TBD: What’s the overall reaction been to your article and general perspective regarding “full-service?”

TW: That is a question that I’ve been discussing with people for twenty years. In terms of the ad community, I think most thoughtful agencies will concede that “full-service” claims too much and agree that no firm can possibly be good at everything – there’s always some competencies missing. But at the same time they’ll say “we feel compelled to say it or we risk losing new business opportunities. We want prospects to come to our website and feel like these guys can help us.”

The point I aim to make in the article is how buyers of professional services actually shop for an agency, law firm, or even an accounting firm. If the buyer is a small and/or less sophisticated company, then they might be shopping for a “full-service agency.” They don’t have the budget or the marketing knowledge to know what they need versus what they don’t. Deciding to go to someone that looks like they do it all is a legitimate motivator. That’s the equivalent of the country doctor – famously doing everything from delivering babies to vaccinating a horse. If that’s the type of client base that the agency wants, then sure, go ahead and proclaim “full-service.”

TBD: So who are the brands or companies that wouldn’t find “full-service” appealing?

TW: The brands that most agencies want to work for – the ones they aspire to, the ones they would put on their “boy wouldn’t this be great list” – are not looking for full-service. They stopped using the full-service model twenty years ago when the agency business was disintermediated and fragmented. The large marketers – Fortune 500 companies – have an average of seventeen active agency relationships. They’re shopping for best-in-class – best-in-class creative, digital, media, research, social, brand identity, ecomm, etc.

Deciding which of these two positions to take is a business decision that an agency has to make. Trying to split the middle and attempt a little of each is not a business strategy. An agency can’t simultaneously optimize two opposing business strategies. A decision is necessary, whether it be a national specialist or a regional generalist.

TBD: So which type of agency do you tend to work with?

TW: All of the interesting work being done in any field anywhere in the world is being done by specialists, not generalists. Look at both science and art – it’s never the generalist that pushes the boundaries. Personally, I don’t find the generalist strategy appealing. Not to mention, as a client grows, they’re sensitivity on using specialists vs. generalists goes up.

TBD: How do you help an agency that wants to remain as a generalist?

TW: Even a generalist can sharpen their strategy and retain market interest. This is where you get into the difference between your positioning strategy and differentiation. Is that the same thing? I don’t think it is. A strategy is deciding what not to do. It’s sacrifice. It’s subtraction, not addition. It’s stripping away what you aren’t. That’s strategy.

Differentiation is when, in spite of offering the same wide range of service and pursuing the same wide range of categories, the agency aims to differentiate with their language, name, customer experience, and the tools and resources at their disposal. They may even develop unique service offerings. Differentiation work can be done with so called “full-service” agencies to find ways to move up the value chain and offer more valuable services. Certainly, and this is the other half of what I do, an agency can improve the way they price their services.

TBD: A lot of agencies can provide ancillary services at better than average proficiency that complement their core competency. Traditionally, this is where they would start to call themselves “full service.” How can agencies that have identified and speak to their core service also describe that they have this “multidisciplinary approach” that, as you mentioned, clients value? Does this still allow them to position themselves as specialists or does this force them into being a generalist?

TW: Interesting question. I think multidisciplinary is a better description of an agency that does a lot of things, rather than full-service. As I argue in the article, full-service is a completely meaningless term. What’s the alternative, half-service? Partial service? It just doesn’t mean anything and everybody uses it. I understand why law firms and other professional services use it, because they don’t know any better. They’re not marketing people, but agencies are exactly that. They should know better! If every agency website on the planet uses the term “full-service,” then wouldn’t they want to think of some other way to describe themselves? The term itself is not differentiating at all.

Specifically, what you’re describing is the phenomenon true of business in general. Most enterprises start as focused businesses and then become increasingly unfocused as they try to meet client requests for services. The classic, “Can you guys help with my _____ marketing?” The agency has no experience with that type of marketing, but they say “Yeah, sure. I think we can do that.” Now they’re forced into figuring out how to add it on the fly. These service add-ons become like barnacles on a ship. They cling to the agency, ultimately forcing them to diversify by default, rather than by design. Over time, the agency loses control of their own fate. By just responding and reacting to client requests, they’re not crafting a proactive business strategy. It’s the long road to unfocused.

In 2010’s best-selling book “Rework,” Jason Fried and David Heinemeier Hansson, co-founders of the software firm 37Signals, cover several business principles they learned along the way. One of which struck me – “let your customers outgrow you.” If you have an effective business strategy, then you’re clear on what you do and don’t do. You’re comfortable with the idea that your customers might outgrow you. The alternative is to continue to add barnacles, inevitably tarnishing your reputation. It’s simply not likely that an agency can deliver add-on services with the same degree of excellence as their core competencies.

TBD: How do you convince a full-service agency to become more narrowly focused?

TW: One of the very first exercises we do in positioning consulting work is to ask, “you think you’re full-service, let’s make a chart. Down the side, we’re going to list your top ten clients. And across the top, we’re going to list all of the services that you offer. Now, let’s go client by client and put an X under the services that they actually buy from your firm.” When we’re finished with that exercise, the firm generally realizes they actually don’t have any full-service clients, but rather clients who largely pick and choose services. It’s really quite startling and eye-opening that, here they are, trying to support this very expensive full-service model and they might have one gorilla client that buys it all. In reality, even this gorilla client doesn’t buy everything – more likely around 70% of what the agency offers. And when the firm steps back to look at that pattern of X’s, they usually say “Wow. Really, if you look at it, most of our clients are interested in our _____ competencies.”

Another piece of education is the work of Clayton Christensen, the Harvard Business School’s father of disruptive innovation theory, who makes the point that all professional business services are being disrupted, including consulting services, due in large part to enabling technology. Clients now have unprecedented access to a global talent pool. That didn’t use to be the case, but now it is. So good luck trying to corral all that business and do everything for a client that can put a brief on Crowdspring tonight and have a new logo within 24 hours.

TBD: Does it feel like this is just a symptom of agencies being started by creatives, rather than business professionals? Or is there some other factor at the core of this?

TW: It’s a range of factors, some of which are historical and subconscious that most agencies don’t even realize. The timesheet/hourly rate system feels like it’s been around forever. Isn’t that just the way agencies work? Well, no. It hasn’t been around forever. When I started my career in NY, working for a WPP agency, I didn’t do a timesheet. They didn’t exist. Timesheets came along later when creative agencies broke away from media agencies. They had to find a way to charge for their services without media commissions to pay for or offset it. As a result, they looked around for a new model. Landing on attorneys, they adopted the hourly rate system.

Meanwhile, agency profits have been on a steady 25-year annual decline. The agencies of the 1960s had margins of 30% on average. Today, the average is 9.6%. The answer isn’t let’s get people to do more accurate timesheets with better punishments for not turning them in on time. That will do nothing to reverse that trend. It takes stepping back and looking at it through a different lens. Why are agencies in this situation? This is explained in part by Michael Farmer in his book Madison Avenue Manslaughter. A brilliant diagnosis, he points out that agencies are historically built with sloppy business managers and measure the wrong things – inputs.

Imagine if Apple only measured people punching in and out of work, rather than measuring how many iPhones they produced in a given year. If I ask an agency to tell me how many print ads they produced in 2016, nobody can tell me. Honestly, during the golden age of advertising with 30% margins, agencies could afford to be this sloppy. They had bandwidth. No one was fretting about hours. There was a proper alignment of economic incentives too. The way agencies made more money in that system was when it worked, the client spent more, therefore the agency made more. Today those incentives are completely unhinged. Now what the client wants less of, which is hours, the agency wants more of. Look at any major agency today and you can see the effects of tracking production effort, rather than the actual product. That’s Michael’s whole thesis and it’s a big part of the problem.

Michael also paints the picture of what’s behind the rise of procurement, which is the financialization of business and the power that finance has in organizations. This brings me to what might be the most important point. Agencies and professional services in general have never studied pricing. They only know cost accounting. If you look at client organizations, all other companies for that matter, they have pricing as a separate function outside of financing. For instance, Marriott has a Chief Pricing Officer. In fact, they have 250 people with a pricing title around the world. And yet, pricing is not a competency at agencies. Let’s be clear, tallying up your costs is not pricing. Pricing is an art. Cost is a science.

Ignition is on a mission to try and establish pricing as a core competency within an agency. I try to work with the C-suite as much as possible because that’s where the change has to happen. Within my pricing workshops, I’ll ask “how many in this room have ever read a book on pricing?” And not a single hand goes up. Not even the CFO. The CFO is a CPA – they know cost accounting – but they’ve never read a book on pricing. “Well, that’s why you’re here today,” I’ll continue. It’s why it’s an unfair fight when you sit in a room with procurement. They come in with an AK-47 and you’ve got a water pistol. You haven’t studied pricing, so don’t start complaining to me about how procurement has all the power. Who’s fault is that? You’re the seller. Don’t be this subservient. That’s how we got to this sad state in the first place.

TBD: We talked to Michael at length about the billable hour. With the timesheet being an ineffective tool, curious to hear your advice on why you’d choose one pricing model over another? Whether its incentive-based compensation, etc. What makes the decision?

TW: What we at Ignition teach is, rather than just having one way of pricing, agencies should have multiple ways they approach compensation. Instead of a standard rate card, they should have what we call a pricing stack. Similar to a technology stack, we recommend having nine or ten ways to work with your clients. Once a better understanding of the desired success metrics are established, the agency can propose a way that they feel aligns both parties’ economic incentives. That might be, for the right kind of client, an outcome-based agreement. But it also might just be a fixed price, based on a fixed scope that is not based on hours. That’s how most products are priced – a fixed price. Or it might be royalties, licensing, or a combination allowing payment on fixed pricing for certain services, but others purchased via a subscription (i.e. social media service or a client dashboard). The goal is to have price discrimination, meaning you’re pricing your services in a different way based on the needs of the client. We teach “price the client, not the service.” Ideally, you don’t want a standard price for anything really. You want the price based on what’s good for the buyer and the seller.

TBD: In a recent call with Dave Snyder, we discussed client reactions to new pricing models from whether it be revenue sharing or performance-based compensation. Interestingly, he reported that most clients have been averse to the shift. Are you finding with the agencies that you work with, those that are able to implement new pricing structures, is one model seeming to be the most likely clients are willing to accept?

TW: Honestly, the fixed price for fixed scope is the easiest way to price outside of the hourly rate system. Because that’s how we’re used to buying things. We pay a fixed price for our car, computer, clothing, etc. We can do the very same thing by getting the client focused on the fact that they’re buying our outputs, not our inputs. We’re not selling our hours or our process. That’s our problem – our business. We’ll figure that out. We’re going to sell these outputs at this price. This changes the dialogue with the client to say “let’s talk about the outputs and this is the price I charge.”

TBD: Obviously there’s no silver bullet, but have you found a way to communicate the idea of not negotiating against hours with clients?

TW: The problem we have is that we taught our clients the hourly rate system so well, that we’ve trained them to ask “how many hours is this going to take?” They’re only asking because we trained them. It’s our system! The central point is that you have to change the dialogue away from inputs to outputs and outcomes. That is the key. And to not sell inputs at all. Remove the metric. Take Anomaly for example. This year’s Ad Age’s US Agency of the Year, nobody in that agency has ever done a timesheet and never will. They are adamantly against it. The fact that they’re Agency of the Year certainly answers the question of whether or not you can run a successful agency without tracking time. They track outputs and outcomes and, to top it off, make 30% margins. Output and outcomes – that’s what clients are really buying. If the client feels the need to negotiate for less, the answer is “we can do it for less … what would you like to take away?” The second an agency offers a discount, they lose their pricing integrity. Reduce the price only if you’re willing to remove portions of the output.

We also teach to always offer options. All consumer marketers offer options (i.e. software service subscriptions, the new iPad, car wash packages, Starbucks, etc.). Why is that? What do they know that we don’t? Why is everyone else who knows pricing offering options? Because it gives the buyer context. It lets them know they don’t need the extra large, but the small’s not big enough. That’s why we teach always, always, always offer options based on outputs. If I were given 30 seconds to walk into an agency to try and help them transform their pricing, I would say “Offer options based on outputs. Start doing that this afternoon and you will improve your margins.” Instead of a “yes” or “no” choice, you’re giving them a choice of yes’s. It changes the dialogue completely away from “how long is it going to take” to “which of these options is going to work best.” It’s really easy to do. It doesn’t require blowing up the timesheet system, although I personally hope they will.

Any agency can offer output based options and large clients are on the warpath to change the system because there’s been stagnant brand growth for more than ten years. They need better business results and the smart ones understand that the hourly rate system isn’t related to results in any way – only efforts.