During the Australian gold rushes of the 1850s, significant numbers of workers from across the globe relocated to areas such as Ballarat, Victoria, in which gold had been discovered. With them came an army of vendors selling tools to get the job done; shovels, pickaxes, hammers, chisels, and pans.

Modern Day Gold Rushes

While mining for natural resources is still a lucrative business today, ‘gold rush’ has become synonymous with any rapid movement of people to a newly discovered economic opportunity. It shows up in myriad domains, from cryptocurrency to military defense contracts to digital transformation which organizations globally are expected to spend US$2 trillion on by 2022.

The thing about shovels and spades though is that they are physical, tangible products. Even a five-year-old can make the obvious connection between the input and the output, which is why many a playground features one of these bad boys (incidentally, one of my childhood favorites).

But when the object of our desire is more ambiguous than digging stuff out of the ground, it becomes difficult to ascertain exactly what tools will help us to dig, and what exactly we should be digging for, to begin with. This ambiguity is none more pronounced than in the world of corporate innovation.

For decades, large organizations could somewhat reliably predict what the next five years would look like, but the last decade has seen exponentially improving technology change the rules of the game. This is manifest by the decrease in the average company lifespan and the changing of the guard on the S&P500. Unfortunately for such companies, innovating in the corporate landscape is like riding your bicycle across a minefield; to do it successfully requires the effective coalescence and alignment of company culture, policies, processes, systems, resources, capability, executive buy-in, timing, incentives, shareholder support and a healthy dose of luck… just to have a shot of getting it right.

Snake Oil: Cure What Ails You

And wherever there is ambiguity and confusion, there are snake-oil salesmen promising to make sense of it all for you. Before the advent of modern medicine, not long after bloodletting was used to ‘cure’ disease, oil made from the fat extracts of the Chinese water snake was sold to desperate buyers who were told it would heal their joint pain. Of course, it did nothing of the sort, but that didn’t stop armies of charlatans from selling the stuff.

Snake oil salesman show up in various forms in the corporate innovation domain. Sometimes they sell what they purport to be silver bullet solutions, such as design thinking, or a startup accelerator program, or an innovation lab, but the reality is that creating meaningful change and value requires more than just isolated initiatives like these, but a cohesive approach that accounts for culture, capability and more. Standalone initiatives can be an awesome part of a corporate innovation arsenal, so long as they remain partof it and not the whole thing. Ping-pong and arcade tables are a fun addition to any office but they alone won't help you generate new revenue streams.

For example, training people in the lean startup is all well and good, but if the underlying policies and processes don’t support rapid experimentation, and prototype investment decisions are often deferred to steering committee meetings, then that training is all for naught. But I’m not talking about dubious corporate innovation consultants who read Innovation and Entrepreneurship once and now think they are Peter Drucker reincarnate.

“We Need An App!”

No, what I’m talking about is digital agencies posing as corporate innovation experts, and taking advantage of the flawed “we need an app!” mentality that pervades many a corporate boardroom. There are 2.1 million apps in the Apple App Store with about 6,00 new apps released each day; how many have you downloaded? You probably don’t need an app.

This is especially worrying when you consider the nature of many digital agencies, best exemplified by the recent high profile bankruptcies of two of Australia’s leading app development agencies, Appster and Buzinga.

But first, what is this ‘nature of many digital agencies’ that I speak of?

‘Shitty Agencies’

Murat Mutlu, designer and co-founder of Marvel App, penned a post called Why Talented Creatives Are Leaving Your Shitty Agency, in which he surmised that conversations with his agency friends always end up in a flurry of grievances such as:

“I want to work on a product people will actually use”

“We only care about hitting targets”; and most potently

“We never push back and tell the client their ideas are shit”.

This makes sense given that the typical digital agency business model is characterized by billable hours, which in any industry poses a conflict of interest insofar as efficiently delivering quality outcomes is concerned.

The Rise and Fall of Appster

Appster was a poster child of the Australian startup scene, founded by youngsters Josiah Humphrey and Mark McDonald in 2011 when they were just 19. By 2015, the pair found themselves on AFR Young Rich List with a combined value of AU$58M. In December of 2018 however, Appster went into sudden liquidation thanks to inexperienced management, operational flaws, and mismatched revenue figures.

SmartCompany’s Dominic Powell wrote that Appster set high client expectations that were dashed months later when the app development was finished. Agencies like Appster have inexplicably high margins because they ship most of the actual development work offshore to India. They might have someone locally overseeing the offshore development team, but the majority of work was off-shored — which would be fine if that quality didn’t suffer.

But the most concerning things about Powell’s revelations is that one of Appster’s clients had spent $500,000 on an app that was near-unusable. Let’s forget about the fact that it has been a good eight years since Eric Ries’ book, The Lean Startup, came out (advocating a philosophy that has permeated the startup world and urges early stage entrepreneurs to test their idea quickly, cheaply and effectively through minimum viable products) and people have no excuse for dropping that kind of money on untested ideas (as it turns out, a $30 investment in Ries’ book would have been a better use of funds).

Whatever personal failings and oversights the client made in this case, the fact that Appster didn’t push back on what was essentially a massive bet on an unproven and untested idea, to step in and say “actually, are you sure you want to invest that much money…why not start with a $10,000 to $20,000 prototype to test your key assumptions before we go any further?”, or, “sure, but let’s take an agile approach and release it in monthly sprints so that we can iterate based on user feedback to ensure you get value for money and we don’t waste your money”.

While this may have cost Appster revenue in the short term, this approach actually makes good business sense.

Taking the aforementioned approach:

1. Positions agencies as a trusted advisor
2. Creates more capital and space to work towards something people will actually use if the initial market validation shoots blanks
3. Your reputation wins and you win more referrals for it
4. Your customer retention increases and therefore your margins, because you spend less time selling to new clients and more servicing existing ones

Here’s a crazy thought:

If you want to make a quick buck at the expense of sustainable gains, cheat.

If you want to build a sustainable business, do what’s right by your customers.

But no, rather than play the role of advisor, Appster did what Mutlu suggests most digital agencies do by singlemindedly chasing targets and agreeing to build stuff people probably wouldn’t use.

Sure, agencies might be all about billable hours and not innovation, but as Mutlu put it, “innovation and hacker-like creativity is what agencies sell to clients, and that’s the problem”.

Pervasive Malpractice

Unfortunately, the Appster story isn’t an isolated case. In my own experiences at Collective Campus, where my team has dealt with almost 100 startups that have collectively raised US$25M over the past five years, whether through our accelerator programs or coworking space, I’ve heard horror stories from entrepreneurs who have spent big dollars on a so-called ‘prototype’ developed by various digital agencies (‘prototypes’ because they didn’t serve to test the concept’s underlying assumptions so they were in many ways redundant). And by big dollars, I mean $50,000 to $100,000 for an unusable prototype! Not only that, but the code was often dirty, the user interface often ugly, and the user experience left one frustrated. And when you look closely, you often find references to previous clients in the code, suggesting a lot of cut, paste, and bolt-on activity going on.

But moving on from agencies working for startups.

Relocating The Shovels

Today, we have digital agencies getting into the corporate innovation space, purporting to be the blue tights and red cape wearing silver-bullet solution to innovation woes that corporate executives have been crying out for. Armed with nothing but a book or two on corporate innovation, and trumpeting the concept of ‘taking a portfolio approach’, such agencies sell corporates on the idea that they can take their people’s ‘best ideas’ and build them — something that was reiterated to me at a recent networking event by digital agency execs — and thus fill a vacuum in the corporate world, whereby idea challenges and design sprints deliver lots of ideas that rarely go any further.

Three things are wrong with this (actually there’s more, but let’s 80/20 this):

1. Ideas are a commodity, execution of them is not

Let’s face it. The typical corporate employee’s idea probably sucks. But so do most ideas, even in the startup world. What makes an idea good is not individual inspiration, but collaborative refinement through interactions with other people and especially would-be customers. It took James Dyson 15 years and 5,127 attempts to make and test prototypes before his bagless cyclonic vacuum first cracked the market.

Offering to build untested ideas and unrefined ideas is like offering to polish a turd. 💩

2. Taking a portfolio approach is about taking small bets, not large ones

As numerous thinkers in the corporate innovation space such as Dan Toma, Alex Osterwalder and I have proposed, taking a portfolio approach, by way of placing lots of small bets across a wide range of ideas, can help organizations better identify where to double down their investment. It has nothing to do with spending $500,000 on 10 x $50,000 apps, at least not in the early stages. It is about spending $50,000 on 10 experiments, or even 25 or 50 experiments depending on how lean your initial experiments are. But of course, there’s no immediate money in this for digital agencies.

3. Doing corporate innovation wrong backfires…bigtime!

Finally, and perhaps most importantly, given that spending big money on untested ideas is unlikely to result in success, large failures ultimately sacrifice senior-executive buy-in, the fallout creates a culture of ‘fear’ around innovation, ongoing funding in innovation suffers, and all of this combines to see the organization’s most entrepreneurial, or intrapreneurial, employees become disgruntled and move on in search of greener pastures — something large companies can ill afford today.

Digital Agencies Can Help, But…

Having said all of this, not all digital agencies are created equal, and like any industry, there are the good, the bad, and the ugly. However, you should only engage a digital agency after you have done the initial market validation pieces described above — unless an agency has proven that they can help you do this successfully and at a price, speed, and scale that is reasonable.

However, you shouldn’t need a digital agency to perform early-stage testing of your problem, solution and customer segment. That can be done with the slightest to no technical ability.

Remember, when you hire a digital agency, you’re hiring Steve Wozniak,not Steve Jobs. You’re hiring a builder, not an innovator — contrary to what an agency might sell you on. Validating and finding product-market fit for your idea is ultimately your responsibility.

So, say you’ve got market validation, you know it can be built, and you know that the unit economics are profitable — maybe you’ve even pre-sold the product to give you an added sense of confidence and margin for error — but you don’t have the resources to develop said product internally, then working with a digital agency makes sense.

But how do you know whether the agency is legit or not?

Questions to ask:

• Do they push back when you propose your idea (or do unreservedly they tell you they love it and that they would love to be involved, so much so that they offer you a ‘discount’ on the spot)?
• Do they ask you what you’ve done to validate your idea?
• Do they say that a prototype will cost upwards of $20,000 to develop?
• Do they know anything about the lean startup methodology, and about designing effective experiments to observe real-world customer behavior?
• Do they propose a large up-front payment, with inflexible contract terms?
• Are they truly agile and advocate releasing working, testable software in 2–4 week increments, so that you (with the help of customer feedback) can determine if you’re on the right track, and interject earlier rather than later?
• Are they open to agile contracts whereby you can terminate at any time and only pay about 10–20% of the remaining contract value?
• Do they know anything about the nuances of corporate innovation?
• Which other large organizations have they worked with, and what have the results been? (arrange to be connected with at least three of them and try to determine not just whether the product was delivered, and what the quality was like, but what engagement company is having with said product)
• Similarly, who has used them more than once?
• Do they do work locally or is most of their work shipped offshore?

Protip: Get onto Linkedin, search for previous employees and speak to several to get a feel for why they left to get a more accurate picture of the culture at the company. They, like Mutlu’s agency friends, might say they got tired of doing shit work and a ‘growth at all costs’ culture.

Digital agencies are but one piece of a larger corporate innovation puzzle. Just don’t expect them to be your silver bullet solution. It’s not just about building stuff. Slow and steady might no longer win the race, but it’s not about that, it’s about choosing which race to run in the first place. Getting ideas developed is the easier bit. Determining what to build in the first place is more art than science. Driving revenue growth and helping your organization navigate the headwinds and gusts of a fast-changing business landscape, that comes down to building the right idea.

This Actually Matters

There are thousands upon thousands of people employed in the corporate world whose passion, energy, and ability go untapped, seeing them spending more time navigating the bureaucracy and playing office politics than creating value. The push within many large organizations to become more innovative is an opportunity to unlock that latent talent, especially amongst younger demographics, so that they can not only create more impact in the world but by virtue of that, lead more fulfilling work lives and ultimately become happier, more content, human beings.

That’s why this matters to all of us, and that’s why executives at large companies need to tread very carefully when considering which digital agencies to play with, and that’s also why digital agency executives should consider the broader implications of their management decisions, because a nonchalant approach can serve to do much more harm than good.