First of all, agencies are cutting their rates like crazy. Just as agencies have beat up on the media over rates, advertisers are resharpening their pencils and pitting one agency against another to push down commissions and fees.
Some agencies are willing to take lower fees for basic ad work, with the hope they can fatten their margins by selling clients other services. Advertising, as a result, is becoming a loss leader.
The worry, of course, is that with price becoming the differentiating factor, agencies are in danger of becoming interchangeable commodities, ready and even eager to snare business by becoming the low bidder -- like suppliers who furnish ashtrays for the auto companies.
You can bet big money that the agencies' arch competitors, the management consultants, aren't cutting their fat fees. In fact, the higher their fees the more valuable clients consider their advice.
Consultants have a built-in advantage that agencies lack -- they act as a "protect-your-ass" mechanism enabling client management to justify their decisions based on the recommendations of an outside (and supposedly objective and dispassionate) source. Many a top executive has kept his or her job after making a lousy decision by being able to say it had been recommended by an outside consultant. Can you imagine a corporate bigwig trying the excuse that "my ad agency made me do it"?
One of the factors tilting the scales in favor of consultants is they match up much better with their clients. Client management is often loaded with MBAs, and the consultants have the firepower to trot out their own lineup of MBAs to make clients feel comfortable.
Ad agencies complain they don't have the profits to hire such exalted talent, so they can't even talk the same talk as their client counterparts. Even a freshly-minted MBA assistant product manager can lord it over a seasoned non-MBA account exec.
The bottom line is that clients give more credibility to advice from consultants. And I don't really think that the mini-trend of ad agencies hiring management consultants in key positions will stem the tide. Once in the door, the new hires become ex-consultants and ad agency guys, and they're tarnished by the same brush as the rest of their colleagues.
The same goes for ad agencies buying consultancies. A management consultant firm owned by an ad agency group is immediately suspect because the client will always be wary of the objectivity of the advice -- even when they propose that the client cut back on his ad spending. Might not the client suspect that the agency wants to sell it some other communications tool that the agency just happens to have available?
So agencies are between a rock and a hard place. They're cutting their fees, which lowers their margins, which makes it harder to afford to hire the MBAs that would make them more competitive with the consultants. And getting into price wars with other agencies helps perpetuate the idea that agencies are commodity suppliers. At the same time, because consultants require clients to pay through the nose for their words of wisdom, and because they've become powerful brand names in their own right -- and thus a safe haven in case things go wrong -- agencies are being hopelessly outmarketed and outmaneuvered.
Is there anything left for them to do but sell out to the management consultant firms?