Posts Tagged ‘Agency Business Model’

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.

As the philosopher Heraclitus said, "You can never step into the same river twice".

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.

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.

To understand the changing dynamics of the “value chain” concept, observe what’s happened to the music business.  Consumers are still spending roughly the same amount of money on music, but the money isn’t going to the record companies and music stores; it’s going to iTunes.  The money in the music business value chain is still there – it just moved.

The same is happening in the advertising agency business.  Marketers are spending, but they’re spending in areas of the value chain that aren’t owned by agencies.  Instead of trying to squeeze the last bit of value from traditional sources of revenue, agencies should instead be focused on finding a different spot on the chain.

Finding the most profitable areas of the value chain

To continue to profit in the marketing business, agencies must select a place on the value chain where the offerings are still underdeveloped. The problem is that most agency business models are still centered around the idea of “production and distribution of advertising” — a spot too far down on the value chain to have any real or perceived value in today’s multi-channel marketplace.

Here’s how to think about your firm’s value proposition:

Most agencies base their value propositions on overdeveloped services; they are placing themselves on the wrong side of the value chain.  By focusing on the underdeveloped features or benefits of the category, you are in effect not just positioning your brand for where the profits are, but for where the profits will be.

Underdeveloped offerings in the agency world include:

Online Account Planning

While many agencies have a well-developed account planning function, they have yet to fully realize the potential of the internet in gleaning customer insights.  For example, in addition to using traditional account planning tools Butler Shine Stern & Partners uses services like MotiveQuest to track consumer behavior for client Mini.

Analytics

Virtually every agency can benefit from adding the discipline of analytics.  Besides helping to meet clients’ demands for accountability, analytics can serve as the foundation for value-based compensation agreements.  Kansas City-based Bernstein-Rein promises clients the ability to “organize, evaluate, measure, and interpret the right data to make it valuable.”

Social Media

As the marketing value chain continues to emphasize non-paid online solutions vs. paid offline solutions, agencies must establish competent services and tools to help their clients maximize the world of social media. Media Logic, an innovative agency located in Albany, New York, has a suite of resources that help them monetize this important area.

Other underdeveloped agency services include:

Digital: Usability testing, behavioral targeting, software application development (think smart phone apps)

Branded Content: Custom publishing (both online and offline), branded channel development

Customer Relationship Management: Customer database analysis, customer service programs

Reputation Management: Online reputation monitoring and reporting

Conversational Marketing: Conversation strategy, online community development

Customer Engagement Marketing: Crowdsourcing, product co-development

Intellectual Property Development: Content syndication, sale or license of IP

And much more …

So now the question is, which side of the value chain are you on now, where do you think you should be, and what are you doing to get there?

By Tim Williams

Times are indeed tough. Most of us have never experienced an economic recession of this magnitude. Virtually every agency – from the smallest independent to the largest multinational – has experienced a wave of layoffs. Some firms have implemented across-the-board pay reductions, furloughs, or cut the length of the work week. Many have suspended 401k contributions and reduced agency-funded insurance benefits.

There’s no doubt that cost cutting is an absolute necessity at a time when clients are reducing budgets, delaying projects, or just cancelling work altogether. Clients are paying later and banks are cutting or freezing agency credit lines, creating a dangerous and uneasy cash flow crunch for firms everywhere.

You only have so much time in the day.  How are you going to spend it?

This is a time when our problems – especially those of the financial variety – confront us squarely every day that we come to work. Our natural reaction to income and profit pressures is to keep pruning; no more discretionary travel, no more administrative help, no more free parking, and no more complimentary sodas in the fridge. But there comes a point where it’s simply no longer possible to save our way to success.

The danger is that we’re devoting so much time and attention to the problems that we’re failing to pursue the opportunities. Peter Drucker believed that far too much time is spent trying to fix problems at the expense of developing all the remarkable potential that surrounds us. His philosophy “Feed the opportunities and starve the problems” is arguably even more relevant when times are tough. Cutting expenses may be necessary, but it’s hardly a business strategy

Trading problems for opportunities

If you put all of your time and energy into squeezing more costs out of the system, there’s no time or energy left to work on the very things that could help pull your firm out of the situation it’s in. Yes, even the very best agencies have had to reduce their expenses; so has virtually every company in America. But the best agencies are also continuing to innovate, develop new services, and find better ways to get paid for the value they create.

Perhaps you’ve eliminated all magazine subscriptions; but have you invested time and energy in developing a new social media capability? You may have a plan to ask everyone to take a week’s unpaid vacation; but do you have a plan to develop an analytics function that could help prove the value of your work to clients? You have spent late nights and weekends poring over billable time reports; but have you devoted time to developing proactive, game-changing ideas for your clients?

The decision to invest in yourself isn’t made by your balance sheet. As economist Alan Weiss preaches, “Money is never a resource issue; it’s a priority issue.”

What will your business look like?

“Feed the opportunities and starve the problems.” - Peter Drucker

When the economic crisis is over, what do you think the agency business will look like? Most economists believe the business world will be changed forever. Do you really want to emerge from the crisis as the same agency, or do you believe there’s an opportunity to emerge as an even better agency, prepared to take advantage of new waves of spending and investment? Instead of hunkering down until the storm passes, see this as the opportunity you’ve been looking for to reinvent your agency.

The future success of your firm hinges on how you focus our energy right now. Avoid the trap of being so consumed by today that you neglect tomorrow. Problems contribute nothing to your firm’s success; opportunities contribute everything.

By Tim Williams

While Ignition is known to be a strong advocate for specialization, there is nonetheless an important role for individuals inside the agency who are generalists – even inside specialist agencies.

While the exploding media universe calls for very specific skill sets when it comes to execution, knowing whether or not to recommend a specific channel in the first place is the job of a generalist; someone who knows enough about all of the options and possibilities to recommend the right one.

Generalists know a little about a lot; specialists know a lot about a little.

The people at your firm who must play the role of skilled generalists are those advising the client on the front lines – brand strategists, brand managers, channel planners, and content development (creative) professionals.

In today’s multichannel universe, the generalist must know the basics of:

Offline + Online
Paid + Non-Paid
Mass + One-to-One

If this sounds like a big job it’s because it is. Someone like a brand strategist must know enough about all of these potential marketing solutions to recommend them. Ignition has written many times about the need to fully integrate offline and online marketing within the agency. Some progressive firms have done the same with paid and non-paid. Cleveland’s Liggett-Stashower, who for many years had a reputation that was equally strong in both PR and advertising, made the bold decision to erase the line between these two disciplines so they could do an even better job of being channel-agnostic in their work with clients.

Enter the specialists

Alongside a small group of generalists is a somewhat larger group of specialists – professionals skilled in executing the recommended solutions. This isn’t to say that an agency must physically employ all these specialists; sometimes it’s more effective and efficient to use specialist business partners, especially when it comes to very highly-specialized work. In fact, the more specialized the work, the more sense it makes to go outside. Just as a television production project would rely on outside specialists for things like lighting and makeup, a digital production project would rely on specialist programmers and coders.

Complimentary roles

Here’s how to think about the interrelated functions of generalists and specialists:

Abolish the silos?

It’s fashionable to talk about the evil of “silos” but that really misses the point. It’s actually desirable and even necessary to have “silos” of specialists in marketing communications firms at certain points in the process. It’s impossible to have literally everyone in the firm fully briefed, fully involved, and fully integrated into every function and discipline. If you think there are too many meetings with too many people now, imagine a business model where everyone does everything. It’s just nonsense.

Instead of misdirecting your energy to “knocking down the silos” make deliberate decisions about who in your organization needs to be a generalist and who needs to be specialist. You need both, and both need to be great at their jobs.

What happens if the traditional marketing model collapses before a better alternative is established?

So asked Advertising Age’s Bob Garfield in his landmark article titled “The Chaos Scenario.” Garfield recently wrote the third installment in this series proclaiming that we’ve actually entered this scenario ahead of schedule.

Not linear, but exponential

Some of the changes we experience in this business are gradual and linear, but the movement to digital is exponential. Some agency executives continue to think of the digital revolution as “This year’s most critical issue for the past 8 years,” but even the most cynical will now acknowledge that the revolution has truly arrived.

The implications for marketing communications firms are monumental – some obvious and some not so obvious. Senior agency executives around the world report seismic changes in their client relationships brought on by not just the economy, but by the urgent need to find more innovative solutions to marketing problems.

Demonstrating digital leadership

Of course digital isn’t always the answer, but increasingly clients are turning to agencies not only for help but for thought leadership in digital marketing, and only the most progressive agencies are in a position to deliver it.

In Ignition’s consulting work, we regularly encounter agency principals who recognize the urgency and importance of the shift to digital, but are personally unprepared for the change.

Not just organizational competency, but personal competency

Ask a senior agency professional a question about broadcast production and they can usually answer it. Same with print, radio, outdoor, or even point of sale. But ask them a question about digital and the answer is often, “That’s a little out of my league – let me have the digital guys get back to you.” That’s a little like dodging questions about television if you were an account executive in 1954.

Agency leaders, managers, and senior executives all need to develop a personal competency in digital just as they have in traditional. And if you haven’t learned it already, you need to enroll yourself in what BBDO’s Andrew Robertson calls a “reverse apprenticeship.”

Senior professionals as students

If you can’t answer the questions of what, who, why, and when regarding digital, you need to enroll yourself in a program of self-study. If you’re in a general agency management position, your curriculum should cover such topics as:

• Digital terms and terminology
• Types of digital projects and solutions
• Identifying and mapping scope of work for digital projects
• Stages in digital projects
• The tools and methodologies of digital project management
• Managing technologists
• Marshalling and managing digital assets
• Experience design and usability testing
• The role of quality assurance in digital production
• Basics of online analytics

Most of the digerati are self taught

Think about the digitally-talented people you know and you’ll realize most of them are self-taught. They took an interest in digital and learned it on their own. You can do the same, especially because everything you need to know about digital is online, and most of it is free at sites ranging from the Interactive Advertising Bureau (IAB) to ClickZ.

Make the commitment to a digital apprenticeship this summer and assure your personal relevance in the marketing communications business.