7 Ways Ad Agencies Can Capture Value in the Marketplace
Advertising agencies, once a cottage industry made up of small innovative firms, have consolidated into enormous firms with global scale and massive reach yet still manage to not make much money.
What’s missing is a businesslike approach. That is, agencies aren’t run like other businesses, but as idea factories and the logical consequence is that there is an oversupply of meaningless ideas- lots of sound and fury, signifying nothing.
The solution is for marketing services companies to operate as money making enterprises whose primary objective is to capture value in the marketplace. That means adopting the business best practices of this century.
A Bit of History
The ad agency business had its heyday in the 50’s and 60’s. The post-war boom led to an expanded middle class and a consumer culture. Pioneers in mass communication such as David Ogilvy, Leo Burnett and Bill Bernbach pioneered a new industry that built many of today’s great brands.
With the 1970’s came tougher economic times and greater focus on cost efficiency. Independent media agencies who emphasized accountability grew in size and stature. Soon full service agencies were spinning off not only their media departments, but were metastasizing into a dizzying array of specialty agencies.
Unfortunately, the increased specialization didn’t do much for profitability, so the industry consolidated. Revered old names merged into four massive conglomerates (IPG, WPP, Publicis and Omincom) with not only global scale but also a broad scope of services.
The Big Sqeeze
How has it all turned out? Take a look at the chart below:
Two things should immediately become apparent: First, that despite their enormous scope and years of active consolidation, the marketing services giants are puny comapared to their clients and suppliers. Second, even given their small balance sheets, they still can’t manage to earn decent returns.
In other words, consolidation has failed to result in market clout and value capture. The marketing services firms are caught between the more powerful marketers and content publishers (who agency people deride as mere “suppliers”).
The upshot is that marketing services firms are widely seen as commodities. Marketers view them as a cost to be optimized and for media they are a mere gatekeeper to work around. On much that involves value creation or innovation, the big guys often deal directly (and sometimes invite the agency).
So the root of the problem lies in that neither of the more powerful constituencies sees much value in marketing services firms. That’s a problem that can’t be solved with mind-numbingly complex PowerPoint charts, neologisms or blaming clients. Performance has to improve.
7 Ways for Agencies to Capture Value
At the core of the problem is that agencies, in their quest for originality, have failed to borrow best practices from high performance industries. If they are going to move forward, first they will have to catch up to the rest of the business world.
Talent Management: Compared to other professional services industries such as Management Consulting and Financial Services, talent development at ad agencies is virtually non-existent.
On campus recruiting, management training and graduate education programs are the norm for many other industries, yet conspicuously absent in marketing services. Is there any wonder that their advice is rarely taken seriously?
Value capture will stay out of reach as long as the skills gap persists. (See How to Win the War for Talent).
De-Balkanize and Integrate: Through mergers and acquisitions, today’s marketing services giants have managed to transform a bunch of small unprofitable companies into a few large unprofitable companies. Integration across brands and functions is woeful, at best.
The industry is very well aware of the problem and there are lots of intranets, systems and compensation scheme ideas that float around from time to time, but little is accomplished. Once you enter a corporate silo, the only real way out is to leave the industry.
There really is a simple solution to all of this: Simply institute a policy whereby to get promoted beyond a certain level, you have to work in at least two different functional and/or divisions. That would change incentives and help to create a true small world network.
Improved communication across geographical and functional areas is critical for spotting and capitalizing on opportunities.
Get Semantic: One of the most exciting things going on in the world of technology today is the Semantic Web. The first web allowed us to view content independently of local systems and Tim Berners-Lee intends to do the same for databases.
This is an especially big opportunity for global marketing services firms who have a treasure trove of consumer, media and expenditure data locked away in local systems in almost every country in the world. Being able to analyze data on a global and regional scale would be a serious way to create and capture value.
The World Wide Web Consortium has recommended a standard, called RDF, that would allow agencies to do just that. However, not only has RDF implementation not begun, very few in the agency world even know what it is.
Cross-Functional Teams: In technology driven industries, product development systems like Agile emphasize cross-functional teams and self organization rather than structured organizational charts.
Amazingly, the internal workflow in many agencies today emphasizes functional specialization rather than service and innovation. This oversight is particularly glaring in the face of all the jabbering on about “holistic thinking” and “360 degree planning” over the past decade or so.
Get Some Quants: Financial services, much like marketing services, has evolved from an intuition driven industry to a quantitative one. The difference, of course, is that financial services met the challenge with serious IT investment and a concerted recruiting effort to bring in top flight mathematical minds.
Ad agencies, on the other hand, lag far behind both media and marketers in skills and computational power. As media increasingly goes digital, the computational gap will only widen. (See The Unfinished Marketing Revolution).
Admittedly, there are econometric divisions in each of the marketing services holding companies, but for the most part they are not integrated well and skills haven’t transfered over to the front lines.
Manage the Supply Chain: While the rest of the business world has been obsessed with managing their supply chain, much of the agency world scoffs at such “implementational issues.” Is it any wonder that agencies are reviled by broadcasters and publishers?
While the media environment is innovating at light speed and media companies offer an increasingly wide range of services, agency “strategic planners” remain blissfully ignorant and ensconced in their ivory towers.
Magazine editors, radio and TV programmers and web developers are truly on the front lines and know more than anybody else about emerging trends. Rather than ignore them, anybody who is serious about delivering value in marketing services should be seeking them out.
Humility: Most of all, agencies need to ditch their culture of entitlement and imagined superiority and adopt one of service and performance. The dismal financial performance of the industry is no accident. Poor value capture is simply a symptom of poor value delivery.
The good news is that very little of what needs to be done requires extensive financial investment or even managerial wizardry. Improvement will have nothing to do with systems and strategies and everything to do with skills and a sense of mission.
Many of these problems have successfully been dealt with by other companies in other industries. This isn’t rocket science. A little watching and learning can go a long way.
A Personal Note
I first arrived in Poland in 1997, about 6 months before people meters did. The fall of the Berlin Wall was still fresh in everybody’s minds and a new era had begun. It was a moment in history and everybody knew it. We all had a great time and built one of the most progressive markets in Europe.
I can’t help feeling that it is a similar moment in the media and marketing world as a whole and that if there was less fear and loathing and more wonder and excitement, marketing services could reach their full potential.
However, before you can lead, you first have to catch up.