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.
Who should we believe?
- “Media agencies will maintain their relevance into the future because of the knowledge they possess and the best practices they are continuously developing.” – Brian Wieser, global president, business intelligence, GroupM.
- “The pressure to defend and pitch over and over again leads media agencies to perform at near-zero margins.” – Avi Dan, contributor, Forbes.
Both parties are right. However, if agencies are relevant partners, they should not earn near-zero margins. What’s needed to fix this situation? There are three key factors for a media agency makeover:
1. A better understanding of agency economics.
Media agencies carry out services for their clients — e.g., media planning (campaign by campaign), media buying, and analyses of results and reporting. But how much work is involved for a given level of spend? How many agency people (in full-time equivalents, or FTEs) ought to be required? What level of fees should be paid? Unfortunately, clients and agencies do not have a shared view of these questions. In some cases, neither party has an informed view. Workloads are not being quantified, although it is not difficult to do.
There are several areas where agencies need to improve their understanding:
- Fragmentation and complexity – Ever since the introduction of digital and social media, marketing scopes of work have become more fragmented and complex. So have client marketing organisations. Silos abound for search, programmatic, digital, and social. Every marketing silo expects to have its own spend, its own analyses, and its own agency reports. Media agencies struggle to meet these growing needs, ignoring the effects on staffing needs. This leads to understaffing.
- Economics of scale – Both parties believe that there are economies of scale; i.e., relationships with high levels of spend are more “efficient.” A $50 million media spend might need one agency FTE for every $2.5 million of spend, or 20 FTEs. A larger relationship with $500 million of spend might need only one FTE for every $5.0 million of spend or 100 FTEs — five times the staffing for 10 times the spend.
- Diseconomies of scale – What is not factored in by either party are the diseconomies of scale that come from fragmentation and complexity. If the $500 million spend is fragmented across 15 media types, with a large number of complex campaigns that require separate analyses and reports, economies of scale will be severely diminished. Instead of 100 FTEs, the fragmented $500 million spend might require 150 agency FTEs. Clients and agencies that do not factor in the effects of fragmentation and complexity have too few FTEs in the resource plan and fees that are much too low. I’ve researched this thoroughly using our Media ScopeMetric Model; fragmentation and complexity destroy economies of scale too often and drag down performance, reducing agency capabilities.
2. Results-driven relationships.
Logically, media agencies ought to serve clients and brands by helping them grow in the marketplace, using media spend wisely to generate efficient results. However, the purpose of the client-agency relationship seems to have been forgotten in the thicket of mistrust and cost-cutting that defines our times. Media agencies are now “low-cost vendors” that are replaced at will once contracts expire. Under attack by procurement, media agencies have accepted this and downgraded their purpose, which is now “we will cope with any and all circumstances and give you our outputs at the lowest possible price.”
The consequences of this show up in a simple metric: agency fee income per FTE by client. Typical media agency figures are in a range of $125,000 to $250,000 fee income per FTE. (At a billing multiple of 2.22, this means that agency average salaries by client are between $56,000 and $113,000. You can’t generate much value with agency teams that are so junior.) A typical consulting firm would be generating closer to $500,000 in fee income per FTE.
3. Relationship longevity.
Understandably, agencies that turn over every three years are not going to generate improved results. Familiarity and intimacy are required by both parties — high-quality relationships cannot be reinvented with every media agency turnover.
It’s time for clients and agencies alike to commit to media agency makeovers. Both parties will benefit.
They must commit to maintaining long-term relationships that will solve brand growth problems — switching agencies only if they do not succeed. Also, they need to work jointly as partners on complex issues of spend level and mix: What’s the minimum spend that will work, and what is the appropriate mix of the spend? Finally, they must mutually commit to understanding the economics of their own relationship, so agencies can succeed.
Both parties have to contribute, guided by the desire to reduce fragmentation and complexity to achieve economies of scale and ensure that the right mix of junior and senior resources will focus on a client’s scope of work.
Marriages of agencies and clients need to replace one-night stands. Media agency makeovers reestablish long-term arrangements as a superior basis for working relationships.
Photo credit: Elton Dedini, The New Yorker, The Cartoon Bank. With permission
This article was first published in Media Village October 31, 2019
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