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Who's Minding the Shop?
By Mike Carlton
A Simple Business
The agency business has always been pretty simple. You get clients. You do great work that moves their audience. You bill them. They pay you. And, everybody’s happy. While there are lots of subtle variations to this equation, it has never been very complicated. Until now.
It’s a new world. Agencies are being besieged by complexity. It is coming from all directions. There is more change confronting the agency business today than any of us have ever seen. And, it is likely to get worse before it gets better.
Today, it’s harder than ever to get clients. It’s harder than ever to do great work. It’s harder than ever to build partnering relationships with clients. It’s harder than ever to keep clients. It’s harder than ever to differentiate your agency in its marketplace. And, it’s harder than ever to make money.
Wow! What happened? What’s going on? And, what can you do about it?
A Model in Decline
Simply put, the traditional agency business model doesn’t work the way it used to. The market has shifted. And, to remain relevant, agencies need to shift, too.
There is no question that the consumer has moved well beyond a primary reliance on broadcast TV as her primary information and entertainment source. Consumers’ commercial decisions are being based on information and experiences from all kinds of sources. They are inviting marketers to connect with them in a myriad of new ways. Some of it one-to-one dialogic. Some of it experiential. Some of it just plain cultural buzz. Yet many agencies seem to be mired in the 30 second spot / colorful ad business.
Steve Heyer, president of Coca-Cola said it best. “The magnitude and urgency of change isn’t evolutionary – it’s transformational. Agencies need to rethink the core assumptions and practices of their current business models.”
And he’s not alone. Hardly a week goes by without the trade press reporting some other influential questioning the business model agencies are following.
OK, Just What is a Business Model?
A business model is the way in which the agency relates to its clients, the services it provides and the way it gets paid for those services.
A Look Back
In the historic agency business model, the agency created ads or commercials and got paid a media commission for running them. That was a good model in that if the ad or commercial worked in the marketplace, the client kept running it, and the agency got paid continuing commissions that were a lot like residuals. And, if the ad didn’t work, the client stopped running it, and the agency didn’t get paid any more until they came up with a new, and presumably better, ad.
Very simple. Very easy. And, very fair.
But the commission system had it limitations. It did not work well on non-media related activities. And, the size of the media budget dictated the level of agency involvement. So marketers and agencies groped for a better model.
As the commission system declined, agencies moved primarily to hourly charge business models. These were more appropriate as agencies expanded their range of services into non-media activities, which were not commissionable.
From an economic standpoint, hourly charges protected the agency on the downside, but provided little reward on the upside. And, the agency received the same compensation for effective work as it did for ineffective work.
Also, balancing internal time resources became much more complicated, and more difficult. An agency could not sell more time than its staff had available, but if client demand faltered, it could have a lot of un-bought time on its hands.
And worse yet, this model made it appear that the agency was just selling stuff at hourly charges, and was no longer as much of a partner as before. Vendor mentality began creeping into the relationship. Stuff overwhelmed ideas.
All the while, an expanded array of communications avenues was becoming available with which to reach the client’s audience.
The hourly charge for projects model has partially evolved into the fee for services model, which while still hourly cost-based can treat the client much more holistically. In effect, the fee system could allow the agency to become media agnostic, so that all kinds of new avenues of communications could be opened with the client’s audience.
While there has been some experimentation with compensation systems that reward the agency for effectiveness in the client’s marketplace; application of these has been limited, and usually only adopted by the most sophisticated marketers.
The Core of the Business Model Issue
With all this change, many of the business models currently used by individual agencies have been arrived at almost by accident. They are often the product of reactive client situations, rather than thoughtful proactive approaches. As such, it is not uncommon to see two glaring weaknesses in them:
1. They Restrict Innovation
The consumer is accessible through more avenues than ever. And clients are expecting agencies to lead in the use of these new avenues. Yet, many agencies do not have business models in which they can be fairly compensated using these new avenues. So, as a result, they fall back on the security of using those they are most familiar with, and know they can make money at. Thus, the 30 second spot / colorful ad rut.
2. There is Little Reward for Outstanding Work
The client receives a fundamental economic benefit from creative leverage. A great idea moves an audience more that an average idea. And, clients want great ideas. But only the audience can indicate the value of a great idea, and only then by their behavior in the marketplace. Yet, most agencies get paid the same for an average idea as they do for a great one.
These business model weaknesses have led clients to commoditize what agencies offer. This falsely assumes that all talent is equal, and that all ideas have the same leverage in the marketplace. A sure recipe for mediocrity.
And on the agency side, these business model weaknesses breed caution and conservatism. Safety trumps innovation. Surely not the best way to get great ideas. Or to win hearts and minds in the client’s marketplace.
Make no mistake. There is probably not one “magic bullet” agency business model. But rather, a wide array of sub-models, each tailored to the needs of individual clients. This is mass customization of the agency’s master model.
In this kind of environment, continuing thoughtful exploration of better agency business models – each one unique to the needs of each individual client - is obviously called for. But unfortunately, seldom done.
It’s Hard to Build a Fire House When You Are Always Putting Out Fires
Many agency leaders understand that things aren’t working the way they should. But, they are almost overwhelmingly engrossed in urgent day-to-day issues. About clients. About new business. About people. About their product. About money.
When life is like this, it is very difficult to focus on the strategic issues of the agency’s business model. As a result, serious business model thinking gets pushed to tomorrow. And then tomorrow, it gets pushed back again. And when it is done, it takes on a patch-work quality. This is clearly a case of the urgent continually preempting the important.
The gut issue is that while agency leadership is busy minding the urgent, no one is minding the shop!
To be successful today, agencies need to pay as much attention to their business model as they do to their clients. But few are organized in a way to make this happen.
This puts them on a road to limbo. Or worse yet, slow death. Slowly, the agency loses its competitive strength. Slowly, almost imperceptibly, it loses its share of the client spend. And slowly too, it loses its spirit. Not a happy picture.
The sad fact is that if the business model isn’t right, nothing else works well.
So, Who’s Going to Fix the Business Model?
First, a couple of definitions:
1. Business management means the establishment and maintenance of a successful business model.
2. A successful business model commands a premium in its marketplace and meets the psychic and financial needs of the agency principals and staff.
In smaller, less highly developed agencies and similar organizations, the founder or principal owner often holds the business management portfolio. This is natural. Someone has to create the initial business model. And someone has to make sure the business is soundly run.
But, as a firm grows, it is in everyone’s interest for the key players to focus more intently on their specific skill sets, particularly as their firm encounters challenges from larger, more competent and more sophisticated competitors.
Enter the Business Manager
This is a new role. It needs to be thought of in a new way. It is essentially entrepreneurial. It is intense. And it is highly passionate.
This is not just the trusted accountant, who can be loyal and knowledgeable, but may be passive. It is not a senior account person who does this in his spare time. Nor is it the leader of the agency who does this in addition to her countless other duties.
The primary focus of the business manager is the business. And, he is a full fledged member of agency leadership. With the same credibility and strength as the leaders of the other key disciplines.
In a nutshell, the business manager is responsible for the success of the business, consistent with the core values and culture of the enterprise.
For, if the business is consistently successful, the holders of the other portfolios such as account service, creative, new business, media, planning, etc. can concentrate their entire energy on their areas of expertise. By minimizing their diversion to business issues, they can be individually and collectively more successful.
Let’s Look at Those Discipline Portfolios
Within an advertising agency, or similar creative organization, there are typically four or five key management portfolios. Each contains a specific set of responsibilities. While it is not necessary that a different person carry each portfolio, the skill set differences are such that in larger organizations a separate individual usually holds each unique portfolio.
Typically, these four or five portfolio holders make up the senior management team. And, they often behave as partners, in the most traditional sense. The portfolios are:
Standard Bearer
The firm’s vision and values, setting and maintaining the strategic agenda, the inspiration and rallying point for staff, and the embodiment of the firm to the outside world, with particular emphasis on business development. Standard bearers typically come from client service or creative, and in a small but growing number of cases, planning.
Client Service
The relationships with existing clients, including their retention and growth, management of all client activities, stewardship of client spending, attraction, management and development of client service talent, and participation in business development.
Creative
The quality and effectiveness of all the products of the organization (not just advertising), from conceptual through completion, attracting, managing and developing creative talent, and participation in business development.
Planning
Not all firms embrace this portfolio, but when one does, it usually represents the end customer point of view and incorporates the strategic communications component that may include research, etc., with talent responsibilities as well as participation in business development.
Business Management
This is the newest discrete portfolio. Essentially, this portfolio embraces everything necessary to make the business successful, except the functions described above.
Just What Does the Business Management Portfolio Contain?
No two agencies have the same business management portfolio. But, typically the business management portfolio can contain the following:
Development and maintenance of the business model
Strategic planning
Corporate governance
Budgeting
Finance and accounting
Merger and acquisition
HR, talent attraction, upgrade and retention
HR, including benefits, support staffing
Facilities and support services
Legal
Information systems and technology
Insurance
Media (sometimes – particularly when it is outsourced)
Operations, including traffic and sometimes production
Business relations with clients (specifically compensation and stewardship)
Business relations with suppliers and media
Business relations with partnering organizations
Subsidiary organizations (studios, web shops, PR firms, etc.)
In addition, and in many respects much more important, a well-developed business management portfolio includes establishing and maintaining the framework for the interactions and deliberations between the other portfolio holders. For example, the agendas and schedules for the firm’s management boards, committees, etc. are usually set within this portfolio.
At a higher level, a strong business management function provides continual consultative and collaborative services to the leaders of the other functions. The other portfolio holders rely heavily on the business management portfolio holder as a trusted business advisor. The mind set is to build the mutual trust between business management and the other portfolios to a level whereby each can focus most intently on her area of expertise.
The most effective holders of the business management portfolio are extremely powerful. But that power is not granted by special position or authority, but rather voluntarily ceded by the holders of the other portfolios. When this level of mutual respect and trust exists, the firm can then achieve its maximum effectiveness and competitiveness.
What Does It Cost?
Obviously, a senior management person of this caliber is not inexpensive. And, it is easy to view such a position as a luxury. Yet, business management done well is probably one of the greatest bargains in the agency business. A good business manager brings focus, efficiency and effectiveness to a bunch of largely independent functions that if left alone easily fall out of sync, to the detriment of the entire agency. Not to mention the clients.
In short, a good business manager way more that pays for himself.
A Quote
When Fallon won the first of its several Agency of the Year awards, Advertising Age asked Pat Fallon what was the most important factor in the agency’s success. Without hesitating an instant, he replied that it was including Irv Fish as the partner responsible for business management from day one. He stated that without that, the other partners could never have focused on what they needed to do to achieve the award.
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