How the AOR cycle is killing creativity

by Gabrielle Tenaglia

In the marketing world, creativity is hard earned for both the agencies hard-headed enough to create the work and the clients brave enough to buy it. That’s why Cannes Lions is such a big deal for agencies and marketers. It’s a celebration of creativity. But creativity is getting harder to come by and the primary reason why is that one of the most common practices in our industry, the Agency of Record relationship, is hurting our collective ability to deliver more creativity.

I spent 20 years working in advertising agencies, with my salary paid by the AOR client businesses I worked on, so I understand the value and the partnership that AOR relationships offer. Agency partners build deep knowledge of the business and can pivot to changing business needs. For agencies, these relationships bring cash-flow predictability, and AORs can help attract top talent.

Today, however, it’s harder and harder for those AOR agencies to deliver the creativity clients need due to four key changes in the industry:

1. Marketing has changed more in the last five years than in the last 50 years

The pace of change in this industry requires that to truly be creative today, you need to be able to harness a wide spectrum of skills — new media, experiential, data science, and the seemingly never-ending emergence of new social platforms, among others. There are no agencies that can do it all. And marketers who are constantly looking to innovate versus their competitors can’t wait while agencies hire or develop the right expertise.

In the past six months since leaving the agency world, I’ve talked to countless clients who are frustrated by what their agencies are delivering. Often times, there are one or two critical things that their AOR agencies do well, and a laundry list of things that they don’t. But clients are hamstrung by the procurement process, by the pitch process, and the incredible difficulty of finding an agency who is excellent at doing exactly what they need, when and where they need it.

Winning entries at Cannes Lions during the past 15 years were more likely to have a higher number of agencies credited, according to a study last year from Razorfish and Contagious. The study notes that modern creativity demands collaboration from multiple agencies across multiple disciplines. But the AOR model is designed to prevent exactly that flexibility.

2. Bad pitch math

The economics of AOR engagements, especially when we factor in new business costs, has only become more difficult.

I previously worked on a pitch, not for an AOR engagement, worth an expected $1.5 million annually in fees. If the winning agency does really well, it might make 20 percent in profit or $300,000 annually. We were highly motivated to win this business so we spent $500,000 on the pitch — almost two years of profit to win the account.

We could also expect the other three agencies in the final round of the pitch to spend the first year’s potential profit. In addition, the client had four other agencies participate in an opening round of pitching, efforts that typically cost an agency about $50,000 in time and materials.

Altogether, the pitch effort resulted in $1.6 million spent to win a $300,000 profit. And that doesn’t include the time and expense on the client side, with four key marketing stakeholders and at least one procurement person involved over a period of four months while they ran the pitch process.

All that cost, that time of staff, freelancer fees, travel and materials ends up as overhead that the agency has to fund somehow. Agencies need to make that money back, so they build it in to the hourly rate — it’s part of the cost of doing business. So when you pay an agency, you are helping to fund all of the lost pitches the agency has participated in that year. The process used today wastes time, money and resources, and, in the end, makes agencies more expensive for clients to hire, creating a scenario where agencies have to hold on to the business for multiple years to make it profitable. Agencies do what’s best for the relationship instead of what’s best for the work.

3. Inflexible relationships

Spec pitches are so time consuming and expensive to run for agencies and brands that both sides try not to do them. The process works against everyone’s ability to be flexible and nimble and everyone ends up spending a lot of time trying to work on relationships. But does a better relationship really make for better work? Clients don’t get a bonus for having great agency relationships, but agencies focus on the relationship instead of focusing on the work — in the hope that relationship makes the work better.

At the end of the day, pitches work against project work and against bringing more options and more creativity into an organization. Agencies can’t pitch for project work because they can’t invest that kind of time and money without some expectation, or hope, that they will hold onto the business for four or five years. And clients can’t make this kind of commitment to an agency today.

4. The ‘valley of despair’

This chart from the Razorfish and Contagious study shows the length of client relationships in years, and Cannes Lion win rates. Win rates peak in year two, which, given the cycle of making work and award shows, likely means the work was concepted in year one. The study argues that this is evidence of the value of long term agency-client relationships, because after year 10 that average win rate doubles. And while there can be a lot of value in long term relationships, no one should feel forced to preserve relationships over creative work.

Let’s think about two more numbers relative to this chart: average CMO tenure in 2016 is 3.5 years, down six months from two years ago, and average agency tenure is 3.2 years. No one originally involved is around to see the boost in creativity that comes after year 10. CMOs are being replaced with Chief Growth Officers, agencies are being replaced by management consultants and creativity is being driven out of the system, which is bad for everyone.

Structural changes in the industry need to prioritize creativity and business results.

We need to disrupt this AOR/pitch cycle in a way that is efficient and that transforms the way that procurement thinks about bringing in new partners.

Today’s marketing procurement process can’t keep pace with the changing needs of today’s businesses. It’s not providing the right options, doing it fast enough, or enabling the right kinds of change. I believe that moving away from a traditional AOR relationship into more project-based work, doing away with the expensive and time-consuming pitch process, and onboarding new agencies quickly and efficiently, can bring more creativity into marketing organizations.

About the author:

Gabrielle Tenaglia is the General Manager of the Marketing Services Sector at Globality, a business-to-business marketplace using artificial intelligence and industry expertise to match projects from global brands with small and mid-sized independent agencies. Globality is backed by $37.5 million in funding from a roster of distinguished leaders and investors, including former U.S. Vice President Al Gore, Yahoo CFO Ken Goldman, and former U.S. ambassador to Germany John Emerson.