This post is by Darren Woolley, Founder of TrinityP3. With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.
It is interesting to see how the advertising industry has reacted to the recent acquisition play of the management consultant firms like Accenture and PWC. Some people embrace the trend while others are sceptical as to the efficacy of the strategy.
Will Accenture be able to leverage the value of their investment in Karmarama and Monkeys on opposite sides of the world? Or will what is seen as fundamental cultural differences cause it to fail? Time will tell.
But of course other management consultant firms are not acquiring these skills through acquisition, but building them in house such as Deloitte and their digital practice, PWC and even KPMG. Likewise, we are seeing many of the agencies, particularly IPG MediaBrands now offering technology and digital consulting services as part of their media offering and Ogilvy and M&C Saatchi competing with business consulting offerings too.
But as Michael Farmer recently pointed out there is a fundamental difference in the approach between advertising agencies and management consultants when it comes to fees. To paraphrase Michael’s point, management consultants focus on improving bottom line results and charge accordingly, while agencies are focused on improving marketing and brand metrics such as awareness and desirability, which is valued less by marketers and their organisations.
This was recently sharply demonstrated by a recent conversation with a Board Adviser in the middle of a merger, and their story reminded me of a similar story from a few years back, which highlights how agencies need to change their focus and their understanding of value if they want to compete.
Pricing yourself into profit
A recent conversation with a board adviser for a company going through a merger / acquisition was enlightening in regards to the role of the management consultant firm.
The consultants were providing board and management advice on the process including legal, financial and accounting advice in a major merger. But at a critical point in the process, a question arose on the brands of each of the merging companies and the best strategy for either rationalising or managing the resultant large portfolio of complimentary but potentially duplicated brands and their services.
The management consultants immediately offered to provide this advice and provided a proposal to provide a full review of the brand portfolio with recommendations on the best strategy for managing the resulting brand portfolio. The work would need to be delivered within 2 – 3 weeks and the management consultants did not blink when they tabled their $670,000 proposal for the work.
The board adviser, well versed in brand and marketing, asked which team would be delivering the project to be told that their director of marketing and brand, a new capability for the firm, would be leading the project. A quick check of LinkedIn showed the project lead was previously an account director at one of the big multinational agency networks with about 15 years experience before joining the management consulting firm almost a year earlier.
While the board was ready to approve the proposal on the spot, after all the cost was a fraction of the total fees charged to date for the merger work, the board adviser thought it worth providing an alternative for consideration. They approached one of the major agencies in the market, which was well considered for brand and comms strategy and were not one of the rostered agencies of either of the companies currently merging.
They briefed the agency on the task and asked the agency to provide a proposal. The agency CEO immediately, without thinking, offered to the do work for free if they would then be appointed to handle the advertising account of the new merged entity.
The board adviser explained that the companies had agencies and that if this changed post merger then the appropriate tender process would be undertaken and that the agency could be considered then. So they asked the CEO again for a proposal. The CEO and his CFO started throwing names and hours around for the three weeks of work and came up with a figure for the project, sheepishly asking for $75,000.
The board adviser was shocked at how low the price was, but before they could express their thinking the agency CEO misreading their reaction jumped in and discounted it to $60,000. Realising the mistaken interpretation they decided to let the agency off the hook and began to explain the situation. Let’s just say the agency did not get the project, but one of the specialist brand strategy agencies did for less than half the price of the management consultants.
Not giving away your value
Similarly, a few years back, a management consulting firm was working with a retailer to explore possible specialist retail concepts, including world trends, market size and potential, projected sales and investment levels and the like.
They had identified 4 different specialist retail categories but did not have the capabilities to develop the brands and concepts for these. They approached one of the major multinational agency brands in the local market, explained the work they were doing and enquired if the agency would be interested in partnering with them to approach the client with a proposal to develop the brand and communications for strategy and concept for each of the identified categories.
The agency CEO decided that they would do the work for free on the basis that if any of the concepts were approved and the concept progressed then the agency would be awarded the advertising account. The management consultant and their client readily agreed. Possibly they agreed too readily.
The agency proceeded to work with the management consultants to take the analysis and data they had collected and to develop brands and communication strategies for each of the four identified specialist retail categories. The work included not just developing the brand strategy, but also the brand identity work and a full launch communication strategy and execution. It was four massive pieces of work all completed over a 12 week period.
The agency presented to the client, which included senior management and board representatives and was enthusiastically received. The management consultants were very complimentary and passed on their client’s appreciation for all the work the agency had done. Then the agency waited. If an agency thinks waiting for the results of a pitch is onerous, then this was much worse. Six months of monthly calls to the management consultant before finally being told that none of the four specialist concepts would be progressing.
As a consolation to the agency, the partner of the management consulting firm who was overseeing the project took the agency CEO, Executive Creative Director and Head of Strategy to lunch at one of the top restaurants in the city.
Here over wagu steaks and Chateau Margaux the partner explained how they could not believe that the agency would effectively give away what they had valued as more than $1.6 million in consulting fees and intellectual property value for nothing. The chances of any of the concepts getting up was slim at best and even then new retail concepts or businesses have a significantly high failure rate. Think Masters.
Lessons to be learnt
So what are the lessons learned here for agencies and their marketers?
- If you give away something for nothing it is worth nothing. This applies to all sorts of services, even if it is in the hope of perhaps getting something back later. If it is an investment then make sure the opportunity is guaranteed, but too often the optimistic agency throws valuable time and effort away on a hope and a prayer.
- The price you place on your services also represents an indication of how you value these. Ultimately the buyer decides the value, but undervaluing your services indicates to the buyer that you think they are not worth much. And of course offering them for free means that they are potentially worth nothing.
- You have to match your pricing to the buyer as well. In these two cases the agencies were not dealing with marketers, they were dealing with CEOs, CFOs and Boards who are used to paying significantly more for similar services from management consultant firms. This is what makes it difficult for agencies to use pricing for consulting because they use costs for advertising. Pricing is based on setting a price that represents the value, while cost is about calculating the cost of the service and marking it up for profit.
Marketers are certainly using management consultants but it will be interesting what happens when management consultants want to charge consulting prices for advertising agency services and likewise what would happen if agencies really got serious in pricing their services based on value and price and not simply on cost.
TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal. Read more here