This post is by Michael Farmer, Chairman of TrinityP3 USA and author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, which won the Axiom Gold Business Book Award for the best marketing/advertising book of 2016.
Did you hear about the infamous Army briefing during the Vietnam War? “We had to destroy Ben Tre in order to save it.” The briefing referred to a terrible act, the annihilation of a Vietnamese village by overwhelming American firepower, carried out during a terrible war that was lost in any case.
So it goes when tactics, rather than strategies dominate a conflict. Less gruesome, but relevant is the bungled tactical war between advertisers and agencies. Well-meaning tactical “best practices,” used extensively and nearly universally by marketing procurement departments, are worst practices that destroy agency capabilities and annihilate partnerships. Unfortunately, agencies are equally complicit in their destruction.
The Relationship War began, like many wars, with a skirmish and a few opening shots. In the ’90’s, media commissions were giving way to labor-based fees, and advertisers were clueless about agency headcounts, salaries, overhead rates, and profit margins (let’s leave aside the stupidity of adopting this labor-based approach).
Advertisers asked their agencies to provide the necessary cost details. Agencies demurred, offended by the request, failing to recognize that procurement folks had been used to knowing intimate details from their manufacturing and distribution suppliers, and they expected the same transparency from their marketing communications suppliers.
The agency refusal to cooperate infuriated procurement. As one exasperated executive told me in 2003, “Who the hell do they think they are, anyway? A bunch of prima donnas. I’m going to whack their fees by 10% — maybe that will send them a message.”
Agency fee cutting became procurement’s raison d’être, and over the decades fee-cutting took on many sophisticated forms:
Worst Practice #1 — Benchmarking
Advertisers hired benchmarking consultants to measure agency salaries, overhead rates, and profit margins. The underlying assumption was that advertisers would pay at rates consistent with the lowest blended salaries, overhead rates, and profit margins in the benchmarkers’ databases, not at the agencies’ actual costs. This was comparable to thinking “we will pay Kay Jewelers’ prices for Tiffany products.” The practice has endured for several decades and is still a mainstay of procurement. Benchmarking has driven down agency fees, depressed agency salaries and led to the downsizing of senior agency personnel. Did 4As and agencies fight back? Not very effectively.
Worst Practice #2 – ‘Best-in-Class’ Agency Policy
When media fragmented in the early 2000’s, advertisers were uncertain about what would work best – traditional, digital or social. Instead of insisting that their creative Agencies of Record (AOR) become proficient across all media types (as did Toyota USA with Saatchi & Saatchi), most advertisers went shopping for agencies. They dignified their shopping by asserting that they were pursuing ‘best-in-class’ strategies, hiring the best agencies in each narrow expertise. This was like hitching up 20 to 50 thoroughbred horses to a stage coach and hoping for a smooth ride.
Instead of one committed AOR giving strategic and creative advice across all media, advertisers ended up with a portfolio of competing agencies, each seeking a bigger share of the fee by promoting their own expertise. This undermined agency objectivity and credibility.
AORs saw their strategic advice-giving reduced from 100% to (say) 5% among the din of competing agencies — hardly worth the effort of their best, most senior people.
The policy eliminated advertiser-agency partnerships, and established dominant-submissive relationships in their stead, with advertisers as the dominatrices despite their limited experience.
Eventually, agencies were converted into commodity-like suppliers of commodity-like products, bought at commodity-like prices, waiting to take direction from their clients.
Agencies facilitated their clients’ best-in-class policies by failing to diversify from their own narrow areas of expertise.
Worst Practice #3 – Poor Scope of Work Practices
Fixed labor-based fees permitted advertisers to grow and experiment with Scopes of Work without having to pay agencies for increased volumes of work. Growing Scopes of Work were documented in a sloppy way, making it difficult to figure out how much work they contained. Work-intensive SOWs stretched agency personnel and reduced the quality of outputs. Agencies compounded the SOW problem by failing to document, measure or negotiate fees for the work they did. One-sided SOW planning undermined the strategic effectiveness of SOWs for brand-performance purposes.
Worst Practice #4 – Engaging Agencies for ‘Creativity’ rather than Brand Performance Improvements
Advertisers and agencies share a vision that agencies’ value-added is ‘creativity’ rather than brand performance improvements. ‘Creativity’ means the kind of work that wins awards and has a straight-line lineage from Bill Bernbach. The only problem; ‘creativity’ is not enough to move brands today. Despite the emphasis on creativity, brands remain stagnant. Agencies last only 2-3 years in today’s relationships.
It’s hard to dislodge an industry from its worst practices when the worst practices are called ‘best practices.’
What’s needed? Strategy, not tactics. Consolidation of agency portfolios. Broadly-capable agencies that are good enough and committed enough to solve brand problems. Fair remuneration based on Scopes of Work. SOWs jointly crafted to solve brand problems. Re-establishment of partnerships and trust. Long-term relationships to see the job through.
Procurement needs to change direction and cease to burn agencies through the ‘best practice tactics’ discussed at ANA conferences. Agencies, for their part, need to invest to earn renewed trust.
Cartoon credit: Joe Dator, The New Yorker, The Cartoon Bank. With permission.
This post was originally published at Media Village.
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