The agency model is broken - but you can fix it

The current 'one size fits all' commodity model is no longer fit for purpose. The future will need to be more diverse, with individual agency models better adapted to the individual needs of different advertisers. Advertisers as well as agencies also need to look hard at their processes: applying 'lean' principles and upgrading their project management, focusing on what is core and what is better outsourced.

Warren Buffet famously observed, 'You only find out who is swimming naked when the tide goes out.' The tide went out faster and further than anyone expected, exposing many unexpected skinnydippers, the most notable of whom were commemorated in the Economist's (hopefully once in a lifetime) 'Swimming Naked Awards'.

The full impact of recession on the advertising business is only now revealing itself. Figures emerging this summer left the traditional agency model looking, if not naked, then certainly with little more than a pair of Speedos to hide its embarrassment.

All the major holding companies have seen big profit falls and sharp reductions in headcount. Dig more deeply and you'll discover that the agency side of their business in mature markets such as the UK is often already deeply in the red.

Coincidentally, the IPA's new guidance note Seizing the High Ground in the De-Coupling Debate sounds another alarm to agencies, repeating the messages from 2006's 'Magic and Logic' consultation process.

THREE UNDERLYING FACTORS

It attributes the continued de-coupling of agency activities to three underlying factors identified then, but seemingly still largely unaddressed by agencies:

• a perceived lack of competence
• a lack of trust about the financial relationship an agency has with its suppliers
• a failure by agencies to articulate the added value to the client of keeping the agency involved.

As long as agencies remain stuck in the traditional agency model such problems will persist. But, as The Mamas and The Papas sang, 'The darkest hour is just before dawn.'

While the current commodity model may be unsustainable, there are better ways for clients to be served and choices for agencies to deliver these.

The long-term client dynamic towards working with multiple specialists and de-coupling is an inevitable response to shortcomings in current agency delivery: in terms of skill sets (still limited beyond traditional media); agency procurement (how they spend clients' money); efficiency and responsiveness.

But these are largely changes clients have been forced to make, rather than wanted to make.

Delivery of marketing communications via a fragmented, de-coupled array of providers has considerable downsides for clients too: transferring costs to clients (via time and skill set demands); added complexity; making it harder to create a consistent customer experience; driving up cumulative agency and production fees; creating inefficiencies, duplication and coordination costs.

Clients may end up paying less for individual elements of their marketing communications while increasing their overall 'transaction cost'.

While there is always a role for specialists, a multi-agency approach inevitably leads to unnecessary duplication across all agency functions, plus a tendency to proliferate production (rather than create core assets and make them 'sweat' across multiple channels).

Many advertisers could reduce overall transaction costs (and potentially improve quality) by working with fewer providers each doing more. If agencies can get to grips with the delivery issues they face – in IPA terms the 'Logic' issue, not the 'Magic' – there is a basis for a strong and proactive value proposition here.

Indeed there are signs that belatedly agencies are beginning to make up for their lack of proactivity in tackling ever-squeezed budgets by finding smarter ways to save clients money.

This summer several agency networks moved to invest heavily in new divisions to compete with independent production facilities for that same backend production and delivery – in effect outsourcing production but within their overall group.

We see a future in which there will be genuine choice for clients in terms of their core marketing communications agency (there will always be a role for a niche specialist or two around the edges). That choice will be guided by how an agency is configured to meet a broad spectrum of their specific needs, not just chemistry or a creative 'beauty show'.

THE DECLINE OF THE TRADITIONAL MODEL

Since the Mad Men days of the 1950s and 1960s agencies have prided themselves on being generalists. Despite the departure of media and splintering off of numerous spcialisms over the years, most still cleave to a commodity, 'everything for everybody' model – and, for the most part, are allergic to anything resembling a lean process.

This has led to little true differentiation between agencies at the core of the market – so in a world where success increasingly demands being different or cheaper, it's not surprising that agencies have long faced pressure on price. And where clients have distinctive needs, as many do, they have had to create their own distinctive solutions via an array of suppliers and decoupling elements of delivery.

As night follows day, continued adherence, by most, to the commodity model has led to pressure on topline fees and the gradual unbundling of agency services to lower cost and/or more specialist suppliers, run on 'lean' principles and more fully embracing the benefits of digital technologies.

Protection of the bottom line has reduced headcounts, particularly in more highly paid, high-skilled back-office functions such as the TV department – thus further eroding agencies' capacity to deliver, and increasing the attractions of independent specialists to clients.

This process is well advanced, with strong advocacy for de-coupled solutions within ISBA's Compag group. Some independent production houses are already bigger than the biggest traditional London agency. And then along came the recession.

QUESTIONS FOR ADVERTISERS

Several new, more distinctive models are emerging and doing well despite different market conditions, but that's a different article. There's a tendency to blame agencies for all the woes surrounding the sector, but in our experience advertiser practices and processes are frequently major contributors to dysfunction.

Advertisers need to ask themselves some tough questions and give honest answers:

Does the process of working with your agency really work?

Are the working processes between you and your agency beneficial to you both?

Are you and your agency's processes configured to deliver the most efficient results for both parties? How is it managed at both ends to ensure they are?

Thinking and delivery – do you currently view them as linked or separate? What is the best choice for you?

What added value, if any, does your agency proactively bring to the process aspect of the relationship, and therefore your business?

Do you and your agency apply 'lean' principles rigorously to the production and delivery of marketing services (within your business as well as theirs)?

What is the contract of expectation with your agencies in terms of detail of the process itself?

How do you work with your procurement colleagues in relation to your agencies? Who owns the relationships?

TEN IDEAS FOR IMPROVEMENT

But ultimately it's a service business and it's up to agencies to reboot their own offer to fit the new challenges they face. We finish on 10 things agencies might consider in doing this, and also things advertisers should be looking for in their agencies too:

1. Define your own agency model, don't default to the commodity status quo. Think about your distinctiveness in terms of client type or needs (eg delivering a total brand experience, driving footfall, engaging with a particular consumer group, being a challenger brand) or even consumer type or needs (eg homemakers, pleasure, entertainment). Things such as culture, values, beliefs or thinking processes are important, but insufficient as an organising principle for a business. Refocus your business around this tangible definition of who or what you are for. If your footprint is diverse, segment it in these terms – be prepared to sacrifice or manage out current activities that don't really fit or make economic sense.

2. Then think about how you could configure your offer based on this to better meet the broader needs of your 'focus clients', simplify their lives and save them money.

3. Focus on what you are brilliant at, or want to improve; look at developing partnerships or outsourcing everything else. Outsourcing does not necessarily mean de-coupling. Intelligent, well-managed outsourcing and new partnerships proactively initiated or embraced by agencies should keep the agency at the heart of the process in terms of creation, strategy and management.

4. Talk to your clients – proactively share your plans or the choices you are considering. What's working and not working for them from a total marketing communications delivery and transaction cost perspective? How could you reconfigure things to simplify their lives and save money (and improve delivery)?

5. Divest and reinvest. Invest to better meet the needs of your chosen focus clients – for example, in a broader range of creative, strategic and project management skills to span the off/online world, and disciplines such as brand entertainment and experiential marketing. In practice this is hard to do without divesting aspects of the current offer that may be better addressed in other ways.

6. Treat delivery as a business discipline, not an add-on creative service. Aspects of delivery may just be a distraction from your central purpose of 'creating stuff', and better expertise as well as cost efficiencies may be available outside. Depending on your business focus it may make sense to keep specific elements of delivery in-house, but you have to be able to justify this to both yourselves and your clients in terms of transparency and value. With the outsourced options available you need a strong business rationale to retain print production or the traditional TV department in-house.

7. Apply 'lean' principles rigorously to the delivery/production side of your business, getting external help if you need it – external suppliers are doing this, which is what is driving de-coupling. We don't advocate the 'full on' application of lean principles to the creation side of the business – an element of managed chaos plays a vital role in creativity (although a little organisation does not go amiss).

8. Invest in project management (this applies to advertiser organisations too). Whether in-house or outsourced, you need to fluidly and competently deal with a broader delivery palette. There's a big training job to be done here as very few people have the crosschannel knowledge, or a combination of hard and soft project management skills, necessary to deliver in the new environment. Consider how other industries, such as IT and architecture, have PM at their core, a key part of their business model.

9. 'Procurement proof' your business – stress test your model using an external procurement eye, refining delivery and building your business rationale.

10. Don't forget to have fun. You'll know when change is working when you liberate creativity and make the whole process enjoyable again for everyone involved.

ABOUT THE AUTHOR

Chris Baker is a partner in Bacon Strategy & Research, advertising process doctor

[email protected]

Martin Handyside is a partner in Where, advertising process doctor.

[email protected]