Agencies of the future will be value drivers, not service providers. Here’s how…
Agencies are stuck in the mud. Consultancies take all of a companies cash… and none of the risk.
I hear this rhetoric from executives all the time. Thus far this ‘consensus’ has underserved the client market by ignoring their commercial realities.
There is a problem in the deep roots of the agency industry and it sits in the transaction right at the beginning of any client-agency relationship. The standard agreement goes something like this; Agency walks away with every penny they asked for regardless of the value they provided, client is left holding the output with their fingers crossed it works. While ‘outputs’ are always provided, whether they drive value or not is rarely in the minutiae of contractual agreements.
I believe this model must be unsustainable and therefore in the millennial queue for a radical overhaul. If the economy is to correct itself as it has historically, to survive we must radically rethink how agencies and clients partner together.
Rather than play a part in this unaccountable mess we’ve been testing a slightly different business model at Dawson Andrews for the past four years. This is not a ‘new model’, or a reinvention, or any buzzword you might attach to it. We’re merely looking at the problem and backing an attempt at a solution that we believe in. For mere reference and certainly nothing to boast about, we’ve just entered our 4th year and we’ve generated 36% EBITDA and have a healthy balance sheet of a 1yr+ of cash even after ignoring our debtor book, WIP and contracted work. We might be relatively new on the grand scale of things but I believe we’re on to something here.
Commercial instinct
Competing on service offering alone is no longer good enough. Why? Technical, digital or creative services have become a commodity. Writing great code, designing beautiful interfaces and writing ‘strategy’ is a readily available resource and frankly, becoming easier. Having spoken to VPs of Engineering, Directors of Digital, Heads of CX from all around the world they all have the same problem; They have great engineers, world class designers, superb data but they often lack commercial instinct. They’re brilliant at the big reveal, but when it comes to the business, they have never had to worry about return on capital employed.
A precipice has arrived with the emergence of the Digital Product industry. Data and design are now intrinsically linked, engineering and analytics are joined at the hip. The once-silo’s of the industry are so interdependent that every effort (output) is now measured for effectiveness. This provides an opportunity for service providers to demonstrate tangible value driven by their works.
“More importantly, this is an opportunity for clients to demand transparency on the return on investment their suppliers provide.”
Digital revenues are higher than ever before and the clip at which they are growing is staggering. A huge proportion of medium to large sized corporations are sighting digital as their primary growth driver in the next decade yet their digital teams responsible still haven’t integrated the language of the P&L into their granular product decisions. With digital starting to take an important seat in the boardroom, commercial justification has never been more important. We believe product teams should have their own P&L and should run their product strategy directly in line with it.
“To provide a client with P&L-effecting results requires team-wide commercial instinct.”
Gone are the days of client managers ‘translating’ the actions of their designers and engineers in desperate attempts to justify decisions made. A product designer needs to be able to hold a financial hypothesis for his new idea. An engineer must justify return on days spent rewriting a product feature.
“The collective team’s focus must remain intrinsically linked with the C-Suite agenda otherwise this model falls apart at the seams.”
A new pricing model is needed
Selling on units of time (hourly or daily rates) is an old-fashioned setup that for decades has underserved both clients and their providers.
- It is completely removed from the value it promises to create.
- It allows agencies to sell an endless piece of very expensive string to unfortunate clients who have no other option.
- It undervalues efficiency.
- It shows a complete lack of respect to the client.
The fundamental issue with hourly billing is that it weighs massively in favour of the agency to spend as much time on a project as they can. It pays zero attention to the value that time must drive. This flies in the face of the foundations of agile development practice. As a result, agencies and management consultancies tend to fixate on items of a potential scope that are the longest/hardest to do because of the billable hours that comes attached while ignoring value.
Pareto’s law is being used in product teams industry-wide. When we know 80% of the value can come from 20% of the scope, we need a model that allows us to be brave enough to back such an approach.
Fixed bid pricing
Our industry has a stigma for being over time and over budget. The fixed bid incentivises an agency to be on time. Time to market has a fiscal value; every week missed is a revenue number lost off the balance sheet. In an industry notorious for missing deadlines this is a value agencies can provide that only comes at the cost of accuracy and discipline. It also forces the agency to be accurate on price which finally serves the client-budget fairly.
Of course, a bad scope can ruin all of this and poke holes in our grandiose rhetoric, however, we argue this can be countered too — by better scoping! Some people fear that when they hear “fixed price” it means zero tolerance for scope creep but it simply means one must account for even more provision for changes in their roadmap.
Performance-based pricing
“125K/mo and a 1/8 of a point of the upside.”
Fixed bids are good, but performance-based pricing can create even more alignment between client and agency. A lot of people are trying to repackage their services this way but the body shops are struggling to transition to this model, it simply doesn’t suit them or worse — they don’t have the competency. Everyone talks about ‘partnering’ with their clients, heck some don’t even use the word ‘client’ anymore.
“We feel the only true partnership is where effort, results and reward are balanced in true equilibrium between client and service provider.”
At Dawson Andrews we build our own revenue-generating products on the side. This forces us to think like our clients, being strict on time allocated and development decisions. If we don’t find value fast we cull even faster and push on. Selling on units of time was a system of trust where there was no other way. Data provides a new way allowing it to dictate resource allocation and performance metrics required for tangible ROI metrics.
A new product mindset is needed.
At Dawson Andrews we have learned to manage the risks of this model by bringing together special kind of workforce. Designers and engineers are historically a protected species, sheltered by an extroverted ‘client manager’ who covers the ‘business side’. We ensure all engineers, product managers and designers can clearly articulate business value at all times. We have had to train a new breed of technical and creative talent that isn’t scared of a CFO asking them to explain the basis point impact their product choices will make on his financial statements.
What we’re aiming for is a shift in focus. Rather than focusing on the time spent on a project, we focus on the value. When a client is surrounded by a product team whose questions and focus revolve around the business value their results need to drive, we find the conversation of time spent rarely surfaces.
“The agency of the future will be value drivers, not service providers.”
Performance-based pricing is not exclusive to revenue increasing and cost saving projects either. KPI’s are complex and multifaceted and so our ways of measuring them must reflect that.
Are you actually doing this?
Yes. Most of our clients are quids-in on this new way of thinking and enjoying the fruits of such a setup. Others have their hands tied by legacy governance twenty years out of date. We’re empathetic to the time it will take for this change to fully come about and still occasionally conduct retainer models to facilitate everyone. Sometimes performance-based pricing mightn’t be applicable if a project is, largely R&D, an internal system, high risk, or where scopes cannot be fully defined and we must be adaptable to that.
It comes back to courage. Courage to put your money where your mouth is. It’s often said agencies would take your watch to tell you the time. For us we feel it’s our responsibility to deliver what is needed at a business level, and that takes a particularly minded client.
If you think like this, book in for a chat. We’ll bring the donuts.
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Andrew Fulton is Managing Director at Dawson Andrews, a digital product studio based in Belfast, Northern Ireland.
