How Innovative is Your Firm?

By Tim Williams

While advertising agencies are famous for innovating on behalf of their clients, only rarely are they recognized for applying original thinking to their own business model. 

At the root of this enigma is the belief that agencies are in the “service business.” True enough, agencies provide specific services in response to specific client needs. The problem is the mindset; the “client service” mentality that centers on responding to client requests instead of proactively solving client problems. 

The very best firms are hired much more for their heads than their hands; for what they think, not just what they do. Client companies are desperate for impartial, informed, inventive thinking. But many agencies now resemble production houses, delivering projects as ordered based upon pre-determined scopes of work.

The frenzied pace of project work has the effect of keeping agencies in a nose-to-the-grindstone mode. Because much agency work is now piecemeal, many agencies have neither the time nor the incentive to think big picture on behalf of their clients. And this mentality unfortunately (but understandably) bleeds into the way agencies think about and run their own businesses.

Assessing internal innovation

The net effect: agencies are not innovating nearly enough. In the business community at large, the conventional way to measure unconventional thinking involves metrics like:

·      R&D budget as a percentage of revenues

·      Percentage of revenue from new products/services

·      Number of proactive ideas submitted by employees

·      Number of patents filed

This list is only partially relevant for professional service firms. For the most part, agencies don’t have R&D budgets and don’t file patents.  But that shouldn’t stop them from assessing the level of innovation in their organizations.  They are, after all, populated with some of the most creative people on the planet.

A simple internal survey can provide you with valuable insights regarding the degree to which your firm engages in and supports internal innovation. Once a year, ask your key people to rate the following questions on a scale from 1 to 10, where 1 means “Strongly Disagree” and 10 means “Strongly Agree.”

1. We are actively engaged in evaluating and developing services that address the unfulfilled needs of today’s clients.

2. We view ourselves not as a service business, but as a marketing invention business. 

3. We are centered on understanding and solving business problems, not just delivering services.

4. We execute against a “Scope of Value” (deep understanding of client objectives) not just a Scope of Work.

5. We employ innovative methods for understanding our clients’ customers.

6. Our business model incentives our people to be effective on behalf of our clients, not efficient on behalf of the agency.

7. We pay as much attention to our clients’ metrics of success as we do the agency’s internal costs of service. 

8. Our process encourages prototyping many different solutions and developing “minimum viable products.”

9. Our culture values collaboration over “managing hours.”

10. We regularly provide proactive thinking and unasked-for ideas.

11. We encourage and support the development of new programs, services, and products, knowing only some will succeed and many might fail.

12. We have developed and regularly access a knowledge base — an internal body of intellectual capital that adds value to the work we do for our clients.

13. We actively pursue ways to monetize our intellectual property in ways that produce new revenue streams that transcend the conventional “work for hire.”

14. We engage in inventive and unorthodox forms of promotion for our brand.

15. We take an innovative approach to remuneration by following the practice of pricing based on value vs. estimating based on costs.

Beware the disincentives

The central challenge most agencies have when it comes to innovation can be described in three words: the billable hour. Imagine Elon Musk being constrained by a target utilization rate when developing the Telsa. Research and development units of major companies don’t fret about “billability.” Professional service firms obviously do, but that’s only because most have chosen to tie their renumeration to hourly rates. This produces a built-in disincentive to innovate because it’s not billable. 

There’s no client job number for proactive thinking, so professionals fear getting dinged in their next performance review for a below-average utilization rate. In agencies that are still slaves to the billable hour, collaboration doesn’t happen like it should because the “estimate” doesn’t allow for it. 

Cultivating a culture of innovation requires a focus on effectiveness, not efficiency. This can represent a major paradigm shift for firms used to cracking the whip on time tracking and hourly billing. Not surprisingly, some of the most innovative agencies today are those who have adopted pricing methods based on value created for the client, not costs incurred by the agency.