Why Ad Agencies Must Be Run to Achieve Business Success -- and why I write about agency shortcomings
The gap between what agencies could be and what they are has become very large. The lost opportunity can be captured by CEOs if they do the right thing.
Credit: Charles Barsotti, The New Yorker, The Cartoon Bank
Ad agencies used to be highly successful businesses. During the media commission era, they generated such high levels of income that they could afford to overstaff their creative work, using multiple creative teams and incurring high levels of rework without hurting their profitability. TV briefs were the most profitable and desirable ads.
If a TV ad was highly creative, entertaining and award-worthy, it could be aired over and over again, generating a 15% media commission each time it ran. Creative work generated measurable income. Creativity had a distinct and measurable business purpose — this is why agencies celebrated creativity in the good old days.
Today’s agency executives, most of whom entered the industry after the end of the media commission era, continue to laud creativity as if it were as valuable today as it was in the past. Today’s executives echo Bill Bernbach, Leo Burnett and David Ogilvy as if the experiences of these creative giants were as relevant today as they were in the very different past.
This is nonsense, of course, but the belief is so widely held — and so often articulated — that it gets in the way of clear thinking about what an agency needs to do to achieve business success today.
“Being more creative” is a much smaller part of the equation than it was in the past, and other factors, like technology and brand / strategic problem-solving have become much more important.
That’s something you won’t hear from the organizers of Cannes and other awards ceremonies, but it is the kind of idea that you will always read about in this column — because it is the truth.
PLAN A
When media commissions disappeared, replaced by labor-based fees that broke the industry’s price-fixing monopoly, all hell broke loose.
Clients saw an opportunity to cut agency fees, and they brought in procurement to wield the head-chopping axe.
Holding companies were equally complicit. Martin Sorrell, at WPP, acquired agencies and raised their budgeted profit targets, requiring them to downsize to meet their numbers. This became the holding company pattern for the industry.
Downsizing was the foundation of Plan A. Downsizing was a smart thing to do, at least until 2004, when the surplus resources were gone — but agencies continued to downsize, as if its staff resources were a bottomless pool to be dipped into every time there was a cost-reduction need.
Even worse, 2004 marked the beginning of the digital era, which saw an explosion in the amount of work in agency scopes of work — media plans and buys in every possible channel, and creative campaigns to fill each of the media buys.
C-Suite executives continued with Plan A, downsizing to “make the numbers” despite the massive increase in workloads.
CONSEQUENCES OF PLAN A
We know what the consequences have been. A deterioration of quality. AOR and long-term relationships disappearing. Clients now put media and creative relationships into review every three years or so, forcing senior agency executives to spend all their time hustling for new business and trying to win every RFP — most often by cutting price against competitors.
Much of the advertising of the past fifteen years has been ineffective. Twenty of the top fifty major advertisers have suffered, seeing their sales grow at less than GDP growth. CMOs lost status, seen as executives who no longer drive improvements in shareholder value. On average, CMOs have been fired every three years or so.
Overall, the industry is now a cost-driven industry, short of talent, with bloated and ineffective scopes of work, stretched agency resources and uncertain job / career prospects for those who deserve better.
Plan A, with its focus on downsizing and inflated scopes of work, has been a disaster.
You won’t read about this in Ad Age, Campaign, The Drum, Adweek or any of the other trade publications, but you will read about it here — because it is the truth.
PLAN B
Plan B takes a sober assessment of the industry’s current situation and fixes it, one issue at a time. Here’s the required path:
Agencies change their definition of success. Winning new clients and winning awards do not define success. Client wins are not genuine wins; they replace clients who have been lost — that’s why agencies have grown so little since 2009. Success needs to be defined as “we diagnose our clients’ brand problems, help them design appropriate scopes of work, and help them achieve improvements in the competitive performance of their brands. Because of this, we are working in committed long-term relationships.” Agency C-Suite executives must work on improving existing relationships, not on finding new clients.
Agencies develop or acquire consulting-like skills. It is not enough to be able to carry out bloated, ineffective, multi-dimensional scopes of work. What matters is to know why client brands, and particularly legacy brands, are not growing, and to be able to develop focused scopes of work that can change this dynamic. This requires consulting-like diagnostic skills.
Agencies shift to being paid for the amount of work in their agreed scopes of work. During David Ogilvy’s day, the average creative completed three ads per year. Today, the average creative completes between 200-300 ads per year. Agencies, more than ever, are “output producers” — yet, during my 35-year experience working with them, I have yet to find an agency that documents or measures the amount of work in their scopes of work. How crazy is this? Does Apple know how many iPhones it produces every year, model by model? Yes, indeed. Why don’t agencies know what their outputs are?
Agencies invest in talent and create a genuine culture of success for their employees. Today, employees are “costs to be eliminated if we fall short of our budget targets.” WPP, the largest communications holding company, grew its employee base by only 0.6% per year between 2009 and 2023, with agency mergers and downsizings carried out on a depressingly regular basis. So did the other holding companies. Investing in client success, through improved and focused scopes of work, and in the skills required among agency employees, would be a good start towards changing this outcome.
Agency CEOs appear to have lost the plot, struggling to make their growth and profitability targets by following the polluted dictates of Plan A.
Instead, they need to raise their vision and think about the next 5-10 years, positioning their agencies for future business success. Major transformations will be required. The transformations will be disruptive. Financial reserves should be taken to cushion their effects.
Imagine the benefits, though.
Agency employees who are proud of the business successes they bring to their clients.
Agency employees who feel like members of a winning team, trusting their C-Suite executives to create a successful future for them.
Agency employees who love the work and plan to stay for a long career, with increases in responsibilities and pay.
Clients who value the total package of agency diagnostic, planning, creative, technological and problem-solving services.
Clients who see their agencies as strategic partners rather than overpaid vendors.
Clients who see that the price of agency work is only a small fraction of the realized value for brands.
The disruption will be worth it.
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Note to my readers: as of November 1, 2024, C-Suite Blues will be converting to a paid-subscription basis — I plan to invest more time to investigate and write about the dramatic changes that will be needed to bring the industry back to the levels of performance it deserves and achieved in the recent past. As always, I plan on writing the truth, painful as it might be for today’s industry leaders.