The crisis mirrors what has happened in the newspaper business. Two decades ago, newspapers were profiting by big margins, with no incentive to invest for the future. As technology changed and profit margins shrank, these companies were left with no capacity to invest. So they laid off people. This led to diminished product quality, which contributed to even more lost revenue. Many newspaper companies got entangled in a race to the bottom.
In our industry, the digital revolution has triggered three dangerous trends that , combined, pose a similar life-threatening challenge:
The business of managing digital advertising is hugely complex compared with that involved with handling traditional TV, print and radio advertising. The solution for most agencies has been to hire more junior people, which increases expenses, rather than invest in advanced technology that could spark enhanced productivity with fewer staff.
- The dominant fixed fee-for-service compensation system vs. the traditional commission-based compensation, whereby digital work was paid much higher, has meant that agencies are doing more work for less money. With somewhat larger staffs and little new technology, they have limited resources to handle increasingly complex digital advertising.
- Digital work gets even more complex with the emergence of search, social, big data, owned media, branded entertainment and other new media. Already stretched-thin teams are required to manage, track, analyze, slice, maximize and handle countless new responsibilities.
The result? There's huge pressure on agencies and employees. It's sapping our industry's lifeblood -- the creative and strategic product -- as limited budgets lead to more junior associates directing accounts with minimal guidance from veteran visionaries, many of whom are too costly to retain.
What's the answer? For savvy agencies, investing in technology is a start. This means using technology to increase efficiencies in workflow and media buying, so that agencies can be free to focus on strategy and ideas. But technology requires capital, and with persistent pressure on profit margins, agencies are reluctant or limited in their ability to invest capital in innovation.
Still, it's a matter of survival. Agencies must invest in technology that will allow them to operate more efficiently. Breakthrough technology is available, often from companies backed by private equity and venture capital.
For instance, Centro, a Chicago-based digital media logistics company where I'm on the board, secured $22 .5 million to invest in, among other things, automated media-buying software. The global cloud-marketing platform Turn Inc. has raised $20 million to fuel scalability in media planning and accountability for brands and agencies. Mediaocean is attempting to create a global, open and neutral operating system for the advertising business, thus enabling standardization of development and deployment.
A crowd-funding site, LoudSauce, has emerged to help entrepreneurs raise capital for buying media from individual investors by offering stock for sale through third-party intermediaries.
Private investors are banking on ad agencies recognizing that they must become more efficient to survive, and that having their people just do more work isn't the answer. Consider all that Walmart does with new technology -- whether it's bar-code advances or logistics-related software -- to reap additional efficiencies.
Advertising agencies can become more vocal and aggressive in urging their clients, C suites and holding companies to loosen up when it comes to spending and invest in fresh technology that will deliver a rich return on investment. Or they can keep asking more of people already stretched thin.
What's at stake is this: They either win the race to the bottom or look up to clearer skies ahead.