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7 Ways Ad Agencies Can Capture Value in the Marketplace

2010 June 24
by Greg Satell

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.

– Greg

4 Responses
  1. June 24, 2010

    Greg
    Another good post.

    Having been an Exec Director of Strategy in one of the big networks (Omnicom) and left 5 years ago to run a strategy change consultancy, the issue in my view is more simple and it runs very deep.

    The communication groups have become obsessed with targets vs objectives. At the top they’ve been managing the balance sheet by quarter & hence the slow decline. The people running groups and how they run are all very similar. You don’t find a David Ogilvy running an agency network – let alone a holding group any more. What hasn’t been happening is investment in reinvention or disruption in models or structure to build differentiated and added value agency solutions for the future. They are not therefore organisations with any sense on NPD or reinvention built into their approach. The model has been driven by size, geographical coverage and balance sheet targets.

    Its amazing in a social & media & digital world for example that there is not a joined up PR, media and digital agency from any of the groups. Functionally that would mean disturbing 1 or 2 existing balance sheets, reducing the short term income and getting a fitter and more useful agency long term. These sort of mergers or changes are only the action of last resort when an agency is failing. Meanwhile, spinning a new venture or giving someone a title or a varnished restructure are heralded as change. They are what they are. Moving deck chairs.

    The reality is also that the sort of people who challenge agency models and behaviours, or are passionate about quality of output and change are not embraced as the catalysts they should be in the groups. The resistance to change and the wisemen who have the power to delay change arguing “rationally” based on the current numbers that are well arranged. Hitting a target for a quaret or a year is predominantly how networks are aremanaged and incentivated up and down. Innovation & reinvention is not a target (with a budget, or people, or permission attched tomake it real) from the top – neither is it what keeps your international line manager happy if you strive for it in an agency. Many agency bosses – really want to do just that – but their hands are tied. Add into the mix the commoditisation of pitches and the truth is if you are behind on your numbersheading into the second half of the year you’ll be inclined to put forward terms and structures to get you the business vs what is needed. You certainly willbe less inclined to challenge a client to think and behave differently – its too big of a risk.

    The potential change agents do exist – but in a group or and agency they struggle to be heard or embraced. They suffer the weird sheep syndrome (see blog http://www.maverickplanet.co.uk/index.php/2010/03/more-orange-dinosaurs-weird-sheep-will-save-the-world/ ) the group structues work on having leader sheep and follower sheep as employees. The 2% of weird sheep who see the world differently and challenge perceptions/rules – those who use to be at the heart of what agencies were about – are not embraced and given support to change the business. They are seen as contrary and normally leave. The logic on this previously for the group companies was very simple. If you go off and are successful we’ll buy you back and reassimilate your billings and new behaviours.

    This leave, succeed and we’ll buy you back worked well for ages. However, in a digital world with new skills and disaggregation of traditional agency powers like offices, footprint and troop numbers…it didn’t pan out. Digital search was the first – where entrepreneurs built business & technologies and politely refused to be bought back in on a multiple for holding company shares when their business was booming for cash. Eventually, the group companies entered the fray – but often by bundling these services at a discount under the guise of integration. The senior management and the agency bosses also struggle that they still see theses aspects as functions or departments. They don’t have the next generation of industry leader who are the generalists who are born joining up comms in the world we are now in. It will take a while – but if they really want to change it – the answer is threefold.

    1. Skip a generation and give digital thinkers and some weird sheep a chance of leadership of agencies whilst they learn about traditional comms – vs doing it the other way round.
    2. Strip out your best talent across discipline and start a new type agency. Its objective should be to kill what you have – but at higher margins.
    3. Look at how you structure your staff, time and talent and charge for it. A big reason why margins are slipping is due to how long, how many people it takes to get stuff done. Its a 2 tier business – learn from management consultants. Have super talent and charge for it. Then have a more cost efficient system that then executes.

    Greg Reply:

    Mark,

    Thanks for taking the time to write such a comprehensive comment. I recently entered the agency world after watching it from afar for quite some time. It’s been a real eye opener!

    – Greg

  2. August 11, 2010

    Another good article. Very relevant suggestions, very true observations and very valuable points made. And an informative comment from Mark. A bonus.

    I’d like to add a bit here about the part I know best: The Creative Department

    It is without a doubt, the nucleus of an Ad agencies. It is one of the key outlays and has some of the agency’s most high-maintenance assets. Yet, for the most part it is horribly managed.

    For starters, big network agencies don’t seem to understand that more people or more work done in Creative doesn’t necessarily translate into more revenue! There is an optimum team size – beyond which, it quickly becomes unwieldy.

    I know from experience that a tightly-knit, multi-talented group can deliver much more value for the agency and its clients. They tend to be more confident; they venture out more from their comfort zones; experiment; and learn – thus creating a sort of positive feedback loop.

    But when quantity is valued over quality, the chickens eventually come home to roost; and clients too begin to demand more for less.

    I guess it all boils down to this: The only way to bring in good results, is to have good people. And ONLY good people. The rest just get in the way.

    Greg Reply:

    Shanty,

    Thanks for this. All of what you have to say rings true, and not only for creative agencies, but for digital development teams too!

    Thanks.

    – Greg

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