The traditional agency model is challenged. Revenue growth is tepid. Layoffs are rampant. And the big agencies have not adapted to the digital transformation and to the ascendency of digital spend.
There are some advantages to scale, for sure, especially when it comes to multinational advertisers. And yet, the game has changed radically in the last decade. The holding companies had actually been formed initially to aggregate eyeballs and allow advertisers a better negotiating power with the media. However, this need is less relevant, now that the majority of media is auctioned.
Much of the woes of agencies, these days, are due to being forced to accept less for services. For at least a good decade now, client CFOs and the procurement departments had been pushing back on agency fee. Often, up to the point that what they are paying to the agencies just barely covers the cost of the agency employees’ salaries. As a result, the best talent, unfortunately, is leaving the agency business.
The traditional agency-client service model is currently very costly, being overhead-intensive and centered on the agency, not the client. Another troubling sign is the waning tenure of client-agency relationships. The average length of an agency-client relationship has declined dramatically, from 7.2 years to less than three years today.
Agencies are not structured well. In fact, in many agencies today, only 35% to 40% of the staff is directly involved in the creation of the advertising. There are whole levels of people whose job is to essentially sit around and wait to approve or disapprove someone else’s work. As a result, many clients are looking for agile agencies, and, with fewer people.
The standard agency model is hierarchical. When agencies had historically moved from commission to a largely fee-based compensation, the hierarchy structure had even more value for agencies because the more levels you have, the more levels you can bill out. It was a dream system: That is, until it wasn’t.
In a hierarchical structure, the approval process for work takes longer. Inevitably, the work has to go through the meat grinder of too many layers, second-guessing what clients might like, or, just what consumers actually want, and, innumerable committees diluting the work, all the while, spending the client’s money.
As advertisers have looked to cut their own costs in recent years, they have tried to rein in agency fee. They are pushing out payment to a longer and longer time frame, and to take more work in-house, or to switch to working with agencies on a project basis. This means that agencies, already faced with razor-thin profit margins, can no longer expect a steady revenue stream`.
I, personally, don’t believe that this will change. Higher margins and more generous fees will not be restored. I think that advertisers will continue to insist on competitive prices from agencies, and, unfortunately, most agencies do not have the leverage to push back. The plain truth is that agencies must adapt to the new austere environment or perish. It’s that simple – income will be tough to grow, therefore agencies must concentrate on reduced overhead and optimizing their cash flow. It’s time for an alternative model.
As agencies scramble to keep advertisers satisfied and still make money, they need to cut cost by relying heavily on the gig economy. Perhaps it’s time to look to Hollywood, as guide.
For those who skipped Cinema Studies 101 in college, here’s a quick refresher course: Beginning in the early 1920s, studios controlled every aspect of the filmmaking process, from creation to filming to distribution, by using their own stable of actors, directors, as well as the technical and production staff. However, in the late 1940s, a federal antitrust action took away the studios’ ability to force theaters to take big blocks of movies, thus resulting in a significant loss of income. That, combined with the introduction of television, was, a one-two punch from which the system could not recover. By the ’60s, old-style moviemaking was dead, as was the studio system that could not adapt to the new world order.
The future of agencies is not the Hollywood studio model of ‘all staff under one roof’. It is ad hoc teams of creative and differently skilled people coming together on projects, and then, disbanding. The people involved change as do the projects change. At the center of it all are client relationships, people-and project-management skilled, and high-level creative direction, and culture. That’s it. Everything else is outsourced as needed.
In the end, it all boils down to access to the best talent, instead of inflexibility, gigs instead of hierarchy, mobility instead of roots. And, at the heart of it all is something that older firms driven by anachronistic thinking lack. A true culture of entrepreneurships and creativity.