Is There Such a Thing as Bad Growth?

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 service 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 today, even firms with excellent reputations have little intellectual, financial, or structural capital invested in tomorrow.

Budgeting every year for "professional development" isn't the same as having an R&D line item on your annual budget. Especially in an environment where professional services are being increasingly disintermediated and therefore increasingly devalued, it's essential to engage in the same kind of product development that keeps your clients on the forefront of their industries.

Wringing profits out of revenues

Advertising agencies in particular find themselves in a genuine vicious cycle, fueled in large part by the unfortunate practice of selling "team hours" which fosters a production mentality. Rather than proactively leading marketing programs, the majority of agencies are instead assigned scopes of work by their clients, 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 “creative” environment, which has produced an industry that generally lacks the technology, workflow management systems, and project management practices to effectively wring profit out of revenues.

Agencies have been able to generate acceptable margins mostly 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 ad people who are headed for the greener salaries of marketing technology.

Burning the furniture

Like the steamship at sea that has run out of fuel, agencies and other professional services firms are starting to "burn the furniture." They're engaged in wringing all the revenues they can from current clients by delivering the normally-expected services instead of developing new, more effective solutions sets. Rather than investing in new capabilities, management is fixated on supplying already-existing services as efficiently as possible. These firms are creating temporary, marginal value for their clients as well as for themselves.

The strategic imperative for firms that want to prosper is to build their business model around a virtuous cycle, where one forward-thinking action builds upon the other and your firm becomes steadily better and more future-proof. A virtuous cycle is created when company leaders commit to invest in new competencies, which draws forward-thinking talent, which attracts progressive clients, which creates the reputational capital that always precedes financial capital.

Bigger is rarely better

It's a perennial fact that the most admired companies in a category are rarely the largest. (This is especially true in professional services.) Exceptional firms choose not to focus on revenue growth but rather to be the very best at what they do. Many in fact place significant limits on their growth, choosing to trade easy revenues (dumb growth) -- the kind that usurp organizational energy and yield borderline profits -- for the development of solution sets that will create much more value in the years to come.

The iconic founder of Southwest Airlines, Herb Kelleher, embraced the idea that market share has nothing to do with profitability. Indeed, it's more likely that the larger the firm, the higher the operating expenses, the more difficult it is to produce healthy margins.

Writer Edward Abbey preached the idea that “Growth for the sake of growth is the ideology of a cancer cell." Especially in knowledge work, size does not equal greatness, and size rarely equates to profitability. Firms would do well to remember the bankers creed: revenue is vanity, but profit is sanity.

The pursuit of growth is a different mentality and mindset than the pursuit of excellence. That’s not to say you can’t be big and excellent at the same time; it’s just that the desire for bigness and the desire for greatness produce two very different kinds of behaviors resulting in two different kinds of growth.