Shrinking budgets, a project economy and work-for-free demands created a perfect storm for shops in 2019

Rob Schwartz posted a tweet last month showing a ship dizzily riding a gargantuan wave as a series of others just as menacing lurk behind. The hashtag: #AgencyLife.

The TBWA/Chiat/Day New York CEO’s tweet is an apt metaphor for an agency business facing a perfect storm of shrinking budgets, difficult clients, controversial contract terms, in-housing and a movement to project work. Like the wind gusts whipping up the waves in the tweet, the forces buffeting the agency business have been gathering strength for some time, but now they threaten to swamp the boat.

“That is exactly what I feel on a daily basis,” Schwartz says. “The captain of that ship is actually dealing with that roiling sea and horrifically inclement weather. It does feel like we are in some parts of the ocean where we haven’t been.” Schwartz says shops aren’t necessarily sinking, but navigation has become a lot more difficult.

Some, of course, have gone under. Case in point: Barton F. Graf, which folded in August. Founder Gerry Graf blamed a series of events including major client spending shifts, account losses and a move from agency-of-record assignments to projects.

Bad behavior

There are, of course, two sides to every story. Chief marketing officers argue that they need to prove return on investment and demand more of agencies for less. Some clients claim agency billing is too often based on an anachronistic time-based model rather than scoped for a project-based world. And a common refrain is that a client has every right to ask for the moon—just as every agency has every right to say no.

In November, Nancy Hill, former 4A’s president-CEO and founder of The Agency Sherpa, put up an outraged post on LinkedIn challenging a current RFP “from a large CPG company offering no remuneration for pitch IP and stipulating they own the work.” Hill urged agencies not to pitch: “DON’T DO IT!” She declined to name the marketer.

Matt Weiss, president of strategic growth at Interpublic Group of Cos.’ Huge, also went to LinkedIn to air his grievances on the current pitching environment he sees as the “Wild West.”

“I’m seeing more blatant misfires than ever before—budgets not declared (we are a business, it costs money and time to do a pitch, at a minimum a budget should be disclosed),” Weiss wrote, “process not adhered to (timing delays, zero clarity), IP abuse (we own the idea regardless of outcome), no feedback unless heavily pursued, rules changing midway, decisions made without human contact (send us the proposal and we’ll come back to you), and on and on.”

While a brand marketer might push back against some of these accusations—arguing, for example, that having ownership of ideas is a way to safeguard against agencies bringing similar ideas to the table and trying later to claim credit over winning work—Weiss called the practices “wrong” and “abusive.”

“The power is clearly in the hands of brands since there are 120K agencies all vying for a piece of the pie,” Weiss wrote in the post. “This has to stop and the only chance we have is by locking arms and saying NO.”

TikTok is one brand charged with such malpractice. Ad Age recently reported that three agency executives and one former TikTok employee accused the company of canceling projects midway in the creative development process with little to no communication from the marketing team, and demanding what shops call “unachievable” deliverables with lowball pricing. In one instance TikTok asked for several fully produced videos translated into various languages for a fee of $20,000.

General Mills also generated quite a bit of criticism earlier this year after reports accused the CPG giant of asking participants in its ongoing North American creative review to pitch for free and relinquish control of the ideas they present. At Advertising Week New York in September, General Mills Chief Marketing Officer Ivan Pollard acknowledged the flack but insisted he wants “agencies to make money; lots of money.” 

But then Pollard suggested that the industry shift back to a model where agencies make a commission off the profits a client collects. “That’s where agencies came from in the beginning,” he said. “You were rewarded purely on business results.”

‘Locking arms’

Sandy Greenberg, co-founder and CEO of Terri & Sandy, says one of her biggest gripes is clients declining to disclose fees or budgets to agencies in a pitch. For a small shop like Terri & Sandy, Greenberg says it costs potentially “hundreds of thousands of dollars” to pitch a new piece of business—for a holding company, the cost would probably be in the millions. “That’s a lot of money,” especially if you don’t know what the business is worth, Greenberg says.

Michele Sileo, managing director and partner of Eleven, was involved in a formal creative pitch for a global brand this year that she says would not disclose its budget. “The size and nature of the ask made one assume that they had set aside a sizeable figure for the engagement,” Sileo says. Two days before the final pitch meeting, the agency was surprised to find that “the client canceled and made agencies aware that they no longer had a budget.”

The kicker: “They also shared that they would be willing to have the scheduled meetings anyway and hear the agencies’ thoughts. We were offended.”

Greenberg, fed up with unfair pitching practices, now requires the client disclose the marketing budget and that there be a promise of a multi-year partnership before engaging in a pitch.

Several agency executives have also noted a growing trend of large brands inviting small agencies to pitch their business—not to win a significant piece of it, but simply to get on their roster to pitch one-off projects in the future. Greenberg says Terri & Sandy is no longer interested in such pitches, and feels “lucky to be in a position where I can say ‘no.’” She says she feels encouraged by big names in the industry, such as Hill and Weiss, publicly condemning certain controversial pitch practices.

“We got ourselves into this pitch mess,” Greenberg says, suggesting that agencies’ compliance with controversial terms and requirements have resulted in them becoming widespread, “and we can get ourselves out” by not agreeing to them.

Ghosting

Several agency executives complain of clients “ghosting” them—not responding after they pitch for new business, or even midway through campaign development after they’ve already been assigned to work. 

Tamera Geddes, CEO of Interesting Development, says she received what she feels were “fake pitches.” Clients never intended fully seeing them through, but rather issued them to gain free ideas from agencies, she claims. She says she received several RFPs that came in the door and then died without the brand explaining why.

Geddes says this can be detrimental to small shops especially. “The impact it takes on a small shop reverberates across its financial and emotional health,” Geddes says. “We need to weigh the opportunity at large and consider employee morale. Our people are so valuable to our business, so we try to discern which RFP processes are legitimate to avoid talent burnout.”

Lindsey Seyman, managing partner of accounts at Fancy, says her team recently got ghosted by a client that had reshuffled its marketing department. Fancy was working on a brand relaunch for the client and had the work already approved. It was nearing production when “they stopped getting back to us,” Seyman says. Eventually, the client told Fancy that there no longer was a budget for the project.

“The client liked our work and was just so nervous to tell us,” she says. “We had been paid for the work, but we were also just really excited to see it come out.”

‘Agencies are afraid’

In an environment where agencies are constantly fighting to capture a sliver of a dissolving pie, it’s tough for smaller shops especially to turn down business. “Agencies are afraid,” Greenberg says. “We’re afraid if we speak out, clients won’t call us to pitch.”  

Clients often don’t have much of a choice to do things differently. With their procurement departments putting a tighter squeeze on marketing budgets, and recessionary concerns rising, brands have begun to shift more to project work. And that has pressured agencies to restructure their own operating models, or drown trying.

According to new business data from consultantcy R3, there were 10 percent fewer pitches in 2019 for 26 percent less revenue. “This trend is only going to continue,” warns Greg Paull, R3 co-founder and principal. “There’s been more pressure than ever on getting more for less.” 

“While we are complaining,” Greenberg notes, “keep in mind where it’s coming from. [Marketers] don’t have as much money. They’ve found new ways of working. They’re working leaner, cutting staff. We must find new ways of working, too.”

Surviving in a project-based world

While the new project economy has been tough for certain agencies accustomed to working on retainers, some shops have been able to make it work, or even thrive. Carl Johnson, chairman of the agency group at MDC Partners-owned Anomaly, claims his agency is poised to grow 30 percent in 2019, thanks to the disruption—which he says is “helpful to us because it forces people out of the old model and because we were built for different times.”

“The world is coming to us,” Johnson claims. “We have more opportunity than ever before and this will be our best year ever.”

Frances Webster, Walrus co-founder and CEO, says agencies need to invest in other capabilities outside traditional creative to stabilize their own business, and learn how to work better with procurement. “The industry needs to make friends with those people,” she says. “They’re just doing their jobs. I feel for CMOs. They are under so much pressure. Every quarter you have to show growth.”

Webster says Walrus’ business is a mix of retainer and project-based work, and the agency recently invested in media and strategic capabilities to add new streams of revenue. Walrus recently won agency-of-record duties across both media and creative for Lowes Food, a supermarket chain, following a review led by Ark Advisors.

Webster believes small agencies were designed to thrive on project work and tighter budgets. If that’s the case, she says 2019 should have been their year to shine. “I’m not turning down a project from a large client,” Webster says.

But big AOR assignments are still scarce. “There is just not the velocity of big pitches there used to be,” says TBWA/Chiat/Day’s Schwartz. “There are maybe three big pitches a year that would be significant to an agency’s bottom line, and your impact on the client would be significant enough to turn their fortunes around. That is few and far between.”

Schwartz says the focus should be on the power of the creative idea rather than hours spent on the business. “I love the Walt Disney example,” he says. “It took Walt Disney five minutes to draw Mickey Mouse. So if you were getting paid for the time spent on drawing Mickey Mouse that might have been a $38 transaction. But we now know it’s worth $38 trillion.”

Burning down the house

There are some issues that agencies are powerless to fight, such as clients taking work in-house.

Procter & Gamble’s Secret deodorant brand, Allstate and Anheuser-Busch InBev are among major brands that have taken additional marketing duties in-house in 2019. Meanwhile, agencies have lost top talent to in-house teams this year, including Nick Law, the ex-Publicis Groupe chief creative officer and R/GA veteran, who left for Apple in June.

Ted Nelson, CEO and co-founder of Mechanica, sees opportunity in working with in-house teams by focusing on strategy and brand positioning work in partnership with internal shops.

Nelson criticizes the “traditional review process” in which an external creative agency pitches an idea, wins an account or project and then forces their idea upon everyone else (i.e. the internal teams). “A traditional review process sets up the opposition of the external agency and internal agency,” he says.

Nelson says his agency’s business is primarily in project work—60 percent to 70 percent of revenue in the shop’s 15-year history has come from projects. “We are frequently brought in by in-house agencies,” he says. “Sometimes in-house agencies are the best possible partners in bringing big ideas to life.”

“When we work with clients that have in-house agencies, which is most of the time, they drive us to do better,” says Al Moseley, global president and chief creative officer of 180LA.

How to move forward

Navigating 2019’s rough seas forced holding companies to wring out costs—such as WPP merging VML with Y&R and Wunderman with Thompson—and prompted layoffs and organic growth declines.

Apple’s longtime agency, TBWA/Media Arts Lab, most recently cut 50 jobs due to changes within the tech giant client’s internal marketing department. Amid further restructuring at WPP, the holding company said it was working to cut 3,500 jobs and merge or close 200 offices. 

Publicis Groupe, which also continued to reorganize and consolidate its agency operations this year, faced a significant hurdle in trying to return to organic growth. CEO-Chairman Arthur Sadoun, who had blamed the declines on client budget cuts, made that the company’s focus for 2020 in an internal memo to employees.

Terri & Sandy’s Greenberg predicts there will be more agency closures and more consolidation among holding companies, and in turn loss of jobs and revenue. “When Terri and I started our business 10 years ago, the essence of what we wanted to do was create long-term partnerships based on mutual success,” Greenberg says. “It used to be that clients wanted [that]. Something has changed in the years since. It’s all about money. [Clients] want quality, but it’s price that is really motivating them.”

Steve Parker, CEO and co-founder of Levelwing, however, says agencies have also been culpable. “The historical lack of access from agency partners, in addition to misuse of media platforms as a form of compensation, has helped create and fuel this distrust. We are an industry of highly skilled professionals, and this is the result of bad behavior.”

But Parker says there’s hope that agencies and clients can rebuild relationships. “The theme of 2020 should be trust,” he says.