Advertising's Real Problem Is the Agency Commoditization Crisis

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More accounting is not the way for creative agencies to avoid becoming commodities, argues Jack Skeels.
More accounting is not the way for creative agencies to avoid becoming commodities, argues Jack Skeels. Credit: istock

Agencies are confronting a crisis of commoditization that could unravel the business. The sink-drain of commoditization keeps eroding margins on media and creative services, backing agencies into a position where they need to cheat to stay alive. That's the real cause of the production transparency (aka fraud) issues that the ANA has alleged. Any solution that doesn't address this isn't a solution at all.

Yet lately a few voices, most prominent among them consultant Michael Farmer, have proposed that fixing the ad business requires adding a layer of project management and accounting of the creative enterprise. Execs who give creative teams free rein, and the client's unreasonable demands wanting more for less, they argue, have nearly destroyed the business. Apportioning and measuring creative time by producing more elaborate statements of work and detailed pricing, on the other hand, will restore accountability and get clients to truly value the work again.

That's dead wrong for two reasons. The first is that project management and detailed specifications don't really work.

Standish Group's bi-annual project "success" survey asks agencies how often projects, well, succeed. The survey doesn't belabor the question more than that, but however agency respondents define it, project success rates run about 30% or less across a wide range of marketer industries.

Our discussions with several hundred agencies over the last 5 years suggests overages occur in at least 70% of the projects and that these overages average 25% to 40% of total value.

As Standish notes:

Over the last 20 years the project management field has experienced increasing layers of project management processes, tools, governance, compliance and oversight. Yet these activities and products have done nothing to improve project success.

So you can do a lot of specification and not move the needle much.

And more specifications and better accounting will mend neither relationships nor trust. A couple that focuses on always splitting things evenly may achieve fairness, but that's never the reason for a great and enduring relationship. Trust that requires verification is not really trust.

The second and lethal problem is that both agencies and clients are still treating the best and most strategic thing about their relationship, the creative, like it is a commodity.

Business research shows that buyers consider sellers themselves to be replaceable commodities when their service offering is focused on price, standard components and specifications. Set prices for standardized services like Farmer suggests and you make all agencies look the same.

We've seen that clients pay more when the agency is strategically focused and offers unique services. The research also says that longer and more-trusting relationships happen when sellers both make "forward investments" in their client's business -- by doing spec work and developing customized services -- and increase the breadth and depth of direct client engagement.

The added benefit of being positioned strategically -- and research confirms this -- is that buyers wind up trusting the seller more. Sounds like something we could use now.

Shifting to a more strategic focus can be difficult and painful for agencies that have become order-takers on media, and from there on creative. But having watched more than a few agencies make the transition, I see three essential moves.

First, these shops shorten the distance to the client by de-layering their account organizations, and bringing teams into client strategy conversations more often and more prominently. They let teams present ideas as well as results. The customization and personalization makes them feel strategic to clients.

As clients start valuing the agency more, people's creative focus, productivity and impact increase. Contrast that to the common practice of spreading people thinly across accounts to boost margin: It makes your people look like, again, commodities. "I'll get an art director on that," signals commodity. "Josh will take care of that," signals partnership.

Second, they find out which clients truly value their partnership. Using the industry-standard Net Promoter Score with a few add-on questions, they can see which clients underappreciate the agency's strategic value and turn teams into order-takers. They make it their mission to convert those clients to partnership or show them the door.

Third, they make their agency stand for a unique way of doing what they do. Digital shops have long known to avoid commoditization by selling customized and branded processes (often the way they do the "discovery phase" of getting to know brands) that are designed to connect clients and teams while building strategic solutions. Best practices include a team-based method with at least five stages that both fosters creative excellence and provides a framework for establishing and managing budgets. When you brand it, you can charge more for it.

While most of their clients embrace these shifts, some put up a fight. Some longtime agency folks tied to the status quo do too. But creative agencies must do it, and do it right. Accounting techniques will do little to ward off the strategically-focused legions of consultancies, digital shops and systems integrators that are knocking on every client's door.

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