Ad Exec: Founding a new commercial model for advertising
by Tom Fels (@thomasfels) I recently wrote about the need for a new commercial model for advertising, frustrated by diminishing returns on effort-investment and keen to explore communal solutions to a challenge most agencies have until now, faced in isolation. Thankfully, numerous agency leaders have been keen to put their hand up and share their experiences, among them founders of many of South Africa’s top creative shops.
My findings were echoed on a recent trip to the US, during which I met with agency heads from regions across the world. The message is the same — we’re all looking for the model that will see us sustainably into the future.
It’s bigger than the commercial dilemma
Building upon these discussions, what has emerged is that the commercial pressure on agencies is symptomatic of a far greater ill that the industry is facing. Indeed, before we can resolve the commercial dilemma, we need to start to address the engagement dynamic between agencies and clients.
As a professional service, our product and role have never been so in question. Even the best ad agencies are looking for reinvention as they find themselves lost in the face of new technologies, strategic de-coupling, changing client dynamics and increasing financial pressure. The result is a fragmented relationship structure with enormous demands for transparency in agencies. Confronted by this confusion, marketers talk of partnership, but few evidence it in their actions — buoyed by rapid agency moves, project-based relationships with multiple shops and heavy (some may think untenable) cost-cutting measures.
The good news is that marketers are also frustrated by all of this. Client relationships are frequently judged to be less than satisfactory and, in what seem like cyclical reconsolidation moves, top global brands such as P&G and Unilever and more are talking about cutting the long tail and looking for ways to reintroduce the agency of record in some shape or form. In a US poll, almost 60% of surveyed marketers have made a move to consolidate agencies in the past year.
Back to the numbers
In the short term, and certainly in the local arena, agencies need to make their own moves to improve their prospects. We’ve compromised our financial position by being so transparent as to disclose staff salaries and discount rates at a whim; we’ve given away IP in desperate bids to win new clients and relinquished the strategic high-ground we once held by taking on too many clients, thus spreading ourselves thin as margins declined. Once held in high esteem, many agencies are therefore now seen as downstream execution partners, and client willingness to foot the bill is reflective of this.
Reversing this construct is not an overnight endeavor, and should also not be an individual one. Agencies intent on long-term partnerships with their clients must seek to create new and innovative servicing structures, creative remuneration practices (potentially in the form of shared risk and reward) and rise upward in close collaboration with marketers that share this vision. To encourage this, agencies need to be assured of a reasonable profit, and advertisers need to understand the significant investment agencies are making to deliver what they want in terms of resources and technology.
The conundrum is that this shift must, of course, happen on both sides, complicated by many agencies being now a part of listed entities, too, and thus pushed for ongoing shareholder return. This quarterly mindset is at odds with building long-term relationship equity.
While trust must be regained client by client, rather than persevering in isolation in the broader sense, agencies ought to also share engagement practices that they see as fair, margin ratios that they believe are defensible, and then stand their ground. By contrast, clients, by way of intermediated cost consultants and procurement, already have these protective measures in place. Whether it is the role of any industry body to create a benchmark here is arguable, but locally pitch consultants seem to already be playing larger roles in contracting and fee negotiations, which I believe is a vital step towards the equilibrium we so keenly seek.
I think we have only scratched the surface of what is possible via inter-agency collaboration. It’s not about unionisation, but rather the sharing of good practice. The result may well be a ‘stretch’ within the industry, as agencies that choose to take on this challenge and tool themselves for success rise to the top and become better enabled to deliver value, while also receiving it in return.
By contrast, there will always be both clients and agencies that race for incremental gain, content with best price, quickest turnaround and non-committal on both ends. My view of these proponents is that they will ride the downward spiral into obsolescence, unable to invest in talent, strategy and technology, and suffering as their actions shape their identity in the long game.
No silver bullet
The complexity of the issues facing clients and agencies makes the potential resolution of the status quo so intricately layered that there is no one solution that will deliver transformational change. It is rather iterative steps, consciously implemented toward a clear vision for an enjoyable, beneficial and sustainable future, that will see the momentum build, and the frustration dissipate.
To those agencies that have stepped forward, your intention has been made clear and I welcome others to join the conversation. As always, there is everything to lose, and everything to gain. Mail me on firstname.lastname@example.org if you’d like to add your voice.
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With a decade of local and international experience in leading brand consulting, design, shopper marketing and integrated advertising roles, Tom Fels (@thomasfels) has gained a deeply relevant understanding of the dynamics of agencies. His skills are put to work daily as group managing director of Publicis Machine. He contributes the monthly “Ad Exec” column to MarkLives.
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