Growing or Scaling?
It seems to be the current trend to talk about how to scale businesses rather than grow them. Are you growing or scaling your agency? Many people, myself included, use the terms grow and scale interchangeably, but are they the same thing?
In short, the answer is no.
I spoke at a conference for 80 digital agency leaders this week. Part of my talk included a section on the difference between growing and scaling an agency. From the feedback afterwards, this seemed to strike a chord with many people in the audience.
My point on this was that growing and scaling are different things. They might exist to achieve the same goal (a bigger agency), but they require a different approach and growth plan.
Growing an agency is difficult. Scaling an agency is not only harder, but it is a different strategy that will certainly need more investment, and may even require a different business model entirely.
What defines growth?
According to the OECD, high growth companies are businesses that grow revenue by 20% or more for 3 consecutive years. Doing this in a business, in any sector, is a significant achievement.
However, even growth in revenue over this timeframe, whilst enviable, does not necessarily qualify a business as scaling (or more importantly, a business that is scalable). Despite the frequent commentary around scaling, I’ve found it difficult to find a definition. So are you meant to be growing or scaling your agency? Here’s what I think…
Is there a difference between growing or scaling your agency?
Revenue growth is usually a good thing for any business, but for many firms top line growth often comes with additional baggage; a comparable increase in costs.
This is particularly true for marketing agencies, where securing additional clients generates more revenue, but the costs of the business also usually increase. Being a people-based business model, agencies require more human resources to service the additional clients. In short, growth is achieved, but as costs can grow at a similar pace to revenue, profit only increases proportionally.
Scaling on the other hand, is where revenue increases at a much faster rate than costs. Incremental customers and revenue are acquired. The business does not need to increase costs to service or satisfy this growth. Economies of scale are realised. The gap between revenue and costs widens and, in theory, profit grows exponentially.
Growing any business is a challenge and agencies are not different. Scaling a business however requires more than just hard work, planning and rigorous execution; it requires a certain type of business model.
The traditional marketing agency business model, or any service business for that matter, relies on the quality and number of the people that it employs. The same applies for any professional knowledge firm including accountancy firms and legal practices.
In their traditional format (leaving aside the rise of online legal services platforms etc) for these types of businesses, growth in top line revenue fuelled by more clients, requires additional people resources to service the growth
Growth in revenue therefore, is usually accompanied by a corresponding growth in business costs. Of course, action can be taken to control the rise in costs and it will rarely be as linear as the example shown in Fig. 1. Some economies of scale may well be realised, but broadly more clients means more revenue, means more people, means higher costs.
Of course, growth in both revenue and costs can translate into growth in profits, but the profit figure may well be larger based purely on size not on efficiency. In this situation, profits grow but profit margins are likely to stay the same.
On the other hand, scaling a business can result in bigger profits derived through increases to both revenue and margin. If revenue grows but costs increase at a lesser rate, the gap between them widens (Fig. 2). Improvement in profit margins, as well as profit overall, are the result.
In either the case of growth or scale, the speed with which they are delivered and the timeframe over which they are maintained is significant, but it is not a determinant of whether a business can be said to be scaling.
Different Business Models
It is not that marketing agencies can’t scale, it is just that some business models are more suited to scale than others. As a people-based service firm, the business model of a marketing agency has many advantages:
- It is easy to set up – few barriers to entry exist
- Low investment is required
- It is a relatively low risk business model
- Break-even can be achieved quickly
- Successful agencies can produce healthy profits for their shareholders
These advantages are in stark contrast to the tech firms that are so prevalent at the moment. Tech firms are higher risk. They usually require higher levels of investment and funding at the early stage of their development. Failure rate is high and the break even for the majority of these firms is much later in their evolution than a service business.
That said, they say where there is risk there is reward. Tech companies have much more potential for larger upside than service firms like marketing agencies. Whilst risk is high, the upside in terms of profitability, sustainability and saleability can be much greater than a service firm.
The difference is in the business model. You can grow businesses that rely on people for the delivery of your service (particularly if the people are adding or creating value not just delivering a process), but they’re difficult to scale.
Tech based businesses have the edge when it comes to scaling. In order to scale, a business needs to serve many customers, frequently. Reach and distribution is vital. If technology can facilitate this then economies of scale are more accessible and realisable.
Accepting the heavy initial investment, once a tech firm has passed break-even point and gained traction in recruiting new customers scaling is underway. This is demonstrated in the classic “J curve” (or “hockey stick”) trajectory (Fig. 3).
A service firm usually has a flatter growth trajectory, whilst a tech firm (or similar) is more of a rollercoaster. That said for a lucky few Tech founders at least, the potential for a much steeper scaling phase is more easily accessible.
To illustrate my point further, let’s take a look at 3 separate companies.
1. Marks and Spencer is a British retailer established over 135 years ago in Leeds. It currently has 85,000 employees, with revenue per person standing at around £122,000.
2. WPP started life as a manufacturer of teapots and baskets, but after Sir Martin Sorrell took a controlling stake in 1985, he built it into a global advertising and marketing services group. Today it employs 130,000 people and has revenue of £130,000 per person.
3. Facebook needs no further introduction. At less than 16 years old, the company employs – only – 40,000 people. They currently run a business that achieves revenues of £1.16M per person.
Three very different businesses built on 3 very different business models. The difference in revenue per person between Facebook and the other 2 is remarkable (N.B. the profit per person figures are even more astounding)
Clearly, Facebook is a tech platform and whilst there are several reasons for its phenomenal success, the scalability of its platform, and therefore its entire business is certainly paramount.
Scaling an agency
Growing an agency is not an easy task. Scaling an agency, whilst not impossible, is even more difficult and requires a different strategy.
Fundamentally, to truly scale an agency you need to embrace a different business model. The knowledge firm providing expertise/creativity through people is not scalable.
The scalable agency model must-have technology as a facilitator at its core. It must be able to serve an increasing number of customers without a corresponding increase in costs.
It must be able to use technology to deliver reach. Today’s tech puts agencies in a unique position, the ability to more easily access clients and distribute value to a much wider audience.
Crucially I believe that to scale an agency, you need to have much more of a productised and systemised business. Consultancies are usually, by nature, small boutique operations. To scale an agency you need to break away from the traditional agency consultancy model.
Is growth right for everybody?
I’m a believer in continuous growth and having a growth mindset. The maxim “if you’re not growing you’re dying” has always resonated with me.
However, I also believe that size, in itself, is not a strategy.
As an agency owner, you don’t have to be obsessed by size or scale. Neither do you need to be fixated with scaling.
There is a great deal to be said for being small in today’s agency market. Small is agile and nimble. Small is personal and service focussed. Small is expert and artisan.
If you do want to grow your agency, make sure you have a vision for what that size needs to be and why the size is important. Are you aiming for growth or do you want to scale the business?
If you do choose to scale then assess whether your business model is capable of achieving it. What needs to be changed, improved or adapted to give you the platform to be able to add more clients, more revenue but not increase your costs at the same rate?