JournalMay 2014

The 6 ages of an agency

My journey so far, from freelancer, to agency founder over the last 4 years—and how I’ve been trying to build a more sustainable business.

Step 1: the ‘on the side’ freelancer

a.k.a. The one who doesn’t have bills to pay

Team size: 1
My pro rata salary per-year: £10,000

What seems like many years ago, I was a freelancer, picking up the occasional project on the side while studying. Back in those days, with few financial overheads, once you’d built up a bit of a reputation it was pretty straightforward to bring in the occasional project and make a little money on the side. Without the need to even make a sustainable income, it was easy to undercut larger teams massively, and still bank an attractive amount of cash by building small websites. It’s simple to attract clients when you’re perfectly positioned to deliver decent work, at low cost.

Step 2: the ‘pushing hard’ freelancer

a.k.a. The one who doesn’t know their worth

Team size: 1
My pro rata salary per-year: £17,000

Once I graduated, I decided to take a year out to see if it’d be possible to turn this into a ‘proper’ job. Business was a bit slow initially, without a huge portfolio to attract clients with, but within a couple of months, it began to ramp up, and I had too much to handle.

I increased my rates up to about £30/hour to try and reach that ‘liveable’ target. Once again, the value proposition was clear: my rates were fairly cheap, and my skill-level was improving steadily. I wasn’t going to be winning major corporate projects, but I was still a good bet for small businesses. By working very hard (something like 18 hours a day, 6 days a week), I was able to hit that goal of earning a ‘liveable salary’, and it seemed the business might be a viable one.

I found that this position is a real sweet-spot for some cash-pressed clients. For a client, you’re still affordable, hard working, and crucially, available at all hours of the day. You have to be—for me, ridiculously good communication was by far the best way to stand out from others who, while more experienced, set clearer boundaries and are less accessible to clients.

But that doesn’t mean it’s a state of affairs that you can keep up forever…

Step 3: the ‘newly aware’ freelancer

a.k.a. The one who is more expensive, all of a sudden

Team size: 2
My pro rata salary per-year: £50,000

But while ‘pushing hard’ was a fun challenge, the work was tough—I was lucky enough to not suffer any health problems from a year or so of working like crazy (although my wrists and back were showing signs of not being too happy about it), but I know many others who haven’t been so fortunate, and have paid the physical price for it.

It seems that often, freelancers in this position haven’t yet reached the realisation that they need to raise their rates in order to build a sustainable work-life balance and gain a degree of financial stability. It’s classic short-term thinking, and I really did start to see the importance of building a more reliable monthly income, rather than living on a wildly swinging monthly paycheque. Without building in this stable safety net, you’re obviously in a good position to win projects—but that doesn’t mean that your business is a sustainable one.

With this in mind, as soon as I thought I was decent enough to compete with others charging more than me, I raised own freelance rates again. I was still working really hard, but at least I was getting a bit of sleep at night. Raising my own rates allowed me to attract better clients, who respected the work I did a lot more, and helped me deliver better projects.

Step 4: the ‘cheap agency’

a.k.a. The agency that’s like a Step 1 freelancer

Team size: 3
My pro rata salary per-year: £24,000

Okay, so that was the plan, at least. In fact, I’m not being entirely honest when I say I cut back my hours. You probably figured as much, when you saw that £50,000 figure up above. In reality, for a period of 6 months or so, I still worked 18+ hours a day, getting up at 10am and working right through till 6am, since I had several US clients.

The end result was that I built up a workable cash pile. By working these kind of hours, at this sort of hourly rate, I saved as much money as possible, which allowed me to bootstrap the incorporation of our company, and avoid taking on investment from anyone else. It also allowed me to learn a crazy amount in a short space of time. Looking back at my skill-level before this period—just like Jon Snow, I knew nothing.

In hindsight, I’m not sure whether this was a good thing or not—I still have fairly strong feelings about overwork and burnout in my industry—trying to work like this can often totally undermine your ability to produce high-quality work. Maybe I should have taken out a loan, or looked for some other way to get funding?

But regardless of how I did it, what I did know, was that freelancing on my own wasn’t something that really worked for me. It can be tough mentally, when you don’t have a good team to support you, and you still have to deal with that uncertain monthly income. And perhaps the biggest downside for me, is that you’re clearly limited in terms of the speed at which you can learn and grow when you’re working by yourself. Arnas wrote about exactly this dilemma recently.

I put a chunk of this money I’d earned into the newly incorporated company (about £20,000) and kept the remainder of what I’d saved in a personal savings account, as a buffer in case I couldn’t afford to pay myself each month. I built relationships with a few freelancers that I’d been working with beforehand, including Arnas and Sergei, who are both still part of our team, and scaled things up.

And all of a sudden, without the overheads of costly offices, employment costs, buying equipment for a team, nor the need to have an absolutely stable income, we were suddenly able to undercut bigger agencies, especially those in London, whose fees seemed huge by comparison. It’s pretty easy to attract clients when you’ve got that situation to take advantage of.

Step 5: the small, but unsustainable agency

a.k.a. The agency that can’t keep this going for too long, before the cracks start to show

Team size: 4
My pro rata salary per-year: £26,000

It’s funny how these things go round in cycles. The luxury of having saved up a decent cash buffer gave us the breathing space we needed to focus heavily on improving our expertise as fast as possible. Back in those days, we gave a generous amount of ‘free’ work away to clients on larger projects—there might be 100 hours of billable work on a project, but the client wouldn’t necessarily see the other 125 hours that had been spent on anything from running into smaller issues due to our inexperience, to sometimes trying out several different design directions before showing one to the client, simply because we were determined to improve, do the best job possible, and get things right.

But running an agency at ~40% profitability is not something that you can keep going for very long. We treated that initial £20,000 in cash reserves as our ‘runway’, to borrow a term from the startup world. Before it ran out, we needed to be fully self-sufficient, and billing enough to live on. We were pretty good—still a million miles away from where we’re at today, but still, pretty decent, and definitely committed to delivering a really high level of service. But it was still not a necessarily sustainable way to run things on a long-term basis. I wasn’t exactly working 18 hours a day, but I was still working an average of 12 hours a day, 6 or 7 days a week. When you’re part of a small team, everything is stacked against you—you’ll never have enough time to learn and improve as fast as you want to, and you’ll always struggle to bring in enough projects and work to keep the team working at maximum productivity.

The ‘stability’ we needed in order to keep things going, ended up coming from Sergei, Arnas, Matt and myself working long hours, and not necessarily paying ourselves at the same level as we would if we’d been working for other companies. To all of us, it was a short term compromise which was justified by the goal we were heading towards.

But even if we were billing well on some decent projects, running an agency where other people are somewhat financially dependent on you means that it’s not enough to scrape by each month—you need to build up a decent buffer of cash which gives you stability and allows you to attract quality talent.

Step 6: The more expensive small agency

a.k.a. The agency that’s finding its voice

Team size: 7
My pro rata salary: let’s see how it goes

Attracting, and retaining great designers and developers is something I’ve written about before—and I really do think that it’s critical. There’s no way you can run a sustainable business unless you’ve got a good team around you, and you can keep them excited about producing quality work. There are no magic tricks here—in order to attract great talent, you have to at least pay above market rate. Even if you leverage remote working, and offer crazy perks like paying for the team to move to Kuala Lumpur and Hong Kong for 6 weeks, you still need to be paying fairly, and creating a work environment that people enjoy, and can produce great work in.

I never looked to take advantage of freelancers to boost our margins and exploit that for our benefit, but our team definitely committed to my vision for where Hanno was headed, and made certain sacrifices—this worked at the time, but it clearly wouldn’t have been a sustainable path for us, long-term.

Having stepped through that tricky transition a few months ago, upped pay for the whole team, and made some difficult decisions to part ways with a couple of our older clients, in order to focus on delivering the UX-focused design work that’s our real selling point, we now find ourselves in a new position. While most clients absolutely love the changes we’ve put in place, and we’ve specialised, moving away from smaller projects involving personal sites and those for small businesses (it’s very hard for an agency to legitimately compete with tools like Shopify, which is great, and precisely why we refer smaller clients to use fantastic SaaS products like this), it’s interesting to suddenly be looking for a different type of client, and having to communicate your value proposition in a very different way.

For the first time, having shifted to this more sustainable business model, we’re now unable to simply undercut other, bigger agencies as a matter of course. We’re still pretty aggressively streamlined—we have much lower overheads on top of team pay than other agencies. But with a bigger team, we’re automatically priced out of the budget range of some of smaller clients. We still feel that the work we offer is fantastic value, and very competitively priced, but we’re certainly not the cheapest agency out there any more.

What’s next?

Truthfully, you’re never going to reach that point where everything is ‘done’. And if you did, that’d be pretty boring, wouldn’t it? There are always fresh challenges, and ways to improve the quality of what you’re delivering, and your team’s satisfaction.

It’ll be interesting to see how our ‘pivot’ affects our success going forwards. But one thing’s for sure—it’s a heck of a lot more fun to be working with a group of people who love what they do, and to be able to afford to pay them fairly for it. Setting yourself up to underprice projects, finding the cheapest freelancers, and pushing them relentlessly to try and just about make that profitable, doesn’t feel like the best way to do great work for clients in the long-run.

Posted by
Jon Lay

Jon is a Partner at Hanno. He wears many hats, but his primary focus is on leading our engineering and technical operations.