Some say that before an earthquake, dogs act funny. They tense up. They bark at nothing. They seem afraid, because they can sense something is coming.

People, unfortunately, aren't blessed with the same capabilities. And in the agency world, it seems like the dogs are getting anxious.

Jules Ernhardt, founder of the uber-successful product studio Ustwo, has seen this for some time now. He's been warning of an existential crisis in the ad industry for at least two years, and in my opinion, his new State of the Digital Nation outlines the problem perfectly.

WPP lost a third of its market value since 2017, according to Bloomberg, and Dentsu, Publicis, and IPG have been declining in value over the past few years--all during an unprecedented economic expansion. On the client side, Unilever plans to lower its consultancy budgets by 40 percent, according to AdWeek. The Financial Times reports that P&G is moving quickly to cut its agency budget from $10.7 billion to $2 billion by 2021.

Something is wrong here. A reckoning is coming for the digital industry--and it's not just agencies. This affects anyone who gets paid for time and materials, including entrepreneurs.

Deeper Fault Lines

The problem is that the incentive structure is fundamentally broken. Any company or person working on a paid-for-time model doesn't have incentive to provide actual value to clients. They have incentive to bill for time.

The paid-for-time model is a cancer, and the tumor has officially metastasized. Paid-for-time leads to either a race to the bottom, with companies fighting for the scraps of a commodified market, or to clients paying exorbitant rates for the few companies that can still command them based on reputation.

Looking at the industry now, I'm reminded of Blockbuster and Netflix. Blockbuster got fat and lazy, soaking up revenue through late fees without providing value. Netflix saw an opportunity to disrupt the industry by eliminating late fees entirely and using a mail-based DVD delivery system.

But they took it a step further. Netfliix didn't just make Blockbuster obsolete--they made their own DVD-by-mail model obsolete, as well. They disrupted themselves, switching their business model to streaming and focusing on original content. Blockbuster responded by selling popcorn and candy. We all know where that got them.

Planned Obsolescence for Companies, Not Products

The takeaway here isn't that Netflix beat Blockbuster. It's that Netflix beat itself.

Netflix saw that its business model was falling apart, so it set out to make itself obsolete. And, importantly, it did so before the Grim Reaper came knocking. Netflix sacrificed a profitable business--mailing DVDs--to prepare for the new reality before it arrived.

They listened to the dogs. Agencies need to do the same.

In doing this, the primary goal is to eliminate the paid-for-time model. Billing based on hours worked is a trap that fixes the stakes of the game: all you can earn is how much you can work, and as commoditization marches on, those hours will continue to decrease in value. We need to start charging for mind, not for time.

At Rootstrap, we've started to do this through something we call roadmapping. By offering a paid discovery product workshop, we're able to provide stronger value to our clients and position ourselves more competitively.

A number of other agencies have tried a similar approach, but there's still nothing out there that truly solves the problem. Even with roadmapping, our revenue is still bound to time. That's a problem.

A.I. might be another solution. Maybe what entrepreneurs need to be doing is working on algorithms that can write the code for them, training them to create products instantaneously that can be refined by a human touch. Venture and equity is another--they're higher risk, but they divorce revenue from hours worked.

At this point, I'm not sure what the answer is. Something needs to change, and the old strategy of gobbling up smaller companies to consolidate and charge sky-high rates for the same service will not save us. We need a digital disruption or we'll experience a serious market correction.

Whatever happens, in the digital landscape of tomorrow, it will be easier, less expensive, and faster to build products. Access to these capabilities will be democratized, allowing people to build ideas easier and fail faster.

The question is: How will entrepreneurs adapt to and actively bring about that reality? We can either embrace the change before it happens and innovate new ways of doing business, or we can plug our ears and try to sell popcorn and candy to an empty store.

The time to start is now. There's blood in the water; the dogs are whimpering. Something is coming. Those who prepare now will be the ones alive tomorrow. But if you wait for the earthquake to strike?

Well, don't say I didn't warn you.

Published on: Jul 2, 2018
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