Having filled different roles within the marketing-sphere, I believe I have earned the right to have an opinion on the matter of agencies. I have worked for a number of years at a couple of them, I have been a client of a few, I have been a supplier to a whole lot. And I have met a discussed the nature of the agency business with nearly a hundred senior-level executives at agencies across Europe. I’m definitely not claiming to have seen it all or know everything. But I’ve seen enough and know enough to have a fairly educated opinion. If you’re still reading, this is the part where I’m going to start expressing that opinion.
Hype-Cycles of New Agency Types
One thing that I have noticed over the past years is how odd hype-cycles cover the fact that agencies as an industry aren’t creating a whole lot of value for their clients. First digital (or interactive) agencies took the headlines and part of the budgets – and everyone wanted to be more digital. A whole wave of digital flooded the industry with ‘traditional’ agencies buying digital shops, building internal teams and everyone arguing on the best universal solution. Advertisers basically just wanted campaigns that worked. But weren’t getting that because the so-called creative agencies were too busy arguing that the new digital ones didn’t understand communication and the digital shops were too busy whining that the creative dinosaurs couldn’t possibly fathom the nature of technology or how people were consuming interactive content on interactive channels. The dust seems to be settling on that whole debate, finally. In part because some people have been paid off to keep their mouths shut (their agencies have been bought or they have gotten high-profiled jobs at those agencies they used to bash for not ‘getting it’) and the old lot have realised that the nerdy kids were kind of right – developing engaging content for digital channels isn’t the same as doing a 30-second TV ad. Good stuff for everyone. Maybe advertisers can get semi-decent campaigns again now that the geeks and the artists have decided to try and play nicely. Not that they’re doing it yet but they’re trying-
But for those with a nag for drama, there is still hope. Because along came the SEARCH agencies. And they weren’t just search agencies. They were either ORGANIC search or PAID search. And fuelled by Google, they were the greatest thing since sliced bread for a few years. It was all so unbelievably specialised that no one could do a good enough job except for those that were 100% dedicated to doing only search. Now (nearly) all the big agencies have a search department and (nearly) all the big agencies realise that this is important. They haven’t really tied it together in an integrated planning process (sure, on powerpoint they have but in real life...) but that might happen some day.
Along came social media agencies. Same story. The good ones will thrive for some years before expanding their offering beyond social. The almost good ones will get bought by big independents or networks. And the crap ones will disappear as quickly as they came about.
Well, that ended up a semi-pointless ranting about stupid inertia in a self-absorbed industry. Which wasn’t entirely the point. Or at least it was meant to have a more constructive point with a bit of forward-looking ideas.
The Agency Business Model Is Fundamentally Flawed
Creative agency, digital agency, search agency, social media agency or full-service agency. They have one thing in common: they all have broken business models. Bit of a statement. So here’s an argument to back it.
For any given campaign, there is a budget of $100. Any campaign will only – only! – yield any effect once it is put near consumers. Whether that happens via a broadcast medium, as socially spread content or something entirely different, it is only when it’s out of the lab (a somewhat lame metaphor for the processes inside an agency when it develops a campaign – I’m mainly referring to creative development here) that it provides value. Nevertheless, your agency makes its money by keeping it ‘in the lab’ for as long as possible. They sell you a number of hours that they will spend developing your campaign. That means that they are strongly incentivised to spend as much time as possible doing so. And consequently, they will try to keep as much of your $100 marketing budget away from where it yields value. Not because they are bad people, but because they are trying to run a business and make money.
The purist advertiser or agency-owner will argue that this kind of thinking is short-sighted or even dishonest. Or even that they don’t do such things! Every agency that is profitable thinks and acts this way. And it should – it’s there to make a profit for itself, not for its client. If the two can both be achieved, that’s great. But don’t think that an agency’s first and foremost dedication is towards making the most of your marketing budget.
Sanity-check my claim by asking yourself a couple of simple questions:
• When was the last time an agency handed back part of the campaign budget because the creative development was faster and less time-consuming than originally anticipated? Or because they decided you should rather spend some more money buying media?
• When was the last time your agency turned down your brief for a campaign arguing that you should rather spend that money hiring a few more people for customer service because your churn-rate was way too high?
Honestly, the agency is there to optimise its own business, not yours.
Another thing that continues to baffle me is the complete lack of risk-sharing. The way a client-agency relationship normally works is that the client briefs the agency, the agency comes back with a budget, get sign-off and start working. They might invoice something up-front, they’ll definitely invoice something half way and you can be sure that the second your approval email hits the Client Service Directors inbox, the agency’s accounting department starts doing the invoice for the final amount. The client on the other hand has to wait for the campaign to launch, have an impact (maybe!) on consumers and for that impact to materialise in sales. That might take weeks or even months. And by the time the client knows whether it’s a success or not, the agency has already been paid.
Sure – there has been a certain amount of debate on the topic of performance-based contracts. It almost invariably ends up not happening. Partly because some clients are cowards when push comes to shove. But chiefly because agencies are extremely reluctant. They come up with a long list of reasons why performance-based contracts are malicious, ignorant or impossible to enforce. I am yet to see a convincing argument against performance-based agreements. And I’m not talking about the ones where 10 or 15 percent of the total fee is dependent on development in ‘brand awareness’ or ‘liking’ but something tied to the client’s actual financial performance.
In my view, a serious relationship between a client and a trusted advisor should reflect the responsibility the both assume for the outcome of their common efforts. The client makes very significant investments based on the advice of the agency. The client relies on the work performed by the agency to deliver results that are essential to the company’s current and future success. It would suit the agency to have a bit of skin in the game as well. Looking beyond the obvious (and very real) obstacles associated with a such model – e.g. cash flow for the agency in case of mutual goals being quite long term – it seems inevitable that sensible advertisers will push in this direction and confident agencies will embrace it.
What Is Next?
A global agency like Ogilvy and their global client, British Airways, already have performance-based models in place. Presumably the same is the case for a number of other significant brands. A definite step in the right direction. I don’t know the specifics of the contract, but from what I have been told, there is still a long way to go. However, I don’t think that the evolution will be led by big brands or big agencies. More likely it will come from small, bold agencies working with more nimble, opportunistic brands.
I foresee an immediate future where online merchants will provide the ground on which to practise. They are used to buying e.g. AdWords on a PPC basis, they have affiliate partners and many have CPC or even CPA agreements in place with all types of affiliates, be it display advertising, email or something entirely different. So a couple of small agencies will step up to that challenge. And I predict that having an enormous trickle-down (or trickle-up if you will) effect on the industry as a whole.
And I think it will force agencies to specialise in new ways to compete and profit. Instead of being discipline-specific in their specialisation, they will begin to be niche-industry-specific. Instead of sub-optimising a subset of the marketing budget, the agencies will begin to focus broadly on finding the best way to spend the limited resources available. To the benefit of the client – and themselves as they are dependent on the outcome to profit and grow.
Does this mean that each client will not get the best-of-breed specialist within search, email, web analytics etc.? I think it does. But I also firmly believe that this disadvantage will be far outweighed by the advantage of genuinely having the agency living and dying by the success of its work.
As always – I welcome your input. I suspect that not everyone will agree and I would be delighted if this could initiate a wider debate on the subject, because it’s long overdue.
