Ending the Hunger Games for Mad Men Model

The future of the agency

Chief marketing officers at leading consumer brands are a little like the U.S. president — they submit hefty budget requests and have an average of only four years to achieve their goals before they are potentially shown the door.

CMOs don’t do all this alone. Just as the president oversees a web of agencies, CMOs at large companies typically manage an ecosystem of agency partners that has grown both highly consolidated and highly fragmented.

Call them the “Chief Agency Officer.” In terms of agencies, CMOs can choose from the top four global firms offering “end-to-end solutions” and directing 80 percent of all advertising spending, or thousands of smaller independent players and boutique specialists competing along the “long tail.” Top marketers also face the temptation to create in-house agencies, as Apple and other companies have done, and they can now choose from partners outside the traditional agency space, ranging from big tech companies like Google and Facebook to multichannel networks like Maker Studios and Fullscreen to talent agencies like Creative Artists Agency and William Morris Endeavor.

To guide them through the thicket of options and build businesses that last, top marketers need trusted partners, not just “vendors” sourced by the client’s procurement department for the next campaign and kept hungry for the next pitch. Agencies can do this efficiently and at sufficient scale, but for this to work the agency business model itself must be completely rethought, as well as the procurement-led client model that drives it. The Mad Men model of big hourly fees, at a three-martini pace, for uncertain results is over, having been replaced by a Hunger Games-style competition among agencies to the death.

Neither option works. Executives on both sides must reimagine the client-agency relationship. Three areas are ripe for change.

Incentives

For decades, big law firms, as well as big agencies, billed for their time irrespective of results. That longstanding practice is under attack, because the model fails to ensure that firms have clients’ best interests at heart. Compensation should not depend on how much time it takes to deliver strategic and creative work — a great idea can take one day or two months to develop. Agencies should be compensated based on results, not some archaic fee- and time-based schedule that builds complexity into the system and creates incentives to do things bigger, not necessarily quicker and better. In addition, there should be absolutely no incentive to place content in one medium over another, or to increase media spending beyond an optimized level. Both of these practices are commonplace, and once again demonstrate that incentives are misaligned.

Just as important, all compensation incentives must take place over a time frame long enough for agencies to adequately measure results and develop brand knowledge. It takes time for a trusted partner to learn a company’s culture and its unique business context. That knowledge rarely comes from a series of one-off deals or a race-to-the-bottom pricing model. We know of one major company that put a major account up for bid using a Hunger Games-style online system in which a dozen or so “finalist” companies anonymously bid to provide strategy, digital, video, experiential, and other services. Companies were given the opportunity to lower their bids in response to the anonymous posts from their competition. They didn’t know if they were competing against a small shop in Romania or a major international agency. Strategies such as these leave little money left over to pay scarce talent what they deserve and to retain them when they get attractive job offers from tech companies. Quality suffers as a result.

Private equity offers an extreme example of long-term mutual commitment. A typical private equity fund has up to a ten-year life. Five years may be spent finding investments and another five years may be used to create a return on those investments. This kind of mutual commitment, which includes substantial up-front due diligence, allows adequate time for companies to demonstrate the high performance that would validate more significant compensation. Granted, a ten-year commitment is not going to work for many CMOs these days. But a lower-level, multiyear deal aligns both the agency’s and the CMO’s interest in generating results over the medium- to long-term, and allows for sufficient mutual up-front investment in the relationship.

Outcomes

Fee structures should be adjusted so that an agency’s profit is at least partially determined by measurable performance. Agencies should be selling their results, not their time. The hedge fund world provides a cautionary tale, with its customary 2 percent management fee coming under recent attack for being paid regardless of performance, especially when considering that better net returns and much lower fees can often be had from indexed ETFs. Marketing organizations will similarly demand more from their agency arrangement than high billable rates.

We live in a data-driven age, when companies must measure and manage their return on marketing investment (ROMI). Agencies must therefore demonstrate their abilities to deliver outcomes as a result of their client’s marketing spending. This ROMI metric can be as basic as lifting sales on promoted items, increasing fans and engagement on social-media channels, and lowering the cost per like on Facebook. (Measures such as social media likes and shares can be manipulated, of course, so companies must get much savvier about how they know what they know.)

More nuanced metrics can include analyzing an improvement in brand advocacy and favorability, as measured by metrics such as Net Promoter Score or innovative new metrics like BCG’s Brand Advocacy Index. Agencies can also measure the rise in a brand’s value or image, an increase in unaided brand awareness, or a boost in customers’ intent to purchase. For some brands, a decline in the number of vocal detractors can be a leading goal that a client establishes up front with an agency.

Increasingly, agencies are using big data and the latest analytical tools to tease out new insights. Tools like Crimson Hexagon, for example, can measure the consumer sentiment of brand conversations in real time, with an algorithm that can be trained to discern positive, neutral, and negative social media posts, and coming soon, the emotions tied to brands or campaigns.

The truth about ROMI is that no one has yet to completely crack the code. Much of what passes for marketing effectiveness metrics remains a soft science. More important than blindly following the siren song of any particular metric is to decide on a basket of relevant metrics, separate the signal from the noise, and follow metrics over a sufficiently long period of time to accurately gauge results. Companies then have to put these metrics in perspective. At the end of the day, a campaign can hit roadblocks if it is poorly executed, or if competitors cut prices in half, or if a salesperson is rude to the customer. With so many variables to understand, developing a definitive science of marketing effectiveness will remain a significant challenge for clients and agencies.

Cost Efficiencies

Pressures on companies and agencies alike to become more efficient with their spending will only increase in the future. The threat of disruption from a company that is better and cheaper lurks around every corner. To build a medium-to-long-term business relationship based on trust, clients and agencies must establish a scalable business model that can adapt to the industry’s changing demands while also ensuring comprehensive brand stewardship.

For example, brands are seeing that quality video content can be produced at a fraction of the cost of typical agency video spots thanks to improved technology. Lower-cost sources of content can help feed the insatiable appetite of a seemingly endless, ever-changing array of distribution channels. But hiring two guys in a garage to shoot videos just to save money can risk creating work that is inconsistent with the brand and can end up costing more over the long run. Small shops won’t always have the big-picture brand strategy in mind. Established agencies can help top marketers manage the complexity of these new content-sourcing relationships. But hiring an agency to produce low-cost work alone won’t be sustainable. Clients need to motivate agencies to do whatever it takes to find cost efficiencies, because they have a long-term relationship that includes a sustainable mix of larger and smaller projects.

Clients and agencies should structure win-win relationships, rather than winner-takes-all contests to lower costs. One idea would be for clients to take a small equity stake in a partner agency, much as airlines once took a stake in online travel sites or companies provide seed funding for an exiting employee’s startup. For example, in return for a guarantee of $5 million in fees over three years and proprietary access to the latest data about what works, clients could receive options or warrants equal to 2 percent of the agency’s nonvoting shares. Clients would have a vested interest in an agency’s success, and would also benefit from their role in an agency’s growth. Clients would have much less interest in putting pressure on agencies to drastically lower fees when they have the chance to share in the upside if an agency were to be sold.

What’s at Stake

CMOs are under increasing pressure to deliver, and the ways they must deliver are multiplying in number and complexity. Despite the threat of disruption, agencies aren’t going away as a partner to the CMO. They uniquely fulfill core needs for brands, starting with their need to differentiate themselves on a basis other than price, since most of the traditional means of differentiation, such as product features and supply chain efficiencies, can be quickly replicated by competitors. Agencies also deliver measurable increases in brand value that are essential to an organization’s long-term health and its enterprise value. In addition, the best agencies employee people who have deep digital experience and expertise in consumer behavior and data analytics, along with a wealth of creative minds, in order to combine deep consumer insights with sharp and targeted communications that directly solve clients’ business problems.

That being said, the client-agency relationship must be transformed. CMOs that get ahead of this shift — with the help of trusted agencies that can help them maneuver amid a world of constantly changing channels and tools — will enjoy the advantages of simplicity and the power of real results. Those that don’t face not only brand and reputation risks from the uncoordinated actions of divergent agencies acting on their behalf, but also operational risks that too often take the form of higher costs and greater inefficiency.