TL;DR

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• Value Chain Analysis can be used to evaluate all the various activities a firm does to help them deliver the maximum client value for the lowest possible cost.
• It was mostly used for goods-producing companies, but we can apply the general thinking to digital agencies with a few tweaks.
• Start with a service map. List out all the major stages of a client engagement and then list all the activities your firm does under each major stage.
• With your team, evaluate each activity across a set of core attributes: Role responsible, Client-perceived value, Actual project value, Necessity level, Cost in time, Cost in dollars, and Automation potential.
• Ask: Where are we spending a lot of time/money for little client benefit? Those are prime targets to eliminate, simplify, or improve.
• It's an involved exercise, but the insights gained can directly improve client LTV, identify operational sinks, and simplify delivery without giving up client experience.

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Applying some value chain analysis to digital agencies

I mentioned this framework to a client recently and said something like:

Turns out, it didn't exist and I definitely didn't write it. So here's the writeup I was hoping to find a few weeks ago.

Way back in 1985, Michael Porter described a framework to examine the activities a business performs to create value for its customers. For the first step, management would lay out all the steps that went into creating their product. They’d then evaluate each step to quantify the value it created and the cost it required.

He dubbed this Value Chain Analysis, with the goal of delivering maximum value to the customer at the lowest possible cost.

This worked great for companies that produced products, but not so well for professional service firms.

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Adapting the framework

The traditional value chain model focused heavily on manufacturing activities which don’t map elegantly to digital agencies.

An agency doesn’t have analogues for things like delivery networks, raw material storage, or supplier management.

But we can still use the framework.

If we map the client lifecycle, we can list all the activities, roles, value, and costs associated with each, to gain a full understanding of how agencies create value.

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The client lifecycle value chain

Many of Porter’s categories can be reframed in an agency context.

For example, instead of physical inbound logistics, an agency’s “inbound” activity is acquiring resources like skilled talent and software tools.

Operations translates to the core service delivery functions.

Outbound logistics for an agency means delivering the work product and communicating results to the client (reports, meetings, etc.).

Similarly, “Marketing & Sales” is client acquisition (the agency’s own marketing, branding, and sales process to win new clients).

“After-sales Service” means post-project support and client relationship management (ensuring the client is satisfied, gathering feedback, providing ongoing maintenance or follow-ups).

Support activities in an agency’s value chain also exist but with a different emphasis. These include things like firm infrastructure (management, finance, planning) and human resource management (recruiting, training, retaining creative and technical staff).

Technology development is crucial as well – adopting the right tools or innovative processes can enhance service delivery efficiency.

Procurement in an agency is typically about sourcing software, digital platforms, or perhaps freelance specialists, rather than raw materials.

The key is that every internal activity should ultimately contribute to delivering value to the client. If an activity doesn’t clearly benefit the client or support the delivery of quality service, it may be adding unnecessary cost or complexity.

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Putting this into practice

It’s fun (for some of us) to fiddle around with Porter’s value chain and slot agency activities into it, but this process becomes legitimately helpful when we actually put it into practice.

Start with a service map.

List out the major stages of a client engagement, all the way from leadgen through support retainers. I’ll be using webdev projects as an example. Here’s what those stages might look like for a webdev shop:

• Leadgen
• Sales process
• Client onboarding
• Strategy and planning
• Execution/delivery/production
• Launch
• Ongoing support

From that service map, list the specific activities your team carries out. Be absolutely comprehensive here. Include both client-facing and internal activities.

For each activity identified, document the following:

• The role responsible for the activity.
• Client-perceived value. AKA your team’s best guess at how valuable the activity is in your client’s eyes. Rank this on a simple 1-5 scale.
• Actual project value. Similar to the Client-percieved value, this is your team’s estimation of how valuable each task actually is. Again, rank on a 1-5 scale.
• Necessity level. Is the activity absolutely necessary? Rank with a binary scale 0-not 1-necessary.
• Cost in time. How many hours does the activity take to complete? Make sure to multiply this if it’s a recurring task.
• Cost in dollars. Use the role data x the cost in time data to estimate the cost per activity.
• Automation potential. This has turned into “can ChatGPT do this?” Rank it on a 1-“can’t” 5-“does it perfectly” scale.

By mapping all activities with these attributes, you create a comprehensive view of your internal value chain.

The next step is to analyze it. Look across your mapped activities and ask: Where are we spending a lot of time/money for little client benefit? Those are prime targets to eliminate, simplify, or improve.

Conversely, ask: Which activities deliver the most value to the client, and are we executing those as well as possible? Those are the steps you might actually invest more into (to differentiate your service or increase quality).

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What’s the point?

Better margins and faster growth.

Agency leaders can gain an incredibly deep understanding of how each internal activity contributes (or doesn’t) to client value.

This is an involved exercise, but the insights gained can directly improve client LTV, identify operational sinks, and simplify delivery without giving up client experience.

As Porter wrote, “competitive advantage cannot be understood by looking at a firm as a whole.” You really do have to dive pretty deep to fully understand what makes great agencies great. This kind of value chain exercise plays a big part in that.

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Hope this was helpful!

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Until next time,

-Nick