Strategy but for Agencies: Operational Excellence
You have to do things right as well as do the right things.
Before we talk about strategies for agency profitability, there’s an important distinction worth making, and that is the difference between strategy and operational excellence. For some readers, the difference will be well known and obvious, but there are plenty of people who confuse the two.
Operational excellence is about how well a business performs particular activities. What does “how well” mean? It means doing things faster, cheaper, more reliably, at better quality, etc.
In many industries, it’s safe enough to think of it as “doing the same things your competitors are doing, as well as possible”. That’s not always true, as for strategic reasons, there can be some businesses doing things which competitors are not doing, but even for those things, a business can be doing them better or worse. It’s the “as well as possible” part that we mean by operational excellence. But for agencies, operational excellence is typically doing the same things everyone is doing, as well as possible.
Also known as: best practice.
The distinction also lines up fairly well with a common description of the difference between “strategy” and “tactics”.
Strategy is doing the right things; tactics are doing things right.
For reasons I won’t go into here, I actually find those definitions unhelpful in some ways, but for our purposes here, it does the job. Strategy is about what things you do. Operational excellence is about how well you do them.
Both are crucial to attaining outsized profits from an industry. We talked last time about how the Five Forces affect the profitability of an industry as a whole, but these factors don’t set in stone the fate of every industry participant. In an industry as brutal as agencyland, agencies can and do post above-average profits – which means, of course, that the others suffer below-average returns. Both strategy and operational excellence are essential to being on the right side of that balance.
The difference made by operational excellence is this: within the bounds of profitability set by your strategy, operational excellence maximises that profit. Let’s look at some of the kinds of operational excellence which are key to agencies and then I’ll come back to this point and talk a bit more about strategy.
Strategy and Creative Ideation Processes
I’ll start with this one, because it’s my historical area of expertise.
Also, if it’s not clear already, when I talk about agencies I’m primarily thinking of creative/brand/advertising agencies – that is, agencies whose bread and butter is coming up with and executing creative ideas. There are other kinds of marketing agencies – media agencies which plan and buy media, digital specialist agencies which design and build websites, etc. Creativity is involved in all of their processes too, but a specifically creative agency is kind of the exemplar of those processes.
Having ideas is central to the value-creating activities of agencies. Arguably, that activity is the defining feature of such agencies. Upstream marketing/brand strategy and downstream production can (and often are) performed by other players – a client doing their own marketing strategy, a production company making the assets for a campaign. But whether or not an agency offers marketing strategy or production services, it typically has the ideas.
The ideas are produced through a combination of skilled labour and business processes. A typical example in a small agency might look like this:
Account service takes the brief from the client with the creative director present.
Suit1 and CD confirm the client brief after clarifying or pushing back on some points.
CD thinks about the brief and then takes a creative duo (art director and copywriter) through the client brief with some thoughts of her own.
Creatives work together to generate ideas to answer the brief.
They check in with the CD twice during that work.
CD, creatives and suit meet internally to select three ideas to present back to the client.
Short list is presented to the client, who either gives feedback (sending us back to step 4) or selects an idea to commit to.
Suit scopes the work and puts together a final proposal.
Client signs off and the creative process hands off to production processes.
I say that’s an example in a small agency, because there are only four personnel involved – one suit, one CD, two creatives. In larger agencies, you can expect more division of labour and more roles involved. Commonly, a strategy role will be involved in taking the client brief and translating it into a creative brief. A producer will be involved in scoping the work, rather than account service. Perhaps both a senior and junior suit are involved.
And in even smaller agencies, perhaps just a single creative role is there taking the brief from the client and then doing the creative work of coming up with ideas.
The point is that, however many roles or steps, however adhered to, and however documented or not, the business has a process for generating ideas. And these processes and their execution can be better or worse.
What does “better or worse” mean here? It means things like…
Producing ideas that will be more or less effective in achieving the client’s objectives.
Producing ideas in less time.
Related to both – producing ideas which require fewer or no rounds of client feedback.
These elements can’t be reduced to simply how talented, experienced or hardworking the creative team are. Poor processes or poor execution at any of the stage will affect these outcomes.
A client brief that is not sufficiently interrogated by account service or strategy can lead to confused, confusing or even missing success criteria later on when the ideas are being presented to the client. The absence of a producer in internal reviews can lead to ideas being sold to the client which later turn out to be unfeasible within the available budget. And a poor creative brief makes ideation difficult, undirected or misdirected.
From a business perspective, the consequences show up as higher costs, lower client satisfaction, or both. Most agencies are familiar with the issue of “burning time” on ideation work as creatives struggle to generate ideas to a high enough standard, or as multiple client feedback loops keep sending the creatives back to the drawing board.
Over time, agencies have evolved best practices for generating better ideas faster, and a lot of those evolved elements are present in the examples above. If you read the book A Technique for Producing Ideas, published in 1965, it’s clear that 60 years ago there was almost no division of labour at all in ad agencies – the same guy (it’s 1965) manages the client relationship, takes the client brief, comes up with the ideas, presents them back. Even reading the more recent (and brilliant) Hey Whipple, Squeeze This, many of the creative tasks the author explains would be performed by planners or strategists in most modern agencies.
What makes these processes “best practice” – or operational excellence – is the fact that every agency can use them. Best practice both evolves and spreads over time. At some point in history, one agency started separating out “client briefs” from “creative briefs” and began generating better ideas faster as a result. For some brief (pun intended) period of time, that agency had a competitive advantage in agencyland, but it was not a sustainable competitive advantage because some employee moved on to another role and brought with them the magical secrets of creative briefs. Eventually, most agencies treated client briefs and creative briefs separately and while the industry as a whole was more efficient, no individual agency received an advantage from doing so.
It’s a story for another day, but there’s a useful thing to note here – before that innovation, not separating client briefs from creative briefs was “best practice”. Only by questioning today’s best practice is tomorrow’s best practice discovered.
Regardless, the point is that there are better and worse ways for an agency to come up with ideas, and agencies do vary in their competence at this. An experience curve is at play, to some degree, where older more established agencies benefit from the lessons of historical mistakes, refining the efficiency of their processes over time, while many newer agencies are unable to generate the same quality of ideas or take longer (cost more) to do so.
And this is true of all agencies. Unless an agency can come up with a new faster way of generating better ideas which cannot be imitated by competitors, strategic/creative processes cannot be a source of sustainable competitive advantage. And so typically the strategic/creative processes of an agency are a question of operational excellence, not strategy.
But that doesn’t mean that there aren’t vast differences between how well some agencies perform those activities – and the impact on profitability that comes with them.
Um… Other Ones Too
Okay, that took longer than I expected to talk about. Briefly, the three other main elements of operational excellence in agencyland are business development (sales), resource management and project management.
New-business processes result in higher or lower returns in billable client work per dollar spent on the sales function.
Resource management is about cost-effectiveness in matching capacity with demand – particularly managing the balance of salaried staff with freelancers in relation to variability in different kinds of demand. That is, how does the agency trade off between the cost of salaried staff sitting on their hands when there’s not enough work and the cost of paying higher rates to freelancers when there’s too much.
And project management is about ensuring the execution of ideas are done on time, to spec, and within budget.
As I said at the top, the easiest way to understand these processes as being about operational excellence rather than strategy is that every agency does these things, can do them better or worse, and the best ways to do them are imitable by everyone.
That doesn’t mean that they actually are imitated by everyone, and some agencies are much better at them than others – and often those are older more established agencies (who admittedly often have other challenges not faced by newer smaller agencies).
Operational excellence is clearly important, and important enough that it usually doesn’t matter how good an agency’s strategy might be if it’s dropping the ball on best practices. As Michael Porter says, operational excellence is a necessary but not sufficient condition of returning outsized profits. Without operational excellence, a strategy will fail to deliver on its potential. Without strategy, the gains offered by operational excellence are capped.
There’s an analogy here to my article in March about the effects of strategy on creative ideation. I gave this example of the varying quality of ideas being generated by different strategic focuses:
In terms of the analogy, operational excellence is about returning profitability towards the right end of a given bell curve. Strategy, on the other hand, pushes the whole bell curve to the right. What makes it strategy rather than simply pushing out the frontier of the whole industry’s effectiveness is that your strategy can’t be copied by everyone. Ideally it can’t be copied by anyone. Competitors either can’t or won’t follow suit. (If you’re a fan of card games, “can’t or won’t follow suit” is actually a very good analogy.)
So, with that all said, I’ll start looking at strategies for agencies in the next few articles.
Note: if you think your agency’s processes could do with an audit, do feel free to get in touch at ryan@triplegreatstrategy.com or just message me on LinkedIn.
This is a term of endearment for me, and it’s much faster to type than “accounts person” or “client lead” or whatever. Good suits are worth their weight in gold.