How Agencies Should Think About and Manage Risk

Sei-Wook Kim (00:04.207) On today's episode, we're talking about the different degrees of risk that come with running an agency. We'll cover what risk really means in an agency context, how to think about it using a simple matrix, and why the number one priority for every founder is just staying in business. Then we'll dive into nine high impact risks an agency can face and share how to prepare for each one. Peter Kang (00:29.148) Okay, so let's start by talking about what risk is — a definition. When we talk about this, we define risk as exposure to uncertainty that can materially impact business. That's the lens through which we look at risk. And maybe how should an agency think about risk in a categorical form? Sei-Wook Kim (00:58.115) Yeah, risk could be broken into four broad areas: people risk, client risk, financial risk, and strategy and infrastructure risk — so five buckets there. Peter Kang (01:17.611) Yeah, five buckets. And in terms of how we should go one step deeper — there are these categories or areas of risk, but there's also risk in terms of how impactful it is, how infrequently they occur, and just how likely they might be. Maybe we could introduce this concept of a matrix, so to speak. Sei-Wook Kim (01:49.305) Yeah, you can think of it as a risk matrix where you have likelihood on the X axis and impact on the Y axis. As an example, what's a low impact event that has a high likelihood of happening? A client pays an invoice late — that could happen pretty frequently, but the overall impact to the business is pretty low. Or you have a low likelihood, high impact risk. A client legal dispute, for example — it probably won't happen that often, but if it does, it has a pretty big impact on your business. Just thinking about the four quadrants there. Peter Kang (02:32.609) Yeah, and today where we want to really focus our time is on the risk that happens above that Y axis in terms of higher impact. The low impact stuff — these are almost like annoyances we've got to get through on a weekly basis. It's really the high impact stuff that can put the business in jeopardy, the true risk of going out of business. Maybe you could kick off with the first one. Sei-Wook Kim (03:13.21) Yep. The first one we'll call founder burnout. The founder, especially for a smaller agency, has a very big impact on the stability of the business. When a founder is burning out, checking out, or their focus isn't fully there, it puts the agency overall at risk. Peter Kang (03:42.516) Yeah, and this could be a lot of things. Maybe the founder has a health issue — low energy or they're unable physically to contribute to the business or run it properly. It could be other things — maybe certain behavioral challenges, substance abuse or addictions that can impact performance, and that could also lead to burnout. But then there's also things that are a bit more mundane but real. Part of that might be you're just not making enough money, and that could be a big source of burnout. Sei-Wook Kim (04:25.295) Yeah, the financial stability of the company could directly impact the mental well-being of the founders. Putting in a lot of hours but not making money — that's a typical thing that happens. Peter Kang (04:42.176) Yeah, so how do we help prevent or mitigate founder burnout? Sei-Wook Kim (04:48.867) Starting at the end: paying yourself fairly as a founder and really budgeting for it in the company financials. Don't make it an afterthought where you're just taking whatever is left at the end. Really think about what you need to survive and pay yourself appropriately. Peter Kang (05:07.136) Yeah, and a system like Profit First is a good starting point, especially if you struggle with this now. There are some frameworks that can help you ladder up to paying yourself much better. Sei-Wook Kim (05:19.407) Yeah. Another one is if you find yourself working a lot, long hours and all of that — whatever you need to build in your own recovery, whether that's time off or really thinking about delegating some of the work you have so that you're not working those long hours. Just thinking about from a time management standpoint how you could manage your day to day. Peter Kang (05:45.919) Yeah, and adding to that — just good habits, like eating well, sleeping well, hanging out with people outside of work. The relationships aspect of it. All those things contribute to better recovery. Sei-Wook Kim (06:01.176) Yep. Another one is thinking about your network of peers, mentors, or coaches who can really help give you perspective on your business. So it doesn't feel like you're in your own world with no one to talk to, where things feel hopeless at certain points in time. Really getting that external perspective and community is helpful for a founder. Peter Kang (06:30.591) Yeah, and one thing we didn't really talk about as a contributing factor to burnout is the daily grind of managing employees and clients. Those interactions can wear on you, and also just the fact that as a leader, sometimes it feels a little isolating because the relatability of the team might not be quite the same as that of a peer. That loneliness and feeling a little alienated contributes to burnout. You're absolutely right — surrounding yourself with people who can relate makes a big difference. Sei-Wook Kim (07:06.744) Yeah. And if it's the feeling of being trapped, just thinking about what options you have — is it bringing someone in to help run the business? Is it trying to exit yourself from the business? Not constraining the success of the business just to you as the founder. Peter Kang (07:25.47) Yeah, you're not stuck. Okay, I'll do the next one. This is a big risk, especially for agencies where there are multiple founders or partners with varying degrees of ownership. We call this partner conflict or misalignment. The big challenge is that unresolved tension between partners can really impact the business in a big way. The team might see the founders bickering with each other or just not getting along, which can impact morale. You end up making poor decisions — sometimes decisions made out of spite for each other, and we've seen that. And there's also the silos and distrust that emanate from conflict or unresolved tension. There's a lot there. But tying it to risk more — what's the worst that could happen going down the path of conflict? Maybe we could talk about what this could result in. Sei-Wook Kim (08:43.105) Yeah, beyond the day-to-day unhealthiness, we see this where partners just can't get along, can't come to consensus on things, and decide to part ways — shutting down an agency that previously may have been doing just fine financially, but two or more people just can't work with each other. Peter Kang (09:08.618) Yeah, exactly. That's like, hey, we can't do this, let's just shut it all down. But in some cases somebody decides to buy someone else out. And even then, when one of the partners — let's say it's two partners and one decides to walk away — things can still go awry because the negotiations might take a turn. We've heard such stories as well. Sei-Wook Kim (09:41.258) Yeah, thinking about ways to mitigate this — how do you prevent a catastrophic situation where an agency has to shut down because of this? One thing, always starting with the legal aspects: do you have your operating agreement tightly written where there is some kind of buy-sell mechanic built in? Where if a partner wants to leave, what's the mechanism for buying out the other partner and at what valuation — so that you're not having that discussion when there is conflict and emotions run hot. Peter Kang (10:23.229) Yeah, exactly. It's the equivalent of a prenup. Before you, so to speak, marry your partner in going into business together, with cooler heads at that time you can really outline the ways to dissolve a partnership, go separate ways, or have one person buy the other one out. That can save a lot of headache, but a lot of people skip this step. This is one of those risks you really got to look into early on. Sei-Wook Kim (10:54.464) Yeah. Other things come down to communication — just making sure you're touching base with your partners on a regular basis and really aligning on whether we're all marching toward the same vision and all in it for the same reasons. It's just ongoing, constant communication that isn't necessarily just about the work, the clients, or the employees — it's about the higher level. Peter Kang (11:17.705) Yeah, definitely. I can't believe sometimes there are many partners who don't communicate on a regular basis. This is why frameworks like EOS are popular — they kind of systematize the ongoing communication. A lot of the health of these relationships deteriorates because they just don't talk to each other enough and don't sync up often. Luckily you and I have been able to talk every day and not get sick of each other, and a big part of managing through and staying aligned is that ongoing communication. Sei-Wook Kim (12:06.347) Yeah. Another area is just thinking about role definition, especially with multiple partners — who owns what, what are your strengths and focus areas, here's the aspect you're handling and here's the aspect I'm handling. Obviously there's going to be some overlap, but as long as there's a clear role definition, that's important. Peter Kang (12:33.435) Yeah, role definition. And compensation is the other part — just making sure everyone feels good about what they're getting paid. A lot of partners default to equal pay regardless, but sometimes resentments creep up when one partner feels they should be paid more. Just having those tough conversations and working through it, because sometimes people have to set aside their egos and really think about the greater good and the long-term plan. Sei-Wook Kim (13:10.155) Yeah. And as a final point, thinking about mediation. Like we mentioned with the coach or mentors — if things do go down this path, having a third party to help facilitate the discussion. Hopefully you don't get there, though. Peter Kang (13:27.211) Yeah, it's not so different from couples therapy. Can you get a counselor or therapist for your business partnership? Sei-Wook Kim (13:36.702) Cool. The next big bucket is key person dependency. This is where the company has a heavy reliance on a single person or a few key people for core functions in the business — sales, delivery, operations, someone in the leadership team that's critical to everything functioning. Or it could be key members of a project team or an account team. Let's say it's your largest account and the whole project team quits mid-project — that's a big risk for the company. Peter Kang (14:20.454) Yeah, 100%. Mitigating this stuff — you want to have people who are cross-trained and processes documented so it's not a black box of somebody owning all the knowledge. And leadership succession planning, especially for the folks higher up, is huge. If you have a COO or somebody leading business development in the org who could be gone — who can take their place or at least take on certain functions or responsibilities that person was in charge of to lower that blow? Sei-Wook Kim (15:10.91) Yeah. And then for the worst-case scenario — let's say one of the key people, if it's a founder, passes away or can't work — having some kind of insurance for the company to help replace that person and hopefully smooth that over. That's more for the leadership team usually. Peter Kang (15:29.35) Yeah, that's key man insurance, which you can have in place for certain folks in the org. Just for the audience, maybe you can explain how that typically works. If somebody is incapacitated or unable to perform their duties, what happens? Sei-Wook Kim (15:59.687) Yeah, it's usually a life insurance policy that the company takes out on the person — the company owns the policy. If a person passes away, it's usually combined with something called a buy-sell agreement. Let's say it's a founder who owns a portion of the business: the insurance will be used to buy out their ownership stake from their family, and the other portion of the insurance is used to replace that person in the day-to-day running of the business. So yeah, key man insurance covers both the buy-sell and the operating side of the business. Peter Kang (16:48.75) A year, two years of salary, would you say? You could choose whatever — you pay the premiums and you can kind of set the levels. Sei-Wook Kim (16:51.6) Yeah, exactly — it's whatever you think will be needed to replace a person from that portion, and the buy-sell is pegged more to the valuation of the company. Peter Kang (17:01.945) Yeah, okay, cool. And then other ways to mitigate key person dependency: distributing the client relationships as well, especially when someone plays a big role in owning a relationship. It makes sense to have the client meet and be aware of others who can take over or manage that relationship in any circumstance or departure. And some other things — it's similar to cross-training, but also just redundancy of skills and capabilities. In the scenario you mentioned of an entire project team quitting mid-project, you really want some backup — maybe in the form of contractors with similar skills, or a vendor like another firm you can lean on. These things happen. It's certainly happened to us, and it's really important to have some backups in place. Sei-Wook Kim (18:15.686) Yeah, it's a high risk. It can turn into a much higher risk situation where you're supposed to build something on a project and then you suddenly can't for whatever reason, and you have no knowledge of what happened previously. It puts you in a really tricky position. Peter Kang (18:31.717) All right. Number four: client-side legal and delivery exposure. You're unable to deliver on a project, or beyond that, any kind of dispute with the client that can materially impact profit, your reputation — which is incredibly important — and also just your focus as a leader. If you have to deal with a big client problem, you're not going to be able to do other things. A big one here is errors and omissions — there's insurance for that. When clients make a formal claim that the stuff you guys did or didn't do created damage for their business, there's a legal process they can initiate. Other examples are around scope, especially if you write vague SOWs or never had enough discussion and documentation around what certain line items meant — that can lead to disputes that get pretty risky. A couple of other things: IP licensing disputes, and any time there's improper use of client assets by an employee, which could also lead to legal action. We haven't been immune to this ourselves and have had to deal with certain situations that escalated with clients. What are ways agencies can mitigate against this? Sei-Wook Kim (20:29.381) Yeah, since we're talking legal impact where clients can claim quite a bit — lost business, etc. — well beyond what you were paid as an agency, I think it starts with having a really tight master services agreement where you outline a limitation of the liability you're willing to take on as an agency. That definitely gets discussed during the negotiation process. Setting a line and saying: the work we're doing, you're paying us $10,000 — we shouldn't be on the hook for unlimited liability. If someone sues you for IP infringement for millions of dollars, the agency was only paid $10,000 to do this work. We should be capped on what we're liable for. Peter Kang (21:31.537) Yeah, and I've actually observed you when you're helping some of our Barrel Holdings agencies reviewing their MSAs. This comes up a lot. Clients often start at unlimited, uncapped liability. And I've seen you push back on this. In cases where you can't come to an agreement, is it advisable for agencies to walk away altogether? And what are your thoughts on how firm agencies should draw those lines, and some ways to still negotiate so the client doesn't feel it's too one-sided? Sei-Wook Kim (22:22.114) Yeah, part of it is understanding the work you're doing for them and what kind of claim could realistically arise. If you're designing something like a deck that's used internally and won't see the light of day externally, maybe you're willing to accept uncapped liability there. But if it's an area where someone could sue the client really easily — ADA compliance, for example, and that happens pretty often — then you should probably draw a hard line, or even carve out specifically the things you will not cover in an SOW to supplement what's in the MSA. But you also need to just take on the risk sometimes. Some larger companies won't accept any limitation to it, and that's where E&O — errors and omissions insurance — could help. You can say, our policy will cover us up to $3 to $5 million, so fine, we'll leave it uncapped, hoping and expecting that if something does happen, $3 to $5 million should be enough to cover us. Peter Kang (23:43.186) Yeah, those are great points. Other ways to mitigate client-side legal and delivery exposure: signed scopes, change orders, approval logs — these things help. If disputes arise, you can always point to what was agreed on. You mentioned E&O insurance, and documentation of different workflows. And then this last point — maybe you want to take it, because it's very important for mitigating risk with clients. Sei-Wook Kim (24:28.875) Yeah, it's all about being transparent with communication. If you foresee an issue coming — let's say there's a feature you said you would build but for some reason you're unable to deliver it — before it arrives, you should have a conversation with the client: we foresee this issue, how can we resolve this? Maybe we can reduce the scope and have someone else take it on. There are a variety of ways to approach it. But what you don't want is to stumble your way through it, deliver a product that isn't quite what you promised or agreed to, and then have a conflict that needs to be resolved. Try to prevent it in the first place. Peter Kang (25:16.169) Yeah. One way to sum that up is: deliver bad news early. All right, let's do the next one. Sei-Wook Kim (25:21.155) The next one is on the employee side — the same kind of legal and compliance exposure. Employment-related lawsuits can be as damaging as a client-related lawsuit from a reputation and financial impact standpoint, and also in terms of impacting your team. Ways this typically happens: wrongful termination suits if people feel they were terminated for unjust reasons, harassment, discrimination — all the typical things you hear about. It may also happen where contractors feel they're misclassified and should have been employees. Or if people feel they were paid incorrectly — wage disputes or PTO disputes, especially with different state laws around termination and how you pay that out. Some of these can be resolved pretty straightforwardly if it's just a pay issue. But wrongful termination, harassment, and discrimination suits can be a lot more complicated. Peter Kang (26:28.256) Yeah, we're spending a lot of time on this one and the previous one because I think this is where risk seems the biggest — it could suck up a lot of mental energy, and going back to the first one about founder burnout, if you have a lot of legal issues, that's going to burn you out like nothing. Mitigation-wise, we talk often about having a tight employee handbook and just checking the boxes on compliance — making sure you're following the different state and federal laws around employment. Those are super important. Is there insurance around this as well? Sei-Wook Kim (27:27.556) Yeah, there's EPLI — employment practices liability insurance. If you have a payroll provider or use a PEO to help run your payroll, they probably offer this as a way to protect themselves as well. But if you don't have it or you're unsure, double-check that you have this insurance. Peter Kang (27:52.21) Right. And then there's the more blocking-and-tackling stuff: make sure you have a proper HR process and documentation around it. Even just good onboarding, providing people with the tools to do their work, making sure they're aware of their responsibilities, who they're reporting to, what their benefits are, the proper conduct policies — this all ties back to the handbook. And then maybe you could speak to performance management and feedback, because I think handled poorly that can be a huge liability. Sei-Wook Kim (28:46.974) Yeah, it's related to wrongful termination. If people aren't clear why they're being terminated — let's say there's a performance issue, but it's a surprise and comes out of nowhere — that's perfect grounds for a lawsuit. It's all about having proactive performance management where if there is an issue, or even when there isn't an issue, you're providing feedback to your team often and on a consistent basis. Nothing should be a surprise if any action is taken around termination. Peter Kang (29:28.449) Yeah, just make sure you've got that buttoned up, because where people feel the most wronged is when they feel blindsided. Having a process to avoid that as much as possible is going to protect you in a big way. Cool. Number six — and the next few we can probably breeze through because they're important but a bit more straightforward. Number six is business continuity and infrastructure risk. This is stuff like cyber attacks, data breaches, or even natural disasters that can interrupt work and make it hard to deliver on promised client work. Big companies have business continuity plans in place. You don't have to go overkill, but you do need to plan accordingly and have some things in place. On the cyber attack and data security side, there are basic things you can do — cloud backups, password vaults, two-factor authentication. Is there insurance here too? Sei-Wook Kim (30:50.69) Yeah, there's definitely cyber insurance that helps cover situations like this. I remember speaking with an agency owner who had their computer physically hacked into and the hacker accessed all the company bank accounts and wiped them out. These are things you don't normally think about day to day, but they could be catastrophic. Imagine trying to talk to the bank and resolve that — you can't pay anyone, can't pay your team, et cetera. Cyber is something you don't think about until it happens to you. Peter Kang (31:24.331) That's crazy. And part of mitigating that is having a strong IT provider or somebody who can help work through some of these issues. And going back to natural disasters or interruptions to your ability to do business — especially if you have a physical office with people co-located, or even clusters of people in areas impacted by a natural disaster — having some kind of business continuity doc that covers: in the event XYZ people are impacted in an area, is there allowance to get them to a safer place and allow for business continuity? Is there redundancy in the workforce to cover for them? When times are normal you don't have to think about it, but even spending an hour mapping that out and doing the exercise can go a long way when it actually happens, because then you're not scrambling and you've put some rational thought to it in advance. Sei-Wook Kim (32:34.133) Yeah, and also communicating that through your clients as well. Let's say some of your team is in an area and a big hurricane is coming through. If you never tell a client that, they'll be surprised. Just planning ahead and keeping everyone in the loop. Peter Kang (32:53.725) Yeah, and one last thing: keeping the safety of employees in mind. It's both on the physical side, especially if you have an office or natural disasters are impacting things, but also on the cybersecurity side. How many times have we seen new employees get hit with phishing attacks on their personal phones — people pretending to be me or you, saying hey, can you go pick up a laptop and put it on your personal card? It's crazy. Those things need to be considered, and as you come across these patterns, having orientation materials or just information for folks so they know how to protect themselves is super important. Sei-Wook Kim (33:46.304) The next risk is insolvency. This is all about cash flow management. Even profitable agencies on paper could fail if you're not minding the cash and you don't have cash to pay your team, payroll, or contractors. If you miss payroll, that is a downward spiral — you lose trust and you're always on the back foot trying to catch up. Cash flow management is a huge one. We actually did episode six where we went really deep into cash flow management at agencies, so that's the topic we spent a whole episode on. Peter Kang (34:18.202) I'll zoom through some of the mitigation things. Maintain some degree of a cash reserve — maybe three to six months, depending on what your business needs. Look at cash flow on a weekly basis. Have a line of credit early. Obviously, do your client work profitably, because if you're not doing stuff profitably the cash is going to crunch really quickly. Collect invoices on time and have good payment terms — super basic, but super important. And lastly, the timing of when you pay your bills versus when you receive payment: make sure it's not upside down. Either have it matched up nicely, or preferably you receive your money a little earlier and pay out a little later. Having that buffer can really help. Peter Kang (35:31.162) The next risk is client concentration and dependency. This is something we talk a lot about on the M&A side when we're looking at agencies to acquire — we always ask about client concentration. When you have a significant amount of your revenue tied up with a single client, or even worse, a single work stream with that client, the prospect of losing that client could lead to significant damage. You might have to lay off big chunks of your team, you might go into debt, just all kinds of operational and financial challenges. A benchmark we look for a lot is no single client more than 20–25% of revenue. This is not always possible, but it makes sense for people to be aware of it. We've seen agencies where 50–70% of revenue is tied up with one client. Part of the strategy has to be: how are you investing in business development to build up other accounts and lower the percentage concentration you have in that big client? And the other piece is making sure you're monitoring client satisfaction proactively and getting ahead of it. The worst is when you have a high-concentration client and one day they come out of nowhere and say it's over. That could be quite devastating. Sei-Wook Kim (37:21.106) Yeah, definitely. And usually when you have a client that big in your company, it probably takes the attention of a lot of people. Especially for the founder, a lot of energy goes to servicing that client. But as you mentioned with business development, making sure you're always thinking about how to decrease that client's percentage on a relative basis is important. Sei-Wook Kim (37:49.735) The last risk here is strategic misalignment. This is fundamental to the agency — whether you chose the right or wrong service offering or ICP. At the highest level of strategy: what direction are you choosing? What client profile are you going after? What service offering are you investing in? If you've picked the wrong one where it's an uphill climb and the market is going in the opposite direction, it could put you in a tough spot. You could spend years investing in your team, your expertise, building up your brand and your processes — but if demand is decreasing while you're making those investments, you're just going to see poor margins and decline. Peter Kang (38:40.185) Yeah, we've seen and felt this a lot, especially recently in the government and nonprofit sectors. Nonprofits that rely on government funding, and government itself cutting back on spend — those agencies, especially if they don't have other areas they can lean on, could be in a tough period. Other things — maybe on the trend side you could talk about. Sei-Wook Kim (39:21.272) Yeah, a lot of trendy things — NFTs were really hot, and crypto. You could have invested a lot of your team and your company direction into these areas that were really hot for a moment and then dropped off really quickly. That's a risk from a strategy perspective. Peter Kang (39:41.751) Yeah, definitely. Certain industries go through cycles too. Real estate, for example — you're going to have some hot periods followed by some cooler periods, and maybe that's okay. You can build your business for that and scale up and down as needed. But I think the risk is when you enter a space without much deep thinking and you just do it because you like it or something. There's definitely a risk there that can really impact the business. Maybe we can talk a little bit about how agencies can mitigate strategic misalignment. Sei-Wook Kim (40:25.851) Yeah, some of this is making sure you're tracking data against the work you're doing — client profitability, retention, and referrals by ICP. Is the area you're focused on actually profitable and growing for you, or are you chasing business that isn't quite there? Another area is thinking about industry tailwinds. Just because you set your positioning one year doesn't mean it has to be the same every year following that. Take a step back, see what the landscape and the industry look like, and ask whether there are tailwinds helping grow that specific industry. Peter Kang (41:15.387) Yeah, and those two points speak to the fact that you can't always be inward-looking — focused solely on the craft and what you do. That's important, but a big part of strategy is understanding the competitive landscape you play in and what you're going to do and not do. Essentially that's what strategy is: making those choices that set the trajectory of your business. Sei-Wook Kim (41:48.645) Yeah, definitely. And one way to navigate this is thinking about smaller experiments. You don't have to go all in on everything at once. Maybe try it out, see if there's momentum there, and then slowly shift your agency in one direction or another. Peter Kang (42:06.966) Yeah. As a concrete example, we're seeing this with some of our firms where a big chunk of their work is designing and building websites, but we see good demand coming from clients for AEO and GEO-type optimization work. So it's about running some experiments — can we try to service clients with that offering, invest first with contractors, build up that capability, and then go deeper into it? These are definitely ways to mitigate strategic risk. Sei-Wook Kim (42:43.641) Yeah, definitely. And these are the kinds of risks that you may not feel immediately — they could play out over a long period of time. If you went all in on websites but the industry is slowly moving away from that and you don't experiment or think about new service offerings, it's just going to cap your growth over a longer period of time. Peter Kang (43:06.104) Okay, great. So these are nine — a sampling of risks. It's not a comprehensive list of every risk out there, but these are the high impact ones. If you as an agency owner take steps to be proactive and protect yourself from these types of risks, it satisfies the most important thing: increasing the probability that you can survive the unexpected things that come your way. Thank you all for joining. We'll see you next time. Sei-Wook Kim (43:40.271) Thanks.