Agencies are caught between fee-cutting clients and profit-hungry owners. In the meantime, their creative workloads are growing, driven by digital and social executions without a major let-up in traditional advertising. How can profit margins be generated under these circumstances? Through downsizing, salary freezes and juniorizing? Agencies have been disinvesting in their capabilities to earn profits for their owners -- at a time when clients' marketing challenges have never been greater. No wonder clients are beefing up their internal capabilities and changing agencies at an accelerated pace! Is this Madison Avenue manslaughter -- or suicide in slow-motion?
The usual response -- working harder to develop new business -- is not a solution. New clients pay less than old clients, and they expect even more in the way of creative outputs (deliverables) and results. Intensive new business pitching across the industry is driving down prices for agency work, as agencies cut each other's throats to bring in new business. New business 'wins' dig a deeper grave, one shovelful at a time. The pace of new business activity is driven by the rate at which agencies are dropped by their clients.
There needs to be a sober assessment of the fundamental problems that plague ad agencies today, and top-down CEO programs to deal with them in a serious way:
- Acknowledge the falling price problem. Fees divided by workload equals price, and price is in freefall. This is not a new problem -- it's been going on for over a decade. Falling prices must be halted. This is the most fundamental agency problem that needs to be solved. It's difficult to invest and increase capabilities when prices are dropping out of sight. Fee levels and workload levels must both be addressed.
- Renounce downsizing and disinvestment as an acceptable response. Agencies and their holding company owners must come to an understanding that 'profits at any cost' cannot continue. The parties must develop a more sophisticated understanding about how profits will be generated in the long-term. Enhanced price realization, rather than lower costs, must be the foundation for future profits. Agencies and holding companies must cease working at arm's length on profit issues. They have a long-term strategic problem to solve. After all, it is hardly in the interests of the owners to see their portfolio companies weakened.
- Commit to putting a floor under prices. Make an explicit commitment to halt the falling prices. This means dealing with growing workloads and declining fees. It requires dealing with clients in an adult way, on the one hand, and tightening up the loose agency management culture, on the other hand.
- Measure and track agency workloads (SOWs). Agencies have no viable, uniform systems to document, track, measure and negotiate workloads, client by client. It's a huge problem. Client heads are left alone to handle this on an ad hoc basis, as if it's their problem rather than the agency's. Agencies must use a single system across all clients, across all offices, to document and measure Scopes of Work. ScopeTrack, a cloud-based SOW system, exists for this purpose. CEOs need to lead the SOW initiative -- it is not merely a finance or IT or project-management problem.
- Establish clear accountabilities for fees, workloads and resources by client heads. CEOs must reverse decades of 'loose management' and establish, in a serious way, the notion that client heads are accountable for the work they commit to, the resources they use and the fees that are received. Client head responsibilities go beyond 'don't lose the client.'
- Require office heads to review client heads and their clients. Office heads need to be accountable for the SOW management practices of their client heads. Require office heads to review client head performance on a regular basis, particularly for their management of workloads, resources and fees. Office heads need to be part of the solution. Fees, resources and workloads need to be 'aligned,' in balance with one another. This is surely not the case today.
- Establish a policy that the agency will be paid for all the work it does. Unpaid out-of-scope work must cease. This will add at least 10% to revenue and will increase profits accordingly. This can only be done if workloads are known and if relationships with clients are rebalanced.
- Recognize that clients are obsessed by the need for results. Clients pay commodity-like prices because they do not value 'creativity' in the same way that agencies do. Agencies must redefine their missions and become more aligned with the client obsession with 'shareholder value.' It's not enough to brag about creativity and awards won; what matters are the results that are generated for clients. CEOs must realign agency mission statements and lead a change in thinking about the purpose of the agency. Account management people must become as obsessed by results-generation as their clients.
- Publish thought leadership pieces and uncover best practices from within the agency. Agency websites are relatively devoid of ideas. Where is the thinking about how brand growth and profitability can be increased in this digital and social age? Where are the success stories about agency-driven advertising programs that won big for their clients? Rip a page out of the Bain / McKinsey / BCG playbook and see how the consulting firms fuel their growth by promoting ideas and success stories. It's all on their websites.
- Upgrade Account Management skills. These client-facing executives have to become consultative problem-solvers, not just coordinators or providers of service. Take an inventory of their existing skills and commit to major training and recruiting programs to upgrade their value-added.
This is an ambitious program, but it's necessary.
There is more to be done. Read all about it in Madison Avenue Manslaughter, which will be published and launched in June at Cannes 2015.