yeah, guess what? Your gross margin is bad. Of

course your operating profit is bad. Of course you probably don't have enough cash

reserves. There's no reason to make you feel bad about this thing that's several

steps away from us being able to fix. So let's just focus on the one

thing. Let's look at the gross margin problem, right, and let's look at how we

might diagnose that. And, oh, by the way, so it's 30% this month. What

I want to do is 32% next quarter and 35% the

quarter after that. How can we just dial into the one thing you should focus

on and how do we build momentum so that when I come to this, quote,

dashboard, I'm seeing good news. I'm feeling like things are

going my way. And if I have a dashboard of all the things

and they're all flashing red, it's like, again, you feel

overwhelmed. It's too much, right? And so, again, I

think there's a natural life cycle of growth where we

like to say, okay, given where you

are, where should we focus? And again, we can get into more of the weeds.

But that's the reason, right? And it was just one too

many clients who just felt overwhelmed and felt defeated and felt like it's

not even worth it to say, stop the madness. How do we

reframe how we should think about these problems?

Yeah, that makes a lot of sense.

If everything's red, then it feels like you said,

what even is the point? What are we addressing? If I can't address all

of them, why should I address one of them? I see this quite a bit

in what I do with agencies and businesses,

is we start setting quarterly objectives or annual goals, and they're like,

we've got 20 things we've got to address. And I was life. I

said, believe me. And they're like, well, they're all urgent, they're all important, they're all

fires. And I said, I don't doubt that, but

you can't get to all of them right now. Can't do them. And maybe

solving a couple of these actually solves some others down the line.

And so from that standpoint, I'm curious.

When you're helping create focus, is it more about,

hey, if we solve these things. It gives us a foundation to solve the next

thing. Like we can't solve the next thing or this other piece without solving

this. Or is it about identifying where

can we create maximum impact right now. So for your

size company, solving gross margin makes the big yeah,

totally. But for another one, solving utilization rate. And dollar

per hour. Can you speak to that? I can. And the short answer

is it is both. Right? It is both that let

me make it very so I'll finish the thought. It is both that

all of these things are related, right? And so

let's focus on the lowest hanging, highest leverage fruit

and then let's reevaluate the next problem when we're done with that.

It's also true that some things are more important than others depending

on where you are. So as I mentioned to you,

we like to segment our agencies into phases of their

lifecycle. I'll name them quickly and then we'll move past it. But

the phases that we look at are what we call create mode. So this

is an agencies from zero to 1 million in revenue. And then we look at

build mode, right? So we're past the million. Like the thing exists but it's probably

got like warts and concentration risk and all sorts of problems, right?

So you're at a million dollars and that's build mode. That's where we really work

our way through. And how do we get to this sort of profitable,

unit, economically viable agency and that lasts to like let's say three or

4 million in revenue and then what we call that grow mode.

And so this is an agency that now has repeatable

revenue generation but it has gotten to the size where

the partners themselves can no longer bear hug all elements of

the agency. And the exercise is really now promoting the next

level, the deputies of leaders and giving them the visibility and the accountability and the

incentive structure to help co run the PNL with

you. Then the final stage we call scale mode. And that's north of 10 million

in revenue. But let me go back to build mode which is where a lot

of agencies are, a lot of our clients are this is that like one to

3 million in revenue stage when you're in build mode,

we run our clients through what we call the hierarchy of financial

needs. And the hierarchy of financial needs is kind of like Maslow's

hierarchy of needs, right? Which is the premise is I can't worry

about self actualization until I have shelter, right? And

so we have kind of the same approach which is so our hierarchy of

financial needs goes like this at the very bottom, let's say if it's

a pyramid, at the very bottom solvency, which is like can

I make payroll? Can I make my next payroll? If the answer is

I cannot make my next payroll, I don't care about

operating profit margin of course that's terrible.

But focusing on the things that I might do for operating profit,

that is not going to help me find a way in the absolute immediate term

to get solvent and be able to pay my people and keep the doors open,

right? That's number one. The next one we look

at is project profit or gross margin. Right. Am I

profitable on a service level? Because again, if I'm not profitable at a gross

margin level, I'm also not going to be operating profit margin

positive either. Right? So those two things are totally linked. So we're going to talk

about the thing that's highest leverage. Again,

if I have a gross margin problem, then I know I have one of two

problems. I have either a utilization problem or a rate per hour problem.

And so we're going to live there. The next is cash reserves,

right? Okay. Now I'm life making money on a per project basis, but can I

do that for long enough to stash away enough cash to sort of handle the

highs and lows and demic to project based cash flow? The fourth is operating profit

margin, of course. And then the fifth is repeatable or predictable

revenue generation. And that's kind of the hierarchy of needs. And once

you've gotten to the point where you have cleared all of those things, think

you are ready for the next inflection point, you're ready for the next stage. And

that stage is what we call grow mode. But the point of that whole thing

on top of the details of them was to say we're only

ever going to look at one of those stages. And when we clear a stage,

then we move to the next stage and we're only ever going to look at

that stage because that's how we get you from one to 3 million. We

don't do it by trying to try to perfect them all at

once. Got you. You're helping them do fewer things.

Well, make that a discipline, get it in their bones, so

to speak. Totally mode on and then we'll move. On to the next

one. Got you. So you said something interesting and

I love that. I don't know if you have a graphic of that

hierarchy. Yeah, like that. If you can shoot that to me. We'Ll put it in

the show. But the thing that was

interesting is at the top of the pyramid you have repeatable revenue

generation, which is sort of I mean, it's the holy grail for

most companies, but service based companies in particular

agencies are looking for this. Over

the last, I would say 18 to 24 months, the

term rev ops or revenue operations has just

grow exponentially in terms of its popularity. I think

there's probably a lot of people riding the wave that don't even know what they're

saying. And there are as with all of the waves.

Right? And just from my personal

experience in the agency world, it would sound like a lot of people are

trying to start with repeatable revenue generation

and just outsell, just outsell the

expense. And that's the solution.

What do you say to those businesses, those agencies, those

owners who are caught up in that because it's very

sexy, it's attractive, rev ops. Totally. There's ops for

everything. So what do you say to

those? That is a great question.

There's basically two kinds of scenarios you might find yourself

in and I have different opinions for the two scenarios. So one

scenario might be I am a million dollar

or sub million dollar agency. Look,

I provide a multidisciplinary offering like I'm making websites but I

need copy and I need strategy and I need design and all that kind of

stuff. And so just the core nucleus of the team

just to be in business costs me a certain amount of money and I'm not

very profitable right now. And the only path out, I cannot cut my way to

profitability. I have to grow my way to profitability because I'm just too small to

do the opposite. And of course in those cases, yeah, of course we got to

set an AGI target and we have to go hit it and then we can

worry about everything else. But if you're not in that very specific scenario where

you're just too small, there is a

size where it's quite difficult to be operating

profitable well below a million dollars. It's just hard to

do. You need a certain amount of revenue base to sort of amortize your fixed

costs over. But anyways, I sense that's not the example you

had in mind. And in the other example where

I'm a sustainable agency, I'm just not very profitable.

And my answer is I'm just going to grow my way out of it. The

short answer is most agencies never do that, right? There's a reason why

you're not profitable at this level and it could be any number

of things. It's not quite clear to me. Again, it could be

a pricing and scope problem, it could be a utilization problem,

it could be an operation efficiency problem. But my guess is,

regardless of what the source of that problem is, that problem is going to

scale with you as your revenue scales. And so growing your way

out of it is a myth, right? Life, it's a mirage.

And so you're just going to bring that with you. And so again, my

attitude, that's why the repeatable revenue generation is the top of our

pyramid. Because the implicit understanding

is I'm scaling an agency that is otherwise profitable,

efficient and works right. I don't want to put the cart before

the horse and try to scale this thing that I've not nailed down yet. A

couple of things that you said. Number one, for those

people who maybe the financial part

is a weakness for them or just not something they've done

a deep dive into. You mentioned AGI. Oh

yeah. Can you speak to that? Yes, I do have another question. Okay. Yes.

So AGI is this life buzzwordy term that if you've been in the agency space

long enough, you've heard it, it stands for agency gross

income. And it's kind of a fancy way to describe net

revenue, basically. But your AGI, your agency gross income is

your gross revenue. Less

your out of pocket costs to deliver that revenue. So like for instance,

if you are a media agency,

your client might give you $10 million, but you're going to spend $8 million on

ads and you're going to keep 2 million. Your gross revenue might be

10 million, but your AGI is 2 million. That's really the revenue for

you. That's what you get to keep. And that's all we care about.

The other common subtract from AGI would be

freelancers, life project oriented freelancers. So if I sell

$100,000 web project, but I just know up front that I'm

going to have to spend $20,000 on some freelancers, then I have

an $80,000 AGI project. And that's the revenue that matters to

me as my agency. And that's the thing that's going to pay for all my

other stuff. So that's agency gross income got you. It's like

the real revenue. It's your real revenue. It's

yours. Yeah. The others already spoken for.

One of the other things that you spoke about is if you're

growing, those problems follow you. It makes me think

of some wisdom I heard in relation to getting

married. Right. Getting married doesn't solve

relationship issues. It is an amplifier, a magnifier. So

things that were good become great, things that were bad become very terrible.

Terrible. Because you take your problems with you.

Like if you're not managing cash flow, if you're not solvent, if you're

struggling to make payroll, well, adding three,

four, five more people and another half million to a million dollars in

gross revenue to try to keep up with that isn't going to solve

it. You're just going to bring that same problem, but make

it bigger. It's going to add to your stress. Got you. So it's really life

get healthier before you get bigger.

Before bigger, yeah, exactly. That's exactly right.

I think you've nailed the analogy. I think the other thing to

keep in mind is that there

are a set of problems that are somewhat unique to each

stage. Right? So in the create stage, the problems are

predominantly like sales and service life. What is my

positioning? What do I even exist to do? What is

my right to be in the world? And how do I find a way to

service that up to a million dollars? Right. And so if you don't solve that

problem in the million dollar phase, you're going to bring

that problem to a new phase with its own new problem. So the new problems

in that build mode phase are now profitability related.

Right. Which are how do I get solvent and how do I get gross margin

profitable? And how do I get net margin profitable? And if I don't solve those

problems, I'm going to just bring all those problems to the next phase, which is

in our case, grow mode. And at grow mode, the problems

look more like operational and personnel. And so

when you hit and man, I have seen this movie like a bunch of times.

I've lived through this movie, actually, which is like, you hit

like, I don't know, three or 4 million in revenue and things just start to

break. Like employees are maybe just a little less happy and clients

start to churn when they didn't normally, and there's just

churn problems and morale problems. And it's this thing

where it's like you as the ownership or the

leadership are now like several levels of separation away

from the actual work and decision making happening. And there's strain here

and people are feeling like they need to run and you're a bottleneck or you're

holding them back and they just don't have the autonomy to do it. And it's

just because you've not empowered those people to take the governor off

and actually help you scale the agency. But that is

its own challenge. That is a very tricky thing that I've seen agencies

eight to 10 million struggle with. But my point is, if you take

an unprofitable agency into the three to 4 million range, you've got

to deal with all of these things all at once. Don't do that to yourself.

Right.

That's part of the reason. Gotcha. So the thing that

comes to mind is when somebody's listening and they

say, okay, Ryan, this is brilliant. It's perfect. You just

described how I'm feeling, what I'm going through, what I've been seeing.

You gave me language. Beautiful. Wonderful.

Yeah. When does it make sense

for an agency to bring in

a group like Upsourced? Because there's no

shortage. I mean, the fractional market is

exploding. Totally. And as a matter of

fact, I had a conversation yesterday with somebody who was asking

me, I know I need a fractional second in command, but I also need

to hire a coach. Which one should come first and

how should I hire in this help? What's sort

of that ideal timing for someone to bring in someone like you

to speak into it to where you're not. I got

$100,000, I need a CFO. No, you don't. Right. Yeah.

Trust me.

Totally. Can you help people understand that timing? Yeah,

great question. So, look, every phase kind of needs its own

thing, right? So in the create mode stage, the zero to 1 million

is not really the time for you to bring in high powered financial

expertise. Necessarily what you do need is just some compliance, right?

Like, of course you have to file your taxes. You're going to need financials

that are there for decision making, for sure. But

their purpose is really more for maintaining the compliance and setting

yourself up for the true financial management when you're just a little bit

bigger. And so again, in that early stage, you just want to stay lean,

you want to save some money and you want to avoid some regulatory pitfalls. And

so you're going to need some help there. And that looks like CPA, accounting

firms, we offer a little bit of help in that area. But again,

you're just trying to stay lean and you're trying to get to a million dollars

because there are very few problems I cannot solve for you at a million dollars.

The only problem I can't solve for you is getting you there. Right. Like that

you have to do that. You have to do. So then

I'd say that inflection point when you're like, okay, we're here, we've made it,

but man, we did it with shoestring and bubblegum. And this just feels

tenuous. That is the point where hiring a firm like ours

to work you through some version of the hierarchy of financial needs and getting

you to the point where you're now a $3 million profitable agency with predictable revenue

growth, that's the first inflection point that

folks often hire us for. And then again,

I'd say the second inflection point, which is where you start to enter build mode,

where you're profitable. But again, things start to break or

whatever. That's another stage where you really need to bring

in. Again, that first stage is kind of controllership. We can help

you with reporting, we can do some advisory. This stage looks like

CFO. Like once you're at three or four, having a person who can

serve as a CFO very helpful. But again, to your

point, look, a CFO who knows what they're doing in this space

is a few hundred thousand dollars. You're not getting one for

$100,000. You're just not. You're getting like

a bookkeeper basically, who has a high ceiling.

You don't need to spend $300,000 on a CFO as a $3

million agency. Don't do that, right? Right. You only need a

couple of hours or a few hours of their time in any given week. So

just pay for what you need. And that's why fractional models work and that's why

a firm like ours is really helpful. So we really excel at that

one to 10 million range. We've got a handful of clients above 10 million at

the scale mode, and that's kind of its own sort of animal. But if

you find yourself in that range, whether it's us or somebody

else, i, soul really encourage you to seek the right sort of partnership

and level of help because I think you could really benefit from it.

Absolutely. That's really good because that was a confusing part for

me when I was an agency owner, is when's the right time

to bring on the right kind of help. So

I have a question for you. Or going to ask you to speak on something

that is going to feel a bit like a free

commercial or what have you, but I

told this to your content team when we were talking earlier this week is when

I lange on your website and I started reading through just the

way your group thinks about helping

these agency owners. Because agency owners, they're

visionary, they love big ideas and then they're in

the creative space, right? You've seen how all that works.

They're a different breed. And

accounting, CFO financials has a

reputation for sort of being that ultra restrictive. It's not

even focusing the energy, it's just you're going to be a wet

blanket on my enthusiasm for growth. But it

seems like you're really taking a position against that and saying, no, we'll help you

look into the future. Can you talk a bit about that? Because I'm

not joking. I wish I would have found you all earlier in my career because

that's what I kept asking my CPA and other financial

advisors and people for. But they just wanted to tell me how to run a

budget and that I shouldn't spend money. And I was like, that's not helpful. Yeah,

totally. Yeah. Well, hey, you're right. Wonderful. You said it

better than I could have said it. You're hired.

Yay, just kidding. But yeah, I mean, look, that's

what we set out to do, right? We are accountants and so, look, our

lens is accounting. But quite frankly, we're not selling accounting, right? Like, we're not selling

compliance, we're not selling financials. We are selling what we

can do with it. The context of meeting, like, how do we take that information,

financial and non financial, and how do we help you make decisions? I think it

really boils down to we're operators at heart, right?

Everybody has their lens. I self describe, like, yes,

I'm an accountant, but I didn't get into accounting to be an accountant, right? I've

always been. And we are all at Upsource, very passionate about small business and especially

agencies. That's what gives us energy. How do we help our agencies be

successful? Accounting is just like our reason to be in the room, right? Like, it's

our lens, it's how we see the world. But our job here is not to

produce the world's most accurate financial statements for you. Our

job is to produce the kind of financial statements that can help you make the

decisions you need to make. And so we always have a very pragmatic

view of life. We're not dogmatic about anything, right? We like to talk

about accrual accounting so we recognize revenue when you

earn it, but we will do it any number of ways. And our job is

to balance what do you really need versus what is the effort

required to do it. Because again,

our job is not to produce financial statements. Our job is not to file your

tax return. Our job is to help you grow your agency. That's it.

And. We never lose sight of

why we're here. Accounting and finance is just the way that we can help you

do it. Got you. I think it's

definitely needed in the space.

So you've gone over quite a bit, but that

lifecycle stage, really identifying those, what are the

characteristics of those, and that's something that's been

resonating. Another interviewee was talking about

lifecycle stages using predictable success. I don't know if you've seen that.

Yeah, they have some great literature that is really about

when and that's what I'm starting to see with people who are out in

front, like you and Upsourced and a few others, is

talking about the timing of things. And that seems

to be where the next forefront is. If you get the

timing right, a whole lot can go right for you. Just

to recap. We have on the stages, so we have

create and then up to 1 million, we have the build up

build like that three, 4 million create. You're getting up

close to that 10 million. 10 million is holy cow.

No. That'S scale

mode.

Scale mode is very conscious decision. We have many

clients who don't have any interest in that. Right. Like scale mode is I've built

a pretty big business. Now I'm making a conscious choice to become a really big

business. Ten to whatever it is, 50 or 100.

And some agencies are highly motivated for that, but many are just like, I got

it here to do cool work with great friends and

I'm happy where I am. I can make plenty of money at five or six

and 7 million. And things change a lot. North of 10 million. We've seen that

firsthand, so it's its own animal. Yeah, for

sure. So what would you say to that listener, in

particular, the agency owners listening if they wanted

to take their first step sort of towards that financial

health, right. And that hierarchy of needs,

short of going out and reaching for you, maybe it is, they need to call

you. Sure, that level. But what's something they could do in the next 24

hours to just take a step towards better financial health?

Yeah. Well, I think my advice is going to

be all about we have to figure out

what's the one thing? What's the story here for my agency right now?

What is the one thing? There are many things, but what is my

one thing? Right. And again, is my one thing solvency? Is

my one thing focusing on Project Profit? But if it's Project Profit, is

it really utilization or is it really like rate per hour

scoping? Is it really working on building a cash

reserves? There's just one thing, and that's the

goal is figuring out that one thing. Hopefully what we've talked about in this

podcast is somewhat helpful in trying to help you determine your one thing.

We've got a YouTube channel full of all kinds of content that gets a little

bit more granular about how you might go through that. So maybe that

would be helpful for you. Obviously, firms like ours can help you do that, but

that would be my advice is like, if you're sitting here and on one

screen is this podcast, on the other screen is this really complicated dashboard of 15

metrics. The first thing you can do is just drag that to the little trash

icon and then let's restart and let's just look at one

thing. That would be my advice.

I love that. I think the focus is a key

differentiator between those that are really successful and those that are just

producing a lot of activity. So you mentioned

the YouTube channel, but if people are wanting to learn more about you,

about Upsourced and consume some content or

reach out and connect with you or the team, where would you send them?

Great question. So our website is

Upsourcedaccounting.com, so that's a great place to find

us and connect with us. And again, the YouTube channel is just at

Upsourced. Both of those places are great sources

for content and ways to interact with us. So we'd love to

help. Absolutely. And

we'll put the link to your LinkedIn in the show notes. Oh, yes.

So if anybody wants to follow you, connect with you, so we'll

have that there. And shameless

self promotion. The podcast is pretty good. In particular,

there's an episode with a guy who looks a lot like me. One of our

favorite ones. Definitely highest.

So six out of five stars. I don't know how they managed it. But it

was really cool. Apple made an exception. In all

seriousness, put on

the Play Next for their podcast. They're coming out with great

stuff that can help you learn and accelerate and maybe help you get to the

point of where you can come and and hire Ryan and his team of experts.

But Ryan, thank you so much for joining us and we're cheering for

you and hope that you get to help a whole lot of people have success.

Awesome. Kay, thanks. It's been fun. Appreciate you having me.