The Challenge: After two mergers between 2009 and 2011, The Marketing Machine, a Raleigh, N.C. small-business creative agency, had grown from a one-person business to a firm with 11 staffers (seven employees and four contractors) and four business partners. But despite that growth, the company was struggling financially by late 2011. While it had reached nearly $1 million in annual revenue, it barely eked out a 2 percent profit. "Though we essentially quadrupled in size in a few years, profits did not," says Paul Spinak, company founder and chief executive officer. "It didn't take too long to realize that there were a couple different visions going on," and the company needed to change to survive.
The Fix: In early 2012, Spinak had "an epiphany" for how to improve the company's financials: Downsize to a core staff of four employees to oversee the business structure, and then rely on a stable of independent contractors to fill other roles that were needed less consistently, such as account executives, Web designers, graphic designers, copywriters and videographers. He figured this "hybrid agency" approach would increase profitability, because the freelancers would only get paid when they were actually needed, giving the company more agility to ramp up when business is booming and scale back during slow periods.
The vision meant some big shifts. Soon after Spinak decided to change his business model, his business partner from one of his previous mergers left the agency to pursue other projects, Spinak says. Two other partners took on less active roles as leadership centralized into one position. The company laid off one employee who was hired one back as a freelancer. Today, The Marketing Machine still has the four key employees -- Spinak, a production manager, an art director and an office manager/account coordinator -- and relies on a network of about eight freelancers. Three of them work 25 to 35 hours per week, while the rest typically work less than 10 hours per week. Whenever he needs a new freelancer, his production manager posts a job ad on Craigslist's Raleigh-Durham board. He often gets several dozen responses, allowing him to pick the ones with the most appropriate experience. He keeps others on file for future reference.
"The world has opened up to the idea that if you can put a good team together, it doesn't really matter whether they're on staff or where they work," he says, adding: "What I realized is there are so many people out there who don't want a full-time job."
Along with the new operational model, Spinak began allowing his four core employees to work onsite or remotely on a regular basis. Previously, employees were required to work in the office full time since the technology to work remotely wasn't yet in place. Remote working has allowed the company to downsize its office space. Spinak moved the company from a 2,500-foot windowless suite in an industrial office park to a 1,350-foot space in an art-deco building in downtown Raleigh with large windows. On most days, he says, about three to four people are in the office, including freelancers. Many meetings are held via Skype.
Company revenue has almost been cut 45 percent due to his former partner taking several clients with him. However, Spinak says the remaining company is now far more profitable. Its profits are about 11 percent so far this year, compared with 2 percent before the change. Moving to a hybrid employee-contractor model helped the company shave its labor costs by 5 percent to 7 percent, Spinak estimates. Rent on the office space is also $200 less per month, thanks to the relocation. He says the switch to a hybrid model has encouraged him to streamline other processes, including adopting a cloud-based file system ( WorkZone ) that makes it easier for remote workers to collaborate. He's also decided to no longer finance media buys for clients--something that the company did after the mergers and discovered wasn't worth the added risk.
"I like things to be orderly, because it allows me to be creative," he says. "You can't be creative in a noisy, unorganized environment. I felt like that's what I was living in for three years," as a result of the agency growing too fast.
The Takeaway: Relying more on contract or freelance employees can help reduce overhead costs and give a business more flexibility and agility.