Madison Avenue Manslaughter, a book by Michael Farmer about the momentous changes in the advertising industry, is currently in draft and going through final editing.

Agency workloads have been growing. Fees and retainers are flat or declining, often requiring agency downsizings. Meanwhile, holding company owners seek increases in growth and profitability. Agencies are caught between their clients and their holding companies.  Creative resources are being stretched, putting agency long-term creative capabilities at risk.

The introduction of the Madison Avenue Manslaughter book is below. 

All materials copyright (c) 2014 by Michael Farmer.

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From Madison Avenue Manslaughter

By Michael Farmer

 Introduction 

Victoria Roberts / The New Yorker Collection / Cartoon Bank.  With permission.

Victoria Roberts / The New Yorker Collection / Cartoon Bank.  With permission.

 

The global growth and influence of advertising agencies is one of the world’s great business success stories. From modest beginnings, the industry has grown and flourished.

Early advertising involved little more than preparing posters or running display ads in newspapers for patent medicines, soaps, cereals and cigarettes. Today, advertising blankets the world via television, movies, magazines, billboards, radio, newspapers, brochures, electronic displays, computer screens, mobile telephones – as well as via T-shirts, coffee mugs, pencils, athletic uniforms and anything else that can either catch the eye or be handed out. Digital and social advertising includes web pages, games, YouTube videos and tweets that are designed to create involvement with customers. An Oreo cookie tweet (“You can still dunk in the dark”) during the accidental lighting failure of the 2013 Super Bowl defined a new form of instantaneous event-driven advertising. Coca-Cola’s YouTube video of drones delivering cases of Coca-Cola to immigrant high-rise construction workers in Singapore illustrated another type of innovative video advertising in the digital age.

Advertising reaches out to consumers not only from Madison Avenue, USA, but also from London, Frankfurt, Paris, Moscow, Johannesburg, Tokyo, Ho Chi Minh City, Bangkok, Beijing, Singapore, Melbourne and hundreds of other cities around the world. Advertising is ubiquitous, and so are the agencies that create it. Ogilvy & Mather, a typical global agency, has offices in 172 cities in the world.

Historians of advertising mark the end of the Second World War as the beginning of the global boom in advertising. This was the Golden Age of Advertising, when Bill Bernbach, David Ogilvy, George Lois, Leo Burnett and other well-known giants – typically founders of their firms -- made enduring creative marks on the industry. They launched what came to be known as the Creative Revolution, abandoning the hard sell and making advertising entertaining, amusing and palatable. They did this through irony -- making fun of advertising and having fun with the products they advertised, treating the consumer as an insider, in on their joke. Not coincidentally, the leading products they advertised grew and established strong competitive market positions, backed by large spends on over-the-air and print media that were promoted by their ad agencies, who were remunerated by commissions on the media and production spends.

Creative Revolution advertising fueled product growth and created memorable ads during the decades after World War II. It remains the template for today’s advertising.  Agencies, advertisers and consumers expect advertising to surprise, enlighten, and entertain; clients expect it to generate results at the same time. 

Creative advertising went global with commercial television, and advertising agencies went global as well, opening up offices around the world. Their success and profitability attracted financiers from New York, London, Paris and Tokyo, and soon, nearly every major ad agency was acquired by one of the newly-created public holding companies in marketing communications: Interpublic, Omnicom, WPP, Publicis, Dentsu, Havas, MDC – and the holding companies themselves grew and showed a positive track record of profit growth for investors. WPP, the largest of the holding companies, had 2013 revenues of £11.6 billion ($18.2 billion), a PBIT margin of 15.1% and a market capitalization of £18.6 billion ($30.8 billion), with operating companies in advertising, media, marketing data, public relations, branding, healthcare, direct, digital, promotions and specialist communications.

With all this holding company success, it may be surprising to learn that the operating and financial health of the industry’s major advertising agencies is weakening. Agency weakness is neither a matter of public knowledge nor the focus of sufficient senior executive action to reverse the trend. Agencies are slowly dying from within, caught between their clients’ practice of cutting annual fees while growing creative workloads[1], on the one hand, and their parent holding companies’ squeezing them for growing profit margins, on the other hand. The only way agencies can handle this conflict is to downsize or otherwise reduce their headcounts and costs. This enfeebles the agencies at a time when clients’ expectations for more creativity, increased digital and improved results are at a feverish pitch.  Not surprisingly, client dissatisfaction with their agencies appears to be at a high if we judge this by the rate at which they fire their current agencies and search for new ones.[2]

Agency creative workloads are growing substantially, particularly as advertisers experiment with digital and social advertising while maintaining the growth of traditional advertising  -- TV, print, radio, outdoors. With growing creative workloads and declining fees, agencies have to do more creative work with fewer, lower-cost creative people. The effort puts a considerable strain on creative operations and quality. Every year the strain gets worse, and agencies are increasingly stretched and creatively challenged.

A sensible person might assume that agencies are literally paid by their clients for the creative work they do. This is not actually the case. Agencies are paid by the head for the number of people assigned to their client accounts – creative workload is not technically a part of the headcount equation. Only a few advertisers, like Coca-Cola, British Petroleum and Lenovo have taken the step to pay agencies formally for the measurable work they do – by the “deliverable,” as it were.

As a practical measure, it’s the agencies’ clients who determine how many agency people are assigned and paid for. In the typical process, clients first determine an overall fee, based on their marketing budgets, and agencies then assign an affordable number of people based on this figure. Say, for example, that a large client establishes an agency fee of $10 million for the coming fiscal year. A typical agency would assign a number of people that would add up to $4.25 million in salaries and benefits. This might involve 10 creatives and 32 other agency people in account management, strategic planning and production. After covering overhead of $4.25 million, the agency would have $1.5 million left to cover profits, or 15% -- thus meeting holding company requirements.

The amount of creative work to be done during the year develops through a separate process. The creative workload “happens” as client marketing plans evolve throughout the year. Creative workloads grow independently, almost as if they were unrelated to agency resources or fees. These creative workloads are not measured or negotiated, although they are discussed in a process called “Scope of Work Planning,” but because there are no workload metrics – no generally-accepted way of quantifying creative workloads so that a required number of agency people can be assigned – the exercise is nearly meaningless from an operational standpoint. In any case, there are large differences between expected Scopes of Work and the actual amount of creative work that is done. The 10 creatives assigned to the $10 million client might or might not be able to handle the workload comfortably. It all depends.

In the end, looking at the most recent decade, agency workloads have been growing but typical agency fees and headcounts have not.

This workload-fee problem is not isolated to minor agencies. The big agencies, whose reputations were first made in traditional TV, print and radio, suffer the most: agencies like Ogilvy & Mather, J Walter Thompson, Y&R, Grey, McCann Erickson, FCB, Lowe, BBDO, DDB, TBWA\Chiat\Day, Publicis, Saatchi & Saatchi and Leo Burnett, to name a few. These big-name agencies grew up with the belief that doing any and all client work was simply part of the service, as it was originally when they were paid, before 1990, via 15% media commissions. Since then, commissions have been abandoned as the unique form of agency payment. In its place, clients began paying agencies by the head, but this did not change the way agencies thought about servicing their clients. Any and all client work continues to be done for an agreed fee, which remains mostly fixed.

Workloads were not measured during the commission era, just as they are not measured today.

The enduring cultural legacy of the commission days left agencies without the means to measure their workloads. Instead, they were used to making do with the resources they could afford, just as they had been throughout their past, and if the resources were too few or too junior, they would soldier on in any case. They may have complained to their clients from time to time about how inadequate their fees were, but with much less seriousness than the problem actually warranted.

What could have changed their practices was the relentless decline in fees, driven by client procurement departments over the past 20 years, and the growing workloads. Fees divided by workload equals price, and price has been in decline for at least two decades:

Price for Agency Deliverables

($ thousands, constant 2012)

chart.png

Like the proverbial frog in a pot of cold water, agencies adapt to price declines like frogs adapt to a gradual increase in water temperature – it’s fine until it is not, and the frog eventually dies. Agencies are on the same path as their amphibian friends unless something fundamental changes in the way agencies measure their growing workloads and negotiate their relationships and fees.

I have worked as a consultant for advertising agencies and their clients for the past 20 years. This followed a previous 15 years as a consultant, first with The Boston Consulting Group and subsequently as a director of Bain & Company. In these 35 years, I’ve seen a lot of industry changes and nearly as much senior executive action. The advertising industry, though, is an outlier. The industry has undergone more strategic change than any other that I have seen, but the level of senior executive response to these changes has been surprisingly weak. To put it bluntly, senior agency executives have not protected their creative departments or the creative capabilities of their agencies. Through benign neglect of growing creative workloads, and reluctance to tackle clients over declining client retainers, senior agency executives are presiding over the slow decline and over-stretching of a diminishing pool of burned-out creative assets. This is done in the name of meeting holding company profit expectations.  Their efforts to develop new clients and grow revenues is their most visible response to client fee pressures, but since every agency CEO and President in the industry is chasing a limited pool of new business, the results are disappointing.  Prices are driven even lower by cutthroat competition, and no agency manages to outgrow its competitors.  

Phileas Fogg burned his ship’s furniture for fuel to reach Liverpool on his way around the world in 80 days. There is no Liverpool within reach for today’s big ad agencies.  The burning of creative assets is a temporary fix for a more permanent problem.  At some point, the ship will find itself adrift in the middle of the ocean with no more fuel to propel it. 

In this book, I outline the reasons why I believe the industry has reached a critical, even dangerous point in its development. I point out the logical consequences of the failure to act, and I’ll offer a solution to avoid inevitable disaster.

Agencies and their clients need to recapture some of the respect, fun and profitability of working in what was once one of the most fulfilling and glamorous of industries but has become a grim sweatshop for the people who do the work.

Agencies complain privately that clients are demanding and unreasonable, and that agencies are treated as commodity suppliers. They say that it is hard to make money because fee setting is in the hands of Procurement and workload is in the hands of Marketing. Procurement is rewarded for lowering fees, and Marketing wants to experiment, so what can be done? Agencies see a gap in perception between the value they bring and the way they are treated. They accept this as today’s business reality – regrettable and unfortunate, but that’s simply the way things are. A shrug of the shoulders suggests the futility of their situation.

For their part, Procurement executives tend to see agencies as disorganized, chaotic and overpaid for their services. Ad agencies have longstanding reputations for excess, fuelled especially by the annual June Festival of Creativity in Cannes. High agency costs might be acceptable if agency work were creating reliable brand growth and profitability, but brands are not exactly flourishing, especially in recessionary times. Award-winning creativity is not enough; clients want improved brand performance that hits their bottom line. Agencies are not willing to be on the hook for guaranteed results. Advertisers feel entirely justified, cutting what they perceive as the fat out of agency fees.

Growing workloads and declining fees – it’s a recipe for disaster. Sooner or later, an agency will embarrass its holding company and the investment community by failing to grow or deliver the necessary profits. Investment analysts will then raise questions – what has been going on here?

This book was written in advance of this outcome – to outline the industry problems and encourage agencies and their clients to take management actions to keep disaster at bay. These actions form the basis of the required strategic response by agency Chief Executive Officers and their clients’ Chief Marketing and Procurement Officers.

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[1] As used in this book, “creative workloads” refers to the creative deliverables that represent an ad agency’s output for its clients.  Included in the workload is the associated brand strategic work that provides “positioning” for the actual creative deliverables.  Creative workloads exist across all media, including TV, print, radio, out-of-home, direct, promotion, sponsorship, digital, social, and every other possible medium that can contain marketing content.

[2] Industry estimates of relationship longeivity are at a new low – 4 years or so, according to The Bedford Group.