By Tim Williams
EARN A HIGHER RETURN ON YOUR TALENT INVESTMENT
There is a cardinal belief in professional services that our inventory is not parts, but people. If that’s true, professional firms are facing unprecedented inventory shortages. Competition for the best people has always been fierce, but is now intensified by the economic impact of a global pandemic.
The roots of the current talent war actually go back decades — especially for agencies — thanks to the devastating consequences of agency remuneration structures. A business model that bills for employee time can’t possibly compete with other companies that are looking to hire the same caliber talent.
Google can, and does, pay salaries that are at least 30 percent higher than agencies not just because they’re a large successful enterprise, but because that have a business model that generates revenue in ways that have nothing to do with hours logged on timesheets. Revenue per employee in the average agency is usually below $150,000. At Google, it’s about $1.3 million.
The agency business is severely limited by its inability to scale. The only way for a time-based business to earn more revenue is to hire more people who can bill their time — the very people who are being lured to higher paying jobs in client-side organizations.
A different way to look at resources
In a recent study by RSW/US, one of the central findings is that agencies are feeling more and more constrained. When asked to identify the marketing challenges they are most concerned about in the coming years, the top answer among agency executives is “Lack of internal resources.”
The problem with the agency revenue model is that agencies don’t actually have a revenue model; they only have a cost structure. A revenue model is a framework that identifies how an organization generates income, including specific offerings, pricing approaches, value classes, customer segmentation, pricing tiers, and more. An effective revenue model produces multiple revenue streams based on innovative pricing strategies. The billable hour hardly meets that definition.
The typical agency spends 50 to 60 percent of its revenue on salaries — by far the biggest expense item on the financial statement. Using the traditional hourly rate formula (2.5 to 3 times salary cost) the direct return on that investment is seemingly easy to calculate. When agency leaders spend $150,000 to hire a new account director, they anticipate a predictable return.
But what would be the return on that same $150,000 if it were spent on product development? Instead of continuing to spend money to fuel the hourly rate treadmill, what would be the effect of investing in programs and high-value offerings that generate revenue in ways that are not tied to hours?
As illustrated in the chart above, labor-based services are inherently low-margin because they’re nearly impossible to scale. If these same services are reconfigured and reframed as programs, they become much more scalable because they’re repeatable. Moreover, programs are inherently more valuable to clients because they’re designed to provide specific solutions to specific problems.
Easier to scale, harder to duplicate
Programs (vs. common labor-based services) are integrated, making it harder for clients to unbundle them and more difficult for professional buyers to directly compare pricing. And because programs are unique combinations of offerings, they are harder for competitors to duplicate.
APCO, a global public relations and advisory firm, offers a suite of branded programs that address specific client needs, such as APCO Telescope (a proprietary model for influencer mapping), emPOWER (a digital crisis simulation) and Return on Reputation (a research model that measures and optimizes company reputation).
In some cases, agencies can develop pure-play products — intellectually property capable of generating true “money while you sleep.” Candidates for this include unique databases, analytics reports, and a wide variety of possible digital platforms or software solutions.
Publicis Health offers high-value products such as ExpertConnect, a digital platform that connects doctors and pharmaceutical reps, and ROAM, a tool that helps pharmaceutical companies optimize regional delivery of marketing messages.
When making decisions about marketing budgets, client organizations want to know what kind of ROI they can expect from their agencies. When spending their own money, agencies should be asking the same question.