Ad Agency business model not innovating or evolving

Loeries 2009: Apocalypse Now? With Loeries 2009 looming Herman Manson asks if the ad agency business model remains sustainable.

Has the business model of ad agencies evolved and innovated to keep up with a changing world? Ask its own executives and the answer seems to be a resounding no. Former agency man and now Marketing Executive for Capitec Bank, Charl Nel, goes so far as to backdate the agency model to the ’70s, with little interest from agencies in evolving their business models (buying a digital outfit doesn’t really cut it), expanding on their intellectual capital, financial models or general management practise. Most could not even be bothered to build their own brands.

“Most advertising agencies still use the business model from the ’70s, when advertising started to become the big boom industry,” says Nel. “Here and there we have cosmetic changes to agency business models. The industry has not kept up with the changes in business and also not with how the marketing departments they serve have evolved over the years.”

Jerry Mpufane, MD of Draftfcb Johannesburg, agrees that the way agencies organise to service its clients is not sustainable.  “There exists an alarming scarcity of talent in key areas, our fees don’t represent of the worth of our work, many agencies are not financially viable, and in the main we still talk (not walk) the through-the-line approach to communications,” says Mpufane.

This says Nel is the reason for the plethora of smaller niche businesses supporting this field and why the real drivers in the industry, the big agencies, are not playing the same role that they did in the past. “Agencies have thus let their own power slip from them by not adapting to the needs of the situation over time,” says Nel. “Unfortunately the genie is out of the bottle and this power-shift will never be corrected.”

It’s not only the agencies that are at fault. Marketers share the blame. “Client compensation models pay as little as possible for ads and only a very few pay for innovative thinking,” says Edward W. Russell, Assistant Professor of Advertising at the S.I. Newhouse School of Public Communications. “As they say, you get what you pay for.”

Russell says that as soon as agency talk compensation models at the client, you get a different department that buys commodity products and doesn’t know one from another. Marketing and Finance (or worse, purchasing) don’t talk, as he points out.

Alistair King, Group Chief Creative of King James, believes that the ad industry must be the one industry in the world that doesn’t get paid according to the quality of the product it produce. “Some agencies make steak, some make meatballs, but we all charge burger prices,” says King. He maintains that in the current model there is no role for measuring and rewarding quality ideas. The agency simply hands over its intellectual capital in return for an hourly fee.

Nel says he used to believe that agencies should be remunerated in the same way as a Deloitte’s or KPMG. Now working on client side he has come to realise that agencies are a supplier like any other and should be remunerated part for its hours and part a professional/experience fee.

Looking towards the future King says he believes agencies will generate ideas, register and own them as intellectual property and sell or franchise it to clients to use.

Agencies need to change in tandem with the expanded role of marketing departments in the corporate environment. Marketing departments enjoy considerably more power than in the past, with increased capacity, intellectual capital and a say in the strategic management of the companies they serve. How this passed agencies by is anybody’s guess. What is clear is that to survive they will need to adapt their business models – and fast.

Part 2 of our special Loeries coverage. Check back daily for new stories.