Agencies Must Wake Up to a Different Business Model

Out of the Past: Changes in Compensation, Communication at Core of Needed Evolution

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Illustration: Gary Hovland
In the 1993 film "Groundhog Day," Bill Murray plays Phil Connors, an egocentric Pittsburgh TV weatherman grudgingly covering the annual event in Punxsutawney, Pennsylvania. Just when he thinks the hated assignment can't get any worse, he finds himself trapped in an endless loop of repeating it over and over again.

Perhaps one of the icons marching down Madison Avenue this Advertising Week should be Punxsutawney Phil, because most advertising agencies have been waking to the same business model day after day and year after year.

True, lately we've seen attempts at modifications to the integration model being the battle cry du jour. But is that enough? Or is there a need for something deeper, more fundamental?

Pay for work or results?
Take compensation: Instead of compensating agencies fairly, based on their contribution to wealth creation for their clients, clients adopted labor as the metric for evaluating the contribution intellectual property has on wealth creation. Yet most intellectual-property wealth creators, whether they are J.K. Rowling, Steven Spielberg, Damien Hirst or Georgio Armani, don't fill time sheets and don't get compensated based on how many hours they toil, but on the basis of the value that their artistry creates.

Why should agencies be different? Why shouldn't clients recognize that intellectual property is part of asset value and compensate agencies accordingly?

Unfortunately and unfairly, agencies are facing a head wind as the context of compensation has changed in the past two decades. Up until the 1980s the marketing folks or salespeople, the agencies' natural partners, controlled agency compensation. But as the longest-running bull market in the history of Wall Street began in 1982, the balance of power within corporate America shifted. Quarterly reports, financial guidance and stock options as a form of compensation began to take center stage in many companies, and with it the ascent of the CFO from bureaucratic, bean-counting functionary to corporate policy maker and stalwart. Over time, especially when it became harder to build the company's top line in an ever-more competitive environment, many CFOs applied financial engineering to the bottom line -- including the idea that advertising, and an agency fee, is an expense rather than an investment. And a symptom of this new thinking -- the greater emphasis on policing the financial aspect of the client-agency relationship -- is the emergence of procurement as the third leg of the CMO-agency relationship stool.

Another area to explore is outsourcing: Why should agencies confine their services to largely what exists within their walls? The late, brilliant Geoffrey Frost talked about the need for agencies to evolve from "dormitories for copywriters and art directors" to navigators of relevant creative talent, wherever it is, on behalf of their clients. The notion of agencies as creative portals, of outsourcing talent on an ad hoc basis, is not new to the creative community, of course.

New revenue streams
In the early 1950s the old Hollywood studio system succumbed to unsustainable economics as people stayed home to watch TV. The studios that survived and eventually thrived did so by switching from a stable of contract players and directors to a system of ad-hoc arrangements where creative talent comes together under the auspices of the studio for 12 months or 18 months and then disperses at the end of the project. Outsourcing is a viable option for agencies. Take studio operations. One European ad agency came up with a truly innovative solution that makes economic sense: It produces all its work for a Fortune 50 company from its 24/7 studio in that new Mecca of advertising, Bangladesh, at a fraction of what it would cost at its home base. A few people from the home office supervise the work on the ground and then beam the ads back to Europe via satellite.

Or take the whole area of business development, now mostly regarded narrowly by agencies as answering RFPs and pitches. As income pressure grows, agencies should commit to business development in a broader sense, unearthing new revenue streams. For starters, agencies should put greater focus on low-hanging fruit, like growing revenue streams from existing clients.

Then there are all sorts of other opportunities that are currently largely ignored. Take advertising content: Advertising itself can be monetized when it serves a consumer need. Of the whopping 482 pages in the September issue of Vogue, which weighs in at a back-breaking 4 pounds, 9 ounces, a full 87% are ads! In other words, people are willing to shell out five bucks for the privilege of looking at ads. Is this a great country or what? Meanwhile, NBC Universal believes people will pay just to watch ads. Its USA Network subsidiary announced it would in early 2008 launch, a portal that will collect new and classic TV spots, along with other brand content, such as movie trailers and short films.

Other opportunities
Another big revenue opportunity for agencies is licensing. The ring-tone business, for example, at $12 billion and growing rapidly, is bigger than music or films. But how many agencies control licensing rights to their jingles? Traditional agencies can take a cue from digital agencies by entering cyberspace and developing e-commerce applications to serve as an added revenue stream for themselves and their clients. Dentsu is already doing so. It announced recently the creation of its "Virtual Tokyo" space on Second Life. Dentsu will act as a landlord, selling 90 hectares to its top 30 clients and allowing them to conduct business there -- allowing date collection on consumer behavior that can be easily monetized. Dentsu expects to attract 3 million visitors -- an astonishing number considering that Second Life has only 8 million visitors at present. And for a relatively small investment of $750,000, Dentsu and its clients will reap millions in new revenue.

The marketing process itself could stand a little turbo action too. Speed today is a key strategic asset and in the ├╝ber-Darwinian online world, only the nimble survive.

In the days before the internet, and before technology made innovation easy to copy and competitive advantage more sustainable, the communication-development process could be as slow as a freight train. You could take seven or eight months to develop advertising, test it, rough produce it, test it again, produce it, test it and put it in a test market.

This world is gone, just like the trench warfare of World War I was replaced by cavalry-like sweeping tank battles in modern warfare. In this kind of war, speed matters more than perfection, and agencies and marketers need to make decisions based on partial information, because waiting for 100% information means the decision is no longer relevant to changing market conditions. Managing a brand today is like running a presidential campaign, where damage control and reaction time are as important as being "on message." The consumer-generated media, mash-ups and bloggers are competing for control of your brand, and potential disaster can strike at any moment like lightning -- whether in toothpaste, toys or a pop star named Britney, and with an instant viral effect. The operating process needs to become less iterative and more akin to Carville and Stephenopolous' war-room operation for Bill Clinton during the 1992 elections, sort of a quick-response team operating on instinct and judgment and not slowed down by exhaustive research. Speed, in and of itself, is now a strategic asset for brands and agencies and needs to be factored into the marketing mix.

Lastly, agencies' business models need to recognize social responsibility and behave accordingly. Doing good and doing well now go hand in hand, as captured so brilliantly by GE in its "Ecomagination" campaign. Agencies must embrace social responsibility to attract young creative minds.

The emergence of the internet has changed the way we communicate, the way we do business and the social architecture that has been in place since the Industrial Revolution. Its force unleashed unprecedented democratization of innovation, knowledge, capital and ideas. On the web, those who understood how people's behavior has shifted -- and came up with relevant business models such as Google, Facebook, Craigslist and YouTube -- won. Agencies 2.0 should learn from the turmoil and disruptions the web has created and adapt to the trends emanating from Silicon Valley with a new-business model that mirrors their clients' needs. To aid that evolution, CMOs and marketers must endorse a fairer compensation platform based on wealth creation and accept that the agency is entitled to intellectual-property ownership. To meet today's more-complicated marketing landscape, we need a commitment to breakthrough ideas from both sides of the conference-room table.

Agency 2.0: Steps to get there

It's time for Madison Avenue to adapt to the turmoil and come up with the agency version of Facebook or YouTube -- a breakthrough idea that embraces change and thrives on tomorrow's challenges.

COMPENSATION: Should be tied to value creation and not based solely on labor. Clients and agencies need to work out a fairer compensation scheme recognizing the value of intellectual capital to brand assets.

OUTSOURCING: Agencies should evolve into creative portals, outsourcing external creative talent in areas such as studio production, as well as in logistical operations.

REVENUE STREAMS: Agencies need to explore ways to monetize new areas of involvement such as licensing, e-commerce applications and even advertising itself.

SPEED: Agencies must recognize that in a web-based world that moves at warp speed, speed itself is a strategic asset and those that can help their clients with speed-to-market executions will have an advantage.

SOCIAL RESPONSIBILITY: The agency model should recognize that social responsibility is at the core of the modern firm, hand in hand with its financial accountability to shareholders, and is essential for recruiting top talent.
Avi Dan is the former global executive director-new business development at Euro RSCG, where he was also a member of the executive committee, and exec VP-new business director at Saatchi & Saatchi.
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