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Why Your Agency Should Have an R&D Budget

Winning new business. Recruiting great staff. Managing growth. Handling difficult clients. Going global. Planning for exit. These are just a few of the issues that all agency owners and directors face on a regular basis. In this blog powered by The Drum Network agency experts help to shed some light on some, if not all, of these important management and leadership challenges, so that you can focus on the important business of building a great and profitable agency business.

Tim Williams

Tim Williams runs U.S.-based Ignition Consulting Group. He will be featured as a keynote speaker at The Drum's upcoming Agency Acceleration Day on May 15.

It’s an unfortunate fact that the term “marketing” has become associated almost exclusively with only one of the four P’s of marketing: “Promotion.” But of course, marketing is also made up of Product, Place and Price. Agencies and client marketing organizations alike are becoming increasingly marginalized in the business world by allowing themselves to be boxed into just the Promotion business.

In the earlier days of marketing, which emphasized all four Ps, marketing was a board-level function in corporations. Today that’s often not the case. Marketing professionals are usually seen as the “advertising people.” Marketing as a profession has allowed itself to be moved downstream, and “business consultants” have come in to fill the void.

Exiting a vicious cycle

Most agencies are caught in a vicious cycle caused by this narrow definition of marketing and a narrow definition of how agencies create value. This vicious cycle is essentially a “harvesting” strategy wherein the agency seeks to wring all the revenues it can from current clients by delivering the normally-expected services instead of investing the time and effort in developing a business model that will help the agency earn revenues in the future.

As a result, much of the immense brainpower and creativity in agencies is wasted on the increasingly routine and somewhat mundane production work that now accounts for around 80% of a typical agency’s revenues. Agencies have been pushed so far downstream that they now sometimes compete directly with printers, publishers, and production companies for work that is seen by clients as a commodity.

On the other hand, agencies focused on “underdeveloped services” – services that address underserved markets and unsatisfied client needs – are positioning their firms for success in years to come. This requires investing in your own brand at a time when margins are already thin and talent is stretched. But after years of cost cutting, agencies are now realizing they will have to innovate – not save -- their way to success.

Moving beyond the “service” business

One positive sign that the agency business is starting to develop new solutions and alternate sources of revenue is the new crop of competitions based on inventions and innovations, like the new Project Isaac contest in the U.S. Instead of the traditional awards categorized by medium, the honors are in such areas as “Marketing Invention,” “Brand Performance Invention,” and “Digital Publishing Invention.” Even the Cannes Lions are moving in this direction with a new “Innovation” category.

The most innovative agencies today reject the idea that they’re in the “message” business and provide solutions injected with marketing invention. For example, as part of their strategic brief, the New York-based agency KBS+ asks the question “What is the marketing invention that will deliver the desired behavior?”

As agencies move beyond their self-perception as a “service business,” they’re creating new forms of value for themselves and their clients. We now see agencies as product developers (from whiskey to mobile phones), intellectual property owners (from apps to databases), and even incubators (from cosmetics to software). These firms are willing to place a series of bets on themselves and literally invest in their future. They do this by:

 Establishing an R&D budget

 Forming a business unit devoted to innovation and experimentation (a “lab”)

 Cataloging their past and current work and expertise for possible use as IP

 Developing inexpensive prototypes for evaluation

 Testing and learning

As industry innovator John Winsor (founder of Victors & Spoils and now Chief Innovation Officer at Havas) observes: “Instead of being executors of communication campaigns, we must become inventors, architects and conductors. The brands we all love see themselves that way. Nike and Apple, for example, don't really make anything. They invent products but leave it to their vendors to build them. It's much better to be an Apple than a Foxconn.”

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