Did Agencies Speclialize Themselves to Death?

Balkanization Has Ruined the Ad Agency Business, According to a New Book

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Balkanization has been the ruination of the advertising agency business.

The word, used to describe the process of dividing a state or region into smaller parts that are hostile or noncooperative with each other, perfectly fits what's happened to agencies, according to a new book, "Madison Avenue Manslaughter," written by consultant Michael Farmer.

Agency balkanization has been driven by the shortsighted belief that "each agency discipline belongs in a separate house." It started with media spinoffs, then digital and has most recently led to the question of whether agencies even have the know-how to manage and manipulate big data.

The book is being published at a time when the client-agency relationship seems more confused and uncertain than ever. Nobody professes to know what a new improved model should look like. We reported last month that Hyundai, and its agency Innocean, is working with media agency Horizon to create an entirely new media agency. The standalone shop is called Canvas Worldwide because it gives Hyundai a blank agency canvas, essentially allowing the new agency and the automaker to make up the rules as they go.

Horizon boss Bill Koenigsberg, who engineered the deal, told our reporter Alexandra Bruell: "There's enormous white space here. The $26 billion that's up for review now in the market -- I believe that's pointing to the fact that the old models are broken. Marketers are looking for a clean slate, new opportunity for invention, new creativity."

And a new canvas is urgently needed, Mr. Farmer asserts. "Agencies are on a path to self-destruction," he proclaims. "Through benign neglect of growing creative workloads, and reluctance to tackle clients over declining client fees, agency CEOs are presiding over the slow decline and over-stretching of a diminishing pool of burned-out creative assets."

A confluence of events has further unsettled the landscape. Ever since the days when the Ted Bates agency sold out to the Saatchi brothers and agency management walked away with a huge payday, clients have put the squeeze on agencies' oversized profits. Mr. Farmer cites the unleashing of procurement departments and the emphasis on shareholder value as forces that pushed hard on agency profit margins—as well as diminished the role of marketing.

When the procurement spotlight turned to analyzing media and advertising costs, chief marketing officers "were no longer in a position to protect their favored agencies," Mr. Farmer writes. "Marketing began to lose control over what happened to its ad agencies."

Mr. Farmer also notes that the widespread pursuit of shareholder value "put marketing in the back seat among other strategic priorities. There were easier ways of growing top and bottom lines than by gambling on marketing. Marketing was uncertain and difficult in the recession-prone, post-Golden Age decades. The cozy relationship between chief executives and advertising agencies had unraveled, as other strategic advisers like investment bankers and strategic management consultants jumped to the head of the queue." (Mr. Farmer should know: He worked for the Boston Consulting Group and Bain & Co. before starting his own consulting firm for ad agencies and advertisers.)

And during all this turmoil, agencies clung to their basic belief in specialization—digital, media, direct, traditional -- and consequently got pushed further down the food chain.

Agencies "began to slide down the slippery slope of their clients' organizations," Mr. Farmer stated. "Increasingly, procurement developed a louder voice in matters involving agency fees, CEOs disappeared as direct clients, marketing experimented with greater quantities of marketing deliverables across all media types [especially digital] and agencies responded, unsuccessfully, by over-investing in client service in an attempt to regain control of their relationships.

"Whatever opportunities there were for agencies to become key players in corporate strategy and shareholder value by focusing on 'improved results' was lost during this critical period. Agencies retained their primary culture and commercial focus on creativity and service, even though their market was shifting out from underneath them."

Mr. Farmer says the only way out is for agencies to rethink their primary mission from "creativity" and "big ideas" to "results for clients."

You'd think that agencies would have figured out this basic (and rather simplistic) message for themselves by now. But radically changing consumer tastes and behavior have made it difficult to achieve the results that clients so desperately crave, and the unprecedented volume of agency reviews, spurred by sagging sales and a breakdown in trust amid allegations that agencies are on the take, shows there's equal turmoil on both sides.

As Kevin Roberts, executive chairman of Saatchi & Saatchi, writes in the book's foreword: "The industry must forsake its historical penchant for tinkering and incremental change, and transform itself for the first time in 100 years."