The current advertising business model: thoughts.
The growing complexity of platforms and channels used today to reach consumers means the need to develop much more integrated ways than they are now. In these new models, teams inside agencies must play a far more active and strategic role in managing all the functions of the agency: back-office, middle-office, and customer-facing activities.
Agencies are urgently looking for partners and people capable of designing integrated, “end-to-end”, “omnichannel”, “integrated”, “data driven” experiences, through this set of ideas, there is an exploration of thoughts about the current business model and possible alternatives to improve the performance and activities in the industry.
Stuck in the model
At the highest level, global marketing agencies have essentially evolved toward one common operating model.
A handful of giant holding companies dominate the industry, each having grown through a decades-long strategy of acquiring smaller agencies. The four largest are WPP, Publicis, Omnicom Group, and IPG. Each group its agencies into categories by discipline: creative and branding services, digital, media planning and buying, public relations, and market research. And, historically, each has managed its agencies financially, but has left them alone to bring their services to market independently. The result is an operating structure of complexity. Some of the marketing giants manage dozens of subsidiary divisions and hundreds of branded agencies.
Despite that complexity, this operating model has served these companies and their clients very well.
But in this era of disruption, it is no longer sufficient for survival, let alone success. To put the parent agencies in a better strategic position, leaders cannot just regroup or rationalize functions. They must fundamentally rethink their organizational and operational structures so that they can serve clients better.
What is needed is the development of business operating models that are much more integrated than they are now. In these new models, they must play a far more active and strategic role in managing all the functions of the agency: back-office, middle- office, and customer-facing activities.
The growing complexity of platforms and channels they must use to reach customers means senior brand executives who are urgently looking for agency partners capable of designing integrated, “end-to-end”, “omnichannel”, “integrated”, “data driven” customer experiences.
Rightly or wrongly, clients see the current model, in which they are forced to engage multiple agencies to address multiple disciplines, as full of redundancies and an impediment to efficiency. The ratio of “working” dollars (money spent on, say, ads in the marketplace) to “non-working” dollars (agency staffing costs) is increasingly being scrutinized.
“Your complexity should not be our problem, so we want you to make that complexity invisible”.
Marc Pritchard, (2016). AdAge. P&G’S Pritchard to agencies: your complexity not our problem.
The current model can’t accomplish that effectively or efficiently.
The proliferation and fragmentation of marketing platforms and channels, for example, demands best-in-class teams capable of creating integrated experiences. Talent can no longer be separated into specialized branded groups operating without regard to the goals of their sister agencies.
The growing need to develop new capabilities is yet another internal driver of business model change. Executing on strategies like the systematic use of data, or leveraging innovative technologies like virtual reality, requires investment at a scale that is possible to achieve across agencies but not at the individual agency level.
Current Path
In general, back-office functions are the low-hanging fruit of this process. To the extent that some of these capabilities have already been centralized in shared services centers, IT and finance have generally led the way, followed in some cases by functions such as treasury, tax, legal, and real estate. Human resources has generally lagged because creative talent is seen as such an important point of differentiation between agencies.
This component of the transformation will accelerate, as centralized back-office capabilities will soon be table stakes for the global marketing companies, relatively simple ways to save costs and demonstrate efficiency to clients.
The most headway has been made in production departments, as agencies have been tasked with cooperating in support of integrated pitches and unified storytelling.
Despite some steps toward greater alignment, collaboration, and parent-company-level management, there are challenges preventing the transformation from happening quickly or aggressively enough.
Perhaps the most fundamental of these impediments is that the fierce competition between agencies still remains firmly at odds with the new drive for more interagency collaboration.
Billing hours
It is not a secret that part of disruption to the industry is the loss of trust between agencies and brands. The current billable hour structure is not dissimilar to the commission-based media buying model that has incentivized agencies to advise their clients to make bigger buys, whether it is in their clients’ best interests or not. Selling based on billable hours may encourage an agency to operate below-board.
For example, an agency might cease operational work before the end of the month because their allocated hours might be spent, which naturally, contradicts the always-on expectation of the retainer model. Additionally, if an agency moves slower, they can charge more for their product, which begs the question, “Does it really make sense to penalize an agency that does good work faster?” But that is exactly what has traditionally happened.
During a time when advertising is attacked by controversies that have blurred the industry’s reputation, like ad fraud and brand safety, the shady practices encouraged by billable hours only upholds this narrative. The “in-house agency” has become more common, with more and more brands bringing in talent and building out their teams in-house, an environment in which billable hours are never even discussed.
Abandoning billable hours as a sales mechanism forces agencies to think more strategically, not tactically. Without billable hours, agencies must make more meaningful business cases to their clients and are unable to hide behind billable hours and vanity metrics that have little to relate on a client’s sales or business objectives. This approach is more challenging but better for the long-term health of agencies. But billable hours are an effective internal tool but can have a harmful effect on an agency’s client-facing practices and also create an atmosphere that fosters bad behavior.
Opportunities
Back Office
Talent management is perhaps most critically in need of a company-wide approach. The lack of integrated talent management and succession planning across different agencies means existing agency executives don’t have access to the same opportunities and sponsorship as they would for other massive global corporations. Given the extent to which agencies are suffering from high turnover and losing key talent to tech companies.
Front Office
Superficial change, characterized by ad hoc task forces being reunited on top the existing operating model, isn’t going to work. For example in the case of an important pitch to a major global consumer, the agency assembled a multidisciplinary team of all-stars from across its network. It was a clear effort to impress the client with the talent and demonstrate that it could hold an integrated best-in-class, cross-agency team on the client’s behalf. This move backfires, when the client noticed that members of the cross-agency team were introducing themselves to one another before the meetings.
On the other hand, meaningful change that will better position the marketing giants strategically is a matter of not just regrouping functions but fundamentally rethinking organizational and operational structure to better serve clients. Existing agency brands can’t emerge from this process untouched, and new business units will need to be formed.
Organizational Opportunities
In a way, agencies suffer from organizational attention deficit disorder (ADD). By their very nature, agencies are organizations that are short-term oriented. Everything in the world of agencies works at the pace of ad campaigns that are often only a few months long. Staff rotates in and out of accounts and between agencies all the time. Time spans are typically short.
Even more importantly, incentives are stacked against long-term strategies. In agency land, you get rewarded for winning the next piece of new business or for increasing the client’s spend levels this quarter. Deep skill development, the creation of real intellectual property and the building of efficient infrastructure are all things that take years, and attention spans are simply not that long.
The optimal organization choice will depend on several factors and circumstances.
Interdisciplinary business units
This model aligns along disciplines or archetypes, but would further integrate disciplines by combining branding/creative, media buying, and digital into a single business unit called, perhaps, “brand experience”.
The rationale behind this model is. First, digital media is increasingly integral to every marketing campaign, so it makes little sense for digital and branding units to operate independently. And the integrated customer-experience design capabilities for which marketers are clamoring are typically strongest in the digital agencies, which naturally think in terms of user experience and user interface. By contrast, the legacy branding agencies too often still think in terms of the 30-second ad spot.
The second rationale behind the interdisciplinary business units model is that media-buying agencies have, in recent years, driven the lion’s share of profits for the global marketing companies because they’ve participated in the overall advertising spending growth even as that spending has shifted from TV to online.
Legacy branding/creative agencies have often been left out of that growth because their business isn’t classified as working media and because their business model is limited by cost-plus pricing. As a result, brand agencies are increasingly going after media agency clients (and offering media management capabilities in the process).
The reverse is happening as well, with media agencies adding their own creative offerings to their pitches. That kind of competition between sister agencies argues for an inevitable convergence between the two disciplines, which solves the problem proactively.
One-brand, one-agency experience
The notion of a single, monolithic business unit that merges branding/ creative, digital and media buying into a single “experience” agency may seem easy but it isn’t due to the problems of ego and assigning lead stakeholders to each project. But it offers clear advantages: It is an ideal structure for providing a truly integrated marketing experience, it facilitates horizontal storytelling in the sales process, and it enables that storytelling to take shape earlier and more organically than is possible in the current environment.
Become a Maker
“Our clients were asking for data-inspired, high-quality content that could be produced quickly and at less cost, Steelhead is more and more becoming a key offering as the typical full service integrated agency model just doesn’t deliver for modern brands”.
Mike Sheldon, (2018). AdWeek. What the MediaMonks Bidding War Revealed About the Evolution of the Holding Company Model. https://www.adweek.com/agencies/what-the-mediamonks-bidding-war-revealed-about-the-evolution-of-the-holding-company-model/
It makes sense to have an interest in production. Agencies need to stay way ahead of the client ask.
There most certainly is merit to this new way of doing things which, according to the buzzwords is agile, efficient, and of premium creative quality, in other words faster, better and cheaper and, in this ideal model that is streamlined and arguable more efficient, the creative solutions can indeed lead to quicker, faster and better content and storytelling.
This view is extremist in the sense that it fails to consider this new type of agency working in harmony with others ad agencies and with consultancies, where none of them have to follow this path.
But over and over again it seems that what we hear from brands, and this has gone on for years, that they want to get rid of the middleman and work more directly with the makers, it marks a point in time when production has been more strategically placed at the center of advertising, in a search for a more agile system.
Today, there is an easy access to the same talent that was previously at ad agencies. It becomes easy to plug them into, that is why production companies have been expanding into creative strategy and ideation. Also agencies are building their own in-house production and post-production capabilities, and also know that brands are starting to reach out to production and post companies directly. In a certain sense, both ate starting to eat each other’s lunch.
A natural evolution. And all of them are in the advertising business… at the end each first idea is mostly tied to “Let’s make something”. That is just the sweet spot of production companies.
Improvements inside the current business
Historically the agency business was driven by creative excellence and personal relationships, both things that lose importance in a world of fast-moving, data-driven, AI-powered marketing, for better or worse.
Most agencies still run on Excel sheets and lunch meetings, not modern software infrastructure. It is very rare to see real proprietary technology at a traditional agency. Many pretend to have something like AI-driven buying and reporting tools, but these are rarely more than piles of off-the-shelf software components. But there are a few things that could improve today in this business.
- Invest in real talent and pay great people properly. Under all the financial pressure of the recent past, agencies have systematically started to hire ever cheaper staff, obviously at the expense of quality and competence. The amount of money that junior agency staffers make for their very, very long hours is ridiculous. This is just leading to a downward spiral. Clients notice that they’re not getting the best talent, and of course they will want to cut fees even more.
- Automate and invest in technology, not office space. The amount of manual labor that is still being done in agencies is amazing. Madison Avenue media agencies often have hundreds of badly paid junior people sitting around in expensive Manhattan buildings, creating media plans by hand. Buys are typically executed by emailing Excel sheets. Why in the world can media buying not be done online instead?
- Build real partnerships with tech vendors and publishers. Agencies complain bitterly about brands treating them just as expendable vendors instead of long-term partners. But guess how agencies treat their tech partners and publishers? Exactly. As soon as the next guy comes along and offers lower fees by half a percentage point, all loyalty goes out of the window. Again, it is a case of organizational ADD and rampant short-termism. The most productive and financially successful relationships between service providers and tech vendors are those that are developed over the years, strategically on many levels, not just over a glass of rosé at Cannes.
