The truth is, almost all agencies are looking in the wrong place for value.  Their compensation agreements are based on hours worked, FTE’s assigned, and costs incurred.  Hours and costs look inside the agency, but value is created outside the agency.  In other words, value is created outside your four walls.  Agencies and their clients are therefore usually looking in the wrong place for the basis of pricing and compensation.

In order for an agency’s compensation to be based on the value it creates, the agency needs the necessary knowledge and skills to identify and measure the drivers of a brand’s success.  If you don’t understand how you create value for your clients, you’ll never succeed in being paid for it.

Counting the wrong things

A survey by the American Association of Advertising Agencies asked agencies “What information do you track?”  Here’s what the agencies said:  

These results make it painfully clear that agencies believe value is created inside, rather than outside, their organizations, because they’re paying close attention to internal activities and very little attention to external outcomes.

Investing your time in ways that create and capture more value

By some estimates, the average agency spends up to 20% of its time and energy recording, tracking, capturing, estimating, billing, and adjusting it’s time.  Imagine if you took that same time and energy and instead invested it in doing a better job of creating marketplace value.  What if you traded the time spent in column A for time spent in column B?

If you turned your agency’s focus to column B, would the quality of your work be better?  Would the client receive better value from the agency?  Would you earn better margins on each assignment, and therefore on the client as a whole?  The answer to all of these questions is yes.  Why should we stay trapped in a model that serves neither party well? 

Knowing what you’re really selling

The critical first step on the path to becoming a value-based agency is to start turning your attention and energies to what clients are really buying from you; business success.  And as soon as you become as expert in identifying, measuring, and analyzing client business results as you are in crunching your agency’s cost accounting data, you will be infinitely more valuable to clients and prospects.

The first rule of business development: Decide that not everybody is a prospect

Most agencies have a weak and frequently replicated combination of objective and subjective criteria that attempt to define their target prospect.  

For unfocused agencies, the objective criteria usually include things like:

• Company size
• Advertising or marketing budget
• Geographical location

The subjective criteria usually consist of elements like:

• Values good work
• Easy to work with
• Has experience working with ad agencies

Look familiar?

The problem is, none of these criteria come are enough to be of much help in new business development.  First, because it’s virtually impossible to identify prospects that match your subjective criteria (unless you meet them face-to-face and get some experience working with them.)  And countless other agencies are looking for the same prospects that match the objective criteria.

Not “anyone with a pulse”

The ideal prospect for your firm must be defined in much more specific terms.  Having a good answer to the question “Who is our best customer” is the foundation of success for any business – ad agencies included.  Rather than defaulting to “anyone with a pulse,” gather your management team and invest some creative thinking to this question by deeply exploring the following questions:

1. What kinds of clients have we been most successful attracting in the past?  Looking at the history of our client relationships, what are some of the traits these companies have in common?  Start with the more obvious questions of size or geography.  Then apply some creative thinking to identifying common threads that might not be so obvious.
2. Which industries or business categories do our people know best?  Looking at the historical experience of the key people in our firm, in which industries or market segments do we have the most collective experience?  To help in this process, reference a list of industry categories such as the one published by The List.
3. As a group, what types of brands do we know best?  What is our collective experience in terms of types of brands?  There are many ways to think about a type of brand: New or established/Products or services/Retailer or manufacturer/Upscale or average/National or regional/Conservative or progressive/Entrepreneurial or traditional/Physical location or online?  Try to think creatively about this question.
4. Which audiences or market segments do we know best?  Given the types of clients we have worked for in the past, what characterizes their customer base?  Think about age, gender, income, geography, occupation, attitudes, behaviors, buying habits, media habits, usage habits, ethnicity etc.
5. Which internal and external brand stakeholders do we know best?  Inside client organizations, which constituencies do we know best (think beyond marketing to include sales, HR, etc.)? In the external marketplace, who do we communicate to most often (think beyond customers or consumers to include such things as dealers, distributors, etc.)?

In a way, these queries are all different ways of asking the same essential question: “Which specific kind of client organization wants what we do best?”  The answer can’t be everybody.  

You counsel your clients to define a specific target, a “best customer.”  You wouldn’t let your clients gets away with customer definition platitudes like “people with money” or “customers that are easy to deal with.”  Hold your agency to the same standard.  

Agency managers reason that what’s needed is to motivate employees with the promise of more money – a chance to earn more if they’ll work more.  Many agency CEOs embark on complicated bonus programs using formulas based on things like billable time and income targets.

It is, however a cold hard business reality that this carrot and stick approach really doesn’t work.  It seems like it should work; after all, income, forecasts, and billable time are all topics that most agency managers dwell on when it comes to discussions of performance. But 21^st-century knowledge workers have an entirely different set of motivations.

The surprising truth

Author and behaviorist Dan Pink sums it up well in the book, “Drive: The Surprising Truth About What Motivates Us.”  Drawing on four decades of research on human motivation, Pink shows that the secret to high performance and satisfaction is “the deeply human need to direct our own lives, to learn and create new things, and to do better by ourselves and our world.”  In other words, the elements of true motivation are not raises, bonuses, and spiffs, but rather autonomy, mastery, and purpose,

Working with the research firm Millward Brown, former P&G CMO Jim Stengel recently developed the “Stengel 50”; brands that are most closely associated with an ideal or purpose.  Stengel reports that these 50 ideal-driven brands outperformed the “Standard & Poor’s 500” by 400% over the past decade.   That’s the power of purpose.

Beyond an economic purpose

No doubt your firm has an economic purpose characterized by income and growth.  But your economic purpose gets more attention than it needs or deserves, because it is only an end; it is not the means.  The means is a human purpose that transcends making money. 

Rosabeth Moss Kanter writes persuasively about this in the Harvard Business Review piece “How Great Companies Think Differently,” in which she observes: 

1. The most successful companies identify something larger than transactions to provide purpose and meaning. 
2. Articulating a purpose broader than making money can open new sources for innovation. 
3. Trusting people to make choices about where, when and with whom they work makes jobs more engaging.
4. Great companies trust their people and believe they can rely on relationships, not just rules.  They treat employees as self-determining professionals who can work in self-organizing ways.

What’s needed in today’s professional knowledge firms is not more financial transparency, more sharing of financial data, or even more financial rewards.  What we need is more trust, more autonomy, and more meaning.  Your people work not for money but for a sense of accomplishment.  Give them the opportunities, the resources, and the support to reach for the stars, and they most likely will.

Here’s an email I received recently from the leader of a respected agency (a name you would know):

“As the world changes, and I continue to explore different business models, I keep running up against new competitors.  I'm trying to map out as many different places that we intersect and compete with companies in other industries as possible. From media companies like Meredith who have purchased agencies so they can create content directly for clients, to entertainment companies like Electus in Hollywood, to data companies, to technology companies like Foursquare that have direct client relationships, to media agencies that are now in the content creation business like Starcom’s Liquid Thread, to PR firms, to design firms, even companies like Accenture vying for their share of analytics and digital production. This is not a comprehensive list by any means.

The pool of marketing dollars is being bellied up to by everyone. Technology has made it possible for everyone to expand their capabilities and all of the different ways to reach the consumer has really grayed who does what.

Net, not only have our options to reach consumers increased exponentially, but also the universe of our competition.”

Just like ink – or blood -- in water, agencies tend to diffuse their offerings until they appear to offer everything.  As Ignition has written many times, diversification is an unfortunate human tendency.  We reason that because everybody else is headed in a particular direction, it must be the way to go. As a result, by the end of the 20^th century the advertising agency industry had converged around “full-service” and “integrated.”  Today it’s converging around “channel-neutral,” and “branded content provider.”

Here are some recent examples from Ignition’s consulting work:

• A major PR firm in the Midwest who wants to add “paid” and “owned” media capabilities to its already impressive “earned” media credentials
• A major brand identity firm who wants to expand services enough to be considered as an “agency of record”
• A leading digital firm in Canada who is adding services and capabilities that would make them a direct competitor with so-called “lead agencies”

One interesting recent example of this phenomenon is Ruth, Edelman’s newest entry into the marketplace. 

The ultimate one-stop shop?

Rather than differentiating their offering by sticking to what they know best, agencies are rushing to be seen as the ultimate one-stop marketing shop.  Problem is, sophisticated marketers aren’t really looking for that.  They’re looking for best-in-class specialists.   

We’re firmly in the era of the “long tail”, where major client organizations employ an average of 17 agencies (according to the ANA).  Not only is it true that clients aren’t looking for generalists, there really is no such thing as an “agency of record” any more. 

So pursuing a strategy of more “AOR” assignments doesn’t hold a lot of promise. While small marketers can often be served by a single small agency, it’s pretty unlikely that a large marketer is going to one day decide that they can get the dozens of different specialized marketing services they need from a single “channel-neutral branded content provider.” 

Refuse to diffuse

Avoid the pull of convergence.  By appearing to be able to do everything, you end up being known for nothing.  It’s the General Motors strategy applied to advertising agencies.  There’s no such thing as a “general market” or “general needs,” There are only specific markets and specific needs.  Pick your spot and be the best at what you do.  It’s impossible to be the best at everything.

And why exactly is it so difficult?  An interesting piece in HBR “The New Psychology of Strategic Leadership” summarizes one of the key issues this way:  Because most business strategists (including agency professionals pursuing new business) have similar mental representations, we perceive and pursue the same opportunities.

In fact, not only do we pursue the same opportunities but we say the same thing, and most of the time, even sell the same product.  So let’s stop and ask, what’s the first and most important thing we preach to clients? Yes: differentiation.

Longtime Advertising Age reporter Matt Creamer observed in a recent piece in Advertising Age:

“Telling an effective agency brand story should be easy for companies that are in the business of telling brand stories, right?  I can tell you, after perusing many an agency website, that fewer than you’d think have figured it out.  Very few take stands. All this has made the agency landscape feel too flat and featureless, and that is exacerbating the commoditization of the business. If agencies don’t stand out, then what do prospective clients have to judge them on but for how much or little they’re willing to charge to handle an account?”

It’s a curious trait of human nature that our natural tendency is to mimic and imitate what others do – even, and especially in, business.  Actually, anthropologists tell us that “copying” is one of our oldest and most basic survival mechanisms. 

10,000 years later, the way that translates to a business setting is that instead of staking out a completely unique position, we tend to look around at what others are doing and conclude that that’s what we should be doing as well. While this might have helped us adopt successful hunting techniques as early humans, this tendency doesn’t serve us well at all in the modern business world. 

Instead of claiming unoccupied peaks, we climb the ones where someone is already there!  The HBR article previously referenced makes this point, observing that “Firms typically cluster around a few strategic positions, leaving others unoccupied.”

Actually, a mountain is a pretty good analogy for what we’re talking about, because it represents the shape of a bell curve.  Do you know what it means to be at the peak of the bell curve?  It means you are the most average.  In agencies, as in other businesses, the really interesting stuff is happening at the edges.

To improve your new business track record, spend more time and energy addressing the cause, not the symptoms.  Lack of new business success for most agencies is a direct result of an unfocused business strategy.

You can't be good at everything, but you can be good at something. And that "something" forms the basis of a successful positioning and business development strategy. 

But intangible brand equity counts as the major part of the market value of knowledge firms as well – like advertising agencies.  Agencies actually understand this concept better than most companies because it’s precisely what they preach to their clients.  They understand that differentiated brands are infinitely more valuable than me-too brands, and they do a good job of helping client companies make brands look, sound, and behave differently.  In other words, the best agencies have applied their considerable branding skills to their own brand. 

Agency, differentiate thyself

A previous post, “How Differentiated is Our Firm?” will help you gauge your firm’s current level of differentiation.  Of course the most important dimension of differentiation is to have a clear positioning – a focused business strategy that avoids the “full service” trap.  (No topic has received more coverage by Ignition than why and how to develop a positioning strategy.)  But beyond that essential question, you can achieve additional differentiation in the following 10 ways:

1. How you solve. 

(For example, do you have a distinctive way of approaching client marketing problems, like Victors & Spoils and their crowdsourcing model?)

2. How you produce. 

(For example, do you take an unconventional approach to execution by outsourcing production work to companies like Affinity Express?)

3. How you collaborate. 

(For example, do you work in an agile framework like Brunner and their “momentum teams.”)

4. How you deliver. 

(For example, do you leverage uncommon technology to distribute deliverables or share work with clients like LatinWorks’ client-accessible intranet?)

5. How you serve. 

(For example, have you moved beyond the traditional “account service” role by introducing disciplines like Client Leadership and Program Management like Moxie?)

6. How you price.

(For example, have you adopted creative approaches to pricing and compensation that transcend the hourly rate like Venables Bell & Partners?)

7.  How you manage.

(For example, does your firm provide exceptional benefits to its employees like Peter Mayer?)

8.  How you look.

(For example, do your offices communicate your philosophy like GSD&M and the principles that appear literally in stone in the lobby?)

9. How you sound.

(For example, do you have a rule that a live human should always answer incoming calls like GlynnDevins?  Are clients and associates entertained by music during the day like at Partners+simons?)

10. How you promote.

(For example, do you have an exceptional social media footprint like Teehan+Lax?)

Every single one of these areas presents an opportunity for differentiation.  All you have to do is apply the same creative thinking to your own business as you do to your clients’ business.  We preach differentiation.  Let’s differentiate our own brands.

An agency positioning that’s too authentic is too backward-looking, too focused on where the business was instead of where the business is going.  On the other hand, a positioning strategy that’s too aspirational is a shot in the dark based more on hopes than abilities. 

The best solution isn’t to draw the line right in the middle of the spectrum, but rather to err on the side of aspiration.  Your positioning must be looking more to the future than the past; otherwise you’ll be cycling back to the re-positioning process much sooner than you either want or need to.

Effective agency positioning strategies look ahead, not just behind.

A positioning rooted in the future

Here’s another way of looking at it.  If you base your agency positioning on current data or information about the industry, you will be defining a position for the present and the past, but not one for the future.  Current industry information can only tell you what has happened, not what will happen.  Facts don’t predict the future – only a theory predicts the future. 

Your positioning should be based not on where the money is, but where the money will be.  And to know where the money will be requires that you have a well-founded theory about what will happen in our business and why. 

Not just who you are, but who you want to be

The point is that your positioning will not be found as much in the archive of facts about your agency as in the storehouse of knowledge, learning, and expertise in your company that can peer ahead and predict.  This is not the equivalent of an “educated guess,” but rather a well-constructed view of the future based on an understanding of the trends that are reshaping our business. A positioning that’s grounded mostly on past performance and past client needs will be true to what you are, but misses the opportunity to define who you want to be.

Of course this isn’t easy.  (Nothing worth doing is.)  Writing recently in the Harvard Business Review, Seth Godin observes “If you can offer a scarce and coveted good or service that others can’t, you win.  What is both scarce and in demand.  Things that are difficult; difficult to conceive, to convey, to make … In fact, just about the only that that is not available in unlimited supply in an ever more efficient, connected works is the product of difficult work.” 

The alternative is to produce the same thing most other agencies produce; the stuff that the client community increasingly regards as “commoditized.” Here are the top criteria economists use to evaluate the degree to which a product or service has become a “commodity”:

• Homogeneous products and services.  The characteristics of the product or service do not vary much across providers.
• Industry standard specifications.  The means of developing the product or service are well understood and widely available.
• Excess supply of buyers and sellers.  There are an abundance of customers with the willingness and ability to buy the product or service at a certain price, and an abundance of producers with the willingness and ability to supply the product at a certain price.
• Wide availability. There is overcapacity in the market because the product or service is widely distributed and easily obtained.
• Low barriers to entry and exit.  It is relatively easy to enter or exit as a business in a “commoditized” market.

If your approach is to look around to see what other agencies are doing (so called “best practices”) for inspiration, your business strategy will just be a reflection of what already exists.  Your goal should be to develop a business model that’s “scarce.”  And you won’t find it through focus groups and “listening to your customers.”  Apple’s breakthrough product line didn’t come from customer input.  Brilliant business strategies – in agencies as in client organizations – are about leading, not following.  

Be creative about your own brand

Agency professional Darryl Ohrt’s guest column in Advertising Age, “Don’t Let Your Agency Be a Cover Band” makes the point that lack of originality is the reason most agencies never break from the pack.  Observes Ohrt, “It's ironic that so many in our industry have a hard time being original. They're coming up with innovative, original conceptual work for their clients each and every day. But when it comes to taking care of themselves, plenty of agencies stick with the ‘we've always done it like that’ approach. And in a noisy industry space, that's not enough to stand out, and leaves clients and talent looking for another band.”

In positioning your firm, your objective is to be exclusive, not inclusive. Strategy making is like map making; you can’t include everything.  “Cartography is essentially about dividing things up – deciding what’s in and what’s out,” says University of Toronto professor and business author Sarah Kaplan. “In order to draw a map of any sort, you have to take a stand for some things and not for other things.”

So make your mark by making a market – of your own.

So here’s a game-changing resolution for your firm: commit to bill for what clients really buy.  Instead of billing for time, bill in other creative ways that are tied to the value you create rather than the costs you incur.

For inspiration, consider the consequences of continuing down the path of the increasingly discredited hourly rate system.  Over the years, my colleagues and I have developed the following list:

1. The hourly rate focuses on efforts, inputs, hours, costs, activities, rather than outputs, results, and marketplace value.  It assumes the client is buying an activity rather than an outcome.
2. The hourly rate misaligns the interests of agencies and clients.  Clients want their agencies to spend less time, whereas the firm makes more money by spending more time.
3. The hourly rate places all of the risk on the client.  This is why most clients don’t really view agencies as true “partners.”  The nature of partnership is shared risk.
4. The hourly rate fosters a production mentality instead of spirit of invention and entrepreneurial problem solving.
5. The hourly rate encourages hoarding “estimated time” and produces a disincentive for people to delegate work and responsibilities.
6. The hourly rate creates a system in which as the agency gets more effective and efficient on a client’s business, it actually earns less money instead of more.
7. The hourly rate works against making more progressive use of technology to get work done faster.
8. The hourly rate commoditizes the firm’s intellectual capital and expertise, as if an hour from one person or firm is as valuable as any other.
9. The hourly rate places an artificial ceiling on a firm’s income, since there are only so many hours in a day. This amounts to a self-imposed limit on agency profitability.
10. The hourly rate creates a large bureaucracy centered around collecting, policing, reporting, analyzing, transferring, and managing time.  There are much better uses of the firm’s time and resources.
11. The hourly rate diminishes quality of life for associates of the firm. No one became a professional to bill the most hours, but rather to achieve something important.
12. The hourly rate looks in the wrong place for value.  Value is created out in the marketplace, not inside the four walls of the firm.  For pricing cues, agency should look outside, not inside the organization.
13. The hourly rate is based on the cost to the agency rather than value to client.  Clients don’t buy your costs.
14. The hourly rate discourages collaboration and integration, because account managers are constantly worried about going “over estimate” on an assignment.
15. The hourly rate puts the emphasis on efficiency instead of effectiveness.  No client hires an agency just to be efficient.

Ultimately, the main problem with hourly billing is that it keeps agency professionals trapped in the illusion that what they sell is time.  Clients don’t buy the time of the people working on their business any more than you buy the time of the mechanics who work on your car. As buyers of services, what we’re buying is a successful outcome – the solution to a problem. 

So consider making this the year that your agency really does move to a new level of success by changing your paradigm about what you really sell and what clients really buy.  If you do, you’ll join the growing ranks of innovative firms who are realizing greater profits and professional satisfaction by burying the billable hour.

Back in the days of Mad Men, agencies had a “television department,” because TV was a new technology that the print/outdoor/radio-centric agency executive of the 1950’s didn’t really understand.  So agencies were staffed with “television specialists” whose job it was to understand and recommend the new medium.

Over time, it became clear that a “television department” was no longer needed.  Television became mainstream and assumed its place as the most “mass” of all mass media.

In 2011, the internet officially became the world’s largest advertising medium.  It already was the planet’s leading communications medium.  To have the most popular medium on earth “departmentalized” doesn’t make a lot of sense.  We killed the “television department” when TV became part of the culture; it’s time to kill the “digital department.”

Not separate, but equal

Of course an equally important reason we need to de-departmentalize digital is so that it will no longer be viewed as something “special” or “different” within the agency.  This only serves to give the “non-digital” types an excuse to postpone their immersion into digital marketing and continue to lean on the “interactive group” to come and speak intelligently about digital at client meetings.

I actually believe the digital cognoscenti in agencies perpetuated for many years the notion that digital is indeed a separate, mysterious thing that only certain types of people can understand.  True, some aspects of digital are indeed complex (programming, coding, software development) but some aspects of television production are complex as well (producing animation, lighting sets, running edit bays, etc.)  The point is that every medium has its areas that are the domain of specialist experts.  Digital is no different.

Disbanding the digital department isn’t difficult.  There’s already a natural home for most of the functions that exist in a typical interactive group:

See how easy that was?