$142.5B 2015 U.S. ad spending for 200 LNA
In 2008, Grey New York made a decision that ran counter to the economic reality of the time: It doubled the size of the production facility it was building inside the agency's then-new office in Manhattan's Flatiron district. Most companies were cutting back, but Grey was splurging.
It paid off. Today, those edit bays and sound bays -- along with the three in-house directors at the agency -- are worked around the clock, seven days a week. Demand is high enough that the shop has expanded its production operation in a location five blocks away. "My only regret is not building an even larger facility in-house back in 2008," said Tor Myhren, worldwide chief creative officer at Grey. Why? Because clients are demanding more content at cheaper price -- and they want it done yesterday.
Andrew Robertson, president-CEO of BBDO Worldwide, calls it a shift from "tentpoles" to "tadpoles." There are fewer big agency-of-record relationships and blowout TV spectacles. In their place are more small-budget work and projects. That's making agencies grapple with questions like the right number of people to keep on staff; the type of talent and capabilities they need; which projects to pursue; and how to charge for ephemeral, low-cost creative like Vine, Instagram and Snapchat ads.
The first set of BBDO's "Fix in Six" Vine videos for Lowe's, for example, cost about $5,000 to make, according to agency Chairman David Lubars. According to the 4A's 2011 Television Production Cost Survey -- the last time the study was done -- the average national 30-second spot cost $354,000 to produce.
"Within social media, content demands are definitely evolving," said FCB Worldwide CEO Carter Murray. "The volume of creative work in social media that clients want produced these days is much greater than the volume of content designed for television. Because of that, the way you produce work has changed."
The degree of that change varies widely among agencies, with some producing as much as 80% of work in-house and others handling as little as 10%. But shops broadly feel the pressure to experiment with more forms of integrated production.
FCB shot and produced its recent "How Do You KFC?" home-movie-style TV commercials entirely in-house. WPP's Johannes Leonardo is currently shooting a TV spot for a client. "We're just reacting to a marketplace that appreciates speed and efficiency," said Johannes Leonardo CEO Mike Duda.
Grey's Mr. Myhren said clients aren't crazy about the antiquated triple-bid structure that requires agencies to ask multiple production and postproduction vendors to "bid" on projects no matter what.
"Having an idea that isn't coming to fruition for four or five months is ridiculous," Mr. Myhren said.
Agencies, particularly smaller ones, are also becoming more judicious. Digital shop Firstborn, which began as a production company, tries to keep staffing steady. As a result, president Dan LaCivita spends a lot of time mapping out which pitches to join -- and turning down work that's too big for the agency or isn't the right fit at the time. "We do feel some pressure to keep the lights on," he said.
Success in a "tadpole" environment depends on many factors. The revenue on a few Vine videos is never going to match the fee on a 30-second, high-gloss TV commercial. But moving production in-house is helping some shops keep between 10% and 12% more revenue for themselves, executives said.
Having certain capabilities at the agency helps keep clients in the building, too. Dave Rolfe, head of integrated production at BBDO, added that having production done inside the agency "enables creative thinking." The agency has to show that "we can make anything," he said.
And some said it's more of a shift in models than in money. "Agencies are paid for the time it takes to develop ideas and create work," Mr. Duda said. "Even if the production value is down, the time it takes is still the time it takes."
John Patroulis, chief creative officer at BBH, New York, said filling all the channels still takes the same amount of time. "You may cut back on the big, heavy production, but it still takes an awful lot of people to optimize channels and do PR." BBH recently expanded its PR capabilities after being tapped as agency of record for Rubbermaid, handling all creative, digital, social and public relations.
Mr. Myhren said budgets might be smaller, but the fact that agencies now handle more projects "works itself out" when it comes to payment.
Mekanism, a full-service creative agency that started off as a production company, has had to change how it meets demands. President Jason Harris said his company creates TV, print and other content all at once, then splits it up to make "pieces" so it stays within budget. He calls it "production at the speed of social media."
FCB's Mr. Murray said he wants clients to recognize how the agency business model has changed. "Agency partners should be fairly compensated," he said. "If the model may be changing, all we ask is that we have a partnership where they demonstrate expertise and passion for business and we get paid a fair profit."