The Death of the Agency of Record Is Near
The "agency of record" concept is just about dead, and so are the retainers that funded them.
Advertisers have expanded their network of agencies, creating a diverse "family of agencies" to provide specialized services across the fragmented media landscape. Agency funding has been converted to project-based funding. Workloads are uncertain for individual agencies, and as a consequence, so is expected income. Scope-of-work planning is an ad hoc exercise. Uncertainty is on the rise. What does this mean for individual agencies, which have to forecast income and profits for their holding-company owners? What does it mean for advertisers, which now have to integrate the members of their family of agencies? Here are a few observations:
Agencies will cut costs and capabilities
Project-based remuneration for uncertain workloads will lead to increased conservatism regarding cost investments. Don't expect non-digital agencies to invest in digital capabilities -- the risks are too great. Instead, you can expect a continued focus on agency cost reduction so that agencies can weather any storm. This will, of course, continue the long-term trend that we have observed -- agencies shedding people in order to generate holding-company margins, and reducing capabilities through juniorization of resources.
You can further expect individual agencies to see a continued loss of influence with clients, and thus continue to be treated as commodity providers of a service that clients are all too willing to replace if another agency offers lower prices. Senior agency executives will focus exclusively on new business development, in the belief that an increased number of these marginal client situations will strengthen income statements and balance sheets, even though new clients pay even less than existing clients.
In short, the disappearance of AORs will accelerate the decline of agency capabilities. Dealing with this disappearance through tactical initiatives, like reducing costs and pursuing new business prospecting, will do nothing to save the agency from long-term self-destruction. A fundamental transformation that adds capabilities and influence with clients is certainly called for, but few agencies have any such plans.
Advertisers will move toward scope of work
Advertisers will feel free to experiment with scope-of-work projects, since they are not bound to plan or forecast them with individual agencies. This will lead to increased scope-of-work growth that will have to be handled by agencies whose resources will have been cut to the bone. Advertisers will increasingly become their own integrators and strategists, even though their marketing organizations do not have the required capabilities.
This does not bode well for brand growth. Dissatisfaction with outcomes will motivate procurement to stir the pot and look for new agencies -- at lower cost, of course. New agencies will line up for this possibility, and trumpet their "client wins" in Ad Age and other trade magazines.
It's "Madison Avenue Manslaughter"
The disappearance of AORs is unfortunate, and the intellectual and economic idea behind the concept is terrible. In manufacturing and distribution industries, strategic sourcing principles embraced having fewer suppliers which had increased strategic roles to play. Advertisers should have worked with their AORs and made it possible for them to invest in all the required technologies to ensure that they could meet all specialized needs. This would have reduced complexity and led to stronger, more viable strategic partnerships.
Procurement professionals who attacked service costs (media and advertising) went in the wrong direction, fragmenting agency networks rather than simplifying them. The price is now going to be paid. The family of agencies has all the earmarks of a dysfunctional family. It's "Madison Avenue Manslaughter" at its worst.