Lessons for Madison Avenue From Wall Street

Take Risks and Change Your Business Model to Connect With Consumers, but Don't Get Greedy

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Avi Dan
Avi Dan
Agencies can learn something from Wall Street these days -- and there is no punch line here.

In all the analysis, palpable anger, accusations and finger pointing of the past couple of weeks, one thing seems to have been forgotten: Before they got greedy and irresponsible, investment banks were models of efficiency and growth to which other industries aspired.

And the thing that made them successful is what they did at the beginning of this decade, after the dot-com bust: They changed their business model.

Wall Street
Photo: Dan Callister
Advice for agencies
  • Start investing your own funds
  • Switch your organizing principle from selling to insight.
  • Recognize that the paradigm has shifted from push to pull.
Tom Wolfe's depiction of masters of the universe aside, investment banks traditionally made their money in a very sober way: by providing advice to companies engaged in mergers and acquisitions, and by providing markets for investors. It was a nice, lucrative business, just like making and placing advertising for a 15% commission.

But that started to change in the late 1990s. Stock trading was becoming commoditized, which meant price competition. Underwriting fees were squeezed as fewer dot-com IPOs materialized. And commercial banks started moving in on investment banks' turf and taking away market share.

Then something interesting happened. The big financial supermarkets, the Citigroups and JP Morgans, could not get traction, and their profits and stock prices lagged, while profits and stock prices at investment banks took off exponentially.

Bigger risks, rewards
Why? The investment banks responded to the threats largely by changing their business model and taking more risks with their own money than they had before. Sure, they still did top-notch advisory work and acted as market makers. But their revenue and income growth has come mostly from betting with their own capital.

Avi Dan is a marketing consultant with 30 years' experience in business, brand and strategy for flagship consumer brands who specializes in business development for communications and marketing-services companies.
Agencies will increasingly find themselves in Wall Street's predicament as revenue and margins face a technology squeeze. Addressable TV will eliminate the half-empty glass. Trading exchanges and behavioral science will eliminate distribution inefficiencies. The moral here is that while Gordon Gekko was wrong, and greed is not good, risk can be very good if exercised with good judgment, especially for a business that is still operating with an antiquated model.

For starters, I believe that -- dare I say it -- agencies should start trading with their own funds. And if you think that it is such a revolutionary idea, think again. It's done on a regular basis, with relish, and it's called "pitching new business."

Agencies like to believe they "partner" with clients, but unless they have skin in the game, that assertion is questionable. And the product, whether a creative idea or a media plan, needs to be sold to marketers at a negotiated market value, not simply an aggregated number of billable hours. If agencies really want to control their own destinies, they must de-commoditize their products and invest their own funds in whatever they think they can create a market for, whether it be content, media, product development or merchandizing. The old-fashioned approach -- acting as agents on behalf of clients alone -- is a slippery slope.

Agencies also must evolve their model from the original organizing principle of selling, which required bombarding the consumer with messages pushed through distribution channels. For an attention-deficit economy, in which the consumer is trying to cope with information overload, insight will become the organizing principle. Instead of dealing in price-competitive, commoditized creative and media products, a significant premium could be charged for data collection and analysis. Data and analytics need to be put at the center of the agency model and monetized aggressively. In the same way Wall Street analysts gave the marketing machine credibility, agency scientists will make sure creative ideas and media plans are relevant and engaging, and they will deliver a desired return on investment.

Ownership of content
Finally, agencies must recognize that the old model was based on a push paradigm, while the consumer had already moved on to dominate an ecosystem based on pull. Today there is more money in owning the consumer and in developing social networks that can be commercialized than owning the relationship with clients. Agencies must connect with consumers directly and monetize the value of engagement, primarily through development and ownership of content.

The new business model worked well for Wall Street firms when they carried a tenfold debt. It was only at multiples of 30 or 40, when greed replaced sound business judgment, that risk taking became another matter. As agencies face challenges to growth and profitability, they should examine their business model and weigh the opportunity that the risk of change brings with it. Every change is risky, but the risk of not changing is bigger. The world we lived in a couple of weeks ago is gone. It would be foolish of agencies to assume business as usual.
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