Will Ad Agencies Be Left High and Dry?


high and dry

 

 

 

 

 

 

 

 

 

 

 

This is an article that I first posted on LinkedIn.

My journey in advertising and media started in the shadow of the real Mad Men forty years ago. Imagine Don Draper and Pete Campbell ten years on. Those were my first bosses at J. Walter Thompson on Santa Monica Boulevard in LA in 1975.

Even though I suspected that the business had been cooler and more fun a few years earlier (isn’t that always the way?), it was still fun and exciting. Long hours. Hard work. Pressure. But still there was a buzz and a very strong belief that we were the business partners of our clients and contributed to their success. Across the industry, people were doing smart, fresh work.

I mention this not because of some overwrought nostalgia brought on by the departure of Mad Men. Rather, I think it’s important to benchmark how much agency/client relationships have changed (deteriorated really) over the past few years and to ask whether we are perilously close to a point of no return.

I started writing this post, with the intention to complain about how agencies had screwed up their relationships with clients. As I wrote and thought, I realized that each side of the partnership had done its part to convert a valuable partnership into a dysfunctional vendor/customer relationship.

Agency economics and new technologies are creating opportuni`ties and incentives for agencies to change their underlying business relationship with their clients. Whereas once the agency relationship was a partnership owned by senior management, it has now devolved into a vendor relationship owned by procurement.

In those long ago days, agency teams were fully staffed and headed up by grown ups who spent all day thinking about their client’s business. Management Supervisors were awe-inspiring figures who wore good suits and drove Jaguars. They not only thought about advertising but products, consumers and retail channels. The term “agency of record” had true meaning. A campaign was literally rolled out across all media and all geographies by the same agency. Executives would work on a client in several offices throughout their career. Their career paths would often parallel those of their clients.

These relationships were possible because of several supporting factors: long tenure; an agency compensation system that permitted investment; and broad, strategic relationships with agency management acting as the “general contractors” across the marketing spectrum.

Starting in the late 70’s clients started to treat agencies as vendors rather than partners. They cut agency compensation. Not surprisingly, this quickly resulted in cuts in staffing. With fewer people on the business, the agencies spent less time thinking about the client’s business. Agency account teams (all functions) became extreme pyramids: one or two really smart senior people at the top; two or three solid citizens in the middle; and dozens and dozens of kids. High turnover. High burn out. Rather than moving up within the agencies, those bright young kids are applying at tech startups. The brain drain accelerates.

Clients became more aggressive over time about breaking up assignments by product line or function (planning versus buying or digital versus TV). Although the theory was that competition would make everyone better, the evidence is that it caused disruption, confusion and a decline in the quality of work. It has also left agencies with an ever more tenuous relationship with their clients. The consequence is that clients must now be their own “agency of record” and coordinate the efforts of scattered agency teams.

A friend recently shared a glimpse of this brave new world. The newly hired CMO of a top brand called a summit of his agencies to share his strategic vision. Before they were done they had to find a bigger room. This client had about 20 agencies in North America and their “team” numbered about 200 people. Extending this globally would only magnify the problem. Each agency is optimizing for a very small part of the marketing puzzle and, more importantly, optimizing for their own well-being.

Agencies were once explicitly ‘agents” of the client, acting on their behalf. They are now acting more like third party vendors dealing on their own account. This is most visible in the media world. Some have asked whether this is caused by friction over rebates and lack of transparency.

While this is possible, I think the high turnover is more likely the grand result of three decades of agencies and clients both chipping away at the fabric of their relationship. In the end, the agency has more to lose than the client. Clients don’t go away. They are the wellspring of budgets.

The more interesting question is what is the future of agencies. Will they be left high and dry by the tides of change? I think the odds are high that they will. We’ve seen big consulting firms take away the agency’s seat at the board table. In the near future, we may seen big tech platform companies including IBM, Oracle and SalesForce throwing sharp elbows for leadership.

To reverse the trend, agency management would need to make investments in relationships with their clients that are not profitable in the short term. More top people. More research. More time on spec projects. This is tough to do for publicly traded holding companies. Wall Street wants higher margins and growing profits. Unfortunately, agencies may optimize themselves into oblivion.