As Long as You Monetize Time, You Will Never Have a Scalable Business

By Tim Williams

It’s fashionable (and confusing) to use the term “scale” in place of the word “grow,” as in “We need to work harder to scale our business next year.” But growth and scalability are two completely different concepts, and the distinction is critically important — especially in the professional service business.

A scalable business is defined as an organization that is able to add revenue without also having to add a corresponding amount of labor. Client organizations are generally all scalable businesses, because they don’t derive their revenues from hours logged on timesheets. But most advertising agencies are non-scalable businesses, because adding revenue always requires adding staff (thanks to the billable time revenue model).

Solutions that are built to scale

It is possible to “scale” the agency business model, but it requires moving away from hourly billing. It’s now clear that the long-term economic viability of the agency business is dependent on the ability and willingness of agencies to adopt a business model that actually scales. Agencies can obviously “grow” without “scaling,” but it’s an arduous, arguably unsustainable path to financial success.

Consider the business model of most marketers. Google can add a new customer — or potentially thousands of new customers — without incurring a significant increase in their internal costs. That’s because Google sells solutions, not time of staff. And their solutions are built to scale.

Could an agency do the same? Absolutely, and it’s the future of the professional services business. Already, major consulting firms derive a majority of their revenues from “products, programs and platforms” that are not tied to an hourly billing revenue model. One major proof point is that these businesses are now at the top of the heap in the annual ranking of largest agencies. Accenture Song and Deloitte Digital are in the top 5, with Accenture in the #1 spot (larger than any of the traditional agency holding companies).

Yet the vast majority of agencies continue to resist the idea of building a scalable business. What exactly are they waiting for? Permission from their clients? Requests from procurement? A policy announcement from the 4As? None of that is ever going to happen. Agencies themselves are in the driver’s seat, and no outside organization is ever going to act as the catalyst for business model transformation.

”Change or be changed”

It appears the only thing that will motivate the change is the threat of financial collapse, and even then, most organizations continue down the easy path — the path of least resistance— until collapse is imminent. Most of the large holding companies would rather consolidate, fire thousands of talented staffers and shutter venerable agency brands than do the hard work of actually changing their business models. It’s been a sad and distressing thing to witness. The axiom “Change or be changed” is painfully applicable here.

My friend Michael Farmer explores the disintegration of the agency business in excruciating detail in his forthcoming book, “Madison Avenue Revisited. The Verdict of the Advertising Industry: Murder, not Manslaughter,” which details the convergence of greed, inside-out thinking and incompetence in large agency networks over the past several decades that has wrung the value out of what was once an immensely profitable, prestigious business.

But for the rest of you, it’s not too late to invest in your future. But you have only 18-24 months to navigate through the challenge of creating an AI-optimized business model untethered from the time-based billing system. It should be painfully obvious to agency executives everywhere that the hourly rate simply will not survive the advent of AI. It is simply inconceivable that agencies will be able to capture the value of AI-powered work while still deriving their compensation from time-based staffing plans.

Finally, financial breathing room

The solution is to sell solutions, not time. And AI should be fully baked into every solution you create and sell. Another Michael Farmer book, “Madison Avenue Makeover” documents the transformation of the agency Huge away from time-based services to a productized business model. According to recent press reports, Huge has seen a fivefold uptick in new business quarter over quarter, and in recent months the agency’s growth has doubled.

What does it say about the holding companies that rather than choosing to fund and support the change-making agencies in their portfolio (which requires some investment spending), they instead choose to spin them off? This is, in fact, what happened to Huge. Same story for the legendary RG/A which has also gone through the process of implementing a product-centric business model.

Investing in the future success of the agencies in their portfolio is a stumbling block for most holding companies precisely because they don’t have a scalable business model. They run their business on razor-thin profit margins that are directly tied to staff logging hours on timesheets, leaving them no financial breathing room to fund product development or invest ahead of their success — a vicious cycle.

A new story for your firm

It’s time for your firm to create a new story. Time to step off the hourly billing treadmill and onto the pathway creating of a truly scalable business. The first step is to engage your leadership team in a discussion of the main types of problems you solve for your clients. From there, develop a suite of programs and platforms that represent solutions to these problems, priced based on the value they deliver rather than the internal costs incurred.

At the end of this journey (not as difficult as you think) you’ll have a fit-for-purpose business built around the concept of proactively delivering solutions to business problems instead of reactively filling scopes of work. Finally, you’ll be able to grow a truly scalable business.