Agency Service Mix – Evolution or Extinction

Agency Service Mix: Evolution or Extinction

A few weeks ago, I got a question during a Q&A at our “Salaries Are F*cked… Now What?” presentation about if specialization is at odds with agencies adapting new tech into their service mix. The short answer is, no, digital shops need to evolve to survive.

I want to elaborate though because it’s critical that the more organizationally mature agencies out there get this right.

Stages of sophistication

There are a few distinct stages to how agencies grow. We’ve talked about this a few times, but here’s a simplified recap:

• Stage one is essentially an advanced freelancer. These firms make up the bulk of the market, and they stay around through heroic reactive efforts. They can have a fair number of employees (up to about 25 is typically the max), but their processes and procedures are undeveloped and their financial performance tends to be sub-par.
  
• Stage two, they’re building out their operational chops and increasing their level of sophistication. Most shops don’t make it past this stage.
  
• Stage three, operations are pretty well in order, and they have their services and pricing dialed in. This gives them space to think more strategically about the future of what they’re building.
  

Through the first two stages, they’re focusing on building a core business. Finding that core piece of value that they can repeatedly offer, that the market demands, and that they can earn a margin doing. Finding that core business is usually the easy part. Building systems to support the continued value delivery is where the challenges come in.

The question from the webinar starts to come into play midway through Stage two but especially during Stage three.

What happens if you don’t adapt?

There are countless examples of companies that were pre-internet powerhouses that fumbled the transition to digital. We’re well enough into the digital transformation process where we have even more examples of those that made the initial transition to digital (think marketing firm that transitioned to offering webdev/design in the early 2000s) but, failed to evolve again. If they’re still around, their primary offering consists of making brochure sites for local SMBs. I can guarantee their margins suck, and there’s probably some serious tension between the old guard who refuses to change and new employees who last 12-18 months on average. We’ve worked with a few of these in the past. They aren’t our favorite projects.

To build a lasting entity, leadership needs to experiment and invest in new areas that’ll eventually replace the core business they previously built. Markets change, and as leaders of shops that earn a margin based on enabling new tech, you need to change with them.

How do you avoid stagnation?

Solidify your core business as quickly as possible. Get your near-term strategy down, your roadmap and forecasts in order, your positioning and pricing set, your delivery processes solidified, and your repeatable revenue generation system in place. Whatever you’re building your shop around, operationalize it ASAP.

We’ve done a lot of work on industry metrics (see our recently released benchmarking service), and if you complete the above, you’ll be earning ~15-25% on your revenue that’s growing ~20-30%/yr. While there are exceptions, most shops begin to see the need for better ops around 25 FTEs, but it really sinks in around 45-50. At recent revenue/FTE numbers, you’re looking at about $1M/yr in net income with this kind of business.

How much do experiments cost?

At their most basic level, not much. New capabilities that you’re thinking of offering can be run through your current team and processes with clients you already have. Choose a small group of production employees and make sure everyone’s up to speed on the new tech. Run through the business value with your account managers and have them bring it up with a select group of forward-thinking clients. Then it’s up to you to sell them on the new capability (don’t pass this to salespeople yet). Rinse, repeat.

Some questions to see what works.

• How quickly do clients go “Yes, that sounds amazing! Can we start yesterday?!” The faster this happens, the more likely you’re onto something.
  
• What’s the market doing? Are you seeing this capability being offered in this way by competitors? Try not to get sucked into flash-in-the-pan trends, but seeing competition in a space is normally good.
  
• What kind of pricing does the capability command? If it’s not above your average, it’s probably not worth pursuing. We’re not looking for margin compression here.
  
• What are the main challenges your team’s facing during the projects? Is it process-oriented stuff? Typical new tech headaches? Something more serious? Keep tabs on these, and if the pricing and market are there, it might be time to hire specifically for this new capability.
  

To answer the original question.

Specialization isn’t at odds with experimenting. In fact, that experimentation is a critical part of building a company that outlasts you. It’s what allows an agency to evolve effectively. While this topic’s a bit more advanced, it’s helpful for leaders to know how shops typically evolve as they mature. This can help you make better decisions at earlier stages.

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Are you experimenting with new services? I’m working on pulling some more data together on this topic, and I’d love to chat. Just reply to this email, and we’ll find a time to connect.

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Data Point

Recent survey results, benchmark data, industry metrics, analysis, and new survey opportunities.

The specialist/generalist split has been around 50/50 in our surveys in recent years. The way digital shops specialize seems to be shifting though. Most are now focusing on specific verticals vs. specific services / technologies. This is further supported by our recent outlook survey data showing the average specialist offered an average of 6.0 services while the average generalist offered an average of 5.6 services.

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New Service: Digital Agency Benchmarking

Understand your shop’s performance across 16 core metrics that are critical to measuring the health of digital service firms. Suitable for web development shops, design firms, and digital marketing agencies with 10-150 FTEs.

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