There was a time when most of the services provided by advertising agencies were difficult for marketers or other organizations to duplicate.  Agencies possessed specialized skills centered around the creation, production and distribution of mass media advertising.  Even the now-simple task of “typesetting” required unique knowledge and equipment. 

Today, the personal computer makes many of these previously highly-skilled, high-value activities routine and even automated.  Add the internet to the equation and now many of these services can be outsourced to low-cost centers and individuals around the world. 

It’s no wonder that agencies are experiencing intense pricing pressure.  They haven’t come to grips with the fact that the marketing communications industry has bifurcated into two different businesses:

1. The lower-value services that clients believe they can either do themselves or assign to lower cost providers.
2. The higher-value services that clients are unable to do for themselves; the work that still requires the specialized talent of professional marketing firms.

The IPA calls these two dimensions of the agency business “Magic” and “Logic.”   Ignition’s view is that these two areas businesses have very different features in at least four ways:

• The nature of the work
• The client relationship
• The economy offering itself
• Compensation

Let’s look at each of these features in detail:

Nature of work >>	Advising	Responding
	Problem solving	Task completion
	Solutions	Deliverables
	Design	Build
	Architecture	Construction
	Leadership	Management
	Direction	Coordination
	Ideation	Execution
	Invent	Produce
	Customized	Standardized
	Unique	Repeatable
	Flexible resources	Defined resources
	Specialized knowledge/skills	Widely available knowledge/skills
	Timeframes	Deadlines
	High touch	High tech
Client relationship >>	Deep client involvement	Minimal client involvement
	Client is executive mgmt. or marketing	Client is (often) procurement
	Agency hired as growth driver	Agency hired as service provider
Economic offering >>	Effectiveness	Efficiency
	Hired for what you know	Hired for what you do
Compensation >>	Aligned economic incentives	Usually competing economic incentives
	Potential for IP ownership	Work for hire
	Potential for risk sharing	Rick sharing usually not applicable
	Lower price sensitivity	Higher price sensitivity

By failing to recognize and understand the difference between Magic and Logic, agencies have allowed themselves to become more and more “commoditized.”  Instead of addressing these two businesses differently, agencies continue to combine them just as agencies did 50 years ago,” often compounding the problem by bundling them together with a “blended rate.” 

The optimum solution is to separate these two businesses completely with their own staff, their own pricing structures, their own cost structures, and their own brand name.  (A brand can only stand for one thing). 

Montreal-based Sid Lee describes its focus as creating product, services, and spaces that lead to brand experiences.  That’s the Magic.  Its sister company, Jimmy Lee, delivers “multi-platform production.”  That’s the Logic.

This is clearly where the agency business is headed in the future; only most agency principals still don’t see it.  And instead moving proactively to establish separate cost/profit centers, most agencies are instead just reacting to procurement who will eventually force them into this model anyway.  So instead of changing, most agencies are being changed.

Separating Magic from Logic

If nothing else, you must have a clear understanding of the nature of the work your clients are expecting you to do.  In upfront discussions about new assignments or new relationships, help your clients understand the difference between higher-value and lower-value work, and price these services separately and differently.

Here’s a model to help guide the discussion:

Discover>Define>Solve>Design>Develop>Correct >Deploy>Distribute> Coordinate>Evaluate>Optimize

Notice that the left-hand side starts with Magic, morphs into Logic, and then changes back to Magic again on the far right-hand side.  Agency work doesn’t just involve a “front end” and a “back end”; there’s an important third dimension – analysis and optimization – that should be factored into most assignments.

Different work presents different compensation opportunities

“Magic” work is difficult to compare, difficult to duplicate, and difficult for clients to do themselves (the best creative talent stills works at agencies).  This means the Magic side of the business offers you the opportunity to be paid for outcomes, intellectual property, or other forms of effectiveness.  This is an area or our business where time and hours have absolutely nothing to do with the value you create for a client, and should not be used as the basis of your compensation.  Likewise, Magic work should never involve standard rates or rate cards of any kind.

On the other hand, “Logic” work is often easy to compare, easy to duplicate, and widely available at ever-decreasing costs.  For agencies to continue try to “get our hourly rates” for this type of work is futile.  No sophisticated client is going to pay $150 per hour for work that can be done on the open market for $50 per hour, with no discernable difference in quality (actually, some of the best low-cost providers of these services have even better quality, because their business model is optimized for this kind of work). 

Unlike Magic work, Logic work can be standardized, which is why companies like American Express have published a standard rate card for standard production and distribution services performed by agencies. 

The future is yours to create

The economic forces behind this change in the agency business are remorseless.  And rather than fight it, like the railroad business tried to fight the air transport business, better to redefine what business you’re in.  Harvard’s Theodore Levitt famously taught that if the railroads had viewed themselves as being in the “transportation” business rather than the “railroad” business, we might see a Union Pacific logo on the sides of the aircraft that are now marked UPS.  

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