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.
How should advertisers deal with adverse industry conditions? How can they remain effective with customers? What must they do to improve profitability? How can they grow and gain market share?
Ad agencies have faced these questions for the past 30 years. Many agencies are worse off today than they were in the past. What are the correct pathways for improved performance?
Strategy consultants find and implement those optimal pathways for “sustainably improved performance” for their clients. I’ve worked with agencies and brands to navigate the correct pathways for improved performance for the past 30 years. And when you work in many similar situations over several years, you perceive the broad patterns that affect all players.
For better or worse, after diagnosing more than 1,000 agency-client relationships during my past experiences, I’ve come to several conclusions:
1. The shift from media commissions to fee-based remuneration was a major tectonic disaster. Media commission income was so high that agencies developed very little in the way of expertise to manage profitability. Income was so rich, in fact, that agencies had to overinvest in headcounts to maintain their profit margins at “normal” levels, lest clients or shareholders develop unrealistic profit expectations.
Agencies became accustomed to having surplus resources to “crack” tough briefs. They could handle any and all scopes of work (SOWs) without the need to document, measure, negotiate, or plan their workloads. They could downsize to maintain profits in the face of fee cuts.
Some of the habits and practices of this long-gone media commission era remain, especially the conviction that “any and all work can be handled” by an agency-client relationship — even though high remuneration levels and surplus staffing disappeared around 2004.
2. The adoption of “shareholder value” as the management paradigm for advertisers was the second tectonic disaster. Clients expected improved corporate results, not just creativity for brands. The major consulting firms refocused and made “improved results” their sole mission, supplanting ad agencies in the C-suite.
Procurement was unleashed to cut media and agency costs in the name of shareholder value, especially after 2008, when brand growth rates stalled. Billing rates for consultants grew to 5-6x consultant salaries, while agency billing rates declined to 2x agency salaries.
Agencies today face a pressing need to dig their depressed billing rates out of this hole, which probably means giving clients what they want and need: improved growth and results (just like the consultants provide). This requires new ways of thinking and new disciplines — very different from what agencies think of as their unique capability; i.e., creativity.
3. The average price for creative agency work plummeted by 67 percent, driven by procurement-led fee reductions on the one hand and the unbridled growth of integrated SOWs on the other. Declining prices led to chronic agency downsizings and salary compression, leaving many agencies with deficits in talent and headcounts.
Rebuilding agency capabilities to meet client needs remains a pressing requirement. Prices need to be stabilised and then strengthened. The only way to do this is to negotiate fees based on workloads — something that few agencies do today — and add value by helping client brands grow again.
How can agencies begin the process of rebuilding capabilities and improving their performance? Rethinking scopes of work and improving management accountability.
Scopes of Work.
Agencies need to be proactive in two ways: 1) provide clients with strong and expert analyses about what kinds of strategic and creative work should be executed to improve brand results, and 2) document and measure SOW workloads so that appropriate fees and resources can be negotiated.
Agency CEOs are the central players for these priorities. CEOs need to promulgate policies that state “for every client we serve, we will plan, document, measure, and negotiate scopes of work in a uniform way across our agency, for all clients, in all offices, and in all regions.” No major creative agency does this seriously and uniformly, in my experience.
Agencies need to tighten up their operations management so that client heads — the most senior agency executives responsible for individual clients — are held fully accountable for the overall health of their clients.
Good health means results-generating SOWs, as well as appropriate fees and resources. Client heads must be reviewed formally at regular intervals and corrective action plans put in place for “unhealthy clients” who ask for too much of the wrong work, pay for too few agency personnel, and manage their relationships in an inefficient way.
Client heads currently cope with these problems, but they are not formally reviewed or held accountable to fix unhealthy situations. Client heads’ work is largely invisible to office heads, regional heads, and agency CEOs, who are more focused on finding new clients than on fixing existing ones.
The current factors affecting agency performance need to be looked at anew, rationally and unemotionally. Agencies also need to introduce new management disciplines to manage SOWs, increase business accountability, and improve agency economics. The journey needs to be taken one step at a time, led by management-minded agency CEOs who accept that the easier, unmanaged days of the past are long gone.
Image credit: Charles Barsotti, The New Yorker, The Cartoon Bank. With permission
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