I recently read Digital Agency Owner Jules Ehrhardt’s State of the Digital Nation 2016. His thesis is that small independent agencies that can build digital products are going to succeed mightily in the future.
He explains: There are more digital projects than there are good teams because the client-service leaders in advertising and management consulting must overcome a number of challenges, including accountability for delivery of digital products, competition for talent, and inertia.
As a result, independent digital agencies can win premium consulting contracts and cement a position in the startup tech industry through “services for equity” relationships and bringing their “own products” to market.
Ehrhardt claims that this is good news for many independent digital agencies. Let’s take a deeper look at the credibility of this assertion.
Client needs now encompass delivery of digital products. Advertising firms must move beyond marketing digital products and management consultancies must evolve beyond just the strategy behind them. This is what sets up a fierce competition among the industry leaders.
Both industries are have been on an acquisition spree to fill gaps in digital capabilities as quickly as possible. Mega-firms are selling design services and digital execution (e.g., WPP Digital, Deloitte Digital, Dentsu Digital, and Accenture Digital). The taglines are: “Don’t follow digital trends. Start them” or “We imagine, deliver, and run the future.”
Despite the influx of purchased talent, Ehrhardt says the firms are “a million miles from lean and agile.”
Essentially, advertising firms and management consultancies are attempting to emulate the teams, skills, and methods of world-leading tech companies. It’s no small feat – and no surprise top talent is flocking to Google and Facebook and other tech companies who embody digital expertise.
Ehrhardt’s account makes me think about my own experience from Google to McKinsey, and then back to the tech industry:
I was a management consultant at McKinsey for three years (2012-2014). I served as Engagement Manager on multiple client teams doing digital work. From the firm’s perspective, I was a great fit to lead digital projects given my prior tenure at Google. At the time, the firm’s digital approach was nascent and fragmented. It was commonplace for digital engagements to have “fees at risk” which meant the firm didn’t get paid unless we came up with a solution to the client problem AND saw it through to execution.
To serve a wealth management client that feared the “robo-advisor” revolution, I leaned on newly purchased talent in McKinsey Digital Labs and an independent software development consulting firm to stitch together a team that could deliver a working prototype for tax and estate planning software and train the client team on Agile methodologies.
The people in McKinsey Digital Labs were talented. For example, I worked with Zainab Alikhan and Russell Parrish. Zainab is an experienced and patient Agile Coach who trains clients to be product owners. Russell is a UX Designer who could deliver mock-ups of a potential user interface by the end of any brainstorm session.
However, it was a struggle to see how the client team would be able to deliver or support a product after we left. My patchwork team was light-years ahead of the client team but far from the culture and results I had experienced at Google.
Like me, many others who joined management consulting to gain “strategy” expertise felt unsatisfied with the shift to digital execution.
The skill set to build digital products is highly coveted. The market value of independent agencies is 3-5 times revenue. For reference, many successful publicly traded companies fit this profile (Google is 5-6x, Proctor & Gamble is 3-4x, Coca-Cola is 4-5x).
Most independent agencies with digital product capabilities have either been acquired already or have decided life in a mega-firm will ruin their teams, skills and methods.
Client demand has increased, especially as a way to mitigate risk for digital product launches. As a result, the fees associated with digital product work are increasing.
According to Ehrhardt, the pricing opportunity is significant: “This premium [consultancy] offering is not sold in hourly units of time, but by the day and week to shift the focus on the delivery of value rather than of time.”
Independent agencies that foster a high-performing design and engineering culture will have more work than they can take on. Consequently, independent agencies can choose not to work with clients who are disrespectful or otherwise unsavory.
With a boundless demand for digital product work, independent agencies have a number of advantages beyond simply choosing which clients to work with. New business models are popping up – start-up studios (e.g., Betaworks revived bitly), services for equity (e.g., DesignIt), and own products (e.g., Invoke Media spun out HootSuite).
When investing in start-ups, forgoing fees for equity, or building own products, the risks are high. Here’s how Ehrhardt frames it:
“You’re essentially playing an expensive round of roulette. So be prepared to lose every single penny and never under any circumstances bet the farm. Do not engage Jack and Jane who have an ‘app idea’ and granny’s inheritance. Seek out partnerships with industry veterans.”
Yet, the most recent example I’ve seen is closer to Jack and Jane (literally). Trevor Johnston, a partner at a creative agency in North Vancouver called Thought Shop, partnered with Alison Taylor, the owner of a small clinic called Canopy Integrated Health, to build Jane Software, a web-based solution for online bookings and clinic management.
The early results seem promising for Jane Software but the road to pay day can be long and winding. Some say 90% of start-ups fail.
At least a minority are succeeding with the own product model. Here is a sample of independent agencies that have built their own products:
By harnessing a lean methodology that encourages failing fast and often to test new product ideas, independent agencies are capable of bringing new products to market alongside client-service work.
Taking into account the new models, Ehrhardt predicts a three-headed independent digital agency:
“Get ready for the second coming of the independent studio. The [new model] blends three components: Consultancy, Venture, & Own Product. Each feeds and informs the other in a powerful virtuous circle of network, experience, funding, brand, craft, and talent.”
At its core, the focus of all three components is the delivery of digital products. This is a unifying mandate. However, I don’t believe venture funding is an adjacent skill set or core competence, even if independent agencies hire investment professionals to manage a portfolio of digital investments.
Here’s what I recommend to take advantage of the digital opportunity:
As for true venture funding, I don’t believe a critical mass of independent agencies will hire full-time investment professionals to manage early-stage investments.
It will take time to see whether independent digital agencies can flourish as consultancies, venture funds, and own product creators. What’s for certain, though, is that digital products are growing in demand. To that extent, independent agencies that can build digital products are going to succeed mightily in the future.