Rebuilding Your Business Model
As the old axiom goes, all you need to start an agency is a desk and a phone. In the 21st century version, the desk might be replaced by a laptop computer, but the perceived simplicity of professional service firms is based on the fact that we are essentially knowledge businesses. We don’t have manufacturing facilities, product inventory, warehouses, or distribution centers. Just the same, professional firms are built on top of a set of capabilities and practices that constitute a business model.
The problem is that most leaders have never stopped to consciously identify, examine and modernize the interlocking pieces of their business model framework. In truth, precious few leaders of professional firms could even map the elements of their business model on a piece of paper. So when we see headlines about “the death of the agency business model,” the issue is more a matter of benign neglect than mismanagement.
A triangle of value
Even among business school types, “business model” is an amorphous term habitually referenced in books and articles, but scarcely defined in a way that allows for productive discussions about how to optimize the business strategy of the firm. Over the years, my colleagues and I have worked to develop a useful framework to describe the key elements of a professional firm’s business model, which has resulted in what is essentially a triangle of value. Each side of the triangle represents one of the three key reasons a professional firm exists:
To create value
To deliver value
To capture value
Creating value is the foundation of your firm’s success, and it rests on a clear definition and understanding of the specific client challenges your firm is best prepared to address. Most firms approach this question precisely backwards, showcasing the obligatory bullet point list of services as the standard bearer of their business strategy. But the capabilities you offer must emanate from the types of business problems you solve for your clients. Clayton Christensen frames this in context of Jobs to Be Done Theory; the idea that clients “hire” a specific service to solve a specific problem.
The essence of this leg of the model is to clearly define and articulate “What are the problems we solve for our clients?” The most powerful way to do this is to state these problems from the client’s point of view, in first-person language.
Equally important is a clear articulation of the markets you serve. The answer can’t be “Everyone with money,” as some firms regrettably define their target market. Peter Drucker famously observed that marketing starts with the question “Who is your customer?” and this question applies just as much to professional firms as to the clients they serve. Your target market doesn’t have to be a type of industry category; it can be a type of audience or even a type of brand.
Delivering value is the second piece of your business model. This means developing and supporting an effective engagement model, which is comprised of your operating model and your production system. Most agencies get high marks from client organizations when it comes to responsiveness; meeting deadlines, reply client requests, and fulfilling scopes of work. In other words, we’re seen as very responsive. (Unfortunately, client ratings for agencies being proactive are dismally low.)
When it comes to the operating model, the central issue agencies must address is differentiating between short-, mid-, and long-tail offerings. These solution sets vary widely in perceived value to clients, and must be delivered in very different ways by agencies. Short-tail offerings are the agency’s unique blockbuster competencies; uncommon services and programs that provide high-value solutions to client problems. Mid-tail offerings are capabilities that are routinely applied in most engagements. And long-tail offerings are the widely available executional services and activities that are seen as standardized (and therefore commoditized) by most clients. These three classes of offerings must be developed, delivered and priced in very divergent ways. The mistake most firms make is bundling all three service classes under the banner of the dreaded “blended rate” — the absolute worst way to address the continually-evolving disintermediation of agency services.
Capturing value is the part of the business model where professional firms struggle the most. The root of the problem is trying to package up the value of knowledge work in a unit of time; a hugely suboptimal way to get paid for the expertise and intellectual capital that resides in your firm.
Effectively capturing value is dependent on having an actual revenue model (billing for your costs is not a revenue model, it’s just a reflection of your cost structure). Professional firms with actual revenue models have replaced their rate card with a “pricing stack” — a variety of ways to capture value in ways that align with the principles and practices of modern pricing. These include such approaches as dynamic pricing, two-part pricing, royalties, licensing IP and more. At the very least, it means pricing based on the perceived value of the outputs or outcomes, not the cost of the inputs.
To fully capture the value you create also requires commercial alignment; uniting the entire organization behind a shared vision of what you really sell and how you should get paid for it.
Not planning, but choosing
Especially if your firm has been in business a decade or more, it’s very like that you’ve arrived at your current business model more by default than by design. You are living with an emergent strategy rather than a deliberate strategy. If this describes the current state of affairs at your firm, you have the opportunity (if not the obligation) to deliberately design your business model.
Your remit is not necessarily to make plans, but to make choices. Business planning is about taking steps and deciding what to include. Business strategy is about making choices and deciding what to leave out. As you examine each element of your business model, the job is to not to figure out how you can be better, but how you can be different. As design thinker John Koklo recently observed, “Leading companies say ‘no’ much more than they say ‘yes.’ Rather than chase the market with follow-on features, they lead the market with a constrained focus.”