Bad Growth and How to Avoid It
LinkedIn Article by Tim Williams
October 26, 2015
Grow or die. It's embedded in the capitalist psyche. But is there such a thing as "bad" growth? Or more to the point, "bad" profit?
The answer is yes, and many companies - including professional services firms - are engaged in a short-sighted harvesting strategy that yields revenues in the current year but fails to plant the seed corn to produce profit pools in the years to come.
The "service business" mentality that pervades so many advertising agencies, law firms, and accounting firms creates cultures where the focus is almost exclusively on meeting the needs of today's clients with today's services. With so much time and energy invested in the current month, the current quarter, and the current year, most firms have little intellectual, financial, or structural capital left over to invest in their future success.
No way to grow
Advertising agencies in particular find themselves in a genuine vicious circle, fueled in large part by the ineffective practice of selling "team hours" to their clients, which fosters an unfortunate production mentality. Rather than proactively leading marketing programs, the majority of agencies are instead assigned "scopes of work" by marketers, then scramble to match their resources to the workload. This phenomenon is made worse by a century of laid-back management practices -- meant to cultivate a laid-back environment -- which have unwittingly shaped an industry that often lacks the technology, workflow management systems, and project management practices to effectively wring profit out of revenues. The result has been a steady decline in agency profitability -- from upwards of 30% in the days of Don Draper to an average of around 10% today.
Nowhere is this picture painted more dramatically than in the new book Madison Avenue Manslaughter by consultant Michael Farmer, who argues that agencies have been able to generate acceptable margins only by cutting costs in unsustainable ways – reducing head counts, slashing training budgets, trading out experienced senior talent for juniors, and generally doing more for less, resulting in an exodus of overworked advertising professionals who are headed for the greener salaries of marketing technology.
Burning the furniture
Like the steamship at sea that is running out of fuel, agencies and other professional services firms are starting to "burn the furniture." They're engaged in squeezing all the revenues they can from current clients by delivering the normally-expected services instead of developing unexpected solution sets. Rather than advancing their future effectiveness, management is fixated on supplying already-existing services as efficiently as possible. These firms are creating marginal "thin value" for their clients as well as for themselves.
The strategic imperative is to create business models around a virtuous circle, where one forward-thinking action builds upon the other and your firm becomes steadily better and more future-proof. A virtuous circle is created when company leaders commit to invest in new competencies, which attracts forward-thinking talent, which draws progressive clients, which creates the reputational capital that helps create financial success.
Not "best practices," but "next practices"
Creating what Clayton Christensen calls "underdeveloped services" will allow your firm to create a thicker, more differentiating form of value for your clients, because you'll be addressing unsatisfied client needs. The result is fewer competitors and potentially higher margins, because you’re offering scarce services designed to solve new and emerging needs. This requires replacing the reactive question "What do our clients want?" with a proactive inquiry into "What do our clients need?"
A business model focused on "next practices" instead of "best practices" is the difference between concentrating on innovation or incrementalism. The pursuit of growth involves a distinctly different mindset than the pursuit of invention. That’s not to say you can’t be big and inventive at the same time; it’s just that the chase for bigness and the quest for innovation produce poles apart behaviors inside organizations.
Building new forms of value
As brilliantly expressed by the late writer Edward Abbey “Growth for the sake of growth is the ideology of a cancer cell." The most progressive organizations view growth the same way psychologists view happiness; you're more likely to experience it if you don't chase it directly. Likewise, Peter Drucker taught that profit is not the reason for a business to exist, but rather a test of its validity.
Ultimately, good growth and good profit are the result of faith in the future coupled with belief in your organization's capacity to create new forms of value. Such is the premise of Umair Haque and his book, The New Capitalist Manifesto: Building a Disruptively Better Business, in which he reasons "Where industrial era 'dumb growth' is the growth of thin, low-quality value, 'smart' growth' is the growth of thick, high-quality value." The goal, Haque says, is to create "constructive strategies" that turn dumb growth into smart growth not by becoming more aggressive and competitive, but by becoming radically more useful. Firms that set their sights on the quality of growth rather than the quantity usually end up achieving both.