Posts Tagged ‘Agency Business Model’

Agencies are still operating in a “full scale” mode, but what’s needed today is “agile.”

In an attempt to stay true to the overreaching concept of “full service,” agencies are in the habit of assigning and assembling complete “account teams” for each major assignment and client. Meanwhile, time and cost pressures are driving in the opposite direction.   To better adapt to current client needs, agencies can take a page from software companies who have adopted the concept of “agile” development and production.

This way of working is based on “The Agile Manifesto,” which includes the following key concepts:

1. Build projects around motivated individuals. Give them the environment and support they need, and trust them to get the job done.
2. Simplicity — the art of maximizing the amount of work not done — is essential.
3. At regular intervals, the team reflects on how to become more effective then adjusts its behavior accordingly.
4. The team welcomes changing requirements, even late in development.
5. The team delivers working software frequently, from a couple of weeks to a couple of months, with a preference to the shorter timescale.

In an agency environment, this means fewer, better people operating in smaller teams.  It means less of a top-down, command-and-control structure and dismantling the cumbersome levels of review and approval that make work slow and expensive.  In the agile model, meetings don’t require the writer, art director, associate creative director, and executive creative director – they just require one senior creative who is empowered to make day-to-day decisions about the assignment.  Same goes for the levels of client service, media, etc.

In many ways, software companies are better models for what agencies could and should look like.  The philosophies of iterative development, continual optimization, and test-and-learn are essential to success in a marketing environment in which “good and fast” is better than “perfect and slow.”

The agency business model is built around old metrics of success that have outlived their usefulness.

If you were a marketer, would you prefer to pay your agency for efficiency or effectiveness?  Yes, it’s a simplistic question with an obvious answer, but the sad fact is that most agencies are still selling – and clients are still buying – efficiency.

Efficiency is based on the old advertising model of exposure, which is measured by such time-honored metrics as reach, frequency, gross impressions, and cost-per-thousand.  But what if no one is paying attention?  And in today’s consumer-controlled marketplace, fewer people are.

No more frequency

As a matter of fact, the Advertising Research Council (ARF) has been lobbying for a few years now to discontinue the metric of frequency altogether.  Just because a media schedule achieves an average monthly frequency of 4 doesn’t mean anyone was actually paying attention.  So when agencies sell media programs based on the concept of exposure, they’re selling something of increasingly questionable value.

Effectiveness is what we should be selling.  Effectiveness is about engagement, measured by such metrics as attentiveness, receptivity, and page views.  Nielsen now evaluates not just which programs are most “watched” (exposure), but those that are most “liked” (engagement).  A lot of digital media are sold based on actual engagement.

Solving marketing problems through a different lens

The implications of this for agencies go way beyond the media plan.  When agencies approach a marketing problem through the lens of “exposure,” they instantly jump to the question “Is the budget big enough to sustain a media schedule?”  But if you look at the problem through the lens of “engagement,” the budget question is a lot less relevant.

Imagine that a small travel destination comes to you wanting big results.  Looking at this potential client with the “exposure” mindset, many agencies would just walk away because the client can’t afford much of a paid media program.  But if you approach this assignment from the “engagement” perspective, you might create something like the award-winning campaign for Queensland Australia tourism that was executed for a fraction of the cost of a conventional campaign and produced an incredible amount of impact.

Marketing spending will cease to correlate directly with market share

Remember that in a world where many of the major communications channels (YouTube, Twitter, etc.) have a media cost of zero, the real currency of marketing is no longer money, but ideas. Truly.  In the near future, market share will no longer correlate with how much money you spend, but rather how good your ideas are.

Because most agencies are selling the wrong thing, they’re also charging for the wrong thing.  We can get paid for the value we create (effectiveness) rather than the hours we work (efficiency). The question isn’t how – some of the most successful agencies and marketers are already working this way.  The question is when.  When do you plan to start working this way?  No one is going to force you – not the 4As, the ANA, not even your clients.  It’s up to each individual agency to decide they want to be in the effectiveness business and structure their approach for where our business is headed instead of where it’s been.

Remember, the answers you get are always a result of the questions you ask.

Marketing communications firms are scrambling to reorganize and restructure to meet the needs of a marketplace that’s changing at warp speed.  Agencies need to meet this disruptive change in the market with disruptive change within their organizations.  But to get the right answers you have to start with the right questions.  Here are Ignition’s top 20:

1. Beyond advertising, have we defined what business we’re really in?

2. Can we articulate the ultimate value we bring to client relationships?

3. How can we focus on being best in class instead of trying to be best in everything?

4. What do we need to do to extend idea generation beyond the creative department?

5. What additional skills or capabilities do we need to make the transition from mass marketing to one-to-one marketing?

6. How can we create more value for our clients in the area of brand experience, not just brand perception?

7. How do we effectively deal with the increasingly blurred lines between advertising and PR (paid and non-paid)?

8. In today’s world of multichannel communication, who is the gatekeeper of ideas?

9. How can we devote just as much creativity to message placement as we do message creation?

10. What else do we need to do to make digital a competency instead of a department?

11. How can we retool the production function to be more versatile and creative – production in the Hollywood sense?

12. How can we change our process to from linear to organic to better reflect the ongoing nature of digital assignments, including real-time analytics and optimization?

13. How can we demonstrate more accountability in our client relationships?

14. How can we further flatten our organization to provide better client access to our best people?

15. How can we remove any of the disincentives – real or perceived – for working collaboratively?

16. How can we redesign our jobs and role descriptions to better reflect what we really do (not what we used to do)?

17. What unconventional ways can we use to market our own brand?

18. What do we need to do to make pricing (not estimating) a core competence of our firm?

19. What’s holding us back from experimenting with new forms of compensation that are not based on the misaligned “billable hour” system?

20. How could we develop, own, and profit from more of our own intellectual property?

Devote the rest of this year to answering these questions and you’ll be well on your way to reinventing your business model to be more relevant and valuable to your clients.

Under the flawed hourly-rate system good and bad ideas cost exactly the same.  Here’s how to change that.

Some of the biggest stars take the biggest risks when it comes to compensation by taking a percent of the box office.  A good film makes more than a bad film, and the leading actors get paid accordingly.

In the world of professional photography, a good photograph earns more than a bad photograph.  Because the photographer owns the rights, the more the photo gets used, the more the photographer earns.  The iconic Maxell photo showing a man in a chair “blown away” by the sound of Maxell tape is still earning royalties more than 25 years later.

Despite the fact that most of the professionals that advertising agencies draw upon to complete their work — photographers, actors, musicians, etc. — earn more for good work than bad work, most advertising agencies themselves are stuck in a compensation paradigm that doesn’t correlate to value.

It’s time for marketing communications firms to realize that they’re in the intellectual property business instead of the hourly rate business.  Here’s how agency principal Mike Reineck describes how his firm, Atlanta-based Kilgannon, captures the value they create:

“For the first 70 years of the twentieth century, agencies were paid based on how much media they bought for clients. This imploded after the growth of television drove the cost of media (and consequently the amount they paid agencies) through the roof. So for the next 30 years, agencies got paid based on how many hours of service they gave their clients. This imploded after client-side consultants and procurement folks practically drove agencies out of business by process-engineering the costs down to nothing.

Problem with all this is that it has nothing to do with the core offering of an agency. What is that – Media? Not anymore. Services? Not really. Most clients hire agencies because they want help persuading prospective customers to buy more of their stuff. That generally requires a bright idea that gets effectively communicated to those prospective customers. So, do clients pay agencies based on how bright the idea is? Or how effectively it reaches the customer? Or if it helps sell more stuff? Nope.

A media transaction is a market-determined price, so it’s easy to value. An hour of time is easily measured by a clock. But, how is the brightness of an idea measured, or the effectiveness of communication? These are really fuzzy, non-touchable things to measure. In the land of lawyers they’re called “intellectual property,” and payments for them are generally determined through royalties and licenses.

Underlying the license and royalty are the basic concepts of “Use” and “Value.” If intellectual property has value, it probably is going to be used a bunch. For example, Microsoft Office creates a lot of value to a personal computer. I am using it now to write and post this blog. Our enterprise decided to use it a bunch by loading a version on every computer in the agency.  Even though the disc it came on only cost a few cents, we paid a couple hundred bucks for each license on each computer. The program had value; we used it a bunch. We paid Microsoft accordingly. Our procurement people don’t pay Microsoft based on how many hours their programmers spent developing it, or on how many bytes of media the program occupied on the disc. A similar use and value license is employed in the music, publishing, or art world. Back here in advertising, though, we are a little slow on the uptake.

Despite the difficulty of measurement, agencies and clients need to move to a compensation model tied to “value and use.” It more closely links to what we do and what clients want from us. Most every idea gets embodied into some kind of material (an ad, a banner, content, SWAG, etc.). Most of these materials get used (TV, radio, internet, events). Generally speaking, the better the idea the more it gets used.

The payment system should deliver money to the agency based on the idea’s use and the value it creates, even if the client is still using the material and the Agency is not providing services. Why? Because the idea is still producing value to that client and they are using it. In a Darwinian Adam Smith-type system, this would ultimately lead to good ideas and the agencies that produce them flourishing, while bad ideas and their agencies go the way of the Edsel. Isn’t that the most efficient market mechanism?

At our agency, we have spent a long decade trying to transform our compensation systems to ones based on use and value. In the long run, it’s the only win-win for us and our clients. It involves us identifying ideas, tracking their use, and putting skin in the game based on whether they produce value or not for our clients. Last year 25 percent of our revenue came from intellectual property payments.”

(From the blog Kilgannnon Says.)

So next time you hear that an IP-based approach can’t be done, consider the fact that it already has been done.  It works because it aligns the economic incentives of the agency and the client, the hallmark of effective agency-client relationships.

Value-based compensation can take many forms, from simple to sophisticated.

Are you ready to get some experience with value-based compensation?  The first step, of course, is to be clear about what you’re really selling: the value you create, not the hours you work.  A value-based approach to pricing can take an almost endless variety of forms, but to get started here are three basic forms to consider.

1. Straight Fee

The simplest form of a value price is simply a straight fixed price based on the mutually-agreed value of an assignment.  This is different from a traditional estimate of hours multiplied by the hourly rate, because the value associated with the price isn’t correlated directly with time.

One of the best examples of a professional firm using a straight fixed price associated with value is the public affairs firm that brings tremendous value to an assignment by virtue of its contacts and relationships in government.  Sometimes a single phone call can create the desired value for the client.  It’s really irrelevant that the firm only invested a few hours in the assignment.  What’s relevant – and valuable – is that the client’s objective was accomplished.

2. Usage Fee

More and more, the best solution to a marketing problem is not a conventional advertising campaign, but rather some other form of branded content.  Yet structurally agencies still operate as producers and distributors of “ads,” even going so far as to stipulate that their work is “work for hire” that is wholly-owned by the client.

Compare this to the creative service partners agencies work with: actors, voice talent, models, musicians, and photographers.  A photograph is owned by the photographer and licensed to the firm or client.  The more a photograph gets used, the higher the price to the marketer.  The less it gets used, the lower the price.  This correlates directly to the value of the image to the client.

For example, a photographer typically charges a flat fee to take a photograph, but this never comes close to the income the photographer needs to make the assignment profitable.  The photographer’s “session fee” is subsidized by the licensing fees for the use of the image.  A similar approach could be used by agencies where the development of branded content is priced significantly lower than in the traditional “work for hire” model; the firm then makes its real money on the usage.

With the usage fee, the more effective the branded content, the more it gets used, the more the agency earns.  This approach actually solves the problem many marketers have with hourly-rate system where a bad idea costs the same as a bad idea. Not so when you charge like photographers do.  (See American Society of Media Photographers for a look at how the usage concept works.)

3. Results Fee

Unlike the “straight fee” which is a fixed price, a “results fee” is a variable price.  In the results fee approach, the firm ties its compensation directly to specific indicators.  Progressive consulting firms pursue this approach.  Over 30% of Accenture’s contracts include some type of performance measures.

When identifying KPI’s — Key Predictive Indicators — keep in mind that the health of a company is not measured exclusively by one metric any more than the health of the human body is measured exclusively by heart rate.  Choosing the right metrics is critical, of course (the subject of a much longer discussion), but keep in mind they can all be weighted based on the agency’s ability to influence them.

For example, agencies are famous for arguing that they don’t have enough control over sales to tie their compensation to it.  Fair enough.  Make sales just one metric of several, and assign it a low weighting.  Assign a higher weighting to things where you have more direct control and influence, which might include such measurements as brand awareness, brand likability, website page views, etc.

Beyond these three basic approaches, marketing firms can exercise remarkable creativity in developing compensation approaches based on value created vs. hours worked.  All it takes is your willingness to start experimenting with a better way to get paid.

Time to bring IT out of the back room and put it to work for clients

Exceptional client service is key to agency success, but the truth is that most agencies deliver it.  That’s one of the reasons our business is called “professional services.”  Your firm undoubtedly ranks high in “high touch.”  But are you fully leveraging technology to help improve the operations of your firm? Are you truly “high tech,” or are you mostly just mirroring what most firms do?  Is your agency deep into the digital stream, or mostly standing on the edges?

Maximizing technology to increase agency effectiveness

Because agencies are populated with knowledge workers, not manual laborers, agency executives assume that increased productivity can only come from making people work harder.  But there’s much more that marketing communications firms can do to improve both efficiency and effectiveness, and it starts with making much more aggressive use of technology.

In the enlightening book Reinvent Your Enterprise, consultant Jack Bergstrand asks:

“Does it take your company a couple of weeks just to set up a meeting? If so, you are either in trouble or headed toward it.  If your enterprise can’t improve its knowledge work productivity, your firm’s best years are behind it.”

In most firms, “Information Technology” is mostly about making sure people have working hardware, access to the network, and reasonably current versions of basic operating systems and software. But increasingly, clients expect their agencies to be using technology to maximize value in the relationships. We now see questions in RFPs like this one:

“What web-based tools or systems do you use to create operating efficiencies, manage costs, or service your clients?”

Technology essentials for agencies

Unfortunately the only technology most agencies use with their clients is email.  Sure, email is easy, but it’s a horribly ineffective way of communicating and collaborating with clients.  The essential job of IT in an agency is to equip the firm with proven technology solutions for:

Project management: Abolishing the traditional job jacket and using a software platform (like Advantage or Workamajig) not only to  move work through the system, but to attach and catalog all relevant digital assets, including creative briefs, copy, art elements, and even finished production files.

Presentation: Attaching a PDF to an email is an exceptionally poor way for an agency to present and sell its work.  Instead, progressive firms are using real-time presentation and communication services such as WebEx, Fuze Meeting, or ConceptShare.

Collaboration: The state-of-the-art way to collaborate with clients is using online services such as Basecamp or Workzone which serve as “virtual offices.”  All correspondence and relevant files are cataloged, organized, and instantly accessible online.

The benefits of making this upfront investment of time and money will be immediately apparent.  Art directors will no longer have to waste an hour looking for a file (a complaint Ignition hears often).  Clients will no longer have to call and ask you to “please email that file again.”  And your batting average for getting good work approved will go up, leading to fewer do-overs.  Even revisions are likely to decline as a result of better communication and more accurate version control of files.

Procter & Gamble’s new CEO Bob McDonald keeps no paper files.  He wants to fully digitize P&G, and to the extent possible, its marketing.  Would you rather be following your clients or leading them?

Positioning isn’t logical.  If anything, defining a differentiating value proposition for your firm will take you in the opposite direction of “common sense.”

Logic says your agency will grow faster by targeting the “general market.” But some of the largest and fastest-growing agency brands are squarely focused on a particular type of client, not every type of client.

Of the top 25 advertising agencies in America, more than half are specialist firms, not “full-service” agencies. Focused agency brands like Rapp, Digitas, and Wunderman are actually larger than general market agency brands like DDB, Ogilvy, and Y&R.  In Minneapolis, a city that has spawned more than its share of talented advertising agencies over the past few decades, the largest agency is not Fallon or Campbell Mithun – firms that help put Minneapolis on the advertising map – but rather Carlson Marketing, a specialist in customer relationship marketing.  With revenues of some $265 million, Carlson Marketing is nearly four times larger than any other agency in the city.

Logic says that an agency can increase its revenues by broadening its line-up of services. But experience shows that the most successful brands deliberately cultivate a narrow line.  They know that depth is much more effective strategy than breadth.  This is particularly true for professional service firms, where your product is your intellectual capital.   No client ever buys a “wide range of expertise,” but rather a specific kind of expertise.

Being afraid of “too much focus” is the mistake of assuming narrow is the same thing as small.  Starbucks is narrow – coffee – but it certainly isn’t small.  Intel is narrow – microchips – but ranks as a Fortune 100 company.  In professional services, some of the largest firms are some of the most focused.  For example, while most other advertising agencies attempt to position themselves as “full service,” Zimmerman is focused on the retail category.  They call their specialization “brandtailing” – the combination of strong expertise in both branding and retailing.  As far as ad agencies go, this is a pretty “narrow” focus.  But the result is anything but small.  With billings of over $2 billion, this agency employs several thousand people.

Logic says that diversifying and creating other divisions will helpp grow your firm in these economically challenging times.  This type of diversification may add to your revenues, but it rarely adds to your profit.  This is mostly due to the diffusion of your firm’s energy and resources.  Your agency and your management team (especially if you’re one of the smaller independents) can really only optimize one strategy at a time.

The other argument for diversification is that it broadens your risk — if one business goes bad, the others are there to protect you.  Again, this sounds like inarguable common sense.  But experience and research shows that it’s almost never an effective way to maximize your profits.  The most profitable companies in the country are without exception those that are the most focused, not those that are the most diversified.

To make matters worse, agencies that do choose to establish additional divisions tend to make the same mistake their clients make; they extend the existing agency brand name onto these new companies.  Logic says this will create faster, higher awareness at lower cost.  But marketing text books are littered with examples of line extensions that literally destroy the meaning and value of a brand.  In professional services as well as packaged goods, line extensions rarely if ever result in a strong brand that generates profits without cannibalizing the parent brand.  This is because your brand can really only stand for one thing at a time.

The main reason so many brands — agencies and others — fail to reach their potential is because they do what seems logical instead of what’s actually effective.  As marketing professionals, we in the agency business should know better.

*Heraclitus picture courtesy of Cote – Flickr

These are trying times in the agency business. The latest research shows that advertising spending is projected to decline well into next year. Marketers are spending less and expecting the same (or better) results. The response from agencies is to cut costs.

But is there another way to respond to the upheaval in our business? What would happen if agency leaders invested the same amount of energy in creating opportunities as they do in solving problems?

Growing vs. shrinking

Is it realistic to think that marketing communications firms could be growing, developing and improving in this environment? Some are. But it means agency professionals have to stop investing all their time in “yesterday” and invest some of it in “tomorrow.” Disruptive change must be met with disruptive change.

	Growing	Shrinking
Capabilities	Strong integrated digital capabilities Adoption of non-paid techniques and channels Outsourcing commoditized services Expertise in one-to-one marketing Develop branded content, not just advertising Analytics ability Real-time – not just long-term — campaigns	Business model dependent on production and distribution of advertising Failure to reinvent “media” function Undifferentiated service offering Unwillingness to separate strategy from project management Lingering technophobia (especially among agency principals)
Business Development	Focused business strategy vs. everyone is a prospect Attention to online reputation of agency brand Emphasize marketing activities over sales activities	Reliance on outdated techniques like cold calling, mailings No one in charge of marketing the agency brand Investing in every opportunity that comes along vs. careful selection
Pricing and Compensation	Price based on value instead of hours Emphasis on effectiveness instead of efficiency Develop and charge for some forms of intellectual property (vs. just “work for hire”)	Wasted energy around tracking time, billable time reports, etc. Overcharging for commoditized services, undercharging for high-value services

Writing in a recent issue of the Harvard Business Review, executives of the consultancy Deloitte believe that “Unless firms take radical action, the gap between their potential and their realized opportunities will grow wider…Institutions must increase not just efficiency but also the rate at which they learn and innovate…”

If you’re serious about growing, then developing new products, services, and approaches should be at top of your daily “to do” list. Don’t wait until your calendar eases up, because it never will. As successful entrepreneurs know, business building means acting rather than being acted upon.

In turbulent times like these, marketing communications firms are scrambling to identify the best business strategy not only to get them through this recession, but to position themselves for success once the recession is over.

The natural response is to “try a little bit of everything”; to expand your services, broaden your capabilities, and try to appeal to more clients. It seems like common sense, but it’s exactly the wrong response. The best growth strategy — in good economies or bad — is to decide what not to do.

Expand by narrowing

Imagine two architectural firms: one that’s extremely focused with a clear value proposition, and one with an unfocused business strategy that attempts to do everything for everybody. Which of these two firms would have:

• The strongest earning power?
• The largest geographical market area?
• The fewest competitors?
• The greatest degree of respect from clients?
• The most sophisticated clients?

The answer in every case is the focused firm. Let’s look at each question individually.

The greatest earning power. It’s a simple fact that the specialist earns more than the generalist. This is true in medicine, law, engineering, architecture, consulting, construction, you name it. This is because the specialist knows more, and we live and work in a knowledge economy.

The largest geographical market area. Focused firms draw clients from all over the globe, not just from their own Zip code. That’s because what they’re selling isn’t available down the block from some other firm just like them.

The fewest competitors. The easiest way to narrow your competition is to narrow your focus. There are far fewer specialists than generalists, and the law of supply and demand dictates that the less supply the greater the demand.

The greatest degree of respect from clients. Knowledge and expertise equals respect. An effective value proposition allows your firm to develop and leverage its intellectual capital. This makes you valued – and respected – not just for what you do, but what you know.

The most sophisticated clients. In the boardrooms of professional firms everywhere is heard the lament “If only we had better clients.” A quality value proposition attracts a quality client. A business that proclaims “we’re right for everybody” is logically going to attract both the good and the bad.

As business strategist Chris Zook writes in his insightful book Profit from the Core,

Having a clear sense of business boundaries and of the definition of your core is a critical starting point for growth strategy. Identifying the core of your business is the first step in determining how to grow.

The marketing communications industry has reached a point where radical change is now pragmatic change. Incrementalism is the worst possible approach, not the best – nor even the safest.

This is not the time to deliberate whether digital marketing will continue to grow (it will), whether mass media spending will continue to shrink (it will), or whether marketers will continue to want more innovative problem solving from their agencies (they will).

Needed now: a new creative team

Industry observer Warren Berger, writing in a recent issue of Communication Arts, argues that the writer-and-art-director-in-a-room-developing-big-ideas model simply does work in a world where brand building is accomplished through lots of multifaceted ideas that work in multiple formats on multiple devices, all seamlessly integrated. “What’s needed,” says Berger, “is a more wide-open, technologically sophisticated, collaborate, multidisciplinary team approach to creating brand communications.”

Most agencies are still organized in this old Bill Bernbach-inspired model. It worked effectively in the days of Mad Men, but it’s not what’s needed in a world where marketers need work that engages in technology-centric, consumer-controlled channels.

Trading analog dollars for digital pennies?

A recent study published in AdWeek by the IBM Institute for Business Value says that 65% of marketers will increase their digital marketing this year. The exact same number — 65% — said they would decrease their traditional marketing in 2009.

The means the scale of agency work is changing in almost every dimension, from production to media. The time-honored formula of dividing advertising budgets into 85% media and 15% production gets flipped on its head in the digital world. A recent paper published by the 4As cites research showing how money is moving in this value chain:

Source: Bear, Sterns & Co. “Advertising Outlook – Perspective from Wall Street,” 2008

As this study shows, the news is not all bad. The move to digital can actually produce more income for the agency, not less, but agency principals must change their perspective about where their money comes from.

So should you be working on incremental change at your firm, or disruptive change? I think you know the answer.