Improving your agency's EBITDA without cutting creativity

Some agency leaders I meet assume better margin means worse work. That's not my message... quite the opposite. The route to higher EBITDA depends on which kind of agency the market thinks you are, and whether you're brave enough to agree with them.

Blair Enns argues that innovation and efficiency are mutually opposable goals, that you cannot increase one without decreasing the other. He calls it the Innoficiency Principle. Every agency, in his view, sits somewhere on the spectrum between innovation and efficiency, and the best value is created at the extremes rather than in the middle.

The Innoficiency Principle states that innovation and efficiency are mutually opposable goals. In any reasonably functioning organization, one cannot be increased without decreasing the other.

I agree with him to a point. The principle is really well observed and since hearing him articulate it, I’ve seen it unfold in practice everywhere. My experience is that it's an issue lots of agencies either don’t recognise, or simply don’t know how to address. Maybe that's why very few agencies I've examined live at the extremes. Almost all small to medium-sized agencies seem to live in the messy middle. That's a big issue for the owners because almost to an agency, those in the middle, have lower EBITDA and therefore are worth less.

The challenge for you (once you've realised you're not one thing or the other) is deciding which end to move toward. That's where I'm digging today, because any owner looking at their P&L and wondering how to lift EBITDA before a sale needs to know which direction they're heading before they pull on any levers.

Let's start with a provocation.

Does pursuit of profit kill agency creativity?

When I'm out and about speaking about my agency operating systems model, often, agency leaders assume margin improvement means cost-cutting, and cost cutting means cutting creative capability in favour of efficiency. That’s a false assumption, but only if you've been honest with yourself about which kind of agency you actually run.

The route to better margin is very different at the two ends of Enns's spectrum. Confusing the two is why so many agencies misdiagnose a margin problem as a people problem, a client problem or a market problem.

The hard thing for many agency leaders to get their heads around is that it doesn't matter how they think their agencies are positioned. What matters is how clients perceive them - what clients see as an agency's superpower.

A fork in the road

Agencies that the market recognises as leading creative or strategic powerhouses have pricing power. They can charge significantly more than their competitors for work that looks much the same, because clients are buying the thinking, the craft, and the reputation, not the hours.

For these agencies, lower utilisation targets are a feature, not a bug. Redundancy is designed into the model so that the best people have time to think, to experiment, and to produce work that commands a premium. Market-leading margin comes from pricing, and pricing comes from reputation.

Agencies that the market sees as process-and-outcome specialists operate on different economics.

The work may be valuable, often highly valuable, but it's bought on the basis that it will be delivered reliably, on time, and at a predictable cost. These agencies make their margin through operational efficiency: utilisation, documented process, repeatable delivery, scope discipline, and the sensible application of technology and AI. Creativity still matters in these businesses; it's just applied to a repeatable model rather than being the product itself. These agencies do lend themselves well to productisation though if they want to escape the time and materials trap.

I want to make clear that neither route requires sacrificing creativity.

• The innovation agency protects its creative edge by protecting its pricing.

• The efficiency agency protects its creative standards by applying them consistently through a well-run operation.

The two are not in conflict. Conflict only arises when an agency is pretending to be one thing while operating as the other.

The trap in the middle

I worked with an agency a while back that thought creative excellence was its calling card. They won awards, they talked about creative in every pitch, and they genuinely believed that's what they were selling. But when we looked at the revenue mix, the majority of the work was lower-value production; important work, done well, but not the kind of work that commands a price premium. The award-winning creative was a small slice of the portfolio that they used to market the whole business.

The symptom showed up in what the Growth System calls "what we are invited to." They won lots of business, but of the ‘wrong type’. They'd built a team to produce market-leading creative, which meant they had overcapacity on one side of the business and under-capacity on the other - that's a margin killer. It shows up in your operating system as very high people costs (up to 85% of fee income), declining employee satisfaction and price resistance from clients. The fees didn't match the cost base, because the cost base was designed for a business the market didn’t recognise or didn’t value to the same price premium.

This is the trap in the middle. I think it's more common than many in the advisory world think, if they even know what the issue is or how to recognise it. Agencies that have fallen in to the trap in the middle are hard to sell, but great to buy because they come with hidden value. Simply, they will not achieve their potential because their EBITDA is not optimised.

In the above case, the agency's ambition was to be seen as an innovator, but the market's verdict was it was a safe pair of hands. EBITDA was sub 10%. The right answer wasn't to pretend harder to be a leading creative force. It was to accept the verdict, refocus the team around the work that paid the bills, and run it well. At the time, I spoke to the leadership about price every time we met. But, pricing wasn't going to save their performance because the market was unwilling to pay higher prices for more routine work.

If you're at the efficiency end

If the market sees you at the efficiency end of things, the route to better margin runs through the operating model. The levers are familiar to anyone who's run an agency well: revenue quality, delivery consistency, performance measurement, and sustainability. These might seem boring or plodding to an ambitious leader? I see the job of a leader like this: build a product or service, then get others to run it and go and build new products or services. Building ‘flywheels’ is a good way of thinking of it.

I've written about this in detail in Operations is a System, which is free to anyone who requests it and goes through the four stages and the specific benchmarks at each one.

The point to emphasise is that operational margin improvement isn't about squeezing people harder or dumbing down creative aspiration. The smart route is to focus on removing the operational drag that's already there: undocumented process, accidental portfolio drift, chronic over-delivery, and the time-and-materials contracts that transfer every efficiency gain straight to the client. Fix those, and margin improves without anyone working a longer week or feeling like they’re a B-grade shop.

If you're at the innovation end

If the market genuinely sees you as a creative or strategic leader, the route is different. Your margin problem (if you have one) is almost certainly a pricing or hedging problem. I worked with an agency whose superpower was creative, but who'd built a team offering more routine services to try to appeal to a wider market. They ran at around 15% EBITDA for years and assumed that was just the ceiling. When they eliminated the services that weren't in their power set, EBITDA moved to 25% plus. Nothing changed about the creative work. What changed was the willingness to stop doing the work that diluted it.

Operations still matter at this end of the spectrum, but in a slightly different way. The objective is to allow creative and strategic work to fly without being bogged down in the administrative mess around it. A well-run innovation agency isn't necessarily inefficient; it just chooses where efficiency serves the creative product and where it gets in the way. Lower billable-hour targets are fine if the fees justify them. They're not fine if you're pretending to be an innovation agency while charging efficiency-agency rates.

Outside-in clarity is the most of the work

The question you should seek to answer with honesty is which kind of agency the market thinks you are, not what you want to be. Understanding how the market sees you is a hard task, because it requires you to look at your win rate, your fee levels, your competitive set, and the actual profile of the work that comes through the door, not the showreel version. If there's a gap between how you see yourself and how the market sees you, your business plan has to close it one way or the other. Either reposition toward what the market already values, or sharpen what it sees you as and charge accordingly.

Thus, efficiency doesn’t kill creativity or even diminish it. Both routes protect creativity, but in different ways. In my experience, agencies that handle this with self-awareness and a good understanding of how their positioning is perceived are the ones that close sale with margins that hold up.

Your agency can be whatever you want it to be. You just have to understand where you are now and either commit to a model that works or make a change management plan. Cutting creativity is never the answer. The real skill is understanding how your growth, operations and management systems support your ability to be either optimised (efficiency-focused) or premium-priced (innovation-focused).