Ad agency clients worship the god of 'shareholder value.' It is the source of bloated executive salaries and bonuses, and the driver of obsessive cost reduction programs. Corporate strategy has become a quaint and outdated concept; what matters today are quarterly earnings. Marketing Departments are looked at with suspicion, because their spend levels do not guarantee future profits; Procurement Departments are celebrated instead because they deliver the goods. Can ad agencies thrive in a 'shareholder value' environment?
Thus far, the answer is 'no.' Annual fees have been declining at 2-3% per year, while separately, agency workloads have been growing at 2-3% per year. The deadly effect of this combination means that the 'price' paid to agencies for their services (fees divided by workload) has halved since 2000. Billing multiples are only 2.2x to 2.3x, which is less than half the rate paid to management consulting firms. Agency salaries have been very constrained, and this has limited the capability of agencies to hire and retain the best. Fee reductions have led to annual agency downsizings, so agencies have had to handle growing workloads with severely stretched resources -- and then suffer accordingly when client relationships are terminated because creative quality is 'disappointing.' Ironically, agency downsizing is carried out in the name of shareholder value -- for their holding company owners!
'Shareholder value' is a heavy burden to carry, indeed.
There are other dysfunctions, as well. The social contract between corporations and employees has been severely eroded. Companies neither demonstrate much loyalty to employees nor get it in return. Job insecurity is a fact of life. The salary gap between CEO's and employees has skyrocketed, creating a social and economic distance that further depersonalizes the fabric of corporate life. Risk and insecurity is being engineered out of corporate performance and passed on to employees and suppliers.
Management consulting firms recognized this trend decades ago and decided to ally themselves with 'shareholder value' rather than become a victim of it. They de-emphasized their corporate strategy consulting practices and developed expertise in helping companies reduce costs. Even the renown Boston Consulting Group became an ad agency 'salary and overhead benchmarking' firm for part of its work. Consulting firms reasoned that their studies should enhance shareholder value rather than be viewed as discretionary and expensive efforts whose costs needed to be cut. Procurement Departments became their best clients, and their fee levels and multiples were unchanged from the historical levels of 5.0x.
Agencies did not go down the same kind of path. Instead, they continued to tout 'creativity' as their contribution to their clients. They have not been rewarded for this; 'creativity' smacks of self-indulgence in the eyes of Procurement. Agencies looked like prime targets for cost reduction, and that is what happened.
What should agencies now do? Further fee reductions over the next 5 years will weaken agency operations, perhaps critically, if workloads continue to grow.
Agencies must take control of their Scopes of Work and ensure that the SOWs are constructed to deliver growth and profitability for client operations. This will require an investment in understanding the sources of brand performance problems -- an analytical, not a creative assignment. Then, agencies must negotiate to ensure that they are paid for all the work they do, rather than accept 10-20% unpaid Scope Creep as a fact of life. Putting a floor under falling prices must become Priority #1.
This requirement comes late in the game. 'Shareholder value' has been the corporate battle cry for 20 years. Its burden is now clear. An urgent agency response is required -- now!