To meet the demands of this dynamic age, where technology creates audiences and businesses overnight, agencies need a new approach to profit. Because advertising is an M&A-driven business, we tend to think the most valuable agencies are the ones with the highest net income. Instead, we need to view profit for its more important purpose: as a driver of innovation, transformation and sustainability.
Clients need to build brand platforms and products that work on multiple channels and devices, and do it faster and less expensively. To stay a step ahead and win engagements, agencies need to develop not only unique creative and content, but core technology as well.
Every agency CEO should have this as a key priority: How can I run the business to invest more in innovation? People produce what you incentivize them on, so we have to create new structures to inspire, recognize and reward the things that drive greater business impact for clients. Increasingly, those things are technology that creates meaningful brand experiences.
We can grow competitive, sustainable agencies by keeping profit in perspective. If you manage your business to 20 points of margin but invest 12 points into getting smarter and better for your clients, you can still post eight points at year-end. You're cash-flow positive, more competitive and more strategic, because you've planned for innovation.
By contrast, maxing out profit can run companies too hot. While it helps cash flow in the near term, this approach is not sustainable, burning out staff and creativity in the process.
Profit optimization takes discipline that doesn't come naturally for advertising people. At Level, we experienced this three years ago.
After failing to metabolize client breakthroughs into agency muscle, we created Level Labs, a budget that lets us overinvest in projects as a way to develop new ideas we think the market will demand in 12 to 18 months.
We require managers to propose and justify Labs investments before we bid on a new campaign. The message: Manage a project to margin and you get to do the cool stuff that you and your staff want to do. The cool stuff ultimately differentiates the agency's skill-set and puts it in a leadership position. When you're all about maximizing profit, it's difficult to green-light those projects.
As much as we plan investments, we still have to be fluid. If we sink more hours into a client project than budgeted, the Labs fund shrinks because it has to cover the budget overage. And sometimes we have to reallocate resources.
It's not a perfect system, but it's clear to the entire agency that we're committed to investing in innovation.
Think about how a 15% lift in enthusiasm can produce new ideas, focus and satisfaction at work. When people enjoy performing at a higher level, clients get better results.
It's really the continuum for service businesses. Producing business results for clients drives earnings; investing a solid portion of earnings into innovation and culture creates new capabilities; capabilities attract new client engagements and talent; and the cycle repeats.
Profit is a byproduct of the well-run business; it should not be the compass for our organizations.
It's time for a new financial model that values return-on-innovation and rewards the total market performance of an agency.