Episode 112 Transcript

Brent Trimble: Welcome to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. I'm Brent, and today we're revisiting and compiling some of my favorite conversations with agency and consulting leaders from the past few years. One theme runs through all of them: outcomes and value-based pricing. This isn't a new idea. If you've been in consulting or the agency world for the past decade, or even decade and a half, we talk about it a lot on the podcast. It's something our industry has been wrestling with for a long time, but now it seems that we've reached the tipping point. It's resurfacing in nearly every client conversation and leadership discussion. Here's some reality: many firms aren't ready to completely flip the switch and price entirely on outcomes. The transition requires steps and progression, something of a crawl-walk-run path.

In this episode, you'll hear insights from three leaders who thought deeply and put into practice the shift and have successfully made it a reality. We have Caroline Johnson, the co-founder of The Business Model Company, Patricia Rothenberg, global chief operating officer and general counsel of renowned creative agency 72andSunny, and Michael Farmer, author of the Madison Avenue Manslaughter and Madison Avenue Makeover books and the leader of management consulting firm Farmer & Company. Each offers a unique perspective and advice on how firms can evolve their models, and why those that do will shape the future of agencies and professional services organizations.

Brent Trimble: We see, Caroline, this move by our clients, certainly the industry, consultancies, management consultancies, agencies to begin to evolve their business model and to begin to productize their offerings as part of their transformation journey. I think the listeners would really benefit from your insight, because from the outside looking in, that's the genesis of your firm. Why don't we dive in? We'd love to hear about the origins of The Business Model Company, what need you saw in the market, and what’s your pitch to firms as you are going through this journey with them?

Caroline Johnson: If I take you back to before we founded The Business Model Company, which, as we know, was founded nine years ago, I was working as a partner in a corporate advisory firm where we were transacting and doing deals for global professional service firms and marketing services. We got extraordinary insight at that time because what became very apparent as we were delivering those deals and supporting the sellers was that different business models, as long as they are perceived as authentic and real, actually attract completely different valuations and multiples.

For example, a consulting business or professional service business that has huge confidence in its capability, relevance, and growth potential, if it has any form of legacy pricing, for example, selling time, it will be valued as a service business because it's equating effort to value. If you then repackaged that same business into an authentic consulting model with the right commercial model supporting it, the valuation of multiple that would be applied if that business was looking to transact, exit, or bring in investors was double. If it was then a program and platform consulting business, it was triple. A service business is between six and nine. A consulting business might be 11 up to 18. A consulting business which delivers programs and products is even higher.

I think that insight and experience, being at the absolute coalface of transactions in the corporate advisory world, gave us enormous expertise in how to spend time helping leaders and the executive teams of those businesses transition their business models safely to attract the highest valuation. When we founded The Business Model Company, we recognized that a significant part of the professional service industry and the marketing service industry is on the wrong business model. That causes a huge constraint on how they deliver value, how they capture value, and how they create value in the marketplace.

Those two things coming together was the founding principle to work through The Business Model Company with our clients across the industry to help them transition those business models into something that is absolutely a reflection of the market they are in. Your business model needs to be relevant to the market conditions. That is really important, and it absolutely needs to be relevant to how your clients want to engage with your talent, your capability, and your expertise.

Many great businesses with a fantastic value proposition, great clients, and great case studies are constrained and reduced, pushed down the value chain because they are operating in the wrong business model. That became our founding principle, mission, and ambition. We have had nine years of fantastic experience with clients we have gone on the journey with, who are now post transformation and able to share their story of how they achieved it, what were the conditions for success, and what they would have done differently if they had the knowledge they have now, which is quite fascinating.

Brent Trimble: You know, that's a great story. I like that focus on valuation. Of course, not every consultancy marketing services agency starts their journey thinking of their exit, but that quantification of how they're valued as a firm, the value they deliver back to their clients, how they reward their talent, deliver equity is important.

We're going to get into a few of the successes later in our discussion. I know there are a few, and of course, the book references the big transformation. What we're talking about and what we're seeing in the market— we speak to service leaders every day of all shapes: consultancies, marketing services, deep strategic consultancies to more transactional, managed services, all the way through agencies. There does seem to be this prevailing notion of change afoot and a need to begin packaging differently and really quantify the value they deliver to firms, not simply hourly rates.

One of the things you note in your speaking and in some of our conversations quoted in your success stories is change is scary, but not changing is terrifying. We're going through another cycle of change in marketing services. There's a lot of discussion about the need for change. Some of the biggest catalysts right now are this notion of just selling time as a race to the bottom. We need to shift into selling value. I don't want to turn this into an AI discussion; there's plenty of talk of AI, but it does seem to have particular potential for disruption in marketing services, even in consulting. So much of that model now has been about transacting stuff that goes in front of clients and consumers.

When we look at hype cycles of the past couple of years—NFTs, Web3, AR—this one seems to have the potential to impact the landscape. Take out headcount, do the things that a normal agency fee structure in the past would have executed with a client with a fee-to-hours model. Studio production folks, junior art directors, designers, proofing, all those things can now effectively be replicated. You're seeing that as well in the market. Is your phone buzzing and people reaching out, saying this landscape is shifting under our feet? We have to heed this call to move from the hourly model; the landscape is changing. What are your signals in the clients you're talking to and some of the reach and interest you're receiving?

Caroline Johnson: First of all, there's a lot of paralysis about changing, particularly pricing models. That paralysis comes from fear of essentially having the wrong belief system, and that belief system is based on the wrong assumptions. We'll cover that later in this interview. I look at what's happening in the industry at the moment as a burning platform. The burning platform is the disruption and those external forces that we can't control. I look at it slightly differently; it's actually a gift. The reason I say that disruption is a friend, not a foe, and it's a gift, is because if you think about it, if you have any element of time-based charging, you're actually pricing your effort.

Your effort is what you are charging for. Whether you're a consultancy, an agency, or any professional service firm, that puts you in the service camp, regardless of your investment in talent and capability. That is much more commoditized, more competitive, and much more packaged around your services that are delivered through effort. That's a very hard place to sustain yourself and to scale. If you have that mentality and that pricing model, the rapid acceleration of AI adoption is actually a great gift because it gives you an opportunity to confront yourselves and, when necessary, to be very strong with your clients that the charging by time model will not be sustainable for much longer simply because you cannot charge by the second.

If you think about it, in however you adopt and leverage AI for yourselves and for your clients, to think for one moment that you can charge AI as part of a time-based legacy model is absolutely insane. That is really helpful because the paralysis and fear, based on the wrong assumptions and belief systems, actually starts in the external marketplace around internal mindsets: our clients won't let us, procurement won't allow it, we won't win RFPs. That fear keeps you paralyzed in a non-viable pricing model. AI is your greatest gift because, as this burning platform almost becomes non-negotiable, for you to remain relevant and reflect the actual market conditions you are operating in, you are going to have to transition fairly quickly and safely to a much more appropriate and sustainable commercial model and pricing model.

Brent Trimble: I feel like the pendulum has swung in stock because we've had both in talking to our consulting clients, whether it's IT, strategy, advisory, through our agency clients of all shapes—PR, a bit of media to more of a creative focus—this notion of pricing and selling value and moving beyond the price sheet, billable model, figuring out an effort to give the client a price. There are all kinds of things like hours, reconciliations, burn reports, and retainer. We've had folks like Tim Williams on the pod, who have coauthored thought leadership. He is a big proponent of this. Michael Farmer with Madison Avenue Manslaughter and Madison Avenue Makeover. You have put a form of this into practice.

I don't want you to divulge agency secrets or anything, but in broad strokes, our understanding is you've gone to a pricing model that's really about outputs and outcomes, not bottoms-up, billable hour staffing profiles. To the extent you'd be comfortable to share, how is that going? How does it change the agency? You're at the operations helm; is it something that you see as a plus? Have there been pitfalls? Are you going to continue it? With what you're comfortable sharing for our listeners, we'd love to hear about that.

Patricia Rothenberg: Yeah, it's going well. Like all change, it evolved and improved with time in practice. One thing, it's allowed us to move more quickly, which is interesting to me in the sense of not spending as much time on administrative tasks you were talking about, whether it's the reconciliation process, which is understandable. At the same time, it is a distraction from our ability to focus our team's energies and talents on doing great work for our clients. We definitely feel the benefit of all of that, and our clients do as well.

It takes training our teams early on in how to navigate having a different kind of conversation, centered on making sure that our clients understand the value we're going to bring and what we'll achieve for them, while giving them a sense of comfort and understanding that they're getting value for their money. When you're changing the ways that they are historically assessing that, it can be a challenging conversation. It took training and practice.

A large majority of our clients are now on values-based pricing models, and our teams have gotten more comfortable with how we do that. We no longer do individual-based timesheets, which was a big cultural shift that took iterations. We made sure to parallel path so we understood it was going to have the operational rigor it needs, both for ourselves and our clients. That too was part of the evolution.

We are much tighter as an operational machine than we were historically. There are many different components to that. It helps very much from a tracking perspective and from understanding the health of each of our projects for clients to have more of a values-based model, because otherwise it felt like more of a race to the bottom that wasn't achieving something mutually beneficial. We still have a couple of legacy clients that do that, but it feels like we're getting better outcomes, operationally and in the work we produce for our clients.

Brent Trimble: That's fantastic. I'd also say you've done it without a ton of fanfare and ink in the industry press. You just quietly said, "We're going to adopt this and transform that model." It sounds like it's been successful and you've been able to migrate lots of clients in that direction. Of course, there are some legacy holdovers and so forth. That's really encouraging. The value being placed on the outcome and the creativity results to an extent that you weave those in is a great signal to the market that's always in such a state of dynamism, I guess.

Patricia Rothenberg: What I also think was interesting, and probably an unintended consequence, was that when you start to focus on the value from an internal standpoint, I think it allowed us to really pay more attention to what we do. In other words, rather than the who and the how long, it was redirected energy to the value propositions. What are the things that we do that actually get us to better creative outputs? Unlocking and understanding all the different components of what we do from a strategy perspective was a critical aspect that allowed us to then push further into strategy and develop it as a product itself. In many ways, unraveling the traditional model allowed us to gain better insights into our own products. That allowed us to then come to the conversations with clients, understanding their business problems and objectives, and being able to really align our offering to those, because it wasn't about just the staff hours and the staff plan. It is now about what you really need us to do. Here is a growth audience product that we have. This is what it will do for you. I think that allowed us to have a better, more productive conversation with our clients.

Brent Trimble: You know, this is a great segue into a topic that comes through in the book: the reinvention of Huge and the notion of pivoting from labor-based, fee-based, rate card billable hour work, which we're all familiar with. We've lived through the RFP cycles, uploading templates and hourly rates into a client procurement system like Ariba, and having loosely defined scopes, hoping it all comes out in the wash. We've been partners with Huge for a while, partnered with quite a few agencies, marketing service firms, and hybrids in market. We've seen a shift to firms beginning this journey to adopting a product-based system to sizing work. I'd say this is a trickle, Michael, not a deluge, but the industry is moving in bits and pieces. Huge has taken this—in the book, you illuminate this—to a whole other level, even hiring a product officer. I'd love to hear your insight, because do you see this as the sharp turn that needs to occur for shops to survive and thrive?

Michael Farmer: Yeah. Listen, before I talk about the change in product and change in the way they want to be paid, there is something that preceded that, that Mat Baxter initiated. I think it is what allowed him to kick off the change of pricing. The first thing he told me when we spoke on the phone is that he was going to reposition Huge as a company that helps clients grow, helps clients perform better. He said to me, "I've seen what the management consulting firms have done for 40 years." I couldn't speak to that personally because I was at Bain and BCG when they were fewer than a thousand people. They were a couple of hundred people when I joined. I think BCG is 25,000 today and Bain has 20,000 people around the world. They charge their people out at five times the salaries of their people, not at two times the salaries of their low cost people. They have grown. They make good money. It's all because they focus on helping clients perform better.

Mat said the only way that you can get decent prices in any service industry is you're helping clients with their performance, not giving them creative output, but really helping them to grow, to become more profitable, to expand in new countries, or to introduce new products or whatever it is that they need to do. He said that's the secret to pricing in the industry.

On top of it, we have to change the mechanism. First thing we're going to do, and it was the subject of the first management retreat that I outlined in Madison Avenue Makeover, is get his management team on board that they were going to change their mission to improve results for clients, specifically improve growth. He said, "Now what we're going to do is develop a suite of products that allows us to do that."

We're going to create 45 products. How he got to that number is a long story, but we're going to create 45 products in three separate categories. Each of those products is going to have a price, just like my iPhone has a price. If I go into T-Mobile to buy one, or if I go to Apple to buy one, I pay a price for it. I can't ask them, "Oh, what do the laborers cost?" or "How much overhead do you—what’s your profit margin on that so that I can fix the price for you?" This is what procurement does with agencies. The price is the price.

Mat said we're going to be in the results improvement business. We will have a suite of products that are specifically designed to help do that, and they will be sold at a fixed price. Any program that we engage in with our clients will use one or more of these products to fix whatever performance problems they have, and we will charge a price for it.

There are other things in his transformation. One is a reorganization so that he runs the company on a global basis. Another thing is the way they approach clients and talk to them about the sales process. I think the critical things in the Huge transformation are a complete change of mission to where it's very similar to what consultants say, but what Huge uses is their creativity and their technology and their products to solve it. Consultants go about it a different way. They focus on different kinds of data. Their creativity is a more analytical creativity, but it's still creative. There’s no question about the fact that the Bains, the BCGs, the Kearneys, the McKinseys, and all the others that are involved in the business have highly creative analysts that can look at a lot of data and develop a story and an action plan out of it. It's not the same thing as using the type of creativity that a Huge would use to help clients perform better. Mission first, and then product sold at a fixed price. Very critical for the transformation at Huge.

Brent Trimble: Bringing up the management consultants and the way they've been able to preserve margin over the years by really keeping, not all of them, but keeping their eye on efficacy, expertise, results, some of which won't even engage unless they have that guarantee with the client that we're going to set a goal and share in those results together.

One of the last topics I want to explore with you: lessons. Here at Kantata, we work with all range of shops, various sizes, ascendancy from creative boutiques and digital transformation shops that are on an upward trajectory all the way to the Gold Coast.

What are some lessons that those shops on their journey, on their ascendancy, maybe reinvention, could take? Folks hear, they see the data, essentially cost‑plus pricing and rates, and they think, gosh, this procurement organization that I'm grappling with is formidable. If we can get in enough revenue, I think it'll all work out in the wash. Maybe we'll be able to do some effective work here and there.

For that exhausted or exasperated agency leader or head who wants to pivot, what are some lessons that you think you could distill and take away armed with this data, the books? Where would you suggest they start first?

Michael Farmer: Well, listen, I think the most important thing for an agency client head or a new business team in engaging with the client is to do something that I don't think they do at all, which is to say, let's talk about your problems. Why are we talking with one another? What is it you need to have done? Why is it that you used to perform well and grew and you don't today? What has changed? What do you know about your current situation that would allow us to put together a program of work that would restore growth or profitability, whatever the case may be?

I can tell you from my time at BCG and Bain that we never began an engagement without a very thorough understanding of that, and in many cases, we would commission a short study of three months where we would do an independent evaluation of what had taken place over the last five years that changed the client's situation. Agencies don't do that.

When I go into an agency and I talk to the client heads over their scope of work, I’d say, what's the purpose of this scope of work? Why does it have these different briefs in different disciplines? Why TV, radio, print? Why digital and social? Why the messaging? What is this supposed to accomplish? And you know what I always hear? It's what the client wants.

Is it the client that is failing to grow and has failed to grow for more than a decade that knows what scope of work to use? Why aren't they getting advice from the agency about, given our problem or whatever it is, this is our recommended scope of work to address it? You don't hear that from the agencies anymore. No wonder they're treated like vendors and not like strategy consultants.

If they were real strategic consultants, they would say, for this specific problem of growth that you have, we think the right mix of work and the right number of people and the right timing is as follows, and that's the scope of work that we recommend. They don't do it.

My number one recommendation, and we certainly spend a lot of time talking about this at Huge, is there needs to be a different dialog at the beginning of the new business process, or there needs to be a different dialog at the beginning of the scope‑setting process within a fiscal year, instead of what do you want to do, the same thing we did last year, or more of it. It doesn't cut it. Because if a client isn't growing, a client isn't growing.

P&G has only grown in recent years because they've managed to exploit their strong brand position by raising prices. That's what they've accomplished. They grow by raising prices. We all know that's a dead end. And P&G is one of those companies between 2009 and 2019 that shrunk.

I would say an agency wants to transform, you've got to think differently about what your mission is. You have to engage the client in a different discussion at the beginning of a relationship. You have to take ownership for the scope of work. It has to be the right scope of work, not just the thousands of deliverables that the client thinks might work.

If you do that, and if you're right, then it looks like you've got some expertise and you can help in these situations. And maybe the next year you can raise your prices for the same amount of work.

Unless agencies engage their client like serious performance partners, they're not going to get anywhere. I think they're playing a loser's game today. They're competing with each other, and that's a loser's game, and they're playing a loser's game with their client by not helping them solve the client performance problems, which are obvious if you go to public data and take a look at their sales growth over the last 10 or 15 years.

My number one thing: have discussions with clients about what problem needs to be solved so they can come up with a scope of work and a budget, rather than letting the client tell you what it's going to be.

Brent Trimble: If you enjoyed this podcast, let us know by giving the show a five-star review on your favorite podcast platform and leaving a comment. If you haven't already subscribed to the show, you could do so anywhere you get podcasts on any podcast app. To learn more about the power of Kantata’s purpose-built technology, go to kantata.com. Thanks again for listening.