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How is Your Agency Evolving?
By Mike Carlton

The Gathering Storm

In the spring of 2005, Bob Garfield’s “The Chaos Scenario” appeared in Advertising Age. In this landmark piece he laid out a grim picture for the advertising industry. A future in which advertising revenue from traditional forms collapses faster than revenue from new forms can take its place.

A view that raises serious questions about the future economic viability of the business model most advertising agencies are currently using.

Several weeks later, Ad Age surveyed its readers to get their opinion on Garfield’s draconian thesis. Stunningly, 68% agreed with it! Many indicated that they were already experiencing the specific challenges he foretold.

Business Model Evolution

In one stroke, “The Chaos Scenario” and the immediate and overwhelming support it received from advertising practitioners focused attention on the need for new or dramatically modified business models within many parts of the advertising community.

In advertising agencies, which had already reduced their staff size by 20% during the first half of this decade, the need to rethink their business model was particularly acute. Because the fact is that many agencies make most of their money creating and producing TV and print advertising. Two of the media types facing the greatest disruption.

Two Years Later

Almost two years have now passed. The big questions are:

1. Is “The Chaos Scenario” becoming a reality? Is it in fact actually unfolding?

2. And if so, what are agencies doing to adapt to this new environment? What changes – if any - have agencies implemented in their business models?

A Dilemma

Recently, an agency president told me, “The change going on out there just makes my head hurt. I don’t know where it is all heading. But fortunately, we are busier than ever right now. So, I guess I should be thankful.”

Clearly, the marketplace is changing. And probably at an accelerating pace. But it is happening at a time when overall agency business is good. So the demand for traditional agency services is high. And with smaller staffs, just getting that traditional work out the door can be a big challenge.

With all that on an agency leader’s plate, who has time to worry about how the unfolding market changes may affect the agency in the unknowable future? Much less worry about how to modify the agency’s business model to address those challenges.

The Titanic

Could it be that many agencies are sailing at top speed into an uncharted ice field while happily dancing in the ballroom?

The Evolving Consumer

Make no mistake. The root cause of the seismic shift taking place within the advertising industry lies with consumers.

There is no question that consumers – both end users and business buyers – are evolving rapidly. Their use and consumption of commercial information and messaging is undergoing more change today than it has in the past 50 years. And, there is no indication that this disruption will diminish.

Consumers have become much more demanding. They have taken control of the messaging they receive. They are in charge. So much so that in an unprecedented move Time Magazine recently named them the collective Person of the Year.

Several of the factors at work here are:

1. Invitation, Not Intrusion
During the heyday of broadcast TV, consumers accepted intrusive commercials. Just as they accepted print media with massive advertising sections. Or tons of direct mail.

They accepted that commercial intrusion as the price of free or very low priced news and entertainment content. That has changed.

Increasingly, consumers only want to receive the commercial messages that they want. It is now their choice. Control has shifted from the sender to the receiver.

2. Personal Relevancy
Going beyond just invitation, savvy consumers are also demanding that the commercial messaging they will accept must be personally relevant to them. The marketer that sends them a message that just doesn’t fit their needs, interests or lifestyle actually diminishes their respect for the brand.

This means that not only must the marketer be invited in, but must know precisely what to talk about so that it is always personally relevant to each consumer. A tall order.

3. Brand Message Alignment
Making it even more difficult, the consumer is receiving commercial information from an increasing array of media. From traditional TV to YouTube. From word of mouth to a blog. From a news media story to an email. From a website to a retail outlet.

And the consumer expects that the message from any brand be continuously in alignment regardless of the channel from which the message comes. This is not just a tall order. It is a very tall order.

More Questions than Answers

Against this backdrop it is exceedingly difficult for agency management to plot an evolutionary business model course. What are the right things to do? What are the wrong things? What happens if we do nothing at all?

So, while the challenges are becoming clearer, the solutions remain murky. Who knows where this is all going? And clients don’t have any clearer picture of the road ahead, either.

And all the while agency cash registers are ringing a happy tune.

No wonder heads hurt!

Some Things are For Sure

But while there is so much ambiguity about the future of agency business models there are some certainties in the marketplace:

1. Increasing Variety of Tools
It seems as if almost every day new or expanding ways of commercially communicating with consumers appear. Online video, social networking, blogs, mobile casting, interactive TV, podcasts, viral marketing, etc., etc. And the list goes on and on.

We are in a period of extreme media creativity. And we must expect that media opportunities will continue to expand at a frenetic pace.

2. New Tools are More Efficient Than the Old Ones
Here is the big rub. Many of the new tools are more efficient than traditional TV and print. The cost of reaching and influencing the individual consumer is lower. Ultimately, this is good. Increased efficiency and market fluidity means better informed consumers, lower prices and faster sales cycles. The long-term societal benefit of this is huge.

But, following the typical traditional agency business model, new tools can mean less money for the same result. The new tools can require less agency labor involvement and thus lower hourly charges. The short-term disruption to the agency’s business can also be huge.

3. Selecting the Right Mix of Tools is Not Easy
With all the new tools and the promise of dramatically increased efficiency, the selection of the proper array of tools becomes critical. Ideally the criteria should be based on how the target individuals consume media in this category. And likely those consumption patterns are changing. Kind of like trying to build a complex house on shifting sands.

Someone needs to architect the holistic media solution. And it should be done from a media agnostic point of view. The selection should also be agency revenue agnostic. Meaning that decisions should be based on what mix will be most effective in changing consumer behavior, not how much money is in it for the agency or medium.

4. Solutions Have More Value Than Stuff
In this environment, clients need holistic solutions that accomplish their marketing objectives. The strategic thinking that makes this happen is critical to their success. Conceiving, developing and implementing these strategic solutions is the highest value agencies bring to marketers.

Yet many agencies don’t get adequately paid for this strategic service. Too often the bulk of their compensation comes from implementing lots of tactical stuff.

The Client Budget Conundrum

While clients need, and ultimately value, strategic thinking and guidance the sad fact is that many of their budgets are set up with the focus of the spending going to tactical implementation. And some clients have absolutely nothing in their budgets for agency strategic conceptual work. But lots of line items for stuff.

This has led some agencies to the dangerous practice of surreptitiously building the cost of holistic strategic and conceptual work into the individual pieces of stuff. This of course is dangerous because if it quietly includes the cost of the concept, the agency can no longer be price competitive with a supplier that only does the stuff, not the concept.

Unfortunately, this has led less sophisticated people on the client side to the mistaken belief that the cost of the stuff is of primary importance rather than the strength of the concept and its ability to change consumer behaviors.

All in all, not a happy place for agencies to be.

A Look at Legacy Business Systems

But this flawed thinking is fostered and reinforced on the agency side, too.

Much of agency compensation today comes in the form of hourly charges or fees. And if there are set fees, they tend to be based on the number of hours of labor the agency plans to expend. Just a different kind of hourly charge.

An even closer look at the hourly charge and fee income for many agencies indicates that most of the labor is being applied to executing specific jobs. Creating and producing specific ads, commercials, brochures, etc. This is usually tactical stuff. Needed for the accomplishment of the client’s objectives. But not necessarily strategic.

On the other hand agency strategic thinking is what can move a client’s brand significantly within the market. It is of much higher value than project implementation. The creativity of big ideas is what ultimately drives client and agency success.

Yet too frequently, agencies are grossly underpaid for these big ideas. It is not uncommon to see agencies almost give away strategic thinking in order to get the opportunity to implement all the necessary tactical pieces.

Your Agency

Certainly the market is changing.

But the big questions remain; Is your agency’s business model evolving? Do you even want it to? And if so, how?

The Money Trail

Willie Sutton was a serial bank robber. He was also a likeable character. The story goes that after being jailed a number of times for bank robbery he was asked why he kept robbing banks. His immediate reply was, “Because that is where the money is!”

Your Money Trail

Here is a simple test. Take a look at the sources of your agency’s gross income. What percentage comes from hourly charges and fees directly associated with the creation and implementation of tactical stuff needed to accomplish the client’s objective?

And what percentage comes from holistic conceptual and strategic work that establishes the framework and context for that project implementation?

If a high percentage of your gross income is coming from tactical stuff, you may have a problematic business model. This kind of project implementation can be considered a commodity and subject to increasingly severe pricing pressure. It sure doesn’t look like a satisfying place for an agency to spend its future.

If a high percentage of your gross income is coming from strategic concepts and holistic planning, great. This has high enduring client value and can be disconnected from the tyranny of hourly costs.

A Way Forward

If you’re not happy with what this simple test reveals about your business now may be the time to lay out a plan for changing your business model so as to move you, over time, to the gross income mix that you would like.

Doing this is not as complicated or difficult as it might seem. The trick is to recognize where you want to get to (the ratio between compensation for strategic vs. tactical work) and the mileposts you set in the journey there.

“Great,” you say. “It’s good to have goals, but how are we going to get there?”

Make no mistake. There is no magic bullet to turn everything around quickly. Evolving to more reasonable agency compensation models will take lots of relentless effort over many years. But just deploring what is happening is non-productive. There must be a proactive effort to achieve the goals.

As the Chinese proverb says, “A journey of one thousand miles begins with a single step.”

How

If you are like most agencies, you have one client that you really trust and respect. One that you feel a kindred spirit with. One that deeply values the leverage a great idea can deliver. One that needs holistic solutions. One that has the authority to innovate and is not afraid to do so.

Talk with this client about separating your compensation for broadly based conceptual and strategic work from the cost and compensation from implementing individual jobs. Help her understand the value to her of the holistic conceptual strategic work you should be performing. And why that should be viewed separately from implementation.

Kind of like the fee the client might pay an architect which is separate from the contractor’s cost of building a building.

Remember, the operative word is evolve. Sweeping, overnight changes are likely to generate push-back. And ultimately lead to disenchantment.

Also, don’t get greedy. Trust your gut. And, trust your client. Remember, you are seeking a way to better match your compensation to the value that your ideas deliver to the client. And that value may accrue only with time.

Recognize, too, that once you embark on such a program you must be committed to proactively revisiting it regularly with the client. This is not something you can set on autopilot and ignore.

Celebrate Success

With great, holistic, on-target ideas from the agency your integrated campaigns should be successful. The client should achieve his goals. You should be fairly compensated. Celebrate not only the success in the marketplace, but also the success of your evolving business model. With this success under your belt, it is time to take these business concepts to the second client. And then the third.

Many Paths

As stated before, there is no magic bullet. No one business model will work in all situations. And things won’t change overnight. But, evolving your agency’s business model is a proactive path. A path rooted in the evolving market place.

The Consequences

Remember, nature has an eternal law. It is evolve or die!


  “Evolve or die” – Eternal law of nature  
“Because that’s where the money is!” - Willie Sutton
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