Revisiting the Lessons from "The Innovator's Dilemma" (1997): Companies Facing Disruption Must Disrupt Themselves
CEOs of holding companies and ad agencies must transform themselves -- and suspend the notion that "making ever-growing numbers" is the criterion by which they should be judged
Credit: Al Ross, The New Yorker, The Cartoon Bank
The Innovator’s Dilemma, by HBS Professor Clayton M. Christensen, described, in gripping detail, how successful companies are often caught flat-footed in the face of new disruptive competitors or technologies. A successful company’s culture, shaped by past successes, can become a hindrance in adapting to disruptive changes, as it tends to resist new ways of thinking and doing business. Companies need to disrupt themselves and their cultures to meet the threat of disruptive competitors or technologies, even if their self-disruption causes discontinuities in the steady delivery of the numbers so beloved by Wall Street.
AI, we believe, is a disruption that will attack agency man-hour billing, among other things. This is a nuts-and-bolts issue. Currently, man-hour billing is the source of up to 75% of holding company income, and up to 100% of media and creative agency income.
How the AI disruption will occur, and how fast its effects will be felt on agency man-hours is a matter of speculation. It’s too early to know or to forecast. What we do know, though, is that disruptions play out faster and with greater effect than most experts anticipate or forecast. The shift from film to digital photography; the rise of smartphones; the accelerated growth of streaming (begun, and then accelerated further by COVID ); the knock-on effects of Lehman’s collapse in 2008; and the unexpected rapid rate of glacier melting and iceberg calving are just a few examples of the rapid and unexpected rate of disruptions.
What this suggests is the need for C-Suite leaders to anticipate the AI disruption by taking a two-fold strategic approach: 1) by investing in and seizing the opportunities afforded by AI, and 2) protecting their organizations from AI’s damaging effects.
The holding companies have certainly shown their willingness to take the first step by announcing major investments in AI. Holding company AI announcements figured prominently during the recent presentations of 2023 holding company financial results.
What we have not heard or seen, though, are the steps they are taking to rapidly transform their business model’s billing from the current man-hour based system to “productized billing,” where they will charge clients for the work they carry out.
Although this is a nuts-and-bolts issue, it may be an extremely difficult one for agencies to execute on their own. For one thing, neither media nor creative agencies have agency systems for documenting and measuring their scopes of work. Media and creative deliverables had no meaning and were not tracked back in the long-gone media commission days. When man-hour billing replaced commission rates, some 20-30 years ago, agencies did not begin to document their SOWs, even though they should have. They still do not to this day.
During our 30 years of consulting to the industry, where we routinely (and with difficulty) gather agency SOWs to determine “how much work our agency clients are doing,” we have yet to encounter a single agency that had a viable, uniform system that would give insights or metrics about the work for their various clients. This is true on a client-by-client and office-by-office basis.
The cost of not having any measures of SOW work has had a terrible impact on agency operations. The price for agency work has declined by 70% over the past 30 years — workloads have grown, and fees have declined, leading to a “price per unit of work” decline that has forced agencies to downsize to make up for weakening prices. Agencies have been doing more work with mostly junior people and receiving less income for the work. A lot of senior talent has been liquidated in the process.
Still, it’s the way the current game is played, and the downsizing game delivers the numbers expected by holding company owners and Wall Street, even it is unhealthy in the long term.
However, the AI disruption is likely to be so dramatic and severe that the existing game will no longer work.
Holding companies and their agencies need, with some urgency, to take nuts-and-bolts measures to change the way they price their services.
The technology for this exists — ScopeTrack® and ScopeMetrics®, which we developed at Farmer & Company, document media and creative scopes of work and provide the basis for “productization” — creating prices for agency work.
Shifting from man-hour billing to product billing can be seamless. Fee levels from clients do not need to change, at least not immediately. What needs to change is the basis for the fees — from a man-hour basis to a SOW basis, deliverable by deliverable.
Productization needs to be done with some urgency before AI technologies take a big bite out of agency man-hours and billings.
C-Suite energy and leadership is required to begin the process and complete it rapidly. Additional PR work will be required, as well, to communicate with employees and Wall Street, and major financial reserves will have to be taken to cover the costs of disruption. If the past is any guide, Wall Street will congratulate rather than punish CEOs and CFOs for taking early measures to protect the future.
Let the disruptions now begin!