The Business of Creativity and Rebirth of the Agency Model

by Staff Writer

Jules Ehrhardt’s epic State of the Digital Nation, and the equally epic follow-up, State of the Digital Nation 2020, feels like a darkly comic dirge for the creative industry. With precision, passion, and wit, Jules masterfully identifies every wrong turn that’s led us up to the current state of the traditional agency model.

But, there is light at the end of the tunnel. We sat down with Jules to talk about how new agency models, such as his own creative capital studio FKTRY, can pave the way for a new era of digital creativity under new terms of business.

Tell us about your background.

My whole career has been in ‘digital’. First in web, very much web 1.0, and 2.0. And then I fell into the other side of digital; digital products in all its iterations — initially user interface design, then UX, then UI/UX, then the era of mobile, then the era of digital product, when we got beyond the screen.

My most recent journey was at ustwo, which is a relatively well-known digital product studio. At the time, we also helped, I believe, coin the terminology of ‘Digital Product Studio’, being one of the more prominent players in that space.

Personally, I come from a pretty low-level creative background: Design and engineering, but old-school web, writing HTML markup. So I have a deep empathy and passion for the space and the tribe around that. However, in essence, my ‘thing’ is the business of creativity; how it's represented, how it's sold, and what business models we can build around it.

What does the business of creativity and the creative class mean to you?

For me, the ‘creative class’, are those who create code, design, culture, and even those who create business models. I believe creativity can be that broad. And it needs to be. It was clear during my time at ustwo that for creativity to be effective, it requires a lot of different skill sets.

The creative class is important because we're rapidly advancing into an area of machine learning, automation, and AI. And the only thing that's going to set us apart from the machines is creativity.

The business of creativity is what we do with our skills, how we properly leverage what we’re capable of. I'm actually hugely excited about the potential we have as a community, and how we can bring the creative class together to forge new models that change the terms of business, learning and sharing along the way. That's been my obsession.

Since leaving ustwo, I've been working on a new studio model, one that's fully funded, that engages in work in return for equity around the concept of Creative Capital.

Creative Capital is a form of sweat equity, but one that I feel the creative class needs to embrace and really own. That will help us properly value and leverage our creativity, and build common understanding with all stakeholders as to what to expect in an engagement.

The focus of my studio’s work is purely in the early stage technology company and venture space, rather than working with enterprise, although that's an opportunity area. This is the kind of work which some studio’s have engaged in alongside a more ‘conventional’ mix of paid for time work. It’s not a new concept, but it is the purest expression of the model, reliant on a new funding model that liberates you from chasing a short-term pipeline.

What is a creative capital studio?

A creative capital studio has a ‘stack’ — a set of services that it offers startups in return for equity. In FKTRY’s case, the stack will be product, culture, and growth.

The idea is to not only help deliver the output, let's say the startup’s product, but it will also help establish the infrastructure and processes required for them to scale from seed, to series A, to series B.

That can be from a product perspective, in terms of designing the 2.0 or 3.0 of the product/service. It can be from an engineering stack and process perspective, in terms of establishing Agile, Kanban, or whatever methodologies they need to deliver and scale against, and ensuring design and engineering are working together in the right way.

From a cultural perspective, it can be looking at the organizational design, making sure the foundational values, vision, and mission are in place to help the company scale. Those usually sit in the mind and the gut of the founding team, which is fine if you're 20 people, but not if you're 100 people, because once one-to-one interactions are not possible across the org, it doesn't scale.

My efforts are focused not just on establishing FKTRY, but also trying to socialize and normalize the idea of a creative capital studio. The aim is to help demonstrate that there are many new paths for the creative class beyond the model we've been trapped in for a very long time. I’m committed to an open source approach, sharing as much as I can from the privilege and access I enjoy, in the moment. If we all take the same approach, share and collaborate, we’re going to get to a better place sooner, and we all win.

Are VCs hesitant about moving into the creative space?

I think it’s generally accepted that creativity, or design in this case, is a critical factor in the success of a startup. In fact, a lot of VCs I’ve spent time with have said, "We wouldn't invest in a company that has a poor product, from a user experience perspective." So, I think it's recognized.

Another theme is that in the Valley, especially in San Francisco, a lot more designers are now getting funded than before. That's done something interesting. If you look at Airbnb, Pinterest, Twitter, and others, they're all giant companies, well-funded, achieving giant valuations, and all founded by designers or creators.

It's cliché, but designers really do have a seat at the table. In turn, that's created a bit of a drought in terms of the design resources the engineer-founded startups used to be able to access and tap into to push their own efforts forward. And that creates opportunity. So, VCs recognize the need for creativity in design. And they're interested in the creative capital studio model for the simple reason that you can help them de-risk their portfolio companies, as well as create genuine value-add, and deal flow.

Is there a risk involved with investing in these startups?

Yeah, 100%. I think agencies have been terrible at evaluating projects with startups, because agencies and agency humans are geared to be optimists. They're geared to take a really terrible brief and and see the hope and possibility in it. Of course, the model means they will get paid anyway, but I don't think that's actually the motivating factor.

What motivates anyone is doing great work. But the agency will take a brief, try and turn it around, and try and propose doing the opposite of what was asked. It will even try and work with people they don't consider to be ideal partners.

The danger in building a creative capital studio model is that you bring in that same mindset, but you can't apply that logic to startup investing. In the Creative Capital Studio model, you're basically building a portfolio of equity in the same way that someone distributing a fund and collecting equity in return. So, you need to have the same level of judgment as a VC.

A VC, for example, isn't going to look at Jack or Jane's startup and say, "Well, Jack or Jane don't know what they're doing, but if we work with them, we can turn them into different people, and we can convince them to work on a different product." They just pass. They pass, because they've got deal flow and they see other opportunities.

So unless we in the digital creative industry begin to establish models that a seasoned investor would fund, we're going to be trapped on the paid-for-time prison island. That means building bridges with the capital class, angels, family offices, VCs, corporate venture, institutional investors, and beyond.

I’m personally fascinated to explore the intersection of capital and creativity. It very much feels like the topic to be covered in the next edition of State of the Digital Nation in a year or two, once I've learned enough to warrant sharing.

Tell us about the prison island of the pay-for-time model

The paid-for-time client service model, for me, is an island we trapped ourselves on decades ago. It locks everyone into this kind of fixed odds, limited stakes game. For multiple reasons the model is breaking down and now spitting out single-digit profit margins.

I call it the “procurementization” of creativity. Procurement departments simply have a comparison table, and they'll compare your $250 an hour to someone else's $120 an hour and say, "Well, look. It says visual design or product design, and we pay this much for that." The logical conclusion of this path will be that the same brands won’t have a quality creative market to tap into.

Either way, we've allowed our creativity to be homogenized, commoditized, and ground up like sausage meat to be sold at market. The potential pivotal impact of the right type of creativity at the right time is immense, and it can't be put on a typical scale of pay-for-time. We’ve allowed that to happen and it’s on us to reclaim the footing where appropriate.

The amount agencies can charge for what they do is declining, and a lot of work is going in-house at big brands, so all in all there's less work. The big international shops can offshore a lot of their work, driving their price point down to half the price of the local competitor. But that cannibalizes the industry and the quality of the work suffers as a result.

"We've allowed our creativity to be homogenized, commoditized, and ground up like sausage meat to be sold at market."

At the core of it all is a breakdown of trust between agency and client. I think agencies broke their side of the bargain in delivering value. It started in marketing and advertising, and now the distrust has spread like a contagion to the wider industry in digital product, innovation, etc. Clients are saying, "Well, look at what we got for our money, this doesn't make sense. Let's take work in-house. Let's build in-house capabilities. Let's exercise greater judgment in who we engage, and how much we pay for it."

We're in a downward spiral. What you're seeing now is major shops, the ones that should be winning, hemorrhaging cash and hemorrhaging people. I caveat that with a simple mathematical inequality: that there are more good projects than there are good teams. So if you’re great, you’re going to be able to build a healthy business. However, the market is going to get crushed bottom up.

Why are agencies losing top talent?

Talent is looking for purpose to their work. They're looking for the requisite pay and a good work-life balance. So, it's conditions, pay, and purpose.

Unfortunately, the unit economics a lot of the industry has adopted relies on 60 to 80 hour workweeks. To fix that, your average agency needs to hire 25% more people to take that down to a 50 or 60 hour work week. They're already uncomfortable with margins, yet they have to hire more people to facilitate healthy working conditions.

I used to be a bit itchy when people left the studio ‘on time’. But over the years, I became proud that people left on time, because it means the studio was working right, that you've been selling the work right, and committing to the right level of work with your partners and clients. So it's possible, as long as you charge a premium, to have a healthy working environment and give people purpose in their work.

I definitely recognize that the early years of my career in the industry were bountiful years. The agency model could be very profitable, which meant we could experiment more, and could probably pay more. That generation of talent had the opportunity to grow, experiment, and develop a wide range of skills. Those conditions don't really exist anymore and that is tremendously damaging for a future that relies on emerging talent.

The macro trends in our industry present a bit of an existential crisis for this next generation of talent. This is also wrapped up in the acquisitions you're seeing with the big ad holding groups and the consultancies buying lots of agencies, which I think is creating problems.

Why are these mergers and acquisitions a problem?

It's very clear that there's been a huge amount of consolidation in the creative industry in the last decade. I see the motivations of ad holding groups making acquisitions in an increasingly challenging climate as being the only way that they can demonstrate growth to their shareholders. But it’s a form of corporate supernova — grow until the limit, then...

Having stepped out of the agency game, I do care about the agency model, but I care more about the atomic unit of the industry, which is us, the people. All this change and all the acquisitions should have us, as individuals in this system, reflecting on our role in it. My 2016 perspective on State of the Digital Nation was, "What's the agency's place in all this?" And 2020 was about, "What’s an individual's place in all this?"

I believe all the acquisitions will, at a certain level, lead to a kind of homogenization of design. If half the talent sits within one giant organization, and they’re following one design system, what does that mean for creativity and design? That's a huge question for me.

What does the future hold for agencies?

I’m actually excited about the coming apocalypse, in a way, because out of that chaos we will build and define new models. From destruction and chaos comes new growth. It's probably the only thing that will capture the kind of passion and attention of the next generation of talent who, let’s face it, have lots of other options.

In this climate of creative destruction, you're either a revolutionary or you're not. Everyone who isn't a revolutionary is going down with the ship. And the emerging generation will go out and define new models of engagement. We will of course have agencies in the future, and the greatest will flourish, but things will be necessarily different.

I don't really care what happens to a giant 1,000+ person agency. Because, having stepped out of a relatively prominent shop, with the opiate long having worn off, I had a clear realization... that a company is little more than a temporary vessel for people's hopes, dreams, and ambitions. It's not meant to last forever, at least in the same form. In that transient reality, the only things that are important are the relationships fostered and the work put out into the world. Along that journey, people will come and go, and you should build culture and incentives in alignment with that natural rhythm.

So, yeah, I'm really excited. It's going to be messy as hell, but if it means that we're all going to get focused about new ways of doing things, that's great. Because we need to.

Editor’s note: A version of this interview originally appeared on the 10,000ft blog. In 2019, Smartsheet acquired 10,000ft to enhance resource management capabilities for Smartsheet customers. Learn more about 10,000ft.