Accelerating Risks for Madison Avenue
The predictability and reliability of client fees has been declining for decades – it is much harder for Madison Avenue to achieve targeted growth. Madison Avenue needs a new business model.
Credit: Sidney Harris, The New Yorker, The Cartoon Bank
1960-1985 – low risk. During Madison Avenue’s Golden Era, revenue risks were very low. Fifteen percent media commissions provided exceptionally high levels of agency income, and agencies could afford to hire and retain surplus headcounts to do “the work, the work, the work.” Scopes of work (SOWs) were manageable for TV, radio and print. Agencies retained their clients and had an occasional new client win. Financial and strategic success was virtually guaranteed.
1985-2005 – growing risk. Holding companies entered the picture after 1985, acquired overstaffed agencies and began programs of headcount reductions. Commission income disappeared, replaced by man-hour billing. Surplus agency headcounts no longer existed after 2005.
2005-2024 – higher risk. Digital and social media entered the picture, along with Procurement’s aggressive fee-reduction programs. SOW workloads increased dramatically. Agencies continued to downsize, liquidating senior talent and finding themselves short of talent for the excessive workloads — they overstretched their staffs. Client relationships deteriorated, becoming service-oriented and transactional, lasting only 3-4 years on average.
2024 and ahead – major risks. AI will replace many man-hours with software-generated work, replacing a significant portion of junior staffs and cannibalizing agency income. Agencies will remain short of senior, strategic talent. An entirely new business model is urgently needed.
Madison Avenue, I believe, is failing to acknowledge and take steps to identify and manage these business risks. The positive results from cost reductions and the maintenance of profit margins give a false sense of security. The real business risks are revenue and talent risks.
Risk Management. Companies that face high levels of ongoing risks, like banks, private equity firms and pharmaceutical firms, have Risk Management departments that scrutinize operations and act as a countervailing force to assure that risks are identified and excessive risks avoided. They carry out “due diligence activities” to assess and prevent risks.
Neither agencies nor their holding companies have Risk Management executives who focus on business operations. If agencies had Risk Management executives, they would ask the following questions:
1. How much client work will we be expected to carry out for the proposed fee? (We need measures of SOW workloads, and we have none at present. We need to measure SOWs and price for our work, not for our man-hours).
2. Will the proposed scopes of work strengthen and grow the client’s brands? (We are rarely briefed about the brand challenges that our SOWs are designed to solve. We need better information about brand performance problems).
3. What needs to be changed in the SOWs? (Our opinion is not really sought – clients care more about high service for low fees. We need to re-establish our strategic partnerships with clients – and propose better SOWs).
4. What kind of resources will our SOWs require? Are they available and affordable for the fee? (Currently, we staff for the fee level, not for the workload level. We need to have sufficient staff for the SOWs rather than stretch our people).
To reduce future risks, Madison Avenue needs to develop uniform SOW disciplines across offices and clients – to have uniform ways to document, measure and price agency work. Man-hours need to be abandoned as the basis for revenue generation.
Huge, the former digital creative agency, has transformed itself and can now position itself as a strategic design and innovation company based on a transformation of its mission and scope of work practices (see Madison Avenue Makeover, 2023, which documented Huge’s transformation journey).
A number of consulting firms, including Farmer & Company have the databases and expertise to help Madison Avenue solve their SOW problems.
Agency CEOs, who have historically focused on “making the numbers” for holding company owners, now need to shift their priorities to “reducing revenue and talent risks” for the future.
Vigorous management change programs must be put in place and executed before AI advances too far.