In 2013, we explored the state and future of the digital consultancy industry, posing the question “How, When and Where Will The First Truly Great Digital Design Studio Emerge?“. Three years later in 2016, enough time has passed to discern patterns from trends. In that time the industry has experienced seismic shifts and a sweeping wave of consolidation. So let’s take another look at the state of the digital nation and why, for the bold, great opportunity lies ahead. Indulge me on a four course stream of consciousness on the business of digital.
- Chapter I: Industry Perspective: A look at the what, who, and why of consolidation, Digital Product explained, what lies behind advertising’s existential crisis, and the brewing clash of the titans between Ad Holding Groups and management consultancies.
- Chapter II: Agency Perspective: The red hot agency market, the reality behind buying and selling, calling bullshit on the ‘end of consultancy’, the designer’s delusion, and the second coming of the independent studio.
- Chapter III: New Perspective: Escaping the agency cycle, finding inspiration and perspectives in the startup studio model and in the venture and own product initiatives of progressive agencies.
- Chapter IV: Future Perspective: The blueprint for the next evolutionary step for the studio model… the Digital Product Studio.
There’s plenty of additional reading in the links for those who want to go down the rabbit hole, as well as a reference table at the end. Happy to continue the discussion on Twitter using the hashtag #DigitalNation at @ezyjules and @marvelapp.
Chapter I: Industry Perspective
A sweeping wave of acquisitions has decimated the ranks of independent agencies and formed two clashing clans. On the one side are the giants of advertising and marketing and on the other the titans of management consultancy. Meanwhile the market over which they are fighting is in the midst of a multi-faceted existential crisis.
The Great Consolidation
Over the last four years the design consultancy industry has experienced an unprecedented period of consolidation, building to a frenzy in 2015 with yet another flurry of acquisitions. 2012 and 2013 saw the big fish Ad Holding Firms WPP, Omnicom, Publicis, Interpublic, and Dentsu buying up digital marketing agencies. 2014 and 2015 heralded the era of the big 5 management consultancies such as Accenture, Deloitte, McKinsey, and KPMG snapping up independent design consultancies (a trend foreshadowed by Accenture’s acquisition of Fjord in 2013).
Some highlights of the 2014 / 2015 shopping list…
- Chaotic Moon sold and Reactive sold to Accenture Interactive
- Lunar Design sold to McKinsey Digital Labs
- Mobiento sold to Deloitte Digital
- Seren sold to Ernst & Young
- Sapient sold to Publicis Groupe for $3.7 billion
- Adaptive Path sold to Capital One
- DesignIt sold to WiPro
- Tactel sold to Panasonic Aviation
- Pivotal Labs sold to EMC in 2012 and EMC sold to Dell in 2015
- Bucking the trend Teehan+Lax opt for a dignified dissolution
Brief pause for breath… and into the 2016 new year sales:
- The App Business (TAB) £22M and Solstice Mobile $36M sold to St Ives
- Code & Theory sold to Stagwell
- Aperto sold and Resource/Ammirati sold to IBM
- Creative marketing agency Brooklyn Brothers sold to IPG
- IDEO sold a minority stake to Japan’s Hakuhodo DY Holdings
- Fahrenheit 212 sold to Capgemini
- Heat sold to Deloitte Digital
That’s a whole lot of design legacy, revenue, and talent being assimilated. The reasons behind it mean that we need to preface our journey with an important definition.
WTF is Digital Product
What is ‘Digital Product’? In as human speak as possible — in the style of trying to explain to my mother what I do — here goes…
Real world examples: Your favourite car service app such as Uber or Lyft, your mobile banking app with Chase or Barclays, your shoppable H&M or Nike app, the digital dashboard in your Tesla car (lucky you), the interface of your consumer electronics devices such as your phone or smartwatch, the controller app for your Sonos speakers, or an investment bank broker’s trading platform. Some products and services are made up mostly or entirely of software such as your Facebook messaging or Tinder ‘dating’ app. This is the software that is eating the world as almost all businesses come to be digitised and run on software.
The digital touchpoint through which a human interfaces with said product or service can sit on many types of platforms and devices. Those can include web, mobile, auto, wearables, VR and beyond. Things are slowly moving beyond the visual interface towards the more natural form of conversational interface. Such examples are speaking with your Amazon Echo or accessing services in written conversation in your messaging app. Because you interact with the product, it does more than simply display information, as say a marketing website does. Complex interactions take place between the part you use (the front-end) which is connected (integrated) into the wider system that runs the service in its entirety (the back-end). This means software is core to it all.
Delivery can involve end-to-end concept, design, and engineering of the digital product, bringing it through to market launch and beyond. Delivery can draw on multiple disciplines of not only design and engineering but also business strategy, product management, data science, and marketing.
There are multiple players involved as well as not inconsiderable cost. So the aim is to make the process as holistic as possible in order to get the product to market efficiently. So the method by which you deliver the product becomes as important as the product itself. Well-established best practices of product development include integrated teams, Agile (not waterfall), SCRUM, Lean, and Continuous Delivery methodologies. All of this makes digital product delivery an expensive investment. Engagements can run over many quarters and even years, commanding a high premium and margin. The budget for this kind of work usually comes from places other than the marketing department, which usually makes shorter-term, campaign-based investments.
Design has become recognised as a critical factor in creating successful products and services.
The point of this massively distracting aside is this. All businesses are becoming heavily software driven. So client demand has shifted towards the actual delivery of digital products and services into market, rather than just the strategy behind or marketing of them. In addition Design has become recognised as a critical factor in creating successful products and services. All of this has placed a premium on those skills and the relatively few companies that can offer it. Thus the red hot M&A market.
For those who wish to nerd out on the topic, here’s pretty great stab at What is Digital Product Design by Paul Devay.
So what’s with all the M&A action? From a revenue perspective, Ad Holding Groups have been going from strength to strength in recent years. With their amassed wealth they have have been busily buying up digital agencies. They have done so to cover capability gaps and round out their all-encompassing client offering. This was all about ‘doing digital’ in a world going fully digital and sweeping up any remaining significant non-group affiliated players and their clients/revenue.
Digital represents an ever increasing greater share of their revenues, topping 40% for the first time in 2015. The fresh-off-the-press Ad Age Agency Report 2016 shares some juicy stats: Over the last six years digital’s share of US agency revenue jumped from 25.8% in 2009 to 41.3% in 2015. For Publicis Groupe, digital represented 51.9% of worldwide revenue and for WPP 37.5%. The point is that the Ad Holding Groups are responsible for a huge portion of the digital industry and what happens there affects us all.
Looking at these figures, you’d think doing digital in ad-land is like making hay while the sun shines. You’d be wrong. The weather is about to turn and the industry, heavily centred on ad tech and the execution of digital marketing, is ill-prepared. Whilst the big names in advertising have made many ad tech and agency acquisitions and postured heavily in trade publications, they have failed to meaningfully commit to the field of digital product. The consequences for their failures here are profound; they are standing on a burning platform, and they lack the right skills and DNA to build a new one (figuratively and literally). In short: The ad industry is tipping into an unprecedented existential crisis.
Rome is Burning
It may seem bizarre to claim that a $50B a year and growing industry is in peril. But whilst executives quaff rosé at the self-congratulatory circle jerk that is Cannes, Rome slowly burns. Multiple fires have been smouldering away over decades with more starting every year: service commoditisation, low technical competence, failure to grapple with digital product work, death of linear TV, ad blocking, robots, data judgement, the end of AOR, a people and lifestyle problem, a talent drain, and… a new gang in town out to steal their turf.
The rapid commoditisation of the services the industry offers will continue to erode profit margins. As mobile engineers slowly become as ubiquitous as web engineers the premium on skin deep mobile marketing work will disappear. Margins will go south the same way of once bountiful web marketing work. We have seen that pattern play out on platform after platform.
People are deleting advertising from their lives. Many simply don’t like or want it and now for the first time they have a choice in the matter. With the shift to streaming, the so-called ‘millennial’ has abandoned linear TV and, in turn, the ads that grace it. (Who can blame them? In the US alone an estimated 45 million are using ad-blocking technology and eMarketer predicted that 15 million people in the UK would begin using ad-blockers by the end of 2017. Have you tried watching an episode of anything in the US without developing ADD from all the ad breaks). Higher-income consumers are more able to afford an ad-free existence by paying subscriptions for ad-free service experiences such as YouTube Red, Hulu+, or Spotify. This further erodes the pool of young, upwardly-mobile consumers that the ad industry so covets. In the future, only older, poorer people will experience advertising.
The industry found hope in Nielsen’s 2015 ‘Global Trust in Advertising’ report. It heralded millennials as showing “the highest levels of trust in online and mobile formats.”. But a 2016 KPMG study found that the very same group was most likely to block ads with 60% of 16- to 24-year-olds planning do to so in the next six months. It also found that wealthier consumers are more likely to block ads. In the US alone an estimated 45 million are using ad-blocking technology and eMarketer predicted that 15 million people in the UK would begin using ad-blockers by the end of 2017. Clearly the issue of trust is meaningless without like or want (I trust my dentist, which doesn’t mean I want to unnecessarily spend time with him). This presents a serious challenge to an industry which has principally relied on these channels since inception.
The robots are coming! Software is going to eat a large majority of non-creative agency roles in the coming years. With great irony, like turkeys selling Thanksgiving, the advertising industry is excitedly pushing the very robots that will ultimately replace them (programmatic anyone?). In the brave new world, bots will communicate with millennials in a ‘relevant voice’ in their channel of choice about a product/service they are, according to data, likely to purchase. Dystopia here we come!
The shift to digital channels has delivered a data-rich world of less imperfect information. So the actual impact of what effectively constitutes shouting into the ether (legacy advertising) can now begin to be measured. TV advertising has long been considered effective, but for how long if it becomes measurable or people are not watching it? As consumption of viewing and advertising moves to the internet, quantifiable data means accountability and judgement. That should scare the hell out of agencies and publishers which have, outside of TV advertising, thus far survived and thrived on at best cloudy metrics.
For example a display ad is considered as ‘viewed by the visitor’ if “at least 50% of its pixels were displayed on the visitor’s browser for at least one continuous second”. The bar is clearly low. Kalkis Research recently released an End Of The Online Advertising Bubble report foreboding a beautifully coined “sub-prime crisis” in ad tech. It is well worth a scan. Gabe Leydon, founder of Machine Zone, buys a lot of ads and a lot of TV spots (you know, the ones with Kate Upton and Arnie in them). He gave an epic takedown of the agency/media industry at code/media 2016, characterising “almost all brand advertising as nothing more than a slush fund that feeds lazy advertisers, publishers and networks, who want to avoid accountability.” Ouch! It’s a must-watch if you are in the ad or media industry or if you like watching slow motion car crashes (seriously, the Q&A is like a post-coital cigarette… “Desire is an art and advertising is art and science!” someone forlornly pleads).
The era of the Agency of Record and retainers is coming to an end. I have met with many client-side teams and senior business decision makers at leading brands over the last year. I can tell you that the value and returns on comfortable, long-held agency of record relationships are in question. Feeling gauged and exploited, they are also asking the same of the many millions spent on bloated retainers over many years. The age of mega-retainers is coming to an end and the big brands such as Pepsi are calling it. As a new generation begins to take the helm, brands and clients are seeking out more open relationships than those of the AOR era. That shift presents a significant structural risk to the largest agencies who have grown fat on these arrangements. Everyone will need to figure out an operating model in a post-AOR world.
The ad industry has a talent, lifestyle and purpose problem.
The ad industry has a talent, lifestyle, and purpose problem. Behind the generation of career-coasting marketers maintaining business as usual sits a frustrated, hungry, product focused, and purpose driven generation of progressives. For anyone working in and around agencies and brands those generational fault lines are clear to see. With so many options this talent is not hanging around. Many are emerging from a career-long bout of Stockholm syndrome, the self-justification for the all-hours, all-sacrifice lifestyle of the industry. Some agencies are beginning to act on the damage such as Wieden & Kennedy London limits to work hours and email curfews for its staff. The fresh young talent that used to fuel agencies is increasingly altogether eschewing the industry despite desperate cosmetic makeovers.
It may be a case of too little, too late to change the tide. For more and more the question arises of what’s the point of putting up with all this? Confronted by his mortality following inoperable esophageal cancer, Linds Redding, a New Zealand-based art director who worked at BBDO and Saatchi & Saatchi put it like this:
Where once the talent was trickling from the leak in the dike, talent is now flooding out of the industry. Many are finding roles in tech companies with better pay, better conditions, and greater meaning and fulfilment in the work. From the top down, the very people that could save the industry are leaving it. Rei Inamoto leaving AKQA to open a business invention shop or pretty much all the product-focused talent at Huge leaving to set up the product-focused agency Work & Co are two of countless examples. All of the above means that attracting talent, especially engineers, is approaching the impossible.
The parasite has become the host.The script flips further. Tech giants such as Google and Facebook were once simply vendors and channels for the ad industry. However, both are now taking their talent and offering quantifiable performance marketing services directly to their clients. The parasite has become the host.
There is clearly a real impetus for change and none of this is new. Someone should do something right? Unfortunately, the industry suffers from a false sense of security and lack of urgency. This has been fostered by the billions still being generated through a generation or two of marketers who are fully invested in maintaining the status quo (I suspect in order to ride out careers, pensions and mortgages). The fact is that both agency and client side have been complicit in selling and buying things to and from each other that no one cares about because it’s what has always been done.
A macrocosm of exactly this pattern is cloud advertising. Actual human beings give zero fucks about the cloud aka just someone else’s computer. Yet this untargeted, expensive and pointless noise that exactly this generation has sold to each other is plastered absolutely everywhere: TV, online, stations, billboards, outhouses, sporting events, and ensuring utter global inescapability in practically every major airport on the planet. VR is undoubtedly next as the “I need VR” becomes the new “I need an app” and branded VR content from vodka brands floods our consciousness.
The party is not going to end any day soon. But the industry will continue a slow and inevitable march to redundancy unless it responds to the many forces at play. There is another industry that went from nearly $40B a year to under $15B due to failure to grasp digital. This was the global recorded music industry which was decimated in just over a decade.
Digital product work with its margins, purpose, and engagement is one of the paths that could save the industry. With the writing on the wall for so long, why is the ad industry still not in the game?
The Great Pretenders
There was time when the ad industry had influence over more than Promotion, one of the Four Ps in the traditional Four Ps of marketing (Product, Price, Place, and Promotion). Way back in the Mad Men era so celebrated by the modern advertising industry they heavily informed Product. But as their clients in the 70s and 80s established in-house capabilities for those skills (doesn’t that sound familiar!) they were increasingly limited to Promotion. Decades later, the golden opportunity to reclaim the lost P and properly integrate digital product capabilities and culture is being spurned. The focus appears to be on rebranding existing capabilities to posture as business-building product shops, or even somewhat delusionally as startup disruptors…
Scan the positioning, websites, and decks of design, advertising, marketing, and branding agencies and you will see that everyone is now talking about building products and businesses. Old case studies have been repositioned in a new ‘product’ context. Has everyone transformed themselves into product organisations? No. They’ve mostly painted stripes on their horse to make a zebra. But it’s still a horse. To bastardise Dan Ariely’s beautiful Big Data quote, a lot of people are putting on a good show…
Ad Holding Group agencies such as BBH, Huge, Rockfish, Wieden & Kennedy & Ogilvy et al have all established innovation ‘Labs’. Based on evidence that’s yet to be discovered, they have thus far proven to be marketing and client seduction efforts. They have shown little in terms of real world product output… repeat after me “A Digital Product is a software-enabled product or service that offers some form of utility to a human being”. These labs do not reflect a true intent or investment in building a product for the world. The dust-gathering 3D printers, soon to be joined by dust-gathering VR headsets, are symbolic. This wonderful piece on agencies and products from 2012 still stands strong today.
The ad industry is still characterised by a low level of technical competence.
Despite the many acquisitions of digital shops, the ad industry is still characterised by a low level of technical competence in digital product. It has yet to effectively structurally, or culturally integrate digital within its walls. There are simply so few examples that demonstrate success (before you wheel out RGA and Nike Plus, please… that was launched four James Bonds ago). The industry has struggled to effectively deliver beyond web marketing and e-commerce work into mobile software development. It is hard to see how it will command emerging technologies such as VR or wearable tech let alone complex digital product work.
This is precisely where the industry’s failure to grapple with digital product work, which commands a much higher premium and margin, will have consequence. If digital advertising and not products and services are to be commoditised and if ‘The future of marketing is to be useful’ then there should be no greater impetus for the industry to drive towards the delivery of digital products and services. Brand clients, nearly all of whom are becoming software oriented businesses, will ultimately seek out partners who are able to deliver digital product work. Within the confines of a confine of digital, the ad industry will be left to operate in the low end of the market. It is here that margins and profits will dry up. (Maybe then the focus will shift again on selling brands by making, well… advertising).
The Ad Holding Groups have made an art form of establishing relationships with global brands. They have had the ear of the business decision makers more than any other vendor. I would venture that few do it better. However, with every fumbled product initiative another decades-old bridge gets burnt. As George Walker Bush said “Fool me once, shame on … shame on you. Fool me… You can’t get fooled again!”.
Clients need to question how honest a partner is incentivised to be if their agency delivers on only one part of the process. If you’re married to only one part of the process, selling purely strategy, design, branding or media, you’re most likely going to make that as big and expensive as you can as that’s how you make money. In contrast, being responsible end-to-end for getting a product to market, promotes honesty and efficiency as you’re invested in the outcome and post-launch iteration.
It begs the question of whether, like supertankers trying to navigate rapids, the big ad firms are too big to function in the new world of digital product. For the 500-plus person vessels sailing the marketing seas, I am not confident the patient would survive the necessary surgery, nor their holding group masters allow it. But hold tight, we’re not done yet because adding to all of the above, shit just got real…
Enter the Big Five / Four
Management consultancies have entered the arena through a glut of digital consultancy acquisitions. They have done so for reasons both similar and different to the Ad Holding Groups. They already have C-suite access and accounts from which they are generating tens or hundreds of millions of dollars a year per client. Now they are slip slidin’ along the value chain to sell them more stuff and they have their eye on the Ad Holding Group’s slice of the pie.
They are also responding to market demand. Much as visions of 2030 spur the imagination and inform strategy, they don’t impact more immediate business cycles. Increasingly their clients (and the world) are slowly edging away from buying ideas in multi-million dollar, 300-page powerpoint decks towards actually making ideas happen. In the same vein that the value of AOR and retainer relationships are being questioned by clients, the same is being asked of the strategic engagements of management consultancies. Their clients have become increasingly focused on a meaningful and actionable return on their not inconsiderable investment.
“Management consultancy… The art of stealing someone’s pocket watch and telling them the time” — Anonymous
A broadening of services from idea to encompass execution was required. By ‘buying’ design, management consultancies could now sell ‘design’ through their newly minted, execution focused storefronts; McKinsey Digital Labs / Accenture Interactive / Deloitte Digital / Capgemini Digital Customer Experience / IBM iX etc. They have ready buyers in existing clients, whose businesses are becoming digitised and running on software.
Now they have creative credibility by acquisition, digital chops, and a new and very large product and service design banner to wave to their clients. Something we need to see play out, given the sheer size of these client accounts, is whether design and digital product delivery will be central to or an afterthought in their relationship with the client. This will have a telling impact on the environment in which that work is carried out.
Clash of the Titans
All of this has the behemoths colliding. The old school T-Rex Ad Holding Firms are now fighting over prey with the genetically engineered I-Rex management consultancy design groups (sincere apologies if you haven’t seen Jurassic World). Let’s take a look at the 2015 revenues of the big management consultancies versus the Ad Holding Groups:
Make no mistake these are absolutely giant companies fighting it out and the battle will be epic!
The impact of these seismic shifts in the industry are yet to fully play out. Will the management consultancies entering the market be able to escape the forces plaguing the Ad Holding Groups? Will either be able to shape compelling and sustainable digital product propositions for their clients — the ability to ‘actually make ideas happen’? Will they be able to hold onto the talent they have gathered up via expensive acquisitions?
The answers to those questions we will only know a few years down the line. But right here right now amidst the fray, independent digital consultancies, mere pissants when you consider the numbers above, are a hot commodity. At the same time ‘design as a service’ is by all accounts in critical condition. So next we’re going to zoom in on the little guys amongst all this madness and explore what’s going to be left when the smoke clears.
Chapter II: Agency Perspective
In chapter I we focused on the digital industry at a tumultuous macro level. This sets valuable context in which to explore the situation at the consultancy and agency level that many of us call home. In this red hot market, agency valuations have never been higher. But the truth is that selling is the death of the company you know whilst the buyer ends up with a mere facsimile of what they paid good money for. Despite the consolidation and growing trend of in-house teams, there will always be a market for great consultancies as long as they are prepared for a new reality. So get ready for the second coming of the independent studio.
CONGRATULATIONS!!! Your firm with a global footprint and a few hundred staff, which would have fetched upwards of $75M USD in 2013, will now command closer to $100M in 2016. There is no better time than now to sell your agency with so many well heeled suitors. In fact the market is so hot right now that agencies are being sold based on multiples of between 3x, 4x and in some cases even 5x revenue (not EBIT). Factors such as size, numbers of studios in key markets and client list dictate where in that threshold you sit. Here you go, dream a little…
Buyer (and seller) Beware!
Selling one’s company is of course completely OK and is any owner’s right. The true motivation for a large majority of the aforementioned deals is no-doubt cashing out with retirement on the far horizon. When confronted by the reality of a repetitive Greek tragedy of a professional life in its closing cycles, a handsome offer for one’s life’s work is surely hard to resist. Certainly, scanning the Microsoft Word acquisition template press releases… “wider, scale, expand, access, yada yada yada” from the range of the companies who have sold in the last few years it is hard to discern any authentic non-financial motives (of course money is never mentioned).
All good right? Except the vision they sold to their people along the journey certainly didn’t include being sold. Despite their declarations, they did not start out in the design industry dreaming of selling to a management consultancy, a global accounting firm, or a credit card company. They know it and their people know it. As such telling the world and more crucially their people how great this is going to be for ‘us’ is not all good.
Adaptive Path gave an incredulous spiel following their sale to the credit card company Capital One, declaring “It kind of feels like where we were headed all along.” 19 months on it would be interesting to see how many of those souls are still vibrating.
Keeping It Real
I’d personally love to read a from-the-heart announcement…
— said no one. ever.
Teehan+Lax went well beyond this standard not just in word but also in action by opting for a dignified dissolution of the company rather than a sale. The partners and the employees that would and could moved on to Facebook. This path uniquely preserved the T+L legacy. Exhibiting great self-awareness and honesty, they spoke of failing to break their cycle…
Agencies Scattered On Dawn’s Highway Bleeding
The truth Teehan+Lax recognised is that selling your agency is unequivocally the end for the company you knew. You are no longer master of your own destiny. It’s death by spreadsheet. Once assimilated, your company is now a cell in another company’s spreadsheet in which there are no columns for culture. Most crucially the collective spell, which kept the talent that makes up the sum of the parts doggedly committed to the cause beyond all reason through hell and back, is broken. You’re culturally holed below the waterline. If the agency is lucky they will feature in the following well worn conversation for a generation or two before being forgotten.
The tragic thing about the denial, the self-delusion or worse the outright lie to your people — telling them that selling is not the end but the great next step in the journey — is that no one gets a closure experience. When someone dies you hold a funeral or a wake for people to come together. They mark the occasion, reflect, cry, laugh, celebrate, and commiserate. It is a fundamental human need that allows us to honor what has been and begin the process of moving forward properly. I suspect the Teehan+Lax closing party was just that and the bond between their family, wherever they scatter, will consequently endure.
By not marking the end of what things were, the passing of an era, the company slowly dies. The earnout incentive and timeline is to all intents and purposes a march towards a desert mirage. One by one the people, its very life force, fall away as does its legacy. The founder of Fjord, who sold to Accenture in 2013, recently wrote an article on If a company is its people, then what’s the point if virtually no one you took the journey with arrives at the destination with you?‘Can Corporate and And Creative Cultures Ever Truly Merge?’. It speaks of protecting culture, open-space studios and design methodologies in a sale, yet is tellingly thin on the protection of its people. If a company is its people, then what’s the point if virtually no one you took the journey with arrives at the destination with you? It’s like scoring the Presidential suite at the Bellagio… on your own. It has to feel somehow empty.
We’ve seen death by acquisition over and over. You’ll see nearly all the companies who have sold in the shopping list at the top of this piece wrestle with their predicament, bleed talent, fade, and end up as zombies — mere facsimiles of their former selves.
Ship of Theseus
What will all the Ad Holding Firms and management consultancies end up with from their shopping spree a few years down the line? If an agency is acquired and 70+% of the people, the very soul of that company, leave in the months and years that follow, does the buyer actually end up with what they paid for? It’s a brain teaser Greek philosophers (See ‘Ship of Theseus’) and cockneys have wrestled with over millennia.
The End Of Consultancy
There has been a great deal of noise made about design firms stagnating and the Don’t panic. We’re not seeing the end of design as a service. disappearing business of design. This has been driven by the sales and consolidation, the growing trend of internal design departments, and a few prominent shops shuttering studios — such as Smart Design’s SF studio, more due to shifting strategic focus than P&L. Don’t panic. We’re not seeing the end of design as a service. The underlying business model of design as a service remains strong and will continue to exist for many reasons:
There are more projects than there are good teams. Consequently, there will always be work for companies that do good work. If you do shit work you’re going to get less work and attract shit projects (i.e. you’re done for). If you do great work you are more likely to get more work and attract great projects. It’s a rather obvious virtuous circle many agencies don’t seem to appreciate.
Any client, be it a startup or global brand, is hedging risk when they work with a consultancy. The cost of failure to meet market, board, or investor expectations around a critical product release heavily outweighs the comparatively high premium of retaining a consultancy. Many clients simply neither have the skills or talent in house or the permission or affordance to build a team. They therefore need to work with consultancy partners to deliver.
Whether in-house or in a consultancy, building and running high performing design and engineering teams is extremely difficult. Really! That shit is super fucking hard. You could hand pick a team made up of the very best players from any league of any sport and still have a team that stinks compared to a cohesive, well-drilled team. On top of that, achieving a truly product oriented ‘one team’ approach with tightly integrated designers and engineers is even harder. (Any team that has engineering on different floors, buildings, states or even countries to design is building weakness into the system). All the money in the world cannot buy getting that right and there are innumerable dysfunctional in-house and agency teams that stand testament to that.
So if a consultancy can offer the above, something that even some of the world’s wealthiest companies can not pull off, then you’re going to get business even if there are internal design departments in place. Design as service is far from dead.
The real challenge is to evolve, do it all better: to deliver the irresistible package.
When Teehan+Lax referred to Escape Velocity, a failure to break the cycle to achieve the next evolutionary step for their company, they brought the true challenge for the studio model into sharp focus. How do you achieve orbit in your business if you don’t want to sell? The real challenge is to evolve, do it all better: capabilities, product development, collaboration, process, and culture, to deliver the irresistible package. We’re set for a second wave of new independent agencies that will aim for just that under the product studio model.
But before we go there, we interrupt this transmission for an important message…
The Designer’s Delusion
The design industry has had its ego stroked hard over the last few years. This has resulted in what I refer to as the ‘designer’s delusion’ — the naivety and arrogance to think that an industry can be disrupted simply by making an app. That beautiful material design EMR alone is not going to ‘disrupt healthcare’ because it is only one tiny piece of the gargantuan effort required to even make a dent. For some perspective, beyond pixels that effort can involve lobbying government and taking cities to court.
The design industry has been guilty of self-indulgent navel gazing, debating the difference between UI and UX, chin stroking on ‘design thinking’ or trying to capture the essence of what ‘Design is…’ in 140 characters. Muscles have atrophied from years of consultancy work for giant organisations with five floors of lawyers (NO you cannot spend eight weeks on registration flow!). Every day that we continue to pontificate and indulge in the abstract a dangerous gap widens between us and startupland and techworld where time and methods relentlessly accelerate. It’s time to speak like humans, get grounded and get real.
It is vital that designers be equipped for this ‘real’ world. When a board is reaming you over volume of users, user retention and revenue models, that storytelling campfire bullshit doesn’t cut the mustard. In this world the hierarchical setups, rigid process and stratified walls between disciplines are falling away. Interaction design, visual design, service design, design research et al are all origin stories for the new breed of Product Designer who is honing her multi-disciplinary skills and studying data, business, and technology to move up the value chain with authority.
The Second Coming
Anyway… Many decades old studios have disappeared. But whilst we’re undoubtedly experiencing a contraction in the number of independent consultancies, we are far from the end of times. The talent has been assimilated into ad group holding companies, management consultancies, and startups over the last several years.
The question is whether they can retain the talent. Unless these environments prove to truly satisfy they will not be able to. Designers and engineers are are idealistic folk who want to make things that count. As long as they can afford to be idealistic, they will ultimately place what they are putting into the world above the money they are taking from it. They also fear stagnation. Their inner voice constantly seeks purpose and in time it almost always wins. That reality has been manifesting itself in the talent drain from the advertising and marketing industry over the last five years.
By way of acquisition, the management consultancy industry has swept up a lot of the talent. We’re still to see how it’s going to play out in that domain. Doing great product work within the confines of the management consultancy industry presents its own challenges.
It is a deeply political environment that requires a massive operational overhead just to be able to do your job. This is a million miles from lean and agile and it places a heavy burden on individuals and teams. We’ve yet to see whether design is viewed as a core or bolt on client offering by the consultants who rule their client fiefdoms. This will dictate the level of stakeholder access that teams will be able to secure and in turn the quality of collaboration and of the end-product. If a high percentage of the work is on projects that do not see the light of day, working in abstract, then this will erode the talent’s interest. How will the culture clash play out between the tattooed ‘design guys’ who are rolled out by the pressed pants ‘consultant crew’ to ‘do’ some design. Grab your popcorn folks!
As for the owners and the most senior talent from companies acquired by Ad Holding companies and management consultancies? The majority of those companies will kick their final cultural death throes in the coming years and, with earn outs complete, those people will want out. The inner voice just has a little more resistance to overcome. These are exactly the kinds of people inclined to start new consultancies, kickstarting the second wave of the independent studio.
The intoxicating allure of the startup world has attracted so many designers and engineers in the last decade. However, markets are correcting their inflated valuations of tech stocks and the funding for startups is drying up. As that reality bites, the talent is sobering up. Everyone is realising that the gold in them there hills is just as hard to mine as it is anywhere else. There are no sure things — the laws of nature ultimately apply to a tech startup just as much as they do to other companies. We are going to see more horror stories about long-term employees with common stock getting burnt in the coming months and years due to the ratchets and liquidity preferences for investors built into new rounds of financing. The case of the unicorn Good Technology opting to sell to Blackberry rather than for an IPO is a cautionary tale for those who opt for stock over salary.
I am not saying that any of these silos for talent are better or worse than the other, except for advertising in its current state. They each present their own challenges and the talent is increasingly sober to that and evaluating options between them all.
By 2018 the second coming of the independent studio will be in full force as waves of designers and engineers leave ad land, management consultancy, and startups to start or join new digital consultancies.In the coming years a LOT of the talent that has been holed up will blow like dandelion seeds in a fresh spring breeze. By 2018 the second coming of the independent studio will be in full force as waves of designers and engineers leave ad land, management consultancy, and startups to start or join new digital consultancies. A thriving new independent agency community will emerge with a sharper focus to their work, resolved to do things differently under a new and progressive business model.
A great majority of the industry’s agencies and talent has been churned by the strategic expansion of Ad Holding Groups and management consultancies. But from the carnage and fallout a new and evolved breed of digital agency will emerge that understands and engages with the new world and seizes upon the opening in the market.
Chapter III: New Perspective
In chapter I and II we explored current digital industry and agency perspectives and the quandary which talent finds itself in. We’ve also heralded the second coming of a new breed of studio. Iterating on the old agency model is vital or you’ll be condemned to repeat history. The evolutionary avenues are already being explored by the startup studio, as well as by progressive agencies engaged in venture and own product initiatives. But you need to approach the game wisely or you could lose it all!
Cracking The Code
The digital consultancy business is a game of highs and lows. There is adventure, friends, fun, creativity, and plenty of variety as you get to work on a range of problems in a diverse range of industries. Rock ‘n’ roll!
But it can also be a complete pain in the arse. You live and die by the whim of clients, budgets, and the economy — oh the uncertainty. The outlook can go from 72 and sunny to end-of-days and back again within the course of a month. Your services suffer an endless and increasingly faster downward spiral of commoditisation. In the typical vendor-client relationship shit flows downhill right where you are standing with the shovel. The work can at times seem pointless and unmotivating. The hours can be insane and crap all over your work life balance. The bigger the company gets the more furiously everyone has to scramble. It relies on humans who have needs, feelings, and emotions — unhelpfully, all kinds of different ones at different times — that need to be considered and cared for. Then after putting up with all that, one day the company you work for gets sold to a credit card company, or as an owner, you get sick of the life and sell to one. All of that can mean it’s not much fun at the bottom, middle or top of the pile in the consultancy game, whatever the payoff.
Hamster Wheel or Rocket Ship?
Whether you’re considering starting a new consultancy or pivoting an existing business, you have a fundamental decision to make. Do you want to build A: a giant fucking hamster wheel or B: a rocket ship and explore the galaxy.
The hamster wheel represents the consultancy business as usual. It’s a model that relies on a linear relationship between effort and revenue; you sell your consultancy services on the basis of units of time. To make more money you need to make the hamster wheel bigger. To get to ‘bigger’ and maintain it, everyone including you needs to run furiously faster. When they are sleeping the company does not make money. Those incidentally are the conditions in which an owner is more likely to get tired and sell and those in which employees are going to disengage. Does anyone who has the choice really want to live that life again?
A 500 or 1,000 person marketing agency for example is a giant hamster wheel. I bet most people in them from early on are bewildered with what it has all become. In this age it is evolve or die for the consultancy model. But at that size all your vital organs rely on the dying model of marketing work. You may not survive the surgery required for the transformation.
There has to be a better way. I’ve referred a lot to escape velocity, breaking patterns, evolution, doing things differently and hinted at the need for a new and progressive business model. How can we change our fate, compensate for uncertainty and take control of our destiny?
In what direction can we diversify in order to escape the apparent laws of nature of the consultancy ecosystem? For some inspiration for what the rocket ships could look like it’s well worth looking at the emerging startup studio model and some of the venture and own product plays that progressive digital studios have been making in the last few years.
The Startup Studio
The startup studio is a relatively new model of company that’s focused on developing tech startups internally. They keep their fledglings warm, fed, and safe until they are ready to fly the nest. Not exactly a fund or a typical incubator, they might develop their own startup, back a founder or buy a company — all the while nestling them in their warm ample bosom.
New York’s Betaworks are arguably the baby daddy of the model. They acquired and revived digg and bitly, gave birth to Giphy ($55 Million Series C At A $300 Million Post-Money Valuation), Dots (spun out with a $10 million Series A round from Tencent) and Poncho ($2M seed round hot off the press). One way in which they seed new startups is by backing founders through a Hackers in Residence program that brings in and enables talent. Whilst they are not a fund, they do make small seed investments of between $100k to $200k in companies that they ‘think will make our network stronger’. The crew over at Betaworks shared the content of their 2015 shareholder book, which gives you a great insight into the setup and philosophy. They are super hooked up in the fund and the startup community, which gives them strong deal flow and access to investors.
Other notable startup studios include New York and San Francisco based Expa. Their focus is to ‘partner with founders to create new products and services’. They create the environment to help them scale as independent companies through shared services (back office) and resources (space). That allows the startup’s team to focus on product and business. We’ve yet to see how their piglets Kit, Reserve and Drip will fare in the world. Expa recently raised $100m in funding and took a step into the incubator space by launching Expa Labs to incubate early stage companies with $500k of seed funding and 6 months of office space. The CEO and founder is Garrett Camp, co-founder of Uber and StumbleUpon. They have also attracted partners such as Foursquare co-founder Naveen Selvadurai. They have an absurdly strong network and access to money and investors.
Science, based in Santa Monica in LA, is another player focused on internal investments and partnerships. They incubate by ‘developing a thesis, testing the concept, and then bringing in like-minded talent to help execute and scale.’ as well as make minority investments. They had early success leveraging their toolset with Dollar Shave Club (raising $50 Million Series C round in September 2014, now serving 8.8% of the US men’s cartridge market with over a million members) and DogVacay (raising a $25 million Series B round in November 2014). They’ve put a lot of chips on the table over the last few years and have yet to see a significant exit that would replenish the coffers and prove the model works.
The startup studio model is still relatively new. The barriers to entry to creating a startup such as space, tech, and operations are becoming lower each year. So the startup studio arguably becomes a less compelling and unique proposition for startups. Whether for evolutionary or reactive reasons the leaders in the space are continuously revising their approach and offering. Money and network alone are not enough to guarantee success. Nevertheless the startup studio highlights an opportunity in and around the early-stage technology startup space. I would argue that the ability to execute product has allowed Betaworks to make the greatest headway.
No doubt fuelled by rampant valuations and news of herds of unicorns roving the Californian plains, everyone has been drawn towards the startup and venture space like moths to the flame. However, it is a very different game to services and not something you can simply stroll into.
The Agency Venture Fund
Bigger, older companies with spare cash investing in smaller, younger companies without cash has been happening since the beginning of business time. However in the last six years we have seen agencies enter the venture field. They have done so under formalised venture fund arms which invest cash into early stage technology companies.
The giant Ad Holding Groups have always been busy investing their riches. Notably WPP Ventures (Crunchbase), the investment arm of WPP Digital for whom investments include a 2015 $50 Million series D Investment in Refinery29. They made $50 Million from their $5 Million investment in Buddy Media when it was sold to Salesforce for $745 Million. Interpublic (IPG) (AngelList), which owns Deutsch, Huge, McCann Erickson, and R/GA, bought a half-percent stake in Facebook in 2006 for less than $5 million. In 2011 it sold half of its shares and netted $130 million in the process. They are sitting on their remaining .25% stake, valued at $212 Million. Fair play, that was a stupendous coup. In 2016 French advertising agency holding group Publicis Group launched the Publicis90 fund to invest €10 Million ($10.9 million) in 90 startups. The process by which they are selecting their investments looks like some kind of Facebook-Likes-regional/national-America’s-Got-Talent-clusterfuck, a million miles away from how funds behave. The lucky startups will also benefit from mentorship from senior management who’ve never launched a startup. Good luck with that.
However, this is lifestyles of the rich and famous territory. These guys are minted, are giants and their lifestyle choices are far removed from ours. So where is this kind of activity taking place at the atomic level in ‘smaller’ companies?
Back in 2011 there was a lot of noise about agencies setting up funds including the $16 million BBH Black Sheep fund and Method Inc rounding up $30 million. This represented a false start as many announced funds failed to pan out. The lesson seems to be that once you are acquired you also give up your ambitions of making cash venture investments. Your new masters want you focused on making cash rather than spending it (Viva la independencia).
One of the few agencies that sits in a holding group that has maintained its ability to play in the venture space is RGA. Their investment arm RGA Ventures (Crunchbase) has been highly active. That activity is principally driven through their RGA Accelerators in which they begin with $120K investments for up to 6% equity. They also invest greater amounts and follow on, working not just at seed, but also Series A/B, mostly in line with a lead investor. They are able to present themselves as a unique strategic investor by bringing not only cash but also their services, resources, and a deep and wealthy network to the party — an apparently virtuous circle.
All of this activity relies on having spare cash to invest, which only happens at a certain scale. A new agency would have to put a few years of hard work in to build enough reserves to afford to diversify into investing. There are however other ways in which smaller companies are getting some startup equity action and that is by getting paid in equity rather than cash.
Services for Equity
The practice of companies being paid for their services in equity rather than cash by clients is nothing new to commerce or to the tech sector.
The practice has been a near constant in the industrial design field. Ammunition Group took equity in Beats back in the day and Fuseproject is well known for its venture design-based business model that greatly reduces cash fees in return for a royalty/equity arrangement. Fuseproject notably took an equity stake in Jawbone (admittedly not-so-hot stock right now). Smart Design has been associated with OXO since 1990, having arranged a 3% royalty that generates a double digit percentage of its profits, and has done equity for services deals. Smart founder Davin Stowell notes “Investing in physical product is tough business — even if you have a great product, AND distribution, AND initial success, scaling becomes a challenge”.
During the dot com boom Silicon Valley lawyers would on occasion take equity in exchange for their services. But when the bubble burst in the noughties plenty of fingers got burnt and the practice petered out. However, it’s becoming a growing trend in the digital consultancy space, a sign of renewed confidence (or forgotten history) in the tech sector. The barter can solve both parties needs. For startups who don’t have the cash, bartering provides access to the help they need to get to market. For the service provider who does not have the cash spare to invest it gets them a seat at the early stage technology startup venture game.
It makes a lot of sense as service providers often get to see companies way before VCs at a stage where equity is early enough to be meaningful. As such, to harness that opportunity a number of reputable design focused consultancies have formalised their services for equity propositions.
In 2014 Frog established FrogVentures (Crunchbase). Positioned as a ‘growth partner to entrepreneurs’, they exchange their design services for equity in early stage startups. Also in 2014 their perennial competitor IDEO established their venture arm IDEO Futures (AngelList) to ‘help new ventures soar’. They act as a seed fund, incubator, and run a startup in residence program through which they take a nominal minority stake in companies they mentor.
At ustwo (AngelList) we’ve directly invested in, incubated, and engaged in services for equity deals with early stage tech startups since 2014. We invested in the prototyping tool Marvel App and co-founded DICE, a zero booking fees mobile ticketing service. In 2015 we formalised ventures arm ustwo adventures to manage our growing portfolio.
DesignIt, who sold to WiPro in 2015, worked on the supplier management tool Tradeshift under a services for equity deal and ended up making $3M on the stock in the process. Branding consultancy Red Antler (AngelList) has partnered with startups and early stage companies since being founded in 2007. For select early and late stage venture-backed companies, Red Antler takes equity in addition to fees. Famously they took equity in then unknown e-commerce mattress company Casper which in its latest funding round reached a valuation of $550 million. Nice!
Even videographers are in on the game. Sandwich Video, Silicon Valley’s favourite video maker, established a venture arm in 2015. For select clients they would front the full costs of a video — usually around $100k- in return for $100k of equity. They did not have that setup in place when they did the Twitter and Uber videos, but did score Jawbone stock. And who doesn’t want to be David Choe, the artist who painted Facebook’s first office back in 2005 and got paid in stock rather than $60k in cash. That stock that is now worth $200 million. Jammy sod!
There was also the interesting case of a consultancy called West Studios that came out of Square’s IPO filing which benefitted only from a consultancy fee but also an option to purchase 375,000 shares of Square’s common stock. This was seen as a little controversial at the time as then CEO Jack Dorsey was an also investor in the consultancy.
Why has the services for equity deal been focused largely on early stage startups and not large brand clients? Alternative compensation arrangements such as equity or revenue share are extremely hard to pull off with big brands. Whatever the intent of the stakeholders you’re working with, the very idea tends to blow the fuse when the proposal hits procurement or legal. You may as well be proposing the trafficking of children. Rule of thumb is that for each floor of lawyers your client has, your odds are exponentially longer. All of this means that the services for equity opportunity is largely restricted to startups who can be more flexible.
Investing in early-stage technology startups requires patience and long term perspective.
All in all there are many indicators of significant intent in the consultancy space to begin to diversify by changing up the terms of business. It is still early days and we’ve not seen many results yet. But be careful not to be seduced by a fairytale. Investing in early-stage technology startups requires patience and long term perspective. It is important to note that for nearly every company above, services for equity is the exception not the rule. Most firms have established and staffed separate companies or divisions to manage these arrangements. They do so for good reason…
So drop $100k or so of cash or services into a future unicorn at seed stage and cash out in between 4 to 7 years later in an IPO or exit. Simples right? Not so fast. However you got a seat at the cap table you need to understand that you are no different to any other investor. The golden rule of investing from legendary stock picker Peter Lynch holds true to investing in startups, just as it does to its cousin gambling…
Services for equity deals usually take place at the very early seed stage. With so little proven or defined in the business the chances of failure are high. How high? A lot of stats get thrown around such as that 90% of startups fail. Most of us are familiar with the rule of thumb that experienced investors rely on: that of 10 startups in Be prepared to lose every single penny and never under any circumstances bet the farm their portfolio, three to four will fail, another three to four will break even and one or two will bring home serious bacon. A 2012 study by Shikhar Ghosh, a senior lecturer at Harvard Business School, found that three in four startups fail to return investors’ capital. Whichever of these statistics are right, it is clear that you are dealing with long odds. You’re essentially playing an expensive round of roulette. So be prepared to lose every single penny and never ever under any circumstances bet the farm.
The journey takes patience. A ‘liquidity event’ that would return a significant multiple of the original investment could take anything between 4 to 7 years. This is precisely why, for many of the companies I’ve highlighted above, this kind of deal is the exception not the rule.
You also need to get smart to venture investing. A typical agency team knows as much about startups as a garage mechanic knows about Formula One cars. So why on earth would you think you are going to do better than seasoned investors and VCs? You need to approach with caution, humbly and with eyes open. Understanding that early stage tech investing is a different game to consultancy, many of the aforementioned companies have established dedicated divisions staffed by investment professionals. The setup still does not mirror that of a typical venture firm, but they have become visibly better equipped in the last few years.
And the ‘spare cash’ with which we can place some bets? The thing about gambling is that you need to be able to afford a seat at the table. Profits secure you permission to play. The Ad Holding Group’s permission to play comes from their formidable network and the fact they have very deep pockets. For a smaller company to get into the game they need to be generating significant margins and build the reserves from which the excess can be drawn to invest with. That informs the type of work that the agency needs to do, and their ability to charge a premium for it. Major — Investing is highly risky and you‘ll need to generate ‘spare cash’ to be able to do it.
Yes, that’s it! Why don’t we use our skills and resources to build our own products! We can make money whilst we’re asleep by generating passive revenues and finally break free from the linear relationship between effort and revenue. Enterprise SAAS products offer the prospect of building stable Since the inception of the instant global market of the app stores and stories of teenagers making million dollar apps over one weekend, agencies of all guises have been building their own products subscription revenues and consumer apps offer the prospect of bell-shaped revenue windfall. Since the inception of the instant global market of the app stores and stories of teenagers making million dollar apps over one weekend, agencies of all guises have been building their own products… “A Digital Product is a software enabled product or service that offers some form of utility to a human being”.
Outside of barren holding group agencies, who has successfully brought a product into market? Let’s rise above success being purely defined by how much money was raised in round X or Y as that is money is invested to grow the company rather than an exit. Let’s broaden this out to any of: attracting a significant user base or investment, a big exit, continued media attention or simply as having moved the needle or impacted our digital lives. In crude chronological order, and I am sure people will come at me with what I missed or what success is, here are notable digital products coming from agencies:
There you have it. Client service agencies are capable of shipping their own products. We don’t know how successful all of these efforts are ultimately going to be. A round raised is money given by investors to grow the business, not to put in the founder’s pockets. What these examples do prove though is that it is possible to launch a product within an agency. What they all have in common is that nearly all these products came from smaller independent shops. Just like venture investing and services for equity arrangements, the opportunity of investing in own-product disappears once you are acquired. Your new masters are not interested in you taking that kind of risk. So when you take the cheque you can kiss those dreams goodbye.
The other interesting thing to note is that in the ‘olden days’ running the product operation meant the consultancy side of the business ceasing operations. For a small agency with all resources invested in the product effort this is an inevitability, you can’t do both. This is a function of the size of the agency at the time of the product initiative. As for when is the right time, it’s a matter of how many vital organs are shared between the agency and the product operation and whether the conjoined twins would survive the separation.
No one wants to blow their one big chance in life. So wouldn’t it be wonderful if we could create many big chances? More and more we’re seeing agencies maintain both the consultancy and own product sides of the business rather than betting all their chips on the product. In order to enable both you need to consider the timing and conditions under which you push into own product. Major — You want to be building a shipyard, not a ship.
There is every reason to try to avoid the well worn path of the agency lifecycle. However it takes steely resolve across the company to do so. Whilst there is no magic bullet, there are numerous examples of companies breaking the mold and shaping their own destiny through venture and own product initiatives.
Chapter IV: Future Perspective
The Digital Product Studio
The Digital Product Studio blends three components: Consultancy, Venture & Own Product. Running through each like letters on a stick of rock is a structural, policy, and cultural framework that binds them all together. Each feeds and informs the other in a powerful virtuous circle of network, experience, funding, brand, craft, and talent.
The focus of the Digital Product Studio’s consultancy work is purely on the delivery of digital products. To repeat…
A Digital Product is a software enabled product or service that offers some form of utility to a human being. ‘Digital product’ or ‘product’ work is the delivery of the digital touchpoints of a product or service.
The Digital Product Studio is capable of taking a product from meeting to market.The Digital Product Studio has the strategic, product management, design, and engineering talent that is capable of taking a product through to market launch and beyond from meeting #1. That capability means it earns its keep by getting products to market rather than exploiting any one stage of the process. That keeps things honest and outcome oriented.
The Digital Product Studio completely eschews digital marketing work, which suffers from perpetual commoditisation (Seriously, don’t go near it, it’s like crack cocaine. You’ll get hooked and it will be hard to get off it). Product work is less sensitive to economic downturns. The decision to cut a seasonal campaign marketing budget is ten times easier than the decision to cut a product and service development initiative that runs over many years.
The Digital Product Studio is ‘platform agnostic’ by virtue of having engineering talent that covers multiple platforms. That engineering talent understands software, QA, integration, and embedded systems and it can shoot the breeze with the technical team of any major company. Well beyond web and mobile, it is ready to engage with emerging platforms such as wearables, VR, and beyond to stay at the forefront of digital product (“Screens? Where we’re going, we don’t need screens”). In doing all of the above it stays ahead of the technology and platform commoditisation cycle by being able to ‘move to the next’ in a timely fashion.
The Digital Product Studio focuses on putting work of the highest possible quality and standard into the world. It knows that poor quality output will ensure certain doom and that in a virtuous upward spiral, a proven track record of delivering quality products to market will attract opportunity.
The Digital Product Studio focuses on putting work of the highest possible quality and standard into the world.
The Digital Product Studio charges a premium for its services. That’s not because it simply slaps a high price tag on its work, but because it offers a valuable commodity that is not readily available on the market. That commodity is the ability to design, engineer, and launch digital products for and with partners. Without the ability to get a product to market and into users’ hands, even the greatest idea, Without the ability to get a product into users’ hands, even the greatest ideas are meaningless funding, and network are nigh-on meaningless. This is the thing that companies with almost infinite resources greatly covet. The Digital Product Studio serves as the missing piece, the essential component. This premium offering is not sold in hourly units of time, but by the day and week to shift the focus on the delivery of value rather than of time. A high percentage of the market does not understand the value it delivers. The Digital Product Studio is OK with that and works with select clients that do.
The process by which the Digital Product Studio executes is as important as the output. This is the never-fixed, ever-evolving toolbox of methods; integrated teams, agile, SCRUM, lean, continuous delivery etc. Imparting these methodologies to clients and partners forms part of the offering. Facilitating knowledge transfer sets a path towards self-reliance and ultimately handover. Beyond that, if a client wants to continue working together it is because they want to rather than that they have to.
The Digital Product Studio seeks out partnerships with clients rather than the antiquated shit-flows-downhill vendor client relationship. The Digital Product Studio seeks out partnerships with clients rather than the antiquated shit-flows-downhill vendor client relationship. It steadfastly avoids abusive, non-reciprocal relationships. It will work with, but not through, third parties to work with clients as it will not endanger the quality of access, process, and communications necessary to build good products. Teams take on the same emotional commitment to the product’s success as the client — we’re all in it together.
The Digital Product Studio mirrors the team, skills, and methods of world-leading tech companies. Tech companies and startups are understandably precious about letting anyone work on their core consumer facing products and services. Tech clients have existing teams in place and don’t want to give away their most exciting work for some agency to drag away to a cave. The only partners they will allow to do so are those who reflect the best of their culture, understand their world and who at a minimum produce to their standards. The Digital Product Studio integrates and collaborates with existing client teams to form ‘one team’ for the engagement. It is for these reasons that tech companies and startups will grant access to their hallowed, core consumer facing products. It is also the reason that non-tech clients, who aspire to the standards and methods of the tech sector, want to work with a Digital Product Studio.
The Digital Product Studio needs to do it all better than its predecessor model: capabilities, product development, collaboration, process, and culture, to deliver the compelling package. That premium proposition generates valuable cash reserves. These reserves are the rocket fuel for diversification into venture and own product work.
The Digital Product Studio is actively engaged in the venture space, managing a portfolio of early stage technology company investments. It builds that portfolio through ‘services for equity’ deals and through direct cash investments in early stage startups. It measures its investments carefully to protect a minimum level of runway for the cash generating consultancy arm of the business.
The Digital Product Studio has a dedicated venture team with investment experienceThe Digital Product Studio has a dedicated venture team with investment experience that oversees the portfolio and that seeks out and validates new opportunities for the company. It leverages the product expertise, market insight and proximity of the consultancy arm of its business to early stage entrepreneurs and technologies to support these efforts and generate deal flow.
The Digital Product Studio knows what it brings to the table of early stage technology companies — the ability to take a digital product through to market launch. It is grounded, humble, and understands that its role, albeit essential, is just one of many necessary for success.
For services for equity partnerships the Digital Product Studio seeks out experienced partners. It understands that any industry worth ‘disrupting’ is a high walled garden. It does not engage Jack and Jane who have an ‘app idea’ and granny’s inheritance. It seeks out partnerships with industry veterans who understand the opportunity, risks, and pain points of a sector. These veterans have the knowledge, access, and contacts necessary to improve the chances of success. The Digital Product Studio serves as the enabler for that partner who will put their material existence on the line for the endeavour.
III/III Own Product
The Digital Product Studio deploys its internal resources to engage in own product initiatives, exploiting the instant global marketplace of the web and app stores. It does so in order to both generate passive revenues as well as to raise awareness of the studio. This serves as a form of ‘marketing through doing’. These initiatives serve as a testing and training ground for its teams and technologies, helping the studio refine its ways of working (after all, nothing keeps you more honest that making your own stuff).
Not all of The Digital Product Studio own product initiatives are focused on creating revenues, nor is their intent on creating the next Facebook. As such, these initiatives come in all shapes and sizes and under the fail fast and fail often ethos, many of them will not see public launch. What is important throughout is learning, progress and fuelling passion.
The Digital Product Studio is setup as a shipyard rather than a ship.
Just like venture activities, there is risk associated with own product initiatives. They both have the potential to depress the revenues of the consultancy arm. So the Digital Product Studio measures its investments carefully to protect a minimum runway for the business as a whole.
The Digital Product Studio is setup as a shipyard rather than a ship. It gauges when it can invest its people and time into an own product initiative. Initially it seeks to establish a parallel and independent team until it wishes to push the product out of the nest as an independent but federated company with its own leadership. Should it then ultimately wish to sell the own product company it does not mean the end of the ability to create further products. From one shot to many shots.
The Magic Numbers
The old adage that you need money to make money very much applies to the investment game. Your profit and cash reserves are the rocket fuel for investing in startups, for enabling equity for services deals or for investing in your own products. Let’s say you don’t want to take on investment yourself and you want to self-finance this activity. When and how do you safely begin to accrue cash to engage in risk based venture activities? The rule of thumb in the agency game is to maintain minimum three to four months operating cash, aka Time to Die, at all times. If you got dropped by every single one of your clients in one week this would be how long you have to live without having to change a thing or do nasty stuff like firing people. As such a very crude and idealistic model based on 20% margins, 35% corporation tax and sustaining 3 months runway would look a little something like this…
As you can see, if you’re starting fresh you’re going to have to put a few years in before you’ve stockpiled the ‘surplus cash’ shown in green. Only then can you afford direct investments or services for equity activities that depress revenues. That is unless you take investment that does not challenge your independence (if there is such a thing). Once you hit $5M or so you’ve built yourself a nice but modest investment pot without betting the farm. At $20M revenues you’ve got some decent angel investor sized cash to splash. Naturally if any of your bets delivers a return over the years then you can grow your investment pot, double down or ‘diversify’ your portfolio. Just remember, you need to be ready and able to lose every single cent of your investment pot. Ladies and gentlemen, place your bets!
Make Money Money
The blend of ascending sine wave of consultancy service revenue, passive own product income (either bell curve one-time payment or ascending subscription payment) and peak and trough venture exit windfalls should look a little something like this. Obviously this illustration is rather Hollywood. We’re overlaying three models here, each of which is hard to pull off and all of which are even harder to combine. But hey, if this was easy then anyone could do it and the most inspirational movies are “Based on a true story”.
Without going all HBR on you, wrapped around and running through all of these three components are several other key characteristics. The Digital Product Studio is…
It is perhaps appropriate to have closed on the topic of being a WIP. Just between you and me, it even applies to this very model. After all, life is what happens whilst you’re busy making other plans. In that context any ‘plan’ is simply a North Star to navigate against along your journey into the unknown. You most likely won’t make landfall where you set out for. So in reality the journey is the only thing that is real. Remember to enjoy it.
We are living in humanity’s most exciting age and it’s only going to get exponentially more so as technology and computing rapidly evolves. For those of us in the industry, as the most enabled, empowered, and creative generation ever seen, we have the opportunity to shape the future in some way. This is the real dent the universe territory. So please do something difficult. Please do something that has purpose. The Digital Product Studio is just one such vehicle. Sure, 100,000 things could go wrong before you achieve escape velocity and get into orbit. It’s undoubtedly hard, but so is anything worth doing.
Besides, someone‘s got to figure it out and fortune favours the bold.
Because something or other at this stage I need to tell you:
- I am an investor in Marvel and in DICE.
- I am an owner at ustwo. You can find out about us on the internet somewhere.
- If you have read this far and are in the creative industry in the US then please ‘Pledge Parental Leave’.