Comparing consultancies and agencies, the first impression is that they are very similar, almost the same. But there are some crucial differences. Based on these differences, I will present some recommendations for new media agencies to reduce risks and maximize the ROI.
Starting with the similarities:
- Both sell manpower and rely on the knowledge of their employees for quality in the work delivered.
- Both are called-for when work needs to be done that the client’s workforce is not capable of doing or is understaffed to do so – additional staff won’t be hired for short-term products.
- While consultancies mostly sell non-scalable amounts (working hours/days needed), the agency mostly sells outcomes (an end result of a project with a functionality) for a fixed price. Thus, agencies usually have a greater risk of not meeting time and budget, or the opposite may be true, generating a larger ROI than with the non-scalable work of a consultant. Agency work seems to be more risky, therefore.
- Since agency work involves more repetitions than consultancies, standard tools or technologies can be developed or learned in order to cut on time and budget. If an agency manages to exploit this possibilty better than its competitors even with the expected personalization, it may reduce its costs, and thus, their profit margin. As soon as these tools develop to fully scalable products without need of real personalization, it can not be fully counted as an agency anymore but rather as a vendor which is not the focus of this blog.
- The investment for receiving a job is considerably lower for a consultancy than for an agency. While it is sufficient for a consultancy to send consultant profiles to a (potential) client, that does not suffice for an agency to whin a pitch. A consultancy is usually confronted with a pitch that requires way more ressources than the adaption of existing consultant profiles. Often, weeks of man power are invested into concepts and presentations, not knowing whether the effort might be converted to sunk costs if the pitch is not won.
- Consultancies are seen as partners, helping out during bad times, agencies are usually seen as mere executors that adhere to the wishes of the client. In combination with fixed price projects, this may be a very risky combination for the agencies if requirement management and change request management is not handled well. A client’s wishes are most often inprecise at the start of a project and equally as often undergo changes during the project (well known scope-creep).
- Consultancies are most often requested for work on subjects with high management attention, mostly concerning the core competencies. The objectivity of consultants is required to best evaluate the sharpness of the competitive edge. Agencies are usually summoned to execute projects that need to be done, but are not recurringly vital to the company – otherwise the client would have invested in employees that could do the same work. In rare cases that is not the case, but then the client is so dependent on external suppliers (in this case agencies) I would not recommend this approach to him.
All in all, I have painted a picture that clearly shows more risks for the agency’s business. What would I recommend to reduce these risks and maximize ROI?
- Requirements management, change request management and bid management need to be exceptionally well handled. The first two because that may reduce unexpected costs during the execution of a project, the latter may reduce sunk costs by either prioritizing bids well according to the probability of winning them or by improving the quality of the pitch material, thus improving the chances of winning.
- Increasing the credibility and thus the trust with the potential client in order to increase the possibility of winning a pitch. Herein lies the power of communicating your knowledge openly and an increased brand recognition thereof.
- Constantly improving the tools you can use to minimize the costs while executing your project.
- Selling more projects of a kind to reuse knowledge, leverage well functioning tools and routine, and thus increasing economies of scale
- Selling more consultancy work as add-on to the mere execution of technological projects with a clearly defined output
A consultant or any other knowledge worker will inevitably learn while executing projects: on-the-job experience. He will improve his skills with handling the customer and partners and will do some project-related research he can bill the customer for.
The Increase of Knowledge
However, I’ve recently had the first customer who has actually clearly stated “no learning while earning”. In his opinion, he pays quite a high price for a well known professional service provider because of their knowledge. And understandibly, he won’t pay for us to obtain general knowledge we could then reuse with other projects as well. He wants to pay only for our services not for our intellectual well-being.
If the knowledge he wants does not exist in-house, we can either ask him to look for another service provider (not very likely, I guess) or we’ll actually pay for the acquisition of the required knowledge by our own (let aside that there are ways of billing without his knowing what he payed for – however, this is not what this blog is about and what the author stands for).
The Billing Price Does not Run Parallel to Knowledge Investments
The Price of Knowledge
A problem arises: During the time in which the responsible consultant is being trained or does his research, we can’t bill his hours, plus we might need to invest in off-the-job training. Would we increase the billing price for this consultant by 1$ for each dollar invested in his knowledge acquisition, theoretically we would always receive the same margin (margin = billing price – employee’s cost including investments in his knowledge). However, the actual return at the end of the year would be negative because we can’t bill the days on which the employee has acquired the knowledge.
Thus, we would need to increase the billing price for this consultant by 1.5$ for each dollar invested, right?
I’ve visited a very interesting session about knowledge management at the 3rd barcamp in Berlin held by Stefan Ehrlich from T-Systems Multimedia Solutions. He stated that their approach is NOT directing knowledge from people to documents because that is quite challenging and expensive. Their approach is people to people.
Another guy added to the discussion (and nailed it) that actually they helped the employees to find the knowledge hubs within the company. Thus, some of these hubs will soon be asked by everyone else about their knowledge. They will not be able to bill these hours (usually) – meaning that the management of a company which uses the people to people approach needs to create other incentives than billable hours.
Furthermore, the discussion lead to the question whether you can note somewhere if the knowledge hub likes being a point of contact and is happy that he does not need to work on “real” projects anymore or not. What would the works council say? The presenter stated that they have a corporate IM system with statuses such as “don’t contact me”… imho very short-sited and not the answer to the question. But again, an approach.
They have a Wiki platform with blogging features since 3 months.
- they do not have a rule-set. The merely observe what is being used and how
- one of their employees produces 50% of the content
- most viewed page is the company’s strategy ;) <– very interesting
- in the second month already 7000 edits
- one manager stated that his e-mails after a 10-day holiday was reduced by the half
- competence centers died due to cultural reasons. Now, they are merely doing the same – but bottom-up instead of top-down
Filed under Knowledge, Reuse
Nassim Nicholas Taleb presented a quite interesting idea in his book The Black Swan: Categorizing work into scalable and non-scalable work. A non-scalable job would be one where the outcome (or income of the professional) varys from the amount of work an employee does and is confined by the amount of work he as a ressource can do. An example would be the consultant who can only do as much as his non-sleeping time allows. The produced value is bound to the amount of man hours billed.
Scalable work generates ideas which may be reused every so often – without the confinement of a ressource’s capacity. An example from Taleb’s book was J.K. Rowling’s novel Harry Potter. She only wrote it once, but millions and millions of people consume it.
Scalable work is more risky of course. While the potential is high, the risk is as well since there are only a limited amount of winners (see Carl Shapiro’s ideas), the competition is high – as are the initial costs. Why is the return on investment so high? Because the reuse of an idea is nearly free of costs. While the fix costs for generating the idea are high, the marginal costs for each further copy are nearly zero (again, see Shapiro’s book on that).
Scalable + Non-Scalable = Competitive Advantage
Applying this idea to a professional service provider: the service sold is non-scalable (man hours). Therefore, the competitive advantage can not arise from this “commodity”. The value of each man hour lies in the knowledge that is transfered to the customer. And this knowledge is in one part bound to the employee as intangibles – but on the other hand also centralized, transmittable ideas / knowledge.
value of man hour = intangible knowledge of employee + possible transmittable knowledge the employee can reuse
Therefore, the competitive advantage of a professional service provider comes from how good his people are and fom his investments in centralized knowledge generation and codification or transmission (R&D / market analysis department). The latter are scalable ideas – coming with risks (high fix costs) but also with the advantages mentioned above.
Filed under Knowledge, Reuse